Summary TAX2601 LU 5 Trading deductions and trading stock

Learning unit 3
Different types of taxpayer
INTRODUCTION
 The type of entity used to operate an enterprise has a direct influence on the
tax liability of the specific business or enterprise.
 Income tax legislation provides for various taxpayers, namely, individuals
(whether sole traders or partnerships), companies (this category also includes
close corporations) and trusts.
 The Income Tax Act has a specified structure or framework that must be
applied to determine the taxable income of a taxpayer.
 This framework applies to all taxpayers, irrespective of the specific entity
type.




3.1 Background:
The various taxpayers discussed in this learning unit are:
 sole traders
 partnerships
 companies (including small business corporations, close corporations and
micro businesses)
 trusts
 farmers


IMPORTANT NOTE
= South African resident taxpayers and non-resident taxpayers are dealt with
separately for income tax purposes.
In this learning unit, only the profiles of South African resident taxpayers will be
studied (with non-resident entities and their tax rate merely being referred to).




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,3.2 Sole traders:
SECTION 3.2.3 & 3.2.4
SOLE TRADERS
= A sole trader is not a separate legal entity and is therefore not a separate
taxpayer.


TAXABLE INCOME - SOLE TRADERS
 The profits made from the business must be added to the taxpayer’s income
from other sources, for example interest earned, in order to calculate the
taxpayer’s total taxable income.
 Taxable income is calculated by applying the income tax framework.
 Sole trader individuals pay tax on their profits in terms of the provisional tax
collection method
 For tax purposes, salaries are also considered income from a trade.


TAX LIABILITY – SOLE TRADERS
 Once the taxpayer’s taxable income has been determined, his/her tax liability
is calculated by using the tax table (used for individuals – refer to Appendix A
in the prescribed textbook) and thereafter, the rebates are deducted.


SOLE TRADERS
SECTION 3.2.3
= generally, those persons earning income from trading in their personal
capacity
EXAMPLE = owner of a corner retail shop selling convenience foods = business
not a form of a legal entity & not an independent contractor, as owner not
rendering a service, but selling a product
 Sole traders, like independent contractors – entitled to trading deductions &
capital allowances against their trading income
 Sole traders have the additional complication of separating their trading
income & deductions from their passive income & personal expenses


MULTI TRADES
= Sole traders can have multi trades
EXAMPLE
= a retail trade & a rental trade
 Sole traders & independent contractors may also be operating as employed
individuals

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, Each trade must be separately considered & finally combined when
determining the normal tax liability of such persons
(EXAMPLE PAGE 66)
3.3 Partnerships:
SECTION 3.3


PARTNERSHIP
= A partnership is not a separate legal entity and is therefore not a separate
taxpayer.
 the individual partners will each be taxed on their share of the partnership
profits,
 which they will add to their income from other sources in order to
calculate their taxable income.
 the partnership is not assessed as a taxpayer, but the individual partners
are.
 The income tax framework is applied to calculate taxable income.


TAX LIABILITY - PARTNERSHIP
= A partner’s tax liability is calculated by using the tax table (used for individuals
– refer to Appendix A in the prescribed textbook) and thereafter, the rebates are
deducted.
 The partners in a partnership pay tax on the partnership profits
 according to the provisional tax collection method


PARTNERSHIP
= a legal relationship arising from an agreement between two or more persons




3.4 Companies (& dividends tax):
SECTION 3.4 & 3.7
COMPANIES
= A company is a separate legal entity and is therefore a separate taxpayer.
 Companies are owned by shareholders but,
 because the company is a separate taxpayer,
 the company profit is not added to the shareholders’ income from other
sources to calculate taxable income.




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, TAXABLE INCOME – COMPANIES
= The taxable income of the company is calculated according to the tax
framework and then the applicable tax rate is applied to calculate the tax
liability of the company.
The company tax rate is currently 28%
DEFINITION OF COMPANY
SECTION 3.4.1


 SA companies = any associations, corporation or company incorporated in
SA, registered as a company
 SA public entities = any association, corporation or company established
under any SA law – universities & SA Reserve Bank
 Foreign companies = any associations, corporations or company incorporated
under the law of any other country
 Co-operatives
 SA charities = any association, formed in SA, to serve a specific purpose
beneficial to the public or section of public – certain charities & foundations
even if they were not registered as companies
 Foreign collective investment schemes = an arrangement or scheme carried
on outside SA, where members of public invest in a collective investment
scheme – the investors contribute to the scheme & hold a participatory
interest
 Collective investment scheme qualifying as a REIT (Real Estate Investment
Trust) on JSE
 Close corporations


INCORPORATION OF A COMPANY
= Entity incorporated when entered in a register & given juristic personality (in
terms of law & country) – so it exists as a legal entity apart from its members or
owners


COLLECTIVE INVESTMENT SCHEME
= one is which 2 or more people, companies, etc (investors) contribute money or
other assets to a company or trust & then hold a share or interest in that
company or trust as a way of sharing in the investment
 Collective Investment Schemes Control Act deals with schemes in which
public are invited to invest
 “manage funds” “mutual funds” “funds”


TERM COMPANY REFERS TO:
- Close corporation

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