FAQ – Tax treatment of income of spouses

spouseThe South African Income Tax Act 58 of 1962 defines a “spouse” in relation to any person as a person who is a partner of such person in a marriage, customary relationship or union recognised as a marriage under the laws of South Africa or any religion. The definition also includes a same-sex or heterosexual relationship which the Commissioner is satisfied is intended to be permanent.

Spouses married out of community of property are taxed separately on their individual incomes.

In the case of spouses married in community of property, under South African common law, income received accrues to the joint estate and is deemed as having been received in equal shares by each spouse. However –

  • a salary from a third party is treated as being the income of the spouse who receives that salary;
  • as far as passive income (investment income) originating from assets forming part of the joint estate, is concerned, the provisions of the Act merely confirm the legal position between the spouses married in community of property. Income derived from the letting of property or income other than from carrying on a trade (for example, investments) is deemed to have accrued in equal shares to each spouse;
  • income earned from carrying on a trade jointly or where spouses are trading in partnership will accrue to each partner according to the agreed profit-sharing ratio;
  • income which does not form part of the joint estate of both spouses is taxable in the hands of the spouse who is entitled to the income;
  • benefits from pension, provident and retirement annuity funds are taxable in the hands of the spouse who is the member of the fund;
  • income from patents, designs, trademarks and copyrights is deemed to be the income of the holder or owner.
  • in the case of pension fund or retirement annuity fund contributions, the contributions are deducted in the hands of the spouse who made the contributions as a member of the fund; and
  • expenses incurred in the production of income are deductible to the extent to which that income accrued to the spouses. Expenditure incurred (for example, medical expenses), will be deductible in the hands of the spouse who paid the expenses, even if the funds for the expenses may have come from the joint estate.

These provisions must not in any way be seen as favouring spouses married in community of property over spouses married out of community of property. It is rather a case of harmonising the existing rights with regard to property and income of couples married in community of property.

There are also measures to prevent income splitting (other than those mentioned above) that apply to spouses whether they are married in or out of community of property. The income of one spouse may not be treated as being the income of the other spouse. This provision prevents income splitting between spouses in order to obtain an unfair tax advantage.

These deeming provisions also apply to donations, settlements and other dispositions between spouses, where income is derived by one spouse (recipient) as a result of a donation made by the other spouse (donor) with the purpose of avoiding tax; or as a result of a transaction, operation or a scheme entered into or carried out by the donor with the sole or main purpose of reducing, postponing or avoiding the donor’s liability for tax.

Excessive income derived by a spouse (recipient) from –

• any trade which is connected to the trade of the other spouse (donor);

• a partnership of which the donor is a partner; or

• a company in which the donor is a principal shareholder,

and the income so earned is excessive having regard to the nature of the trade and the recipient’s participation, will be taxed in the hands of the donor.

 

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