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Summary Taxation (BEL200) - Semester 1

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This document contains a summary of the textbook: Silke: South African Income Tax as well as lecture notes. It encompasses Learning Area 1 - 3 which is the full curriculum for the 1st semester.

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  • La 1 - 3: chapter 1 - 6, 12, 13
  • January 27, 2022
  • 60
  • 2021/2022
  • Summary
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Taxation 200 – Semester 1


Contents
LA 1: Chapter 1 + 2: Tax in context ....................................................... 2
LA 2: Chapter 3: Gross Income ........................................................... 19
LA 2: Chapter 4: Specific Inclusions .................................................... 29
LA 2: Chapter 5: Exempt Income........................................................ 35
LA 3: Chapter 6: General deductions ................................................ 41
LA 3: Chapter 12: Special deductions and assessed losses ............48
LA 3: Chapter 13: Capital Allowances and recoupments .............. 52




1

,LA 1: Chapter 1 + 2: Tax in context

1. TAX SPECIALIST
Definition of  Compulsory with purpose to raise revenue for government
tax  where the revenue is intended for funding general
expenditure
 in the provision of public goods and services,
 to the shared benefit of the public as a whole
What our Constitution
country  Highest legal status
consists of  Supported by:
 Legislative branch: people working in courts
 Executive branch: government creates legislation/ approved
 Judicial branch: executing legislation

Legislative branch
 Fiscal policy and Monetary policy
 Consist of SA economy – Primary/ Secondary/ Tertiary
 All of the sectors flow into money – we want to earn income
– source of taxes

Executive branch
 National treasury designs tax legislation
 Approved by Minister of Finance and then executives
 To administrate legislation – SARS – will collect taxes on
behalf of government

Judicial branch
 Tax court – designed to hear tax cases
 Judges that are tax proficient


2. ROLEPLAYERS OF TAX




2

,3. HISTORY OF TAX
4000BC  Clay cones show people of Sumer were heavily taxed
 Means for Ancient Kings to provide safety/ justice/ welfare
3500BC  Tax in form of offerings/ voluntary gifts e.g., compulsory labour
 Egyptians taxed from slaves to agricultural goods
 Payments of grain at 20%
1750BC  Kings in Mesopotamia/ China introduced tax-farming
 State delegated its collection to cities which would delegate
this task to council of elders who would then delegate its power
to tax-farmers:
 prosperous businesspeople who collected taxes
 Payments of 25 – 50% of crop
1400BC  Pharaoh enslaved Israelites
 Israelites were freed/ lived without paying taxes for 400 years
 But gave up freedom for a king
500BC  Confucius developed guiding principles in China
 Only 10% of tax should be collected
200BC  Rosetta Stone inscription confirm amnesty to temples
30BC  Emperor Augustus: master tax strategist
 Negotiated collection of taxes with each provincial town
 New system decentralized collection of taxes
 Resulted in more taxes flowing into tax bureau
 Lower taxes – better living conditions
180AD  Greatest period of peace/ prosperity
 Marcus Aurelius canceled all taxes
 Decreased revenue of Rome
 His successor had to reinstate extreme taxation
600 – 900AD  Brought relief from taxation to who converted to Islam
 Income of Sultan in Spain diminished
 Royal revenues were collected for privilege of farming
 New towns were created where tax was collected
1200AD Champagne
 Fairs were held to increase revenue
 Rulers increased taxes to pay for warfare
 People lost livelihood/ property/ lives
 Magna Carta was an example of people’s rejection

England
 King John began transition from feudal  modern fiscal state
 Collection of taxes was unsuccessful due to resistance
 Magna Carta: King could not levy taxes without consent of
parliament
1700 –  Wars were greatest expense
1800AD  Finance minister, Turgot wanted to implement shifts in tax
assessments from poor to rich
 Thirteen colonies in British North America objected tax
 Tax-farming came to an end with French Revolution
 Sin tax was implemented

Adam Smith’s four points – a bad tax

3

,  requires a large bureaucracy for administration
 destroys funds needed for maintenance/ employment
 encourages evasion
 puts people through unnecessary examinations/ exposes them
to trouble/ vexation/ oppression

