CHAPTER 13
Personal income taxation
13.1 The comprehensive income tax base
Four tax bases → income, wealth, consumption, and persons
Personal budget → has an expenditure/uses side and a revenue/source side.
Income → defined from a source/revenue perspective or from a use/expenditure
perspective.
o Can be defined form both sides of the personal budget.
o Use/expenditure side → income = monetary value of consumption + any
change in net worth over a year.
Net worth (net value of assets) = assets – liabilities
𝑌 = 𝐶 + 𝑆 → 𝑌 is income, 𝐶 is consumption, 𝑆 is savings (change in
net worth)
Income → the net increase in power to consume in a
particular period.
o Source/revenue side → income = anything that makes consumption
possible.
Income includes → salaries, wages, interest, capital gains, rent,
profits, royalties, dividends, gifs, employer contributions, benefits
and income in kind.
Government tax some of the sources of income separately →
administrative and other reasons.
Income of individuals → subject to personal income tax
Income of incorporated businesses (profits) → subject to company tax
Comprehensive approach to income → income is recorded when it accrues to the
taxpayer → not only when it is realized.
o E.g. asset increases in value during the year → capital gain = additional
net worth
Asset need not be sold (realized) for the increases value to be
regarded as income.
, Increase in value of asset = increase in purchasing power of the
owner (ability to pay)
Broad definition of income → known as the Haig-Simon definition of income.
13.1.1 International taxation of income
o Economies of scale → become more internationalised → impact tax
jurisdictions ability to tax individuals and companies.
o Rates of return between countries differ → due to taxation → tax-induced
differentials can be exploited by capital and highly skilled individuals.
Causes distortions within and across countries.
o Methods of dealing with international taxation of income:
Residence of taxpayer (residence principle/worldwide basis
principle) → the country where the person lives receives the tax.
Only income allocated to activities of business (home and
abroad) is taxable.
Living in SA → therefore be taxed on their worldwide
income.
Source of income (source of income principle)→ the country
where the income is generated receives the tax.
Living in SA → only taxed on income they generate in
SA.
o Issues facing developing countries:
The source basis → resembles the benefit principle → relying
on public services to generate income.
The residence base → resembles the ability to pay
principle → allowing countries to tax residents on
worldwide income on a progressive scale.
This has equity implications → countries that do not have
strong administrative capacity may struggle to tax
residents on worldwide income (according to the ability-
to-pay principle).
o Equity may ask for the residence principle → it may not be administratively
feasible.
, The tax neutrality principle → implies that the tax system should
not influence locational decisions.
13.2 The personal income tax base
Gross income = all receipts and accruals (wages and salaries, rent, royalties,
dividends, capital gains and interest) → irrespective of where in the world the
income is earned.
Tax expenditure → includes exclusions, exemptions, deductions, and tax rebates
(credit) that all affect the size of the tax base.
o Exclusions → income not included in the tax base.
o Exemptions → income that is included but made tax exempt.
o Deductions → expenditure items that you are permitted to deduct from
income.
Total (comprehensive) income
minus exclusions (imputed rents and unrealised capital gains)
Gross (cash) income
minus exemptions (tax-free portion of interest)
Net income
minus deductions (contributions to retirement fund and medical expenses)
Taxable income
tax according to tables
Gross tax liability
minus rebates (primary rebate and rebate for age 64 and over)
Net tax liability
Exclusions
o Example → salary of a person employed as a cook/child minder is taxable
but a mother, who performs the same functions as these professions, is
not taxed for her services.
o Example → homeowner lets a person the house → rent received by
homeowner is taxable.
Personal income taxation
13.1 The comprehensive income tax base
Four tax bases → income, wealth, consumption, and persons
Personal budget → has an expenditure/uses side and a revenue/source side.
Income → defined from a source/revenue perspective or from a use/expenditure
perspective.
o Can be defined form both sides of the personal budget.
o Use/expenditure side → income = monetary value of consumption + any
change in net worth over a year.
Net worth (net value of assets) = assets – liabilities
𝑌 = 𝐶 + 𝑆 → 𝑌 is income, 𝐶 is consumption, 𝑆 is savings (change in
net worth)
Income → the net increase in power to consume in a
particular period.
o Source/revenue side → income = anything that makes consumption
possible.
Income includes → salaries, wages, interest, capital gains, rent,
profits, royalties, dividends, gifs, employer contributions, benefits
and income in kind.
Government tax some of the sources of income separately →
administrative and other reasons.
Income of individuals → subject to personal income tax
Income of incorporated businesses (profits) → subject to company tax
Comprehensive approach to income → income is recorded when it accrues to the
taxpayer → not only when it is realized.
o E.g. asset increases in value during the year → capital gain = additional
net worth
Asset need not be sold (realized) for the increases value to be
regarded as income.
, Increase in value of asset = increase in purchasing power of the
owner (ability to pay)
Broad definition of income → known as the Haig-Simon definition of income.
13.1.1 International taxation of income
o Economies of scale → become more internationalised → impact tax
jurisdictions ability to tax individuals and companies.
o Rates of return between countries differ → due to taxation → tax-induced
differentials can be exploited by capital and highly skilled individuals.
Causes distortions within and across countries.
o Methods of dealing with international taxation of income:
Residence of taxpayer (residence principle/worldwide basis
principle) → the country where the person lives receives the tax.
Only income allocated to activities of business (home and
abroad) is taxable.
Living in SA → therefore be taxed on their worldwide
income.
Source of income (source of income principle)→ the country
where the income is generated receives the tax.
Living in SA → only taxed on income they generate in
SA.
o Issues facing developing countries:
The source basis → resembles the benefit principle → relying
on public services to generate income.
The residence base → resembles the ability to pay
principle → allowing countries to tax residents on
worldwide income on a progressive scale.
This has equity implications → countries that do not have
strong administrative capacity may struggle to tax
residents on worldwide income (according to the ability-
to-pay principle).
o Equity may ask for the residence principle → it may not be administratively
feasible.
, The tax neutrality principle → implies that the tax system should
not influence locational decisions.
13.2 The personal income tax base
Gross income = all receipts and accruals (wages and salaries, rent, royalties,
dividends, capital gains and interest) → irrespective of where in the world the
income is earned.
Tax expenditure → includes exclusions, exemptions, deductions, and tax rebates
(credit) that all affect the size of the tax base.
o Exclusions → income not included in the tax base.
o Exemptions → income that is included but made tax exempt.
o Deductions → expenditure items that you are permitted to deduct from
income.
Total (comprehensive) income
minus exclusions (imputed rents and unrealised capital gains)
Gross (cash) income
minus exemptions (tax-free portion of interest)
Net income
minus deductions (contributions to retirement fund and medical expenses)
Taxable income
tax according to tables
Gross tax liability
minus rebates (primary rebate and rebate for age 64 and over)
Net tax liability
Exclusions
o Example → salary of a person employed as a cook/child minder is taxable
but a mother, who performs the same functions as these professions, is
not taxed for her services.
o Example → homeowner lets a person the house → rent received by
homeowner is taxable.
