Income Tax in South Africa
Personal Income Tax:
South African residents are taxed on their worldwide income. Credit is granted in South Africa for foreign taxes paid. Non-residents are taxed on their South African sourced income. The same rates of tax are applicable to both residents and non-residents.
Progressive tax rates apply for individuals. The rates for the tax year commencing on 1 March 2017 and ending on 28 February 2018 are as follows:
Personal income tax rates:
Tax on column 1 (ZAR)
Tax on excess (%)
0 to 189,880
189,881 to 296,540
296,541 to 410,460
410,461 to 555,600
555,601 to 708,310
708,311 to 1,500,000
1,500,001 and above
A natural person ordinarily resident in South Africa, or who is physically present in South Africa for a specified period, is considered a resident for tax purposes. There is no statutory definition of ‘ordinarily resident’. South African courts have held that a taxpayer is ordinarily resident in the country of their most fixed or settled residence, the country to which they would naturally, and as a matter of course, return from their wanderings, or their usual or principal home.
If not ordinarily resident in South Africa, an individual is considered a South African resident if the individual is physically present in South Africa for more than 91 days, in aggregate, in the relevant tax year and each of the preceding five tax years, and also for more than 915 days, in aggregate, in the preceding five tax years. If a person, who has become a South African resident in terms of this physical presence test, spends a continuous period of at least 330 days outside South Africa, then the individual ceases to be a resident from the date of the beginning of the absence from South Africa.
Taxable remuneration includes all cash amounts received for services rendered (including bonuses and allowances) as well as most benefits in kind (such as the use of assets and 'soft' loans). For non-residents, these amounts form a part of South African gross income if they are effectively connected to the person's employment in South Africa. There are no special concessions for short-term foreign employees, except under DTTs.
South African residents who receive employment income for performing their employment-related tasks in a foreign country are generally exempt from tax on this income, provided that they have, during any 12-month period, spent more than 183 days (including a continuous period of at least 60 days) outside South Africa. It is, however, likely that this exemption will fall away for years of assessment beginning on or after 1 March 2019.
Equity instruments acquired by virtue of employment or office held as director, whether from the employer or an associated institution in relation to the employer, are subject to income tax on the difference between the market value of the equity instrument and the consideration paid by the employee or office holder on the date that the equity instrument 'vests'.
Generally, an equity instrument will 'vest' when there are no restrictions attached to the instrument that affect the full and unencumbered ownership of the instrument.
Self-employment income is derived from an unincorporated business, partnership, trade, or profession. Persons earning self-employment income could include partners in a partnership or persons earning commission or professional fees or income from independent services.
An amount received or accrued from self-employment will be taxable in South Africa. Non-residents will only be taxed on South African-sourced self-employment income.
The maximum effective tax rate on capital gains is 18%. 40% of net capital gains realised are taxed at the normal income tax rates. An individual is entitled to an annual exclusion of ZAR 40,000 in determining the net capital gain for that year.
In the year that the taxpayer dies, the annual exclusion is increased to ZAR 300,000.
All foreign capital gains realised by a South African resident are included in the South African tax net. For a non-resident, only the gains from the disposal of South African immovable property, interests in ‘land rich’ companies and the property of a South African permanent establishment (PE) are included.
Any disposal of South African immovable property by a non-resident is subject to WHT. Where the seller is a non-South African resident individual, the rate of WHT is 7.5%. This is not a final tax but an advance against the seller's actual tax liability for the year. Where it is expected that the actual tax liability will be less than the WHT, SARS may allow the WHT to be reduced.
Where an individual who is resident in South Africa disposes of a primary residence, up to ZAR 2 million of the capital gain will be exempt from CGT. If the property has previously been leased or used partly for purposes of trade, an apportionment of the exclusion will apply.
Dividends declared by South African resident companies are generally subject to a 20% dividend withholding tax for the shareholder regardless of residency. Most foreign dividends accrued to or received by South African residents are exempt from tax if the resident holds at least 10% of the equity shares and voting rights in the company. Most other foreign dividends are subject to tax at an effective rate of 20%.
Interest received by or accrued to an individual is taxable. However, an exemption applies to the first ZAR 23,800 of local interest income (ZAR 34,500 for taxpayers who are 65 years of age or older).
