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TAX LAW LECTURE NOTES
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TAX LAWCHAPTER 1
POWER TO TAX + DEFINITION:
The power to tax is inherent and there is no need for an express provision
conferring it.
In practice, fiscal legislation is introduced in the interest of accountability
(Income Tax Act; VAT Act).
The power to tax is described as:
o Monetary based, compulsory contribution payable by the public as a
whole, or as a substantial sector thereof, to a government.
o The purpose of tax is to fund government expenditure and to attain socio
economic and political objectives.
o Tax is not a quid pro quo for something specific in return.
SA’S TAX SYSTEM:
There are 3 tax bases = income tax, consumption tax & wealth tax.
A. Income tax:
o 60 % of national revenue is generated from a direct income tax,
which is levied ito the ITA.
o The SA concept of income tax is based on the English source-based
concept of income.
o Capital gains taxation was introduced into the income tax system by
virtue of the 8th schedule of the ITA.
B. Consumption tax:
o The taxation of goods and services is accomplished by a variety of
indirect taxes.
o Customs duties = levy on importation and exportation of goods. The
levy is determined ito the [Customs and Excise Act].
o This statute imposes excise duties (sin taxes) on wine, spirits, beers,
tobacco, fermented beverages, fuel, diesel, plastic bags,
international air travel and various other products.
o A diamond export levy is also levied ito another statute.
o A general sales tax (GST) was introduced on the sale of goods and
services in the Republic.
o GST had a single stage collection system, which was replaced by
VAT in the [VAT Act].
o VAT is the second largest revenue raiser in SA.
C. Wealth tax:
o Wealth/property is taxed by virtue of ‘rates’, property transfer taxes,
wealth transfer taxes, and capital gains tax.
o Rates, which embody a periodic tax charged on the owner of
immovable property, are levied in the local government sphere ito
[Local Government Municipal Property Rates Act].
o This form of taxation = major revenue for municipalities.
o Property transfer taxes apply to the gross value of assets
transferred without taking liabilities into account.
o In SA, a transfer duty is levied on the transfer of immovable
property ito [The Transfer Duty Act].
, o The transfer of listed and unlisted securities is taxed under the
[Securities Transfer Tax Act].
o Wealth transfer taxes = on inheritances, gifts and estates.
o SA levies on estate duty on deceased estates, ito [Estate Duty Act].
o SA levies a donations tax on inter vivos transfers, provided for in the
ITA.
o The taxation of capital gains was introduced by schedule 8 of the
ITA, which applied from 1 October 2001.
o Capital gains tax is incorporated as an integral part of the income
tax system because a tax on capital gains is regarded as a tax on
income.
o Such an approach has administrative advantages as the existing
procedures and provisions of the ITA regarding matters such as
returns, assessments, payment and recovery of tax, objections and
appeals = utilized for purposes of capital gains tax.
D. Miscellaneous tax:
o Social security contributions = skills development levy and an
unemployment insurance contribution.
THE OBJECTIVES OF TAXATION:
Taxation is an important fiscal tool to provide for the financing of public
expenditure, and can be used to accomplish numerous socio-economic and
political objectives.
Taxation is a central component of state building.
A. Revenue:
o Social policy efforts are funded through loan capital, user charges,
admin fees, inflation and taxation.
o An important function of taxation = generate revenue for the
financing of government activities.
o SA = 90% of government expenditure is financed through tax
revenue.
B. Socio economic objectives:
o Taxes can assist socio-economic objectives such as the
redistribution of resources, economic growth and reprising = the
encouragement/discouragement of certain activities by means of
taxation.
i. Redistribution of resources:
A legal system should value political liberty, equality of
opportunity, and fairness in distribution so that all can
have an equal opportunity to pursue their economic
dreams.
Redistribution can reduce the power the wealthy have,
and raise the standards of the poor.
Confiscatory tax = may violate Constitutionally
protected rights in property, and increase tax evasion.
