LU 1 – INTRODUCTION TO TAXATION
1.1-WHY PAY TAX?
The government needs money so that government can subsidize the poor, educate its children, provide healthcare and
improve infrastructure etc., financed by means of levying different forms of taxation such as,
o Income tax (Grouped as tax on income)
o Turnover tax
o Secondary Tax on companies (effective up until 31 march 2012)
o Donations tax
o Dividends tax (effective 1 April 2012)
o Withholding taxes
o Estate duty
o VAT
o Excise and customs duty (Grouped as tax on consumption)
o Transfer duty on property Grouped as tax on wealth)
o Marketable securities tax on shares
o Local property taxes
o Local authority taxes
o Taxes can also be grouped according to methods of calculation e.g. :
Proportional tax is levied at a fixed rate e.g. fixed company tax rate v progressive taxes,
Where the amount of tax paid is proportional to a person’s income.
o Taxes can also be group according to who is responsible for paying tax, for instance:
Direct tax – the person whom the tax impacts is also responsible for paying the tax.
Indirect tax – (e.g. VAT) the vendor pays the tax (VAT) over to SARS but the impact is borne by the
consumer, who pays a higher (VAT incl.) price for goods.
Adam smith’s for basic maxims:
o The subjects of every state has an obligation to contribute towards the support of the government, as nearly as
possible, in proportion to their respective abilities; that ism in proportion to the revenue which they respectively
enjoy under the protection of the state.
o The tax which each individual is bound to pay out to be certain, and not arbitrary.
o Each tax ought to be levied at the time, or in a manner in which it is most likely to be convenient for the
contributor to pay it.
o Every tax is obliged to be so contrived as to take out, and keep out, of the pockets of the people as little as possible
over and above what it brings into the public treasury of the state.
1.2 - WHO IS LIABLE FOR INCOME TAX?
SA moved to a residence basis on taxation on 1 Jan 2001, which means, ‘anyone who earns income from a South African
source or anyone who is a resident of this country.
A representative taxpayer is appointed in cases where the actual taxpayer is unable to handle his/her own tax matters and
gives appointed representative taxpayer full authority to handle all his/her tax matters.
Natural persons (individuals)
Legal or juristic persons (e.g. companies, trusts, CC – taxed in their own capacity); Contrarily, Sole traders/ partners will be
taxed at the hands of the individual owners.
In certain scenarios a person may be liable for both SA and foreign income tax on income earned.
o International double taxation → the imposition of comparable taxes in two or more countries on the same
taxpayer i.r.o the same income.
o Introduction of double taxation treaties → Developed by countries to attempt reducing the impact of double
taxation. Treaties → agreements between two counties, which provides for bilateral relief by stating where or how
certain income must be taxed in order to avoid the taxation of the same amount in both countries.
, o Ratification of a double taxation agreement → provisions are effective – as if these provisions had already been
incorporated into the Income Tax Act.
Where double taxation arises the following sections of the Income Tax Act provide for unilateral relief:
o S6quat – Allows foreign taxes paid as a credit against the SA tax liability where income which has been derived
from a foreign source has been subject to tax in a foreign country.
o S6quin (effective 1 Jan 2012) – Allows foreign taxes paid as a credit against the SA tax liability where services have
been rendered by a company and taxes have been withheld by jurisdiction with which SA has a double tax
agreement or in any circumstances by any foreign government.
o S9D and S10 - Exempt from SA tax certain foreign income.
o S11C (4)-(5) – Allowable deductions i.r.o withholding tax paid on foreign dividends.
Foreign tax rebates (S6quat and S6quin) are limited to the lesser of the SA tax attributable to the relevant amount or the
foreign taxes incurred i.r.o. the amount.
The rand equivalent of the foreign taxes is determined by translating the foreign tax at the average exchange rate for the
year of assessment.
The excess foreign tax paid above that allowed as a deduction may be carried forward for a maximum of 7 years.
QUESTION 1.1 – (SEE PAGE 4)
For income to be deemed to be ‘from a SA source’, the following needs to be established:
Origin of income – i.e. what gave rise to the income?
The location of the originating cause.
ROYALTIES
Previously a common law system applied.
What gave rise to the income? - In the case of Millan v CIR – 1928 AD - The court decided that the originating cause of
income from the writing of novels was the exercise of the wits, skill and labour of the author.
Location of the originating cause - If a book was written in South Africa the author would be taxed on any royalty income
from such a book in South Africa, irrespective of where the book was published or sold. . If the book was written elsewhere
and sold in South Africa, the royalties received would not be taxed in South Africa, unless the author was a South African
resident. After 1 January 2012, this common law principle will no longer apply. From this date a royalty will only be from a
South African source if it is incurred by a South African resident, i.e. the person paying the royalty is a South African resident
or the intellectual property is used in South Africa. In all other cases S9 (4) will deem a royalty to be from a non-South
African source.
INTEREST ON INVESTMENT:
What gave rise to the income?
In the case of CIR v Lever Brothers and Unilever Ltd (1946) it was decided that the source of interest on a loan is the granting of the
credit.
Location of the originating cause
The granting of the credit is normally situated where the creditor’s business is situated.
In terms of S9(2)(b) which came into effect for years of assessment commencing on or after 1 January 2012, interest is deemed
to be from a South African source if it is paid by a South African resident or is earned on funds invested or used in South Africa.
RENT FROM THE LETTING OF FIXED ASSETS:
What gave rise to the income?
Asset itself which gives rise to the income.
