SPECIAL INCLUSIONS

CHAPTER 3
TEACHING AND LEARNING STRATEGY

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 SPECIAL
INCLUSIONS
Gross income is defined in the Income Tax Act and
can be
distinguished between:
• the preamble to the gross income definition and Previously

• amounts which are specifically included in gross

income. W
eH
er
e

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SPECIAL INCLUSIONS
• The amount will be included in gross income,
even if it does not meet all the requirements
(elements) as per the definition.
• Thus, special inclusion “overrides” the other
elements of the gross income definition (e.g.,
capital)

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Study Outcomes
Be able to apply and calculate the amounts that should be included in Gross Income per the
special inclusions to the “gross income” definition per paragraph:
(a) Annuities
(b) Alimony
(c) Services
(d) Lump sum benefits
(cA) and (cB) Restraint of trade
(f) Commutation of amounts due
(g) Lease premiums
(gA) Compensation for imparting knowledge

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Study Outcomes
(h) Leasehold improvements
(jA) Proceeds from disposal of certain assets
(k) Dividends
(IC) Government Grants
(n) Amounts deemed receipts or accruals

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Gross income: TAXABLE INCOME
Taxable income is determined in terms of the following FRAMEWORK:

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SPECIAL INCLUSIONS
Amounts that are NOT included in Gross Income, because
they do not adhere to the GI definition

Mostly:
–Non-SA Source
–Capital in nature

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The Act
Section 1 of the Act defines Gross Income as:
“in relation to any year or period of assessment…
in the case of any RESIDENT,
the total amount, in cash or otherwise, received by or accrued to
or in favour of such resident; or
in the case of any person OTHER THAN A RESIDENT,
the total amount, in cash or otherwise, received by or accrued to
or in favour of such person from a source within or deemed to be
within the Republic,
during such year or period of assessment, excluding receipts or
accruals of a capital nature…”
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The Act
•“…but including, without in any way limiting the
scope of this definition, such amounts (whether
of a capital nature or not) so received or
accrued as are described hereunder, namely-
(a)…

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Par (a): Annuities
Chapter 3.2
Capital in nature (mostly)
After the Gross Income definition:
“(a) any amount received or accrued
by way of an annuity,
including any amount contemplated in the definition of annuity amount in
section 10A(1).
Not defined in the Act

Case Law
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Par (a): Annuities
Chapter 3.2
• How did the annuity originate/arise?
– From insurance company
– By way of a gift/legacy
– As consideration for the sale of a business or an asset
• ITC 761 pg. 59
– Court outlined characteristics of an annuity
• Provides for a fixed annual payment (but can change, e.g., an increase)
• Payment is repetitive
• Chargeable against some person, i.e., obligation to pay (voluntary pmts – even if repetitive
are not an annuity)
• Note: In an annuity contract no total debt amount is
mentioned…
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Par (a): Annuities
Chapter 3.2
 KBI en ‘n Ander vs Hogan
 Annual/periodical payment
 Beneficiary - right to receive more than 1 payment
 BUT Exemption for capital portion of certain
purchased annuities (sec10A)

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Par (a): Annuities - Example
Mr. A purchased an annuity of R200 per month for the rest of his
life. The capital sum paid for the annuity was R21 600. He received
the first payment of R200 on 1 March 2022. In terms of section 10A
the exempt portion is calculated to be R120.
Required:
Calculate Mr. A’s taxable income for the 2023 assessment.

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Par (a): Annuities - Solution

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Par (b): Alimony
Chapter 3.3
• Capital in nature?
• Paragraph (b) of the gross income definition includes alimony as
follows:
Any amount payable by spouse/former spouse
Under written agreement of separation/ order of divorce
By way of alimony or allowance or maintenance of the taxpayer/any
children

• BUT also note – Exemption iro alimony received ito a post-21 March
1962 divorce settlement (s10(1)(u))
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Par (b): Alimony - Example
Jack and Sarah separated (and were divorced) during the
previous year of assessment. In terms of their divorce
agreement Sarah is paid alimony of R24 000 per year by her
former husband.

Required:
Determine whether the R24 000 will be included in Sarah’s
gross income.
Will Jack be allowed to deduct the alimony paid to Sarah?
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Par (b): Alimony - Solution

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Par (c): Services rendered
Chapter 3.4
• This is an anti-avoidance provision
• All amounts received
i.r.o services rendered or i.r.o employment,
whether of capital or revenue nature,
are deemed to be gross income
(including voluntary awards)
• Par (c) excludes any benefits to which par (i) of the definition applies (fringe benefits)
• An amount received by a person for services rendered by another, shall be taxed in the hands of
the person who rendered the services
• Examples of amounts falling into par(c)
– Voluntary bonus, e.g., performance bonus
– Tips received by waiters
– Reward for providing the police with information

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Par (c): Services rendered
Chapter 3.4
• Rendering of the services gave rise to the gross income, i.e.
require a ‘causal relationship’ between services and amount
paid
(No need for employer / employee relationship to exist).
• Par (c) refers to ‘amount’ - ascertainable money value (CIR
v Butcher Bros (Pty) Ltd)
• If cannot establish amount in cash ≠ GI
• Voluntary awards = part of Gross Income even though not
stipulated in service contract (Stevens vs CSARS)

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Par (c): Services rendered - Example
Mr. Smith renders services to J&J (Pty) Ltd and, in
recognition of these services, J&J (Pty) Ltd pays a sum
of R12 000 to Mr. Smith’s brother, Mr. Fourie.
J&J (Pty) Ltd also paid an amount of R5 000 to Mr.
Smith as a Christmas bonus.
In terms of par (c), an amount of R17 000 (i.e. R12 000
+ R5 000) will be included in Mr. Smith’s gross income.

