The South African income tax system is not cash-based. This means that a person can effectively be taxed on amounts that they have not yet received in cash, but that merely accrued to them within a year of assessment. Cash is also not a requirement to trigger tax – any “amount” that a person receives or that accrues to them, may be subject to tax. The problem with having accruals and amounts that are not in cash, is that taxpayers are often unaware that amounts have accrued to them, and the general rule is that an amount is included in a taxpayer’s gross income (and is potentially taxable) at the earlier of receipt or accrual and there is no right of election in this regard.
The South African Revenue Service (SARS) administers a number of taxes, levies and duties. Interest may accrue in favour of a taxpayer and is payable by SARS in respect of these taxes, levies and duties under a variety of circumstances. Taxpayers are however often not aware of the interest that accrues in their favour, since statements of account are not actively monitored. The introduction of Section 7E of the Income Tax Act[1] to a large degree solves this problem and addresses the complications in taxing accrued by SARS’ interest. The section stipulates that when a person becomes entitled to any amount of interest payable by SARS (effectively and accrual), the interest must be deemed to accrue to the taxpayer on the date on which the amount is paid. The effect of section 7E is that interest payable by SARS is included in a taxpayer’s income only when the amount is actually paid, and not when the amount accrues to a person under general principles.
A consequence of the introduction of section 7E, is that double taxation may arise if interest was taxed in a prior year of assessment when an accrual took place and section 7E was not yet effective, but interest is paid after the effective date. Thus, an amount of interest payable by SARS may have been included in gross income when it accrued, and the same amount may in a subsequent year of assessment be included again in gross income owing to the application of section 7E. SARS recently (on 15 March 2019) closed the public participation process for a Binding General Ruling on the transitional measures that will apply to address this problem.
In terms of the ruling, interest paid by SARS on or after 1 March 2018 must for purposes of section 7E, be included in that person’s gross income only to the extent that no portion of that amount was already included in gross income in any previous year of assessment.
The ruling is still in a draft format and has yet to be issued. It is however not expected that major changes will be made to the draft ruling since the purpose thereof is to avoid double taxation, which is an inherent part of our tax system.
[1] No 58 of 1962 (“the Act”)
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)
