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Make Sure Your Exempt Income Stays Exempt!

29 October 2010   (0 Comments)
Posted by: Author: Steven Jones
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Make Sure Your Exempt Income Stays Exempt!

Tax-exempt income becomes taxable if you don’t fill in the tax return correctly

If you are employed by a South African firm that requires you to spend a substantial proportion of your time in one of its overseas offices,and you are paid from South Africa, Section 10(1)(o) determines that any income "received by or accrued to any employee during any year of assessment by way of any salary, leave pay, wage,overtime pay, bonus, gratuity,commission, fee, emolument or allowance, including any amount referred to in Paragraph (1) of the definition of gross income in Section 1 [gross income definition]or an amount referred to in Section 8 [unexpended allowances],8B [directors' emoluments] or 8C[gains on share schemes] in respect of services rendered outside the Republic by that employee for or on behalf of any employer,” is exempt from tax.

In terms of sub-paragraph ii of Section 10(1)(o), the following conditions need to be fulfilled in order for the said income to qualify for exemption:
aa) The employee must be outside South Africa on business for a period or periods exceeding 183 full days in aggregate during any period of 12 months; and
bb) The employee must be outside South Africa for a continuous period exceeding 60 full days during that period of 12 months,and those services were rendered during that period or periods.

After a recent experience with two clients whose earnings include Section 10(1)(o) exempt income, if it were within my power to do so, I would add an IRP5 code that would automatically classify the said income as being exempt.

The reason for this is that the code 3651, which is the "foreign service” equivalent of 3601 which is used for normal earnings, does not automatically flag such earnings as exempt.This is probably because not all foreign service income is exempt; only such foreign earnings that meet the above criteria as contained in Section 10(1)(o) qualifies for exemption.

In this particular case, both clients' foreign-service income does in fact qualify for exemption, since they spent approximately 10 months of the 2010 tax year outside of South Africa.In fact, we have set up the clients' payroll processes in such a way as to apportion such income between taxable and exempt, since the clients have planned up front how much time they will be overseas on business.

Accordingly, the person who runs the payroll knows that when the directors are outside of South Africa, no PAYE is deducted.The problem comes in when it is time to fill in the personal income tax return.Now before I get berated as an incompetent tax practitioner, let me lay my cards on the table up front and state that these problems have been found somewhere between my seat and my keyboard.And since a bad worker always blames their tools,let me apportion some of the blame to the minute screen on my netbook…

Here's what happened. As already mentioned, IRP5 code 3651does not automatically flag the income as exempt from tax, so one needs to look elsewhere on the form to capture the exempt portion.Now there is no specific area under the deduction section that caters for Section 10(1)(o) exempt income, but there is such a line under the income section.

However, any amount entered here refers to non-taxable income over and above that reflected on an IRP5, which meant that the figure I entered here made not one iota of difference to the final tax calculation—which, because of the non-deduction of PAYE on the foreign service income, led to a rather substantial "due by you”amount for these two clients.When I received the assessments, after my son performed CPR on me I immediately lodged an objection on my clients' behalf. "These cretins at SARS”, I bellowed. "Can't they even take a simple deduction into account?” My left mouse button now carries a permanent lopsidedness as a result of my venom.

Over that following weekend the red mist had cleared, and I realised that the "cretin” in question was not SARS, but yours truly—especially once I remembered how "taxable income” is determined, i.e. gross income, less exempt income, less deductions.Since there was nowhere on the form for me to"flag” the 3651 income as exempt,the only option was for me to show the exempt portion as a deduction.This I had to do under "other”,since there is no deduction section that deals with Section 10(1)(o) income.

But this leads me with a question for the 2011 tax year.I have always understood that when it comes to issuing the IRP5 certificate, all income (whether taxable or exempt) must be disclosed,since such income forms part of one's "gross income”.SARS would then automatically account for any exempt income (as is already the case when it comes to tax-free reimbursive travel allowances, as well as for the exempt portion of interest earned).

While I understand that not all foreign-service income is exempt,there surely has to be an easier way for idiots like me to indicate the exempt portion.My proposals to the designers of the income tax return are therefore as follows:
• In the case of those who take the exemption into account when running their payroll systems,SARS should create an additional IRP5 certificate code that provides for exempt foreign service income (with the existing code 3651 then referring to taxable foreign service income); or
• Where payroll has not taken exempt foreign-service income into account up front, or such foreign service income has been based on an estimate, the income tax form should provide for afield whereby the number of days that the taxpayer has spent outside South Africa on business can be entered.

That clever system called eFiling can probably quite easily be programmed to calculate the exempt portion, so that we cerebrally-challenged and sleep deprived tax practitioners who are under pressure to complete umpteen tax returns each year can avoid giving ourselves and our clients cardiac failure when SARS issues a "due by you” assessment large enough to fund a penthouse suite overlooking the sea at Umhlanga Rocks.

So here's an early "tip” for the new tax year, Mr Commissioner—how about it?

Source: By Steven Jones (Tax breaks)


Section 240A of the Tax Administration Act, 2011 (as amended) requires that all tax practitioners register with a recognized controlling body before 1 July 2013. It is a criminal offense to not register with both a recognized controlling body and SARS.


The Act requires that a minimum academic and practical requirments be set to register with a controlling body. Click here for the minimum requirements of SAIT.

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