Gross Income Definition as per Section 1 of the Income Tax Act, 1962 - Layman Version

Defining “Gross Income” for Tax Purposes

• • When we talk about “gross income” for tax purposes in South Africa, it generally refers to the total amount of money or other value you’ve received or are entitled to receive (accrued) during a specific tax year or period.
  • However, there’s a key distinction based on where you live or where the money comes from:
    • If you are a resident of South Africa: Your gross income includes everything you receive or are entitled to receive, regardless of where it comes from.
    • If you are NOT a resident of South Africa: Your gross income only includes the total amount you receive or are entitled to receive that comes from a source within the Republic (South Africa).

What’s NOT Usually Included (but with important exceptions!):

• • Generally, “gross income” does NOT include money or value that is of a ‘capital nature’. Think of capital items as major investments or assets, like the profit from selling your primary home (though there can be specific rules for certain assets).
  • However, it’s very important to note that the law specifically lists several types of amounts that ARE included in gross income, even if they might seem to be of a capital nature. Let’s look at those specific inclusions.

Specific Amounts That ARE Included in Gross Income:

 

Here’s a breakdown of particular types of income that are specifically included in your gross income:

• • Annuities: Any amount you receive by way of an annuity. This includes specific types like a “living annuity” or an “annuity amount” as defined in section 10A (1) of the Act, with a few exceptions.

Maintenance Payments: Any amount payable to you:

• • By your spouse or former spouse, under a judicial order, written agreement of separation, or divorce order, for your alimony, allowance, or maintenance.
  • In terms of any maintenance order for the maintenance of a child, as covered by section 15 (1) of the Maintenance Act, 1998.

Payments for Work or Employment:

• • Any amount, including voluntary awards, received or entitled to receive (accrued) for services rendered or to be rendered.
  • Any amount (other than specific amounts referred to in sections 8 (1), 8B or 8C of the Act) received or accrued in respect of any employment or the holding of any office.
  • Important Notes:
    • This rule does not apply to certain “taxable benefits” from employment, which are covered under paragraph (i).
    • If an amount is received by or accrued for the benefit of any person in respect of services rendered or to be rendered by another person, it is deemed to have been received by or accrued to that other person for this definition.
    • Amounts received for long service (as defined in paragraph 5 (4) of the Seventh Schedule) are excluded up to an aggregate value of R5,000, when combined with amounts from other specific paragraphs (5 (2)(b), 6 (4)(d), and 10 (2)(e) of the Seventh Schedule).

Restraint of Trade Payments:

