Section 9H of the Income Tax Act provides that a natural person’s year of assessment is deemed to have ended on the date immediately before the day on which that person ceased to be a resident for South African tax purposes. Furthermore, that person’s subsequent tax year is deemed to commence on the day that person ceased to be a tax resident for South African tax purposes. This effectively creates two years of assessment during a single 12-month tax period which would ordinarily constitute a single year of assessment beginning on 1 March and ending at the end of February the following year.
In turn, section 10(1)(i) of the Act provides an exemption in respect of the aggregate interest earned by an individual during a year of assessment. As such, individuals 65 years and older on the last day of the year of assessment are afforded an interest exemption, currently in the amount of R34 500, while individuals younger than 65 on the last day of the year of assessment are afforded an interest exemption, currently in the amount of R23 800.
Further to the above, the Act allows an individual a capital gains tax (CGT) annual exclusion, currently in the amount of R40 000 per year of assessment.
Both the interest exemption and annual exclusion apply per year of assessment.
Reasons for the proposed legislative changes
The issue at hand is the two years of assessment created during the single 12-month tax period during which a natural person ceases to be a South African tax resident. By way of illustration, when a natural person ceases to be a South African tax resident on 1 June 2021, their year of assessment as a South African tax resident would have begun on 1 March 2021 but would be deemed to have ended on 31 May 2021, this constitutes a 3-month year of assessment. Their year of assessment as a non-South African tax resident would have thus begun on 1 June 2021 and ended on 28 February 2022, constituting a 9-month year of assessment. Both years (three- and nine months) would fall within a single 12-month tax period.
As a result of the natural person having these two years of assessment in the single 12-month tax period, the natural person may double-up on the interest exemption as well as the CGT annual exclusion (as the exemption and yearly exclusion are available per year of assessment, and are currently not apportioned in instances where the year of assessment is less than 12-month). This is contrary to the policy rationale. As such, an individual who is younger than 65 years on the last day of the year of assessment would be able to claim an interest exemption of R47 600 (R23 800 for the first 3-month period and another R23 800 for the 9-month period) as well as a CGT annual exclusion of R80 000 (R40 000 for the 3-month period and R40 000 for the 9-month period) for the period 1 March 2021 to 28 February 2022.
What will change?
To address this anomaly, Government proposes that changes be made to the Act to require an apportionment of the interest exemption under section 10(1)(i) of the Act and the CGT annual exclusion under paragraph 5(1) of the Eighth Schedule to the Act to cater for instances where the individual’s year of assessment is less than 12 months. The proposed amendment will come into operation on 1 March 2023 and apply for years of assessment commencing on or after that date.
This article is a general information sheet and should not be used or relied on as legal or other 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 legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)