AUE3701
STUDY
PACK.
1
Introduction to taxation
and calculation of net tax
payable
Gross
income –
Exempt
income – Deductions =
Taxable
income Tax liability
Tax per table – Rebate =
Normal
tax liability –
Prepaid
taxes
=
Net tax due/
(refundable)
Page
1.1 Introduction .....
, Introduction to taxation
1 and calculation of net tax
payable
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Gross Exempt Taxable
– – Deductions = Tax liability
income income income
Normal Prepaid Net tax due/
Tax per table – Rebate = – =
tax liability taxes (refundable)
Page
1.1 Introduction ......................................................................................................... 2
1.2 Taxation in perspective ...................................................................................... 2
1.2.1 Types of taxation .................................................................................... 2
1.2.2 Classification of taxes ............................................................................ 2
1.2.3 Criteria of a good tax system ................................................................ 3
1.3 The budget process ............................................................................................. 4
1.3.1 Medium-term expenditure framework .............................................. 4
1.3.2 The national budget ............................................................................... 4
1.3.3 The Income Tax Act 58 of 1962 (the Act) ............................................ 6
1.4 Calculation of taxable income (section 5) ......................................................... 7
1.5 Calculation of final normal tax liability ........................................................... 12
1.5.1 Year or period of assessment (section 1) ............................................. 13
1.5.2 Normal tax (section 5) ........................................................................... 14
1.5.3 Normal tax rebates for natural persons (section 6) ........................... 15
1.5.4 Medical scheme fees tax credit (MTC) (section 6A) .......................... 17
1.5.5 Additional medical expenses tax credit (AMTC) (section 6B) ......... 19
1.5.6 Rebate in respect of foreign taxes on income (section 6quat) ........... 23
1.5.7 Prepaid taxes .......................................................................................... 23
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, A Student’s Approach to Income Tax/Natural Persons 1.1–1.2
1.1 Introduction
Most people who enter the workplace are amazed to see how much tax is deducted
from their monthly salary. Most people’s first reaction is: ‘There must be a mistake; I
am paying too much tax.’ After consultation with the salary department, it is usually
confirmed that the correct amount was deducted. The reality of tax is something that
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most people have to face whether they are employed or operating their own business.
Critical questions
When dealing with taxation a person is normally confronted with the following questions:
• What determines the tax rate?
• Do the taxation rules change every year?
• Which types of taxes are levied in the Republic?
• What does the government do with the tax levied?
• How is a person’s taxable income for the year calculated?
• How does a person know how much tax they should pay?
• How does the government collect the tax that is due?
1.2 Taxation in perspective
Taxes are levied to enable the government to provide services to the people. Another
view is that taxes are contributions to the State for the ultimate benefit of all who
enjoy the privileges and protection offered by the State.
1.2.1 Types of taxation
In South Africa we pay a variety of taxes of which the main types are income tax,
(which includes capital gains tax), value-added tax (VAT), excise and customs duties
and a whole range of other taxes such as transfer duty and local authority taxes.
South Africans also pay donations tax and estate duty (which tax the transfer of
wealth), securities transfer tax on shares and local property rates.
1.2.2 Classification of taxes
There are a number of ways to classify taxes ranging from the tax calculation method
used, to identifying the person who is ultimately responsible for paying the tax.
Copyright 2022. LexisNexis SA.
Taxes are classified according to a number of different factors.
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, 1.2 Chapter 1: Introduction to taxation and calculation of net tax payable
Based on what the various taxes are levied on
• Income Tax on income earned, for example normal tax levied on taxable income.
• Consumption Taxes on the sale or use of goods or services, for example VAT,
excise duty on domestic consumption, and customs duty and import tariffs on for-
eign trade. These taxes take the form of price increases and affect the consumers.
• Wealth Taxes on the ownership of assets or capital gains made on the sale of
property, for example capital gains tax, estate duty, donations tax and local author-
ity taxes.
• Other Taxes that are levied on specific business transactions, for example stamp
duty, transfer duty and securities transfer tax.
The method used to calculate the tax
• Proportional tax Tax is levied at a fixed rate on the amount of income earned,
for example income tax on companies is levied at a fixed rate of 28% of taxable
income.
• Progressive tax The rate that is used to calculate the amount of tax is determined
by the person’s income. The higher a person’s income, the higher the tax rate that
is used to calculate the tax, for example income tax levied on natural persons.
• Regressive tax The tax rate decreases with the increase of a person’s income. No
such form of tax exists in South Africa.
The person who has the responsibility of paying the tax
• Direct tax The impact and incidence of tax falls on the same person (the person on
whom the tax is levied bears the impact, while the person who ultimately pays the
tax, bears the incidence). Income tax and capital gains tax are therefore direct taxes.
• Indirect tax The seller bears the impact of the tax, while the consumer ultimately
pays the tax. VAT is an example of an indirect tax.
1.2.3 Criteria of a good tax system
As early as 1776, Adam Smith, in his Wealth of Nations, recognised that the levying of
taxation should comply with certain basic criteria or norms and proposed the follow-
ing four canons (or principles) of taxation:
• Equity The subjects of every state ought to contribute, almost in proportion to
their abilities, towards the support of the government, that is to say in proportion
to the benefits which they enjoy under the protection of the state.
• Certainty The tax that every individual is bound to pay should be certain and not
arbitrary. This means that the time and manner of payment, and the amount to be
paid should be clear and plain to the contributor and to every other person.
• Convenience Every tax should be levied at the time or in the manner most con-
venient for the contributor to pay it.
• Economy Every tax should be such that the contributor pays the minimal add-
itional cost for administration and in submission costs beyond its actual tax, but it
must still be sufficient to provide the treasury of the State with the amount it
requires.
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