Class notes
Class Notes for Tax Law
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These class notes are comprehensive for Assessments (tests/exams) for Tax Law (BLR 310). The also contain pointers for the likely questions for assessment purposes.
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BySimon Motshweni ©
BLR 310| 2020
__________________
DISCLAIMER
Please take note of the fact that these notes may not be comprehensive of the
material required to be covered for the module and contained in the prescribed
syllabus as reflected in the study guide. There may be errors; omissions or
shortcomings, accordingly, use these notes at your own discretion.
ACKNOWLEDGEMENT OF SOURCES:
These notes were composed based on:
• Prof SP van Zyl, Ms AB Nyaude, Lecturers in the Department of Mercantile Law,
University of Pretoria: BLR 310 (Tax Law) 2020, Slides / Class Notes / Podcasts.
• BLR 310 Study Guide (2020) (University of Pretoria).
• SILKE: South African Income Tax (2020) LexisNexis.
Please note:
These notes shall not be shared without the express consent of the author thereof.
1
, BLR 310 07
FEB 2020
Theme 1:
The context of Taxation
By Ms. AB Nyaude
Recording: University of Pretoria 6
1. GENERAL PRINCIPLES OF TAXATION
Tax is defined as:
• a compulsory contribution
• to raise revenue for the government;
• to fund expenditure such as education, health and housing;
• for the benefit of society.
The system of taxation exists to facilitate the generation of public expenditure and the
accomplishment of numerous socio-economic and political objectives.
The following may be summarised as the existing primary Tax objectives:
The collection of revenue by the government: The purpose of taxation is to
generate revenue to finance government activities. 90% of the governments
expenditure is financed through tax revenue.
To facilitate the redistribution of resources: This assists in advancing values of
political liberty, equality of opportunities and fairness in distribution by reducing
the economic and political power that is concentrated in the hands of the
wealthy and by raising the economic standards of the poor. The Gini-index is
used to advance the redistribution of resources.
Improve economic growth: Tax policies can be formulated to act as an
incentive for economic growth and development; the avoidance of inflation
and unemployment and the promotion of saving and investment.
reprising (charging more for using certain products to discourage its use): The
encouragement or discouragement of certain types of activities can be
addressed by means of taxation (so called “sin tax”). Sin taxes were initially
implemented to discourage people from consuming these products. The
criticism against reprising through taxation flows from the principle of non-
discrimination which required the government to be neutral towards all kinds
of activities. However, the counter argument is that these taxes can assist in
raising revenue.
In view of the formulation of tax policies, it is evident that the Tax base is the source
through which tax is charged.
1
, • The Tax base requires that we look at whether the tax is charged on income:
via Income Tax Act, or on wealth [property and assets: via transfer duties], or
on
• Consumption [goods and services: via Value Added Tax]).
Another method of taxation evidenced in policy, is the existence of a Tax rate (where
tax is charged as a percentage of a particular value),
• the Tax structure (eg).
o Progressive Tax rate structure which outlines that the greater the
income, the greater the tax, or
o the Regressive tax rate structure which outlines that the more you earn,
the less you pay, or
o the Proportionate Tax rate structure which outlines a capped tax
percentage (eg. The rate is set to 10% irrespective of the amount you
earn – like VAT which is currently capped at 15% no matter what you
buy).
Further, the policy facilitates for ‘Tax incidence’ whereby the person who pays the Tax
is not always the person who bears the burden of the Tax, such as when the employer
collects Tax and hands it over to SARS on behalf on an employee – the employee
does not pay the Tax directly. What must be noted here, is the burden of the Tax is on
the employee but the employer pays it on their behalf for issues of convenience which
is one of the canons of Taxation.
(a) Requirements of a good tax system
The following are the canons of taxation:
• The Equality Principle: Tax policy should be fair, but fairness is subjective so
its determination is on the ability of a person to pay (capacity to pay), in
consideration of the benefit principle which proposes that whoever has the
most benefit, must pay the most. Further, the equality principle requires that
we look at
o horizontal equity which requires taxpayers with equal capacity to
contribute in equal proportion and
o vertical equity which requires that taxpayers with greater capacity
pay more taxes (which is accomplished through progressive
taxation).
