LU1
The Social Contract (also called Social Compact) is an agreement between citizens and the state. The
state creates prosperity and as a consequence, the country requires a commitment from people
through tax payments. There is a balance in this social contract that is illustrated by the Laffer Curve.
The Laffer Curve is a theory that shows the relationship between tax rates and the amount of tax
revenue collected by governments. The curve is used to illustrate the argument that, sometimes,
cutting tax rates can result in increased total tax revenue.
South African government has made provision for the following taxes, among others:
• income tax, which also includes capital gains tax turnover tax dividends tax
• donations tax
• value-added tax (VAT)
• estate duty
• excise duty
• customs duty
• transfer duty
• air passenger tax
• securities transfer tax
• unemployment insurance fund (UIF)
• skills development levy (SDL)
The Income Tax Act was originally legislated in 1962 and it is amended annually. The South African
government has a fiscal year (like an accounting year) that runs from 1 April to 31 March. In February
each year, the Minister of Finance announces the government’s spending, tax and borrowing plans
for the following three years. This is known as the budget speech and usually takes place in the third
week of February. The budget speech is based on the National Budget. The National Budget is a plan
showing how much money will be spent on all the different services that the government must
provide, and it makes provision for the taxes that will be imposed to pay for these services. Part of
the National Budget entails amended tax legislation.
In South Africa, taxpayers are taxed on the residence basis of taxation. This means that persons who
are residents, are subject to taxation in terms of the Income Tax Act in respect of all the income they
earn, anywhere in the world (worldwide income). Even if a person is not a resident, they may still be
taxed in South Africa on income earned from a South African source.
Marginal tax rate: This is the tax rate that will apply if the tax base increases by one rand or more.
Effective tax rate: The effective tax rate can be determined by dividing the tax liability by the total
profit or income. The effective tax rate is often used as a measure to compare the effective tax
liabilities of different taxpayers.
Interpretation Notes issued by SARS are merely the opinion of SARS regarding the interpretation and
application of various legislative provisions. They do not form part of the Income Tax Act and are not
binding on SARS or the taxpayer. A court of law may also not agree with an Interpretation Note.
,However, the exception to this rule is when the Interpretation Note provides guidance on how the
commissioner intends to use his or her discretion. In this instance, the Interpretation Note will be
binding on SARS and therefore have the same effect as the law.
Most of the definitions of the words and terms used in the Income Tax Act can be found in section 1,
but sometimes other sections also contain definitions. When interpreting the wording used in the
Income Tax Act, you should follow these guidelines:
Apply the literal meaning first . If this meaning is clear, it must be applied even if it gives rise
to unfair results
Take note of the real intention of the legislator. This is known as the purposive approach.
Objective approach When interpreting legislation, the emphasis should be on considering
both the context and the words of the provision, with neither dominating the other.
The term substance over form means that if problems of interpretation arise in relation to
the true meaning of an agreement or a transaction, the courts will be concerned with the
substance rather than the form of the agreement or transaction (Silke 2020:20). In plain
terms, ‘substance’ means the material part of something, i.e. what it really is, and ‘form’ is
what it looks like, i.e. what it is described as on paper
Apply the contra fiscum rule. According to this rule, where a provision of the Income Tax Act
has two interpretations, the court will interpret the provision in terms of the interpretation
that places a smaller burden on the taxpayer.
In view of the above “tips” on interpreting legislation, you need to remember that hardship (when a
taxpayer becomes liable for payment of taxation) is not an excuse or a way out. Even if a provision
leads to hardship for a taxpayer, it cannot be interpreted differently to alleviate that hardship.
,Process for objection, appeal and other legal remedies:
Request for reasons - A taxpayer, who is aggrieved by an assessment, may request SARS to provide
the reasons for the assessment prior to lodging an objection. The request must be in the prescribed
form and manner and be delivered to SARS within 30 days from the date of assessment. This period
may, however, be extended as prescribed by the Act.
Lodging an objection A taxpayer, who wishes to object to an assessment, must deliver a notice of
objection within 80 days after the delivery of reasons from SARS, if so requested. Where the taxpayer
has not requested reasons, the notice of objection must be delivered within 80 days after the date of
assessment. A taxpayer who lodges an objection to an assessment, must specify the grounds of the
objection in detail on the notice of objection (NOO) form (for SARS eFiling users) or the ADR1 form
(for taxpayers not registered on SARS eFiling), depending on the type of tax. SARS must notify the
taxpayer of the allowance or disallowance of the objection and the basis for it within 60 days after
delivery of the taxpayer's objection.