Non-resident individuals are exempt from income tax unless the individual is physically present in South Africa for more than 183 days in aggregate during the year preceding the date on which the interest accrues or the debt on which the interest arises is effectively connected to a PE in South Africa. This exemption aligns with the WHT on interest paid from a South African source to a non-resident, levied at a rate of 15%.
Rental income from fixed or moveable property is included in taxable income subject to allowable expenses and losses being deductible against such income.
Exemptions from income exist for natural persons subject to meeting the specified\ requirements. Exemptions include (subject to limitations and conditions):
· remuneration of certain non-resident employees of foreign states employed in South Africa
· certain pensions received from sources outside South Africa by both residents and non-residents
· lump sum payments from qualifying life policies
· special uniform allowances received by an employee
· employment relocation allowances received by an employee
· foreign employment income received by resident employees (specific time periods applicable)
· bona fide scholarships and bursaries
· amounts of alimony received by a spouse under a judicial separation or divorce, and
· amounts received or accrued on tax free investments subsequent to the introduction thereof on 1 March 2015.
Deductions from Income:
Certain limited expenses may be deducted by employees from their employment income. Such expenses include business-related travel, automobile, and entertainment expenses, with the amount that is deductible by an employee also being limited to the amount of the relevant allowance that is granted to the employee by their employer. A capital depreciation deduction is also available for allowance assets used in the course of employment. Legal fees incurred in respect of employment income are also deductible.
Employees who earn most of their income in the form of commissions may, subject to certain requirements, deduct their home office expenses.
As a general rule, allowances (subject to certain limits), granted to an employee by an employer to meet business expenditure are taxable in South Africa, but only to the extent that they are not so expended for business or exceed the maximum limit for deduction. Allowances to meet purely domestic or private expenditure, such as the cost of living, are taxable.
Donations to certain approved public benefit organisations are allowed as deductions, up to a maximum of 10% of taxable income.
Medical scheme contributions for taxpayers and their dependants (subject to certain maximum limits) convert to a specified monetary amount tax rebate. This rebate can be set-off against the person’s tax liability. The conversion rate for persons over the age of 65 and persons with a disability is higher.
The contributions in excess of the specified credit amount as well as any other medical expenses are converted to medical tax rebates at a specified rate. Persons over the age of 65 and persons with a disability are subject to a higher conversion rate and are also not subject to a further threshold for the excess, which applies to persons under the age of 65 who have no disability.
Income insurance policy:
Premiums paid on a loss of income insurance policy as a result of death, disablement, severe illness, or unemployment are not allowed as a deduction. However, a corresponding exemption results in none of the proceeds being taxable.
Contributions to a pension, provident, or retirement annuity fund are deductible (subject to certain maximum limits), provided that such funds are registered in South Africa.
The harmonisation of the tax treatment of payments to South African retirement funds to ensure consistent treatment of the contributions, irrespective of the type of retirement vehicle that the person is a member of, is effective from 1 March 2016. However, the requirement that a provident fund will also only be able to pay out one-third as a lump sum on retirement, with the remaining two-thirds having to be annuitised, has been postponed until 1 March 2019.
There are no other standard deductions from income for natural persons. The other deductions that may be claimed by persons earning remuneration income are limited.
If the taxpayer is carrying on a business in their individual capacity or in partnership, the deduction of business expenditure or losses is available to them on the same basis as to companies.
Where the deductions and allowances permissible under the Income Tax Act exceed income, an assessed loss results which may be carried forward for set-off against income earned in future years. Assessed losses that are realised by an individual who falls into the highest tax bracket and that result from so-called 'secondary trades' (such as sports, arts, dealing in collectibles, hobby-farming, and rental of property) are ring-fenced in certain circumstances.
Assessed losses incurred (deductible expenses exceed income) can be carried over to the next tax year to be set-off against the taxable income of that following year, provided that the taxpayer trades in that following year.
Taxpayers who earn employment income and are subject to income tax at the maximum marginal rate of 45% may, upon meeting certain requirements, have their losses from carrying on a secondary trade ring-fenced to that specific secondary trade.