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Par (c): Services rendered - Example
Would a beggar have to include any amounts received in his Gross
Income?
No – fortuitous gain (happening by chance)

Would a beggar offering to take your rubbish from your car or to

clean your windscreen must include any amounts received in his
Gross Income?
YES – for services rendered

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Par (cA) and (cB) : Restraint of trade
Chapter 3.5
• Payment for undertaking NOT to render services
• Capital nature
• However, special inclusion
• Apply to any restraint of trade amount received by
– A natural person (if relates to employment)
– Labour broker
– Personal service company
• Corresponding deduction in hands of the payer

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Par (cA): Restraint of trade - Example
Julia was retrenched by her employer, Flower (Pty) Ltd, on 31 March
2019. She befriended many customers who had previously been
serviced by Flower. If she would become employed by a “competitor”,
e.g., Tree (Pty) Ltd, it would be possible that she would persuade them
to become customers of Tree. Flower therefore decided to restrain Julia
from working for a competitor and paid her R400 000 not to work for a
“competitor” for 5 years.
Required:
Determine whether the R400 000 will be included in Julia’s gross
income.

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Par (cA): Restraint of trade - Solution
Include any amount received or accrued to any person
as compensation for any restraint of trade imposed on
any natural person in respect of employment.
Julia must therefore include the R400 000 in her gross
income.
Note: The entire amount is taxed in the year it accrues.

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Par (d) Lump Sum Benefits
Chapter 3.6
•Amounts paid
•To employee
•By employer or associated institution
•Due to change or loss of employment
•Capital or nature?

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Par (f) Commutation of amounts due
Chapter 3.4.4
• This refers to the substitution of benefits due in terms
of an employment contract into cash
• The cash received will be included in Gross income

Par (f) includes the following amounts:

- leave days substituted for cash
- lumps sum on termination of services

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Par (g): Lease Premiums
Chapter 3.9
• A Lease premium is a payment over and above, or instead of
rental
• Lessor includes full amount (NB lessee) p.g. 67
• For an amount to qualify as a lease premium, it must pass
from the lessee to the lessor
• Lease Premium is not defined in the act.
• Case law:
–Butcher Bros: In addition to rent

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Para (gA): Compensation for imparting knowledge
Chapter 3.10
• Special inclusion for know-how payments
• Know-how payments =
–amounts received for the use of any knowledge or information
(scientific, technical, industrial or commercial), or
–for the rendering of any assistance or service in connection with the
knowledge or information
• Includes for instance:
–Sale of operating manuals or information
–Technical advisory fees

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Para (gA): Compensation for imparting knowledge

•NB: In determining the source of this

income, consider:
- Who paid the money
- Where the information will be used

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Para (gA): Compensation for imparting knowledge
Example 1
•Supply of information (e.g. operating manual) =
imparting of knowledge = Know-how payments
–Special inclusion, thus included in Gross Income
•Sale of a copyright in operating manual =
ownership of intellectual property, i.e. the right to
inter alia use the information to produce income.
–Capital in nature, no special inclusion, thus not GI

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Para (h): Leasehold improvements
Chapter 3.11
• An improvement made by a lessee to a property (land
or buildings) that he has leased from a lessor
• 2 Possibilities:
–Lessee contractually obliged to perform
improvements: Lessor has to include in GI
–Lessee not contractually required to improve: Lessor
doesn’t have to include in GI.

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Leasehold improvements
• Amount to be included in Gross Income is:
- Amount included in the contract as the value of improvements
- Amount stipulated in the contract as the amount to be expended

- If no amount is stipulated, amount representing fair and reasonable value of

improvements
• If the lessee spends more money than stipulated, this will
not form part of par (h)
• Please see deduction allowed according to section 11(h).
(Capital allowances)

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Example: Leasehold improvements

•Co A entered into a lease of land from Co B. In terms

of the agreement, Co A is supposed to erect a building
to the value of R 8 million. However, Co A erected a
building worth R 10 million.
•How much should be included in Com B’s gross
income?

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Solution
•Only R 8 million will be included in Co B’s gross
income because that is the amount that was stipulated
in the lease agreement.

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Para (jA): Proceeds from disposal of certain assets
Chapter 3.14
Sale of Capital Assets similar to Trading Stock = included in GI
Assets:
Manufactured
Produced
Constructed or
Assembled
i.e. NOT purchased assets!
NB: Full proceed will be included in GI, no wear and tear will be
claimed, no CGT and recoupment will be calculated

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Example
• Company A is a car manufacturer and it manufactured 20 cars in the 2022 year of assessment . Co A decided
to sell 10 cars in the current year for R50 000 each
• What is the amount that must be included in the Gross income of Co A?

•Answer:
• Amount included in Co A gross income
• 10 cars x R50 000 each = R 500 000

• Note : would your answer differ if the cars were bought by company A
• and the resold ?

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Par (k): Dividends
Chapter 3.15
•Dividends are of a revenue nature being the fruits
of capital employed (shares) – thus falling in the
normal gross income definition
•Also refer to Exemptions Lecture – Exemptions
i.r.o
non-residents and residents, provided certain
provisions are met (s10B)
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 Par (lC): Government grants
Chapter 3.18
•Applies to the government in local , national
and provincial sphere.
•Included in Gross Income
•Possible exemption

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Par (n): Amounts deemed receipts or accrual
• Specifically relates to recoupments. (Section 8(4) & 8(5))
• Will tie in and integrate with capital allowances.
• Refers to when an allowance deducted in the past is
recouped through the sale of the asset.

• Will only become applicable after capital allowances.

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