A summary of the tax base, tax rate structure and tax liability. The tax framework for individuals, rebates, gross income (definition and court cases), special inclusions and exempt income. Summarized according to the learning outcomes provided for this study unit.
STUDY UNIT 11 INTRODUCTION AND CALCULATION OF NET TAX PAYABLE FOR AN INDIVIDUAL Amount on which tax is imposed Percentage on value or amount per unit Definition : Tax liability Calculation basis: Income tax on income earned Consumption tax on the sale/use of goods Wealth taxes on the ownership of assets or capital gains made on the sale of property Marginal tax rate = when tax base increases by R1 Statutory tax rate = rate imposed by legislation Average tax rate = tax liability ÷ tax base EƯective tax rate = tax liability ÷ total profit/income Compulsory payments that are imposed on citizens to raise revenue to fund general expenditure such as education, health, housing for the benefit of society as a whole. Person responsible for paying: Direct tax: impact & incidence fall on same person (imposed on person) Indirect tax: seller bears impact of tax, while consumer ultimately pays the tax (imposed on transaction) Methods of determining tax rate structure : Proportional tax: levied at a fixed rate on the amount of income earned Progressive tax: the rate that is used to calculate the tax is determined by the person’s income Regressive tax: the tax rate decreases with the increase of a person’s income Section 5(1) determines that ‘normal’ tax must be calculated on: Taxable income Of the person (received by or accrued to) For the year of assessment Normal tax (S5) Facilitated through system of employees’ tax, provisional tax and withholding tax payments . (employer = obligated to withhold to employees’ but natural person carries the burden of the tax) Tax rates are determined annually by Parliament Uses progressive rate structure: Marginal rate where max is 45% (income >R1 817 000) Average rate = Net normal tax (after rebates) / Total taxable income Natural persons : Year of assessment – Always ends on last day of February (28th/29th); unless taxpays dies, is declared insolvent or emigrates. (begins when TP is born/becomes RSA resident) Tariff formula -s5(10) Profressive rates and rebates
Benefits with CGT, death, etc. Specific deductionsIndividualsTAX BASE TAX RATE STRUCTURE TAX INCIDENCE Rebates : All natural persons are entitled to a rebate (saving of normal tax) from the normal tax per the tax calculated on taxable income (determined by their age on the last day of the YoA) Primary (<65 years) Secondary (>65 to <75 years) Tertiary (>75 years) -R17 235 -R26 679 -R29 824 (R 9 444 + R17 235) (R3 145 + R 9 444 + R17 235) Proportional & cannot create a tax credit TAX FRAMEWORK FOR INDIVIDUALS Section Study unit Gross income – general and specific inclusions S1 4,5,11 Add: Deemed inclusions E.g. S 8(4)(a) 5,13 Less: Exempt income Ss10 and 10A 5,11 Less: Deductions S11 6 Less: Assessed losses s20 and 20A 12 Add: Taxable capital gain S26A Less: Section 11(F) fund contributions 12 Add: Other amounts included 'taxable income' E.g. s8(1)(a) 12 Less: Section 18A donations 12 =TAXABLE INCOME Tax according to table S5(1) Less: Rebates (primary, secondary, tertiary) S6(2) 11 Less: Rebates (tax credit on medical costs) S6A and s6B 11 Less: Employees tax (PAYE) 16 Less: Provisional tax 16 = TAX PAYABLE/REFUNDABLE FOR THE YEAR Exemptions (S10) Dividends – All RSA dividends Dividends – Foreign dividends S10B partial exemption Interest: (only RSA source interest) - S 10(1)(i) R23 800 – persons under 65 R34 500 – persons 65+ No exemption on foreign interest S12T – Interest and dividends on tax free investment GROSS INCOME How to determine whether an amount is taxable? Gross income definition (s1 of the Income Tax Act) Court case decisions Specific inclusions (paragraphs in s1) Gross income definition Resident Non-resident Total amount Court cases In cash or otherwise Received by or accrued to In year/period of assessment Excluding amounts of a capital nature Subjective & objective test World-wide income Source within South Africa All 5 components must be present to be included in gross income & place of residence = important
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