• • For Specific Individuals/Entities: Any amount received or accrued to certain persons as consideration for a restraint of trade imposed on them. This specifically applies to individuals or entities who are or were:
    • • A labour broker (unless they have an exemption certificate).
      • A personal service provider.
      • A personal service company or trust before a specific date (prior to section 66 of the Revenue Laws Amendment Act, 2008, coming into operation).
  • For Natural Persons (Individuals): Any amount received or accrued to a natural person as consideration for a restraint of trade imposed on that person because of their employment or holding of any office, whether past or future.
  • Payments for Ending Employment or Certain Insurance Proceeds: Any amount (excluding annuities mentioned in paragraph (a)), including any voluntary award, received or accrued:
    • For the relinquishment, termination, loss, repudiation, cancellation, or variation of any office or employment (or right or claim to be appointed to any office or employment).
    • By or to a person, or their dependant or nominee, directly or indirectly from proceeds of an insurance policy where the person is or was an employee or director of the policyholder.
    • By or to a person, or their dependant or nominee, in respect of any insurance policy (excluding a risk policy with no cash or surrender value) that has been transferred (ceded) to them, their dependant, or nominee, by their employer/former employer or the company where they are/were a director.
  • Crucial Exceptions/Rules:
    • These provisions do not apply to any lump sum award from a pension fund, pension preservation fund, provident fund, provident preservation fund, or retirement annuity fund.
    • Any such amount that becomes payable due to or following the death of any person is deemed to have accrued to that person immediately prior to their death.
    • For the insurance policy rules (subparagraphs (ii) and (iii)), any amount received by or accrued to a dependant or nominee of a person is deemed to be received by or accrue to that person.
    • Retirement Fund Lump Sum Benefits: Any retirement fund lump sum benefit or retirement fund lump sum withdrawal benefit, other than amounts specifically included under paragraph (eA).
  • Specific Retirement Fund Transfers, Conversions, or Payments (Complex!): This applies to a member who effectively remains in the employment of the same employer, or the dependants or nominees of a deceased member:
    • If an amount from a pension or provident fund (where a portion of the benefit must be taken as an annuity) has been transferred to another fund where the lump sum benefit on retirement exceeds one-third of the capitalized value of all benefits.
    • If such a pension or provident fund (with the annuity portion rule) is wholly or partially converted (e.g., by amending its rules) to entitle the member, or their dependants/nominees, to a lump sum benefit on retirement exceeding one-third of the capitalized value of all benefits.
    • If any amount in such a pension or provident fund has become payable to the member or is being used to pay off a debt.
    • What’s included? In these specific situations, an amount equal to two-thirds of the amount transferred, converted, or paid/utilized to redeem a debt is deemed to have been received by or accrued to the member, dependants, or nominees.
    • Divorce Order Note: If a court order for divorce grants a part of such an amount to the former spouse, that part is still considered as if it was converted for the benefit of the member for these rules.
    • Commissioner’s Discretion: The Commissioner for the South African Revenue Service (SARS) may, under specific conditions, increase the proportion of one-third up to a maximum of one-half. This is typically allowed if, on 12 March 1997, the fund’s lump sum proportion was already greater than one-third but not more than one-half, and the fund’s rules are amended to specify one-third as the maximum.
  • Savings Withdrawal Benefit: A specific type of withdrawal benefit known as a “savings withdrawal benefit”.
  • Commutation of Employment Contracts: Any amount received or accrued in commutation of amounts due under any contract of employment or service. This means a lump sum payment received instead of future regular payments from a contract.
  • Premiums/Consideration for Use of Property or Rights: Any amount received or accrued from another person as a premium or consideration in the nature of a premium for the use or occupation or the right of use or occupation of:
    • Land or buildings.
    • Plant or machinery.
    • Any motion picture film, or any film or video tape/disc for television use, or any sound recording or advertising material connected with such films/recordings.
    • Any patent, design, trademark, copyright, model, pattern, plan, formula, process, or any other property or right of a similar nature.
  • Payments for Sharing Knowledge or Assistance: Any amount received or accrued from another person as consideration for imparting or undertaking to impart any scientific, technical, industrial, or commercial knowledge or information. This also includes payment for rendering or undertaking to render any assistance or service in connection with the application or utilization of such knowledge or information.
  • Improvements to Land or Buildings: If, through an agreement for the use of land or buildings, you gain the right to have another person make improvements on that land or to those buildings, then the following is included:
    • The amount stipulated in the agreement as the value of the improvements or the amount to be spent on them.
    • If no amount is stipulated, an amount representing the fair and reasonable value of the improvements.
  • Taxable Benefits from Employment: The cash equivalent of the value during the tax year of any benefit or advantage granted in respect of employment or to the holder of any office, if it is a “taxable benefit” as defined in the Seventh Schedule. This also includes any amount required to be included in your income under section 8A of the Act.
  • Proceeds from Mining Asset Disposals: A specific calculation for amounts received or accrued during a tax year from the disposal of assets where their cost was previously included (in whole or in part) as capital expenditure for mining deductions under section 15 (a) of the Act (or similar previous laws). This inclusion applies if the disposal amounts exceed the unredeemed capital expenditure at the beginning of the year plus new capital expenditure incurred during that year.
  • Disposal of Self-Manufactured Assets (Similar Type): Any amount received or accrued during the tax year from the disposal of any asset manufactured, produced, constructed, or assembled by that person, provided it is similar to any other asset manufactured, produced, constructed, or assembled by that person for purposes of manufacture, sale, or exchange.
  • Dividends: Any amount received or accrued by way of a dividend or a foreign dividend.
  • Government Grants and Subsidies:
    • Any amount received or accrued by way of a grant or subsidy in respect of soil erosion works (referred to in section 17A (1)) or any matters mentioned in paragraph 12 (1) (a) to (i) of the First Schedule.
    • Any amount received by or accrued to a company or association as contemplated in subparagraph (ii) of section 11E.
    • Any amount received by or accrued to a person by way of a government grant as defined in section 12P.
  • Insurance Policies (Employee/Director Illness, Disablement, Death): Any amount received or accrued in respect of an insurance policy where you are the policyholder, and the policy relates to the death, disablement, or illness of an employee or director (or former employee or director) of the taxpayer. This amount can be reduced by any related debt that has already been included in your gross income.
  • Other Specific Inclusions by the Act: Finally, any amount which, in terms of any other provision of the Income Tax Act, is specifically required to be included in your income. These amounts are automatically considered as having been received by or accrued to you for the purposes of this definition.

When Is Income “Accrued” (Entitled To)?

• • There’s an important timing rule: If you become entitled to any amount during a specific tax year, even if that amount is only payable on a date or dates after the last day of that year, that amount is deemed to have accrued to you during the year you became entitled to it. This means it’s included in your gross income for that earlier year.