The “gross income” definition in the Income Tax Act, starts as follows:
“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…”
Normally a taxpayer would have to include income in his/her gross income on the earlier of receipt of the income or when the income has accrued to the taxpayer.
Case law has shaped this concept over a number of years and believe it or not, can be very complicated to apply in certain scenarios.
In the Taxation Laws Amendment Bill, 2017, National Treasury introduced a new section, namely section 7E. This section is effective from 1 March 2018. Therefore for individual taxpayers, this section could have an impact on their 2019 year of assessment, for which the tax filing season opened on 1 July 2019.
This new section states that in determining your taxable income, you now have to include interest payable by SARS that you have become entitled to, only when SARS actually pays the interest to you.
Previously, if a refund was due, the taxpayer would normally have been accruing interest on a monthly basis, in certain cases. The interest would reflect on the Assessed Income Tax Statement of Account (“ITSA”).
In terms of the gross income definition, the taxpayer would then have been required to include the SARS interest income in determining his/her taxable income. If the SARS interest was significant, it would increase the tax liability (or reduce the tax refund).
However, as the media has been reporting over the last couple of years, to actually receive the refund in your bank account can be an administrative burden and lengthy process.
National Treasury acknowledged this problem, where a taxpayer may be subject to tax as a result of accrued SARS interest income in one year of assessment, but the taxpayer only receives the refund and interest at a much later date.
This section was also introduced to address the complications when SARS would make adjustments in previous years of assessment, which leads to an adjustment to interest, but the taxpayer has already declared the “original” interest to SARS.
Now you only have to include SARS interest income in your taxable income, in the year you actually received the refund from SARS.
There could be complications in the first year of assessment subsequent to the effective date of this section due to the previous declaration of SARS interest. We advise you to discuss this with your Tax Practitioner to ensure the correct declarations are made to SARS.
Associate: Tax, Johannesburg