The NOO is available on the SARS eFiling service only and it must be completed online using the
relevant functionality on eFiling. The NOO form is applicable to the following types of tax only:
, • Personal income tax (administrative penalties and assessed tax)
• Corporate income tax (CIT – assessed tax including additional tax only)
• Value-added tax (VAT)
The alternative dispute resolution for objection (ADR1) is applicable to the following tax types:
• PAYE assessment
• Income tax for trusts
• Other taxes (e.g. donations tax, dividends tax, etc)
Lodging an appeal A taxpayer, who wishes to appeal against the assessment, may lodge a notice of
appeal by completing the notice of appeal (NOA) form or an ADR2 form, depending on the type of
tax. Such a taxpayer must indicate on the NOA form (or ADR2) whether they wish to make use of the
alternative dispute resolution procedures or not. The notice of appeal must be delivered within 30
days after SARS has delivered the notice of disallowance of the objection. In the notice of appeal, the
taxpayer must specify in detail the grounds for disputing SARS’s basis for the decision to disallow the
objection as set out in the notice of disallowance, and/or any new grounds on which the taxpayer is
appealing.
Alternative dispute resolution (ADR) Should a taxpayer indicate on the NOA form that they wish to
make use of the alternative dispute resolution procedures; SARS and the taxpayer may use this
process to settle any type of dispute that relates to a dispute on interpretation of facts. To settle does
not mean that the taxpayer or SARS has to accept one or the other’s interpretation; it just means
that both parties must agree on the tax in question. SARS has to keep a register of all the disputes
that it settles by means of this process.
The Tax Board Any taxpayer, who disagrees with SARS on any decision of the commissioner, has to
appeal to the Tax Board first, provided that the
• amount in question is less than R500 000 (this may be changed by the Minister of Finance), or
• the commissioner and the taxpayer mutually agree to make use of the Tax Board, or
• the taxpayer or the commissioner does not object to the Tax Board making a ruling.
The Tax Board consists of an advocate or attorney. If necessary, an accountant or representative of
the commercial community will also be present. Where the board consists of more than one
member, the advocate or the attorney will chair the board. It is very important to note that the
taxpayer must appear in person (or a representative, in the case of a juristic person) and if he or she
fails to arrive for the hearing, SARS may continue with the assessment as issued, and the taxpayer
cannot appeal against it again. The decision is only binding on the parties before the board. If the
taxpayer or the commissioner is still not happy after the Tax Board’s decision on the issue, they may
take the matter to the Tax Court.
The Social Contract (also called Social Compact) is an agreement between citizens and the state. The
state creates prosperity and as a consequence, the country requires a commitment from people
through tax payments. There is a balance in this social contract that is illustrated by the Laffer Curve.
The Laffer Curve is a theory that shows the relationship between tax rates and the amount of tax
revenue collected by governments. The curve is used to illustrate the argument that, sometimes,
cutting tax rates can result in increased total tax revenue.
South African government has made provision for the following taxes, among others:
• income tax, which also includes capital gains tax turnover tax dividends tax
• donations tax
• value-added tax (VAT)
• estate duty
• excise duty
• customs duty
• transfer duty
• air passenger tax
• securities transfer tax
• unemployment insurance fund (UIF)
• skills development levy (SDL)
The Income Tax Act was originally legislated in 1962 and it is amended annually. The South African
government has a fiscal year (like an accounting year) that runs from 1 April to 31 March. In February
each year, the Minister of Finance announces the government’s spending, tax and borrowing plans
for the following three years. This is known as the budget speech and usually takes place in the third
week of February. The budget speech is based on the National Budget. The National Budget is a plan
showing how much money will be spent on all the different services that the government must
provide, and it makes provision for the taxes that will be imposed to pay for these services. Part of
the National Budget entails amended tax legislation.
In South Africa, taxpayers are taxed on the residence basis of taxation. This means that persons who
are residents, are subject to taxation in terms of the Income Tax Act in respect of all the income they
earn, anywhere in the world (worldwide income). Even if a person is not a resident, they may still be
taxed in South Africa on income earned from a South African source.
Marginal tax rate: This is the tax rate that will apply if the tax base increases by one rand or more.
Effective tax rate: The effective tax rate can be determined by dividing the tax liability by the total
profit or income. The effective tax rate is often used as a measure to compare the effective tax
liabilities of different taxpayers.
Interpretation Notes issued by SARS are merely the opinion of SARS regarding the interpretation and
application of various legislative provisions. They do not form part of the Income Tax Act and are not
binding on SARS or the taxpayer. A court of law may also not agree with an Interpretation Note.
,However, the exception to this rule is when the Interpretation Note provides guidance on how the
commissioner intends to use his or her discretion. In this instance, the Interpretation Note will be
binding on SARS and therefore have the same effect as the law.
