Summary Tax 411 Notes (Themes 1-7) 2019

Theme 1: Introduction to Law of Taxation
1 Introduction
1.1 Income Sources of the Modern State [not prescribed]
 (1) The citizens pay through means of compulsory work – i.e. Free or cheap labour
- Is there such an example of this in SA?
 Doctors working for their "Zuma year"
 Compulsory military service (e.g. Under apartheid)
 Possibility of law students having to work a "Zuma year" in the future
- Is it possible in SA to force citizens to do compulsory labour?
 No – sec 13 of Constitution: no one may be subjected to slavery, servitude or
forced labour
 (2) Donations by citizens to the fiscus (in ancient times) – now mainly channelled through
public benefit organisations
 (3) Realisation of state assets – unusual source of income because state assets are limited
- Also, privatisation of state assets
 (4) State gambling (e.g. the lottery)
- But, regressive in nature
- Means that the rich and poor gamblers make the same contribution to the state
treasury
- Usually supported by the less affluent citizens – thus criticism that immoral and
should be discouraged
 (5) Loans by the government
- Government borrows from its citizens in the form of holding onto the tax refund to
which a person is entitled
- Governments also borrow from international entities, like the World Bank
 But, will have to pay back eventually
- Can defend if the money is used to finance large projects (e.g. Infrastructure)
 (6) Money creation
- The state can finance spending by simply printing more money and putting it into
circulation
- Simplest and cheapest, but can cause runaway inflation
- Tax burden would then to a greater extent be borne by the less fortunate
citizens because inflation will only increase – statistically, poorer people will spend
most of their income in the first 6 days of the month, and so poor people will bear
the burden of this kind of taxation
- This is seen as the most unjust and capricious form of taxation
 (7) Civil service fees
- Fee for services provided by the state – means that citizens pay double (first in tax,
and then for the actual service)
- E.g. Toll gates, deeds registration
 (8) Tax
- This is the only source of income which will generate a sufficient source of income
for the modern state
1.2 What is tax?
 "The essence of a tax, therefore, is the taking of money or property or services, by
government, without paying for it" – Charles Adams
- Is this an agreeable definition?
 No, tax payers are supposed to get something in return (e.g. Using state
hospitals, using roads, using the postal service)
- Governments also use tax for wealth redistribution
 Without enough tax money, there are 17 million people in SA living on social
grants who would not be catered for

,1.3 [NB] A 'good' tax system
 Adam Smith's Wealth of Nations named four maxims with regard to taxes (what the
elements of a good tax system are):
- (1) Equity
 Implies that tax should be levied on citizens on the basis of equality – the
sacrifice of all citizens must be equal
 In favour of a progressive tax system – the wealthier citizens should pay
more than the poorer citizens: “The subjects of every state ought to
contribute towards the support of the Government, as nearly as possible, in
proportion to their respective abilities, that is, in proportion to their revenue
which they respectively enjoy under the protection of the State.”
 We have this kind of system in SA
- (2) Certainty
 The tax which each person is bound to pay ought to be certain, and not
arbitrary
 Our tax system is defined with certainty in the Income Tax Act
 We are also certain as to who will administer the Act – SARS
 It should be certain to the tax payer how much tax he has to pay, to whom
and by what time the tax is to be paid, the place and other procedural
information should also be clear
 This protects the tax payer from exploitation and helps him manage his
income and expenditure
- (3) Convenience
 Every tax ought to be levied at the time or in the manner at which it is most
likely to be convenient for the tax payer to pay
 The tax on rent on land or houses should, for e.g., be payable when the rent
is due
 E.g. PAYE system in SA – the tax is deducted by the employer, from the
employee, when income is earned
 E.g. Taxable supply of goods and services is payable on delivery of such
goods and services
- (4) Efficient and economical
 Taxes should not disrupt the economy or destroy industry
 This principle suggests that the cost of collecting tax should be the minimum
so that a major part of collections will go to the Government treasury, if the
administration expenses in the collection of taxes consume a major portion of
tax revenue collected it cannot be said to be a good tax system
 E.g. In SA VAT has a low administration cost for SARS – why? Because the
vendor largely administers VAT and pays it to SARS
 E.g. Tax on transfer duties have a low administrative cost – why? Transfer is
largely handled by the conveyancer
1.4 Taxes in the Income Tax Act
 [NB] Normal Tax
- Income tax in SA
- Sec 5 of ITA (the charging sec of normal tax)
 Each and every tax has a charging section – the charging section of normal
tax is sec 5 (whereas for VAT, it is sec 7)
 Dividends Tax (since 1 April 2012), sec 64D – 64N
- Replaced Secondary Tax on Companies (STC) on – 1 April 2012
 STC: Payable by the company on declaring dividends
 Why?
 Non-residents were not able to get tax credits in their foreign countries
as it was a tax payable by the SA company