Corporate Income Tax:
A residence-based tax system applies in South Africa. Companies are considered to be resident in South Africa if they are incorporated or have their place of effective management in South Africa.
South African-resident companies are taxed on their worldwide income (including capital gains).
Under complex look-through rules, the foreign operating income of nonresident subsidiaries derived from “non-business establishment” operations in foreign countries is taxed in the hands of the immediately cross-border South African-resident parent company on an accrual basis (see the discussion on controlled foreign companies [CFCs] in Section E). The income of nonresident subsidiaries with business establishments in foreign countries is generally exempt from the look-through rules. Dividends paid by foreign companies that are not CFCs are taxable unless the shareholding of the South African-resident recipient is 10% or more (see the discussion of foreign dividends in Dividends). The participation exemption amendment reducing the participation percentage from 20% to 10% took effect on 1 April 2012.
Nonresident companies are taxed on their South African-source income only.
The basic corporate tax rate is 28%. Branch profits tax at a rate of 28% is imposed on South African-source profits of nonresident companies.
Secondary tax on companies and new dividend withholding tax:
The secondary tax on companies (STC) has been abolished. It was effective until 31 March 2012. STC was imposed on the company, not on the shareholders, and was regarded as a tax on income. It was not similar to a withholding tax and consequently did not qualify for relief under dividends’ articles in treaties.
The STC was replaced by a withholding tax imposed at a rate of 15% on dividends declared on or after 1 April 2012. The tax is levied on dividends declared and paid by South African-resident companies or by foreign companies listed on the Johannesburg Stock Exchange (JSE). Dividend withholding tax is a tax levied on the recipient of a dividend.
The declaring company must withhold the tax from the dividend paid and pay the tax to the South African Revenue Service (SARS) on behalf of the recipient. In the case of a listed company, a regulated intermediary withholds the tax.
Dividends are not subject to the withholding tax if any of the following circumstances exists:
· The beneficial owner is a resident company.
· The beneficial owner is a local, provincial or national government.
· The beneficial owner is a specified tax-exempt entity.
·The dividend is paid by a real estate investment trust or a controlled property company.
· The dividend is paid to certain regulated intermediaries who in turn are liable to administer the tax on behalf of the declaring company.
· The dividend is paid by a micro business, up to ZAR200,000.
· The dividend is paid by a foreign company listed on the JSE to a nonresident beneficial owner.
· The dividend is paid by a headquarter company.
· The dividend is paid to a portfolio of a collective-investment scheme in securities.
· The dividend is taxable in nature or was subject to STC.
· A paying company may not withhold the dividends tax if the beneficial owner has supplied it with a written declaration stating the following:
· It is exempt from the dividends tax.
· It will inform the company when it is no longer the beneficial owner of the shares.
If the beneficial owner is a nonresident that wants to rely on a reduced dividends tax rate under a double tax treaty between South Africa and its country of residence, it must provide the company with a written declaration that the reduced rate applies and specified undertakings.
A dividend is any amount transferred or applied by a company for the benefit of its shareholders, whether by way of a distribution or as consideration for a share buyback, excluding the following:
· Amounts that result in a reduction of the contributed tax capital of the company
· Shares in the company
· An acquisition by a listed company of its own shares through a general repurchase of shares in accordance with the JSE listing requirements
STC credits that were available to a company on 31 March 2012 were carried forward into the dividend tax regime for setoff against dividends in determining the net dividend subject to the tax. The STC credit was increased by dividends received after the introduction of the dividends tax from another company that had used its own STC credits when paying the dividends concerned and that had notified the recipient company of the amount of credits used. A company’s STC credits were available for a period of three years after the introduction of the dividends tax (that is, until 31 March 2015). Effective from 1 April 2015, STC credits of a company are deemed to be nil.
Special types of companies:
Gold mining companies may elect to have their mining income taxed under a special formula, while the non-mining income of such companies is taxed at a rate of 28%.
Petroleum and gas production is taxed in accordance with the usual provisions of the Income Tax Act, as modified by a special schedule applicable to prospecting and development expenses, as well as to farm-ins. A fiscal stability regime can be agreed to with the Minister of Finance. The tax rate is capped at a maximum of 28% for both South African-resident and nonresident companies. Dividends tax need not be withheld from dividends paid out of oil and gas income, and interest withholding tax need not be withheld from interest paid with respect to loans used to fund oil and gas exploration and post-exploration capital expenditure.