Most of the definitions of the words and terms used in the Income Tax Act can be found in section 1,
but sometimes other sections also contain definitions. When interpreting the wording used in the
Income Tax Act, you should follow these guidelines:
Apply the literal meaning first . If this meaning is clear, it must be applied even if it gives rise
to unfair results
Take note of the real intention of the legislator. This is known as the purposive approach.
Objective approach When interpreting legislation, the emphasis should be on considering
both the context and the words of the provision, with neither dominating the other.
The term substance over form means that if problems of interpretation arise in relation to
the true meaning of an agreement or a transaction, the courts will be concerned with the
substance rather than the form of the agreement or transaction (Silke 2020:20). In plain
terms, ‘substance’ means the material part of something, i.e. what it really is, and ‘form’ is
what it looks like, i.e. what it is described as on paper
Apply the contra fiscum rule. According to this rule, where a provision of the Income Tax Act
has two interpretations, the court will interpret the provision in terms of the interpretation
that places a smaller burden on the taxpayer.
In view of the above “tips” on interpreting legislation, you need to remember that hardship (when a
taxpayer becomes liable for payment of taxation) is not an excuse or a way out. Even if a provision
leads to hardship for a taxpayer, it cannot be interpreted differently to alleviate that hardship.
,Process for objection, appeal and other legal remedies:
Request for reasons - A taxpayer, who is aggrieved by an assessment, may request SARS to provide
the reasons for the assessment prior to lodging an objection. The request must be in the prescribed
form and manner and be delivered to SARS within 30 days from the date of assessment. This period
may, however, be extended as prescribed by the Act.
Lodging an objection A taxpayer, who wishes to object to an assessment, must deliver a notice of
objection within 80 days after the delivery of reasons from SARS, if so requested. Where the taxpayer
has not requested reasons, the notice of objection must be delivered within 80 days after the date of
assessment. A taxpayer who lodges an objection to an assessment, must specify the grounds of the
objection in detail on the notice of objection (NOO) form (for SARS eFiling users) or the ADR1 form
(for taxpayers not registered on SARS eFiling), depending on the type of tax. SARS must notify the
taxpayer of the allowance or disallowance of the objection and the basis for it within 60 days after
delivery of the taxpayer's objection.
The NOO is available on the SARS eFiling service only and it must be completed online using the
relevant functionality on eFiling. The NOO form is applicable to the following types of tax only:
, • Personal income tax (administrative penalties and assessed tax)
• Corporate income tax (CIT – assessed tax including additional tax only)
• Value-added tax (VAT)
The alternative dispute resolution for objection (ADR1) is applicable to the following tax types:
• PAYE assessment
• Income tax for trusts
• Other taxes (e.g. donations tax, dividends tax, etc)
Lodging an appeal A taxpayer, who wishes to appeal against the assessment, may lodge a notice of
appeal by completing the notice of appeal (NOA) form or an ADR2 form, depending on the type of
tax. Such a taxpayer must indicate on the NOA form (or ADR2) whether they wish to make use of the
alternative dispute resolution procedures or not. The notice of appeal must be delivered within 30
days after SARS has delivered the notice of disallowance of the objection. In the notice of appeal, the
taxpayer must specify in detail the grounds for disputing SARS’s basis for the decision to disallow the
objection as set out in the notice of disallowance, and/or any new grounds on which the taxpayer is
appealing.
Alternative dispute resolution (ADR) Should a taxpayer indicate on the NOA form that they wish to
make use of the alternative dispute resolution procedures; SARS and the taxpayer may use this
process to settle any type of dispute that relates to a dispute on interpretation of facts. To settle does
not mean that the taxpayer or SARS has to accept one or the other’s interpretation; it just means
that both parties must agree on the tax in question. SARS has to keep a register of all the disputes
that it settles by means of this process.
The Tax Board Any taxpayer, who disagrees with SARS on any decision of the commissioner, has to
appeal to the Tax Board first, provided that the
• amount in question is less than R500 000 (this may be changed by the Minister of Finance), or
• the commissioner and the taxpayer mutually agree to make use of the Tax Board, or
• the taxpayer or the commissioner does not object to the Tax Board making a ruling.
The Tax Board consists of an advocate or attorney. If necessary, an accountant or representative of
the commercial community will also be present. Where the board consists of more than one
member, the advocate or the attorney will chair the board. It is very important to note that the
taxpayer must appear in person (or a representative, in the case of a juristic person) and if he or she
fails to arrive for the hearing, SARS may continue with the assessment as issued, and the taxpayer
cannot appeal against it again. The decision is only binding on the parties before the board. If the
taxpayer or the commissioner is still not happy after the Tax Board’s decision on the issue, they may
take the matter to the Tax Court.