,  Dividends tax allows non-residents to get tax credits and thus to avoid
double taxation
- Taxable on shareholders-level (not the company that is liable)
 When dividends accrued to shareholder
- Rate = 20% (All shareholders pay the same rate)
- Withheld by company – tax is paid by the company from the money owed to
shareholders (balance paid over to shareholders)
- SA dividends are included in a person’s Gross income
 Exception in terms of sec 10(1)(k)
 In effect will only pay tax on dividend income once
 Donations Tax (sec 54-64 ITA)
- Charging section – sec 54 ITA
- Rate – sec 64 ITA = 20% and 25% on aggregate above R30 million
- Exemptions – sec 56 ITA
 Yearly  sec 56(2)(b)) = R100 000
- Capital transfer tax: when a person (as defined in sec 1 of ITA) makes donations,
donations tax is in principle payable
 Why is it included in the ITA? To discourage wealthy people to get rid of their
capital to avoid estate duty later on
 Withholding Tax
- Has nothing to do with gross income or normal tax liability
- Withholding tax on royalties (15%) – Secs 49A-49G
- Withholding tax on fixed acquired property from non-resident (5% (individual), 7,5%
(company) of / or 10% (trust)) – S 35A
 To provide for a possibility that the non-resident may be liable for capital
gains tax, which is usually included in Income Tax (Schedule 8 of the Act)
 Difficult to get tax from non-residents, especially if they have no assets in SA
(therefore, a safety mechanism)
- Withholding tax on payments to foreign entertainers & sportspersons (15%) – Ss
47A-47K (since Aug 2006)
- Withholding tax on interest to foreign persons from 1 January 2015 (15%) – Ss 50A-
50H
 Turnover Tax (secs 48-48C)
- A person will not pay normal tax and turnover tax
- Only businesses pay turnover tax
- Will only elect to pay turnover tax if annual turnover less than R1mil
- Unsophisticated taxpayers
- Person who are not able to understand the calculation of normal tax
- Reduced compliance requirements
Turnover Tax rate
0 – R335 000 0%
R335 001 – R500 000 1% of each R1 above R335 000
R500 001 – R750 000 R1 650 + 2% above R500 000
R750 001 + R6 650 + 3% above R750 000
 How do we know which year of assessment we are in?
- The year of assessment runs from the 1 March to the end of February the following
year for all natural persons
- If a taxable expense/ income happens after the 1 March 2018, then it will be
assessed according to the 2019 assessment
1.5 Other taxes in SA [not prescribed]
 VAT – paid by registered vendors at a rate of 15% and 0%

, - There are two tax rates in SA
- The standard rate of 15%
- And zero-rated items (still ‘taxable’ at a rate of zero)
 Estate duty
- Sec 2 of Estate Duty Act (charging sec)
- Levied on the dutible amount of an estate of a natural person
- 20% if total dutible amount is R30mil or less
- 25% if total dutible amount is more than R30mil
 Transfer duty
- Levied on transfer of property in SA – when a person acquires a property, that
person must pay a transfer duty
- Progressive rates, starting at 0% and going up to 13%
- Payable by all persons, including companies
- Only payable if the property is not exempted
 E.g. If inherit property as defined by the Transfer Duty Act, then will be
exempt
 E.g. if VAT is payable on the supply of the property, will not be liable to pay
the transfer duty
 Will either pay VAT (if supplied by a registered vendor)
 Or will pay the transfer duty (if not supplied by a registered vendor)
 Customs & excise
- Payable on luxury goods imported into SA
- There are several schedules in the Customs and Excise Act
- Excise is payable by the manufacturers of certain goods like liquor and cigarettes
 Securities Transfer Tax
- Levied at 0.25% of the value of shares transferred (includes buying back,
redemption or cancellation of shares)
 Skills Development Levy
- Payable by employers at rate of 1% of total remuneration paid to employees
- If pay less than R500 000 annually, then will be exempt
- Levy imposed to fund learning and development in SA – the funds are used to fund
and develop skills of employees (Sector Education and Training Authorities)
 Tax on international air travel
- Flat amount of +- R900 on all international flights
- Will be included in the plane ticket
 General fuel levy
- Current rate is R3.37 on every litre of fuel in 2019
 Electricity levy
- Taxed on electricity generation from non-renewable sources
 Road Accident Fund levy
- Current rate is R1.93 per litre of fuel
 Carbon Emissions Tax
- Payable on new passenger vehicles
 Other taxes?
- Environmental Levy on tyres – R2.30 per kg weight of that tyre
- Plastic Bag Levy – R0.12 per bag on all carrier bags with a thickness of 24 microns
or more
- Environmental Levy on electric filament lamps or non-energy saving lightbulbs –
R8.00
- Sugar Tax (Levy on Sugary Beverages) – R2.01 per gram f sugar exceeding 4g per
100ml
1.6 [NB] Different Taxes in the Income Tax Act
 Normal Tax
- Charging section – sec 5(1)