Life assurance companies are subject to special rules that separate the taxation of policyholders’ and corporate funds and apply different tax rates to such items.
Small business corporations (SBCs) are taxed at the following rates on their taxable income:
· 0% on the first ZAR75,000 of taxable income
· 7% of the amount of taxable income exceeding ZAR75,000 but not exceeding ZAR365,000
· ZAR20,300 plus 21% on taxable income exceeding ZAR365,000 but not exceeding ZAR550,000
· ZAR59,150 plus 28% on taxable income exceeding ZAR550,000
To qualify as an SBC, a company must satisfy all of the following requirements:
· Its gross income for the year must not exceed ZAR20 million.
· Its shares must be held by individuals who do not hold interests in other companies (except for certain specified interests such as interests in South African-listed companies).
· Its total personal service and investment income must not exceed 20% of its gross income.
· It is not an employment entity.
Capital gains. Capital gains derived by resident companies are subject to capital gains tax (CGT) at an effective rate of 22.4% (80% of the normal corporate tax rate).
Resident companies are subject to CGT on capital gains derived from disposals of worldwide tangible and intangible assets.
Nonresidents are subject to CGT on capital gains derived from disposals of fixed property (land and buildings) and interests in fixed property located in South Africa, and assets of a permanent establishment located in South Africa. An interest in fixed property includes a direct or indirect interest of at least 20% in a resident or nonresident company if, at the time of disposal of the interest, 80% or more of the market value of the assets of the company is attributable to fixed property located in South Africa that is held as capital assets.
A capital gain is equal to the amount by which the disposal proceeds for an asset exceed the base cost of the asset. A capital loss arises if the base cost exceeds the disposal proceeds. Capital losses may offset capital gains, and regular income losses may offset net capital gains. However, net capital losses may not offset regular income.
The base cost for an asset includes the sum of the following:
· The amount actually incurred to acquire the asset
· Cost of the valuation of the asset for the purposes of determining the capital gain or loss
· Expenditure directly related to the acquisition or disposal of the asset, such as transfer costs, advertising costs, costs of moving the asset from one location to another and cost of installation
· Expenditure incurred to establish, maintain or defend the legal title to, or right in, the asset
· Expenditure on improvement costs (if the improvement is still in existence)
The base cost is reduced by any amounts that have been allowed as income tax deductions. It is also reduced by the following amounts if such expenditure was originally included in the base cost:
· Expenditure that is recoverable or recovered
· Amounts paid by another person
· Amounts that have not been paid and are not due in the tax year
· Inflation indexation of the base cost is not allowed.
Special rules apply to the base cost valuation of an asset acquired before 1 October 2001. Subject to loss limitation rules, in principle, a taxpayer may elect to use the market value of such asset on 1 October 2001 as the base cost of the asset (the asset must have been valued before 30 September 2004) or, alternatively, it may use a time-apportionment basis, which is determined by a formula, effectively splitting the gain between the components from before 1 October 2001 and after that date.
A disposal is defined as an event that results in, among other things, the creation, variation or extinction of an asset. It includes the transfer of ownership of an asset, the destruction of an asset and the distribution of an asset by a company to a shareholder. For CGT purposes, a company does not dispose of assets when it issues shares or when it grants an option to acquire a share or debenture in the company.
The proceeds from the disposal of an asset by a taxpayer are equal to the amount received by, or accrued to, the taxpayer as a result of the disposal less any amount that is or was included in the taxpayer’s taxable income for income tax purposes. If a company makes a dividend distribution of an asset to a shareholder, it is deemed to have disposed of the asset for proceeds equal to the asset’s market value.
Rollover relief is available in certain circumstances including destruction of assets and scrapping of assets.
All related-party transactions are deemed to occur at market value, and restrictions are imposed on the claiming of losses incurred in such transactions.
Corporate emigration, which occurs when the effective management of the company is moved outside South Africa, triggers a deemed disposal at market value of the assets of the company, followed by a deemed dividend in specie.