First income tax
 British levied tax on income in 1799
 Enough money to pay for/ win war against Napoleon
 Adams: income tax corrupts social order – people justify tax
evasion through illegal means
1900AD  first attempts at manipulating environmental behaviour through
tax policies
2000AD  Denmark was the first country in the world to implement a “fat
tax” on 1 October 2011 – repealed in 2012
 Sugar tax was implemented 2018
 Proposed at 2.29c per gram of sugar that equates to a 20% tax
incidence on 1; of soft drinks
 tax will be levied from June 1 2019 on greenhouse gases


5. PRINCIPLES OF GOOD TAX SYSTEM
Equity  Tax imposed according to taxable ability/ capacity
 Unfairness could impact taxpayers’ willingness to comply
 Equity is underpinned by:
 Ability to pay principle
 Benefit principle

Vertical Equity
 Taxpayer with greater economic capacity bears greater
burden of tax

Horizontal Equity
 Taxpayers with equal economic capacity bear equal tax
burden
Certainty  Timing/ amount of tax payments should be certain
 Uncertainty may impact economy of a country
 Legislative provisions/ procedures should be transparent/
consistent
Convenience  Tax should be imposed in a manner/ at a time that is
convenient for taxpayers- would increase compliance
Economic  Doesn’t influence person’s economic decision-making
Efficiency  E.g. if interest income is more taxed than dividend income –
taxpayers may rather invest in dividend-bearing investments
 Could encourage desired behaviour – reduced alcohol
consumption because of taxes levied on alcohol
Administrative  To not impose unreasonable administrative burden
Efficiency  Tax system should cost less to implement/ maintain than tax
revenue is able to generate


4

, Revenue authority perspective:
 Number of internal controls required
 Design of organisational structure
 Number of personnel required

Taxpayers’ perspective:
 Keeping supporting documents in prescribed format
 Frequency with which tax has to be submitted
 Hiring of tax practitioner
Flexibility  Accounts for changing economic circumstances
 Tax buoyancy:
 Measure if responsiveness of tax revenue to changes
Simplicity  Should be designed so that it is easy to understand/ apply


6.TYPES OF TAX
Normal/ Pre-payments
income tax 1. Employees tax/ PAYE – deducted from salary
2. Provisional tax – paid to SARA twice a year
Capital Gains  Liable when you dispose of an asset
tax  = proceeds (sales price) – Base cost (cost price)
 R40 000 exemption (deduct from capital gain)
 Inclusion rate
 Individual – 40%
 Companies – 80%

E.g., R300 000 – R160 000
= R140 000 – R40 000
= R100 000 x 40%
= R40 000
Withholding a) Remuneration by employers to employees
tax (ss 10(1)(i))  employer must withhold employees’ tax from remuneration
and pay it to SARS
 Prepayment of normal tax
 Deducted from normal tax payable in calculation of final
normal tax
 Amount subject to Employee Tax incentive Act 26 of 2013

b) Dividends by companies to beneficial owners
 Payable on amount of any dividend paid
 By resident/ non-resident company listed on recognized
stock exchange in SA
 Dividends tax is a final tax
 Final tax

c) Payments to non-residents
 By resident paying non-resident and paid over to SARS
 Tax liability is that of non-resident
 No withholding tax on service fees paid to non-resident
 Payments subject to withholding tax:

5

, 1. Non-resident sellers of immovable property -7.5/10/15%
Not final tax – reduces normal tax payable
2. Non-resident who receives royalties – 15%
Final tax
3. Interest received by non-resident – 15%
Final tax
4. Received by foreign entertainer/ sportsperson – 15%
Final tax
Turnover tax  For businesses of annual turnover of R1mil or less
(ss48-48C)  Calculated on taxable turnover of registered micro business
 Not on taxable income
Dividends tax  Can be considered withholding tax
(ss 64D – 64N)  Payable at 20% on amount
 Exceptions: headquarter/ oil-gas/ international shipping
companies
 Beneficial owner remains liable
 Dividend in specie: resident company remains liable
 Final tax – needn’t submit annual return of income if dividends
are only income received
Donations tax  To prevent avoidance of estate duty through gratuitous
(s54) distribution of wealth while resident is still alive
 Tax on gratuitous transfer of wealth – not income
 20% on cumulative value not exceeding R30mil
 25% on cumulative value exceeding R30mil
 Natural person exemption on R100 000 in tax year
 Company exemption on R10 0000 in tax year
Value-added  Value-Added Tax Act 89 of 1991
tax  15% on supply of goods/services by registered VAT vendor
 Quoted/ advertised prices deemed to include VAT
 Vendor may claim tax it has paid as input tax
 Indirect tax – total direct cost borne by final consumer
Transfer duty  Transfer Duty Act 40 of 1949
 Levied on cost price of fixed property
 0%/ 3%/ 6%/ 8%/ 11%/ 13%
 Wealth tax payable by purchase of property in SA
Estate Duty  Estate Duty Act 45 of 1955
 Levied on dutiable value of estate of deceased
 20% on value not exceeding R30mil
 25% on value exceeding R30mil
 Abatement of R3.5mil available against net value
 Deceases spouse’s unused abatement may be carried
forward to surviving spouse
 Estate/ beneficiaries liable for duty
Securities  Securities Transfer Tax 25 of 2007
transfer tax  0.25%
 Payable by purchaser on transfer of
 listed/ unlisted shares
 shares of foreign companies
 members’ interests in close corporation




6

,Customs/  Customs and Excise Act 91 of 1964
excise duties/  Customs duties on importation – protecting local market
levies  Excise duties/levies on luxury/ non-essential goods
Unemployment  Unemployment Contributions Act 4 of 2002
insurance  Provide relief to employees during short periods of
contributions unemployment
 Deducted from gross remuneration
 Employee and employer make 1% contribution
Skills  Skills Development Levy Act 9 of 1999
development  Paid by employers only
levies
Taxpayers  Natural persons
 Companies
 Trusts
 SBC and micro businesses
 Partnerships
 Not for profit organisations


7. ELEMENTS OF TAX SYSTEM
7.1 Politics
 What the government is doing – make decisions which impact tax impact
 Happening in Parliament with regards to tax legislation
 E.g., Government needed money in Covid times to sustain economy – diverted
income to health sector



7.2 Law
Definition The system of rules which a particular country or community
recognizes as regulating the actions of its members and which it
may enforce by the imposition of penalties.
Legislative 1. Issuing of Green Paper
process  Policy document intended for public discussion
 Sets out government department’s (National Treasury) view
 Public comments are considered
 Elects to adjust green paper

2. White paper
 Refined version of green paper
 Subjected to further discussions/ commentary

3. Draft money bill
 Prepared/ submitted to Minister of Finance
 Once approved - reviewed by State Law Advisors to ensure:
 It doesn’t contradict Constitution
 There are no technical errors



7

,  Once approved – minister of finance must present to National
Assembly/ National Council of Provinces
 Then published in Government Gazette
 Amendments made where required

4. Act of Parliament
Becomes binding on one of following dates:
 Act is published in Government Gazette
 Determined in accordance with Act
 Indicated in Government Gazette
Common law Audi alteram partem
 "let the other side be heard as well"
 no person should be judged without a fair hearing in which
each party is given the opportunity to respond to the evidence
against them

In pari materia
 statutes must be interpreted in light of each other since they
have a common purpose for comparable events or items

Casus Omissus
 a situation omitted from or not provided for by statute or
regulation and therefore governed by the common law

Tax Regulations (s107(1))
legislation:  Duties of all engaged in administration of Act
Interpretation  Limits of such persons
Act  Nature/ contents of accounts to be rendered by taxpayer
 Method of valuation of annuities/ fiduciary/ usufructuary/ other
limited interests in property
Double taxation agreements
 Has effect of law once published/ approved by Parliament
 Must be considered as it forms part of provision
 Conflicting – DTA takes preference over Act
Definitions
 If definition is in TAA, but not Act – definition in TAA will also
apply for purposes of Act
 If definition is in Act, but not TAA – definition in Act also applies
for purposes of TAA
 Inconsistencies between Act and TAA – Act prevails
Interpretation Act 33 of 1957
 Provisions only apply if Income Tax Act doesn’t define term/
ambiguities exist
 Definition in ITA takes precedence
 If not defined within primary legislation/ Interpretation Act –
dictionary may indicate meaning
 Meaning still uncertain/ incomplete – case law is examined
Interpretation notes
 Don’t form part of legislation
 Sets out interpretation of various provisions
 Serve as guidelines

8

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