The extent of redistribution depends on political
considerations.
In SA, redistribution of income is a common goal of tax
policy.
Compiled by T. Moorley
, ii. Economic growth:
Investment and savings are essential for economic
growth.
Tax policy may be formulated as an incentive for
economic growth and development, the avoidance of
inflation and unemployment, and the promotion of
saving and investment.
iii. Reprising:
Sin taxes discourage people from consuming those
products.
This is however viewed is discriminatory, as the
government must be neutral towards all kinds of
activities.
On the other hand, this tax will raise the revenue, which
can be used towards the costs of the misuse or abuse of
these products, which justifies the discriminatory
taxation.
THE CANONS OF TAX POLICY/TAXATION:
These canons provide rational, non-political guidelines to policy makers.
Fiscal legislation however, does not need to conform to these canons in order to
be enforceable.
i. Equity:
o Demands that taxpayers contribute proportionally to their income,
to the state.
o The measure for equity = ability to pay.
o Taxation is a sacrifice levied upon personal economic wellbeing.
o Horizontal equity = requires taxpayers with equal capacity to
contribute in equal proportions.
o Vertical equity = requires taxpayers with greater capacity to pay
more taxes.
o Appropriate measures of taxable capacity = income, consumption,
wealth and utility.
ii. Certainty and simplicity:
o The tax that must be paid must be certain and not arbitrary.
o The time, manner and amount = clear and ascertainable.
o Taxes must be simple in concept, collection and administration.
o It is desirable that the taxpayer ascertains their tax liability
according to operations and records that they need to perform and
preserve.
o Certainty is linked to legality = rule of law = essential to democracy.
o Taxing authorities are accountable to the electorate.
iii. Convenience:
o Tax must be levied at a time or in a way that is most convenient for
the taxpayer.
o Taxes should ideally be levied in a way that taxes cognizance of the
taxpayer’s liquidity.
Compiled by T. Moorley
, o If tax is levied on unrealized assets, the assets need to be valued
which opens doors for inconsistencies and tax avoidance through
discretionary valuations.
iv. Cost effectiveness:
o The economic function of tax in a market economy = transfer
resources from the private to the public sector.
o The costs of taxation should not be a disproportionately high % of
the revenue yield.
o Unproductive costs:
The costs of tax planning and tax advisors =resources being
employed in the unproductivity activity of finning loopholes
and tax-free alternatives.
An efficient tax system = dictates that tax avoidance or
evasion must be kept to a minimum which requires simple tax
laws.
o Dead weight market costs and neutrality:
An efficiency cost influences the decisions of taxpayers.
Taxation perceived as unfair and as a penalty may discourage
work effort and savings, and may encourage tax avoidance.
Tax avoidance = the cost of these dead weight losses of
revenue which distort the tax system.
The taxpayer should not be influenced by the tax system to
choose to pay or avoid.
Taxation does distort economic decision making to some
extent, and thus efficiency requires that taxes should be
designed to redistribute purchasing power with the least
disruption to the market economy.
o Collection costs:
Admin costs = costs of establishing and maintaining a tax
collection system.
Compliance costs = cost for taxpayers to comply with their
tax liabilities.
An efficient cost collection system = resources available for
public use must ne nearly as possible equal to the resources
withdrawn from the private sector. Therefor the transferral of
resources must involve minimal waste.
Both costs will be less if the liability of the taxpayer can be
easily established.
Efficiency will be enhanced by a certain and simple tax
system.
CONSTITUTIONAL CONSIDERATIONS:
I. THE POWER TO PASS FISCAL LEGISLATION:
The national legislative authority confers the power to amend the
Constitution and to pass legislation, to the NA.
The NA can pass legislation on schedule 4 matters.
The NA may assign legislative powers to other bodies.
The area of taxation does not fall within schedule 4 or 5; therefore the NA
primarily has the exclusive authority to pass tax legislation.
Compiled by T. Moorley
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