Subject to certain exceptions, disposals of equity shares in foreign companies to nonresidents are exempt from CGT if the disposing party has held at least 10% of the equity in the foreign company for at least 18 months.
The Tax Administration Act, which took effect on 1 October 2012, governs the administration of most taxes in South Africa.
The tax year for a company is its financial year. A company must file its annual tax return in which it calculates its taxable income and capital gains, together with a copy of its audited financial statements, within 60 days after the end of its financial year. Extensions of up to 12 months after the end of the financial year are usually granted. No payment is made with the annual return.
The tax authorities issue an official tax assessment based on the annual return. The company must pay the balance of tax due after deduction of provisional payments within a specified period after receipt of the assessment.
Companies must pay provisional tax in two installments during their tax year. The installments must be paid by the end of the sixth month of the tax year (the seventh month if the tax year begins on 1 March) and by the end of the tax year. The second payment must generally be accurate to within 80% of the actual tax for the year. A third (“topping up”) payment may be made within six months after the end of the tax year. If this payment is not made and if there is an underpayment of tax, interest is charged from the due date of the payment. A 20% penalty is charged if the total provisional tax paid for the year does not fall within certain prescribed parameters.
Tax penalties fall into two broad categories, which are non-compliance (for which penalty amounts can range between ZAR250 and ZAR16,000) and understatement (for which penalty amounts can range between 5% and 200% of the shortfall).
An e-filing system allows provisional payments and tax returns to be submitted electronically.
South African dividends:
Dividends paid by South African-resident companies are generally exempt from mainstream tax in the hands of the recipients and, accordingly, recipients may not deduct expenses relating to the earning of these dividends, such as interest and other expenses incurred on the acquisition of their shares.
Foreign dividends are dividends paid by nonresident companies and headquarter companies. Most foreign dividends accruing to or received by South African residents are taxable. The following foreign dividends are exempt from tax:
· Dividends paid by a foreign company to a South African resident holding at least 10% of the equity and voting rights in the foreign company, unless the dividend paid by the foreign company is deductible for purposes of determining its tax liability in that foreign country
· Dividends paid by a CFC to a South African resident (subject to certain limitations)
· Dividends paid by a listed foreign company that are not considered distributions of assets in specie (a dividend in specie is a distribution to shareholders in a form other than cash)
· Dividends paid by a foreign company to another foreign company that is resident in the same country as the payer, unless the dividend paid by the foreign company is deductible for the purposes of determining its tax liability in that country
For foreign dividends that are not exempt, a rebate may be claimed by South African resident recipients. The rebate is limited to the amount of South African tax attributable to the foreign dividend. Any excess of the foreign tax over the allowable rebate may be carried forward for a period of seven years. The excess taxes are available for setoff against foreign-source income in subsequent years (the calculation is done on a pooled basis).
A South African resident (company or individual) holding 10% or more of the equity share capital of a nonresident company is exempt from tax on dividends received form the nonresident company with respect to those equity shares. The reduced participation rate of 10% took effect on 1 April 2012 for companies and on 1 March 2012 for individuals and applies to dividends received or accrued on or after that date.
Recipients of dividends that are not exempt are taxed on a formula basis.
Dividend withholding tax at a rate of 15% is imposed, subject to applicable treaty rates. For further details, see Secondary tax on companies and new dividend withholding tax.
Foreign tax relief:
In the absence of treaty relief provisions, unilateral relief is granted through a credit for foreign taxes paid on foreign income, foreign dividends, foreign taxable capital gains, or income attributed under the CFC rules (see Section E), limited to the lesser of the actual foreign tax liability and the South African tax on such foreign income. The credit may be claimed only if the income is from a non-South African source. Excess credits may be carried forward, but they are lost if they are not used within seven years.
A credit was previously available with respect to foreign taxes on service income from a South African source. These credits could not be carried forward. This measure has been eliminated, effective from 1 January 2016.
Foreign taxes that cannot be claimed as a tax credit can generally be claimed as a deduction from taxable income.
Note: Information placed here in above is only for general perception. This may not reflect the latest status on law and may have changed in recent time. Please seek our professional opinion before applying the provision. Thanks.