,  Sec 5(1)(d) - any company during every financial year of such company
 By choice, this is normally the same as the ordinary tax year
- [NB] Normal tax rates for individuals and special trusts
 NOT apply to business trusts
 Found as an Appendix to the Income Tax Act
Tax rates for individuals and special trusts: 2018/2019 – Appendix
I
TAXABLE INCOME (R) RATES OF TAX (R)
0 – 195 850 18% of each R1
195 851 – 305 850 35 253 + 26% above 195 850
305 851 – 423 300 63 853 + 31% above 305 850
423 301 – 555 600 100 263 + 36% above 423 300
555 601 – 708 310 147 891 + 39% above 555 600
708 311 – 1 500 000 207 448 + 41% above 708 310
1 500 001 and above 532 041 + 45% above 1 500 000
 [NB] Rebates
- First determine a person's gross income, then taxable income, then normal tax
payable - the rebate comes off of whatever tax is owed
- Primary rebate - found in sec 6(2)(a) Income Tax Act
- Types of rebates for individuals:
 Under 65 years old R14 067 – sec 6(2)(a)
 65 years and older R7 713 – sec 6(2)(b)
 75 years and older R2 574 – sec 6(2)(c)
 This will be added to the previous amount
 [NB] Trusts
- No progressive rate: will pay 45c on each Rand of taxable income
 Companies
- With place of effective management in RSA – 28%
- With effective management outside RSA (business through a branch or agency in
RSA) – 28%
- Personal service provider companies – 28%
- [NB] Small business corporations (sec 12E) – gross income, if less than R20m
 Taxable income not exceeding R78 150: 0%
 R78 150 – R365 000: 7% above R78 150
 R365 000 – R550 000: R20 080 + 21% of taxable income above R365 000
 R550 000 and above: R58 930 + 28% above R550 000
 Normal tax on taxable capital gains
- Definition of “net capital gain” found in schedule 8
 A person's net capital gain for the year of assessment is the sum of –
 (a) the amount by which that person's aggregate capital gain for
that year exceeds that person's assessed capital loss for the
previous year of assessment; and
 (b) where paragraph 64B(3) becomes applicable during that year
of assessment, the amount of the capital gain which was
disregarded in terms of paragraph 64B(1) or (2) during that year or
any previous year, as contemplated in paragraph 64B(3).
- The inclusion rate for natural persons is 40%
- But, at the highest marginal rate this amount would then be taxed at 45%, meaning
that effectively only 18% of the capital gain is taxed

,  E.g. capital gain of R100 000, 40% inclusion = R40 000. 45% of R40 000 is
then R18 000 (which is only 18% of the capital gain)
 Different styles of taxation:
- What is progressive tax? The percentage of taxation increases as the amount of
taxable income increases – with the result that a tax payer’s average tax rate is less
than the marginal tax rate
- Proportional tax – is a flat rate of taxation
 Fixed rate of taxation
 E.g. The VAT
 There is no change as the taxable amount base increases or decreases
- Regressive tax?
 VAT is a regressive tax system – means that it takes a larger amount from
the poorer people
 Everyone pays the same amount, no differentiation between levels of wealth
 E.g. If a person has a monthly income of R10 000 and must pay R1 500 in
respect of medical services, effectively, such a person used 15% of their
spendable income. This percentage decreases alongside a higher income
level
 How do we prevent the effects of regressive tax?
 Zero-rated items
 Having different VAT rates on different kinds of goods and services
- What is fiscal drag?
 The deflating effect of a progressive taxation system on a country's economy.
As wages rise, due to inflation, a higher income tax bracket is reached, and a
higher proportion of income is paid in tax
 'Dragging into a higher tax bracket'
 2018-2019 threshold
- R78 150 - below age 65
- R121 000 - age 65 and over
- R135 300 - age 75 and over
- This is the income tax level at which a person actually begins paying tax
(otherwise, rebate means not paying tax at all)

Theme 2: Administration, interpretation and dispute
resolution
1 Administration of the Act
 Commissioner for SARS is responsible for administration
- Also called the "receiver" of revenue
- CSARS may delegate his powers (sec 3(1) IT Act)
 E.g. To the tax receiver offices throughout the country
 Tax Administration Act 11 of 2011 – contains almost all administrative provisions
administered by CSARS
- Same Act for VAT, Transfer Duty and Income Tax, etc.
- Before this Act, were various administrative provisions in each Act – often
conflicting – now simplified
 Before SARS we had the Commissioner/ Secretary for Inland Revenue – same as the
CSARS
 The commissioner prescribes the manner and form for income tax returns
- In terms of sec 25 TAA
 Persons are required to furnish returns for the assessment of tax (ITA sec 66(1))
 Financial statements and schedules forms portion of your income tax returns
- ITC 78 (1927), 3 SATC 75
- Must reflect the correct position