• The Certainty Principle: Tax must be certain and not arbitrary, meaning that
the time, manner and amount of payment should be clear and
ascertainable to the taxpayer. The question as regards to whom the tax be
paid must also be certain.
2
,• The Convenience Principle: Easier methods of payment must be established
to facilitate and encourage the payment of Tax.
• The Economic Efficiency Principle: Tax is inefficient if it requires you to
change your behaviour. This principle is based on the rationale that if tax
requires a behavioural change, then the government will lose money when
people change their behaviour. This principle is more or less viewed as
critique to reprisal tax, however, scholars agree that in view of reprisal tax in
particular, it is worth the course (it can be argued that it lessens eg. Social
consumptions of alcohol).
• The Administrative Efficiency Principle: Tax policy must not cause an
unnecessary burden on the taxpayer or the Revenue Authority and the tax
system should cost less to implement and maintain than the tax revenue is
able to generate (eg. we can’t have an unnecessary number of
employees at SARS to the extent that the money received from taxpayers
is almost entirely used to pay the SARS employees and is thus unable to
address its main objectives).
o From a revenue authority’s perspective, administrative efficiency will
relate to issues such as the number of internal controls required to be
put in place in order to audit taxpayers etc, whereas from a
taxpayer’s perspective, this entails processes of keeping supportive
documentation in the format prescribed, the frequency with which
tax and other returns must be submitted and the hiring of tax
practitioners to assist in the completion of tax returns.
• The Flexibility Principle: The tax policy must be able to adjust to changes
especially in a global society with things like ePayments etc, it must
accommodate 4IR innovations of paying taxes.
• The Simplicity Principle: The payment and collection of Tax must be simple
and not complicated.
3
, (b) Current Tax Legislation Taxation in South Africa
The current South African Tax system comprises of a mix of various taxes levied in terms
of various statutes. Most of these taxes can be classified under three broad tax bases,
namely: tax levied on Income, the consumption of goods and services, as well as on
wealth as discussed below:
[i] Taxation of income
• Nearly 60% of the national revenue is currently derived from direct income
tax in terms of the Income Tax Act. The South African concept of income
was formulated on the English source-based concept of income, however,
capital gains were introduced into the income tax system by virtue of the
Eight Schedule to the Income Tax Act in 2001.
• This is the Normal tax, Withholding tax, Turnover tax, Dividends tax.
• Unemployment insurance contributions (employees and employers must
pay a certain tax), Skills development levies (only paid by employer).
• Look at page 13: Table.
[ii] Taxation of consumption
• Tax generated from sales of good and services, as well as the importation
and exportation of goods and regulated in terms of the Custom and Excise
Act which imposes excise duties or ‘sin taxes’ on tobacco, wine, beer and
other fermented beverages, fuel, diesel and plastic bags, international air
travel and a variety of other products. It is crucial to note, that Value Added
Tax is the second largest revenue raiser in South Africa.
[iii] Tax on Wealth
• Based on capital or property and it is taxed by virtue of rates, property
transfer taxes, wealth transfer taxes and capital gain tax. Rates are only
Taxed by Municipalities, and they constitute a major source of revenue for
the Municipalities. Property transfer taxes apply in general, to the gross
value of the assets transferred without taking any liabilities into account. In
SA, Tax is levied on the transfer of immovable property in terms of the
Transfer Duty Act. The transfer of listed and unlisted securities is taxed under
the Securities Transfer Act. Wealth transfer taxes are taxes on inheritance,
gifts and estates. SA currently levies the estate duty of deceased persons
on the Estate Duty Act. Further note, that Tax on capital gains is regarded
as tax on income.
o In addition to these, there is a silent fourth base named:
Miscellaneous taxes: the system also provides for a number of social
security contributions such as skills development levy and
unemployment insurance contributions.
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