Location of the originating cause
1.1-WHY PAY TAX?
The government needs money so that government can subsidize the poor, educate its children, provide healthcare and
improve infrastructure etc., financed by means of levying different forms of taxation such as,
o Income tax (Grouped as tax on income)
o Turnover tax
o Secondary Tax on companies (effective up until 31 march 2012)
o Donations tax
o Dividends tax (effective 1 April 2012)
o Withholding taxes
o Estate duty
o VAT
o Excise and customs duty (Grouped as tax on consumption)
o Transfer duty on property Grouped as tax on wealth)
o Marketable securities tax on shares
o Local property taxes
o Local authority taxes
o Taxes can also be grouped according to methods of calculation e.g. :
Proportional tax is levied at a fixed rate e.g. fixed company tax rate v progressive taxes,
Where the amount of tax paid is proportional to a person’s income.
o Taxes can also be group according to who is responsible for paying tax, for instance:
Direct tax – the person whom the tax impacts is also responsible for paying the tax.
Indirect tax – (e.g. VAT) the vendor pays the tax (VAT) over to SARS but the impact is borne by the
consumer, who pays a higher (VAT incl.) price for goods.
Adam smith’s for basic maxims:
o The subjects of every state has an obligation to contribute towards the support of the government, as nearly as
possible, in proportion to their respective abilities; that ism in proportion to the revenue which they respectively
enjoy under the protection of the state.
o The tax which each individual is bound to pay out to be certain, and not arbitrary.
o Each tax ought to be levied at the time, or in a manner in which it is most likely to be convenient for the
contributor to pay it.
o Every tax is obliged to be so contrived as to take out, and keep out, of the pockets of the people as little as possible
over and above what it brings into the public treasury of the state.
1.2 - WHO IS LIABLE FOR INCOME TAX?
SA moved to a residence basis on taxation on 1 Jan 2001, which means, ‘anyone who earns income from a South African
source or anyone who is a resident of this country.
A representative taxpayer is appointed in cases where the actual taxpayer is unable to handle his/her own tax matters and
gives appointed representative taxpayer full authority to handle all his/her tax matters.
Natural persons (individuals)
Legal or juristic persons (e.g. companies, trusts, CC – taxed in their own capacity); Contrarily, Sole traders/ partners will be
taxed at the hands of the individual owners.
In certain scenarios a person may be liable for both SA and foreign income tax on income earned.
o International double taxation → the imposition of comparable taxes in two or more countries on the same
taxpayer i.r.o the same income.
o Introduction of double taxation treaties → Developed by countries to attempt reducing the impact of double
taxation. Treaties → agreements between two counties, which provides for bilateral relief by stating where or how
certain income must be taxed in order to avoid the taxation of the same amount in both countries.
, o Ratification of a double taxation agreement → provisions are effective – as if these provisions had already been
incorporated into the Income Tax Act.
Where double taxation arises the following sections of the Income Tax Act provide for unilateral relief:
o S6quat – Allows foreign taxes paid as a credit against the SA tax liability where income which has been derived
from a foreign source has been subject to tax in a foreign country.
o S6quin (effective 1 Jan 2012) – Allows foreign taxes paid as a credit against the SA tax liability where services have
been rendered by a company and taxes have been withheld by jurisdiction with which SA has a double tax
agreement or in any circumstances by any foreign government.
o S9D and S10 - Exempt from SA tax certain foreign income.
o S11C (4)-(5) – Allowable deductions i.r.o withholding tax paid on foreign dividends.
Foreign tax rebates (S6quat and S6quin) are limited to the lesser of the SA tax attributable to the relevant amount or the
foreign taxes incurred i.r.o. the amount.
The rand equivalent of the foreign taxes is determined by translating the foreign tax at the average exchange rate for the
year of assessment.
The excess foreign tax paid above that allowed as a deduction may be carried forward for a maximum of 7 years.
QUESTION 1.1 – (SEE PAGE 4)
For income to be deemed to be ‘from a SA source’, the following needs to be established:
Origin of income – i.e. what gave rise to the income?
The location of the originating cause.
ROYALTIES
Previously a common law system applied.
What gave rise to the income? - In the case of Millan v CIR – 1928 AD - The court decided that the originating cause of
income from the writing of novels was the exercise of the wits, skill and labour of the author.
Location of the originating cause - If a book was written in South Africa the author would be taxed on any royalty income
from such a book in South Africa, irrespective of where the book was published or sold. . If the book was written elsewhere
and sold in South Africa, the royalties received would not be taxed in South Africa, unless the author was a South African
resident. After 1 January 2012, this common law principle will no longer apply. From this date a royalty will only be from a
South African source if it is incurred by a South African resident, i.e. the person paying the royalty is a South African resident
or the intellectual property is used in South Africa. In all other cases S9 (4) will deem a royalty to be from a non-South
African source.
INTEREST ON INVESTMENT:
What gave rise to the income?
In the case of CIR v Lever Brothers and Unilever Ltd (1946) it was decided that the source of interest on a loan is the granting of the
credit.
Location of the originating cause
The granting of the credit is normally situated where the creditor’s business is situated.
In terms of S9(2)(b) which came into effect for years of assessment commencing on or after 1 January 2012, interest is deemed
to be from a South African source if it is paid by a South African resident or is earned on funds invested or used in South Africa.
RENT FROM THE LETTING OF FIXED ASSETS:
What gave rise to the income?
Asset itself which gives rise to the income.
Location of the originating cause
