TAX2601
NOTES
,STUDY UNIT – 1 INTRODUCTION
Learning outcomes:
Describe the basic principles of taxation
Describe the South African annual taxation process
List the different Acts and the taxes that they make provision for
Distinguish between direct and indirect taxes
Classify taxes
State the rules for interpreting statutes
State the application of court decisions, general binding agreements, interpretation notes,
practice notes and media releases
Rewrite the framework for calculating taxable income and tax liability
Introduction
It is the duty of any government to provide services for its citizens. In order to provide these ser-vices
the government needs to have some form of income. Consequently, most governments levy taxes in
order to earn income to provide for the residents of the country. The South African government has
made provision for the following taxes, among others:
• Income tax, which also includes:
• Capital gains tax
• Turnover tax
• Dividends 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)
In order to understand the application of taxation it is important that you have a good foundation in the
way taxes are levied in South Africa.
Income tax act
Each year a process is followed by the government in order to update the Income Tax Act and
selected provisions are also amended. 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) which runs from 1 April to 31
March each year. In February each year, the Minister of Finance (currently Mr. Nhlanhla Nene)
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 of how much
money is going to be spent on all the different services that the government must provide and it also
makes provision for the taxes that will be imposed to pay for these services. Part of the National
Budget entails amended tax legislation.
The budget process starts with a three- to four-month process of review in both the national and
provincial legislatures. After debate by Parliament and referral to the Standing Committee on Finance
for comment, the Draft Taxation Bills are presented to the State President for signature, and
promulgated as an Act of Parliament (becomes law) when the Act is published in the Government
Gazette. When the Bill becomes an Act (or law), the legislation that was introduced in the Budget
speech becomes part of the original Income Tax Act.
The Income Tax Act is affected every year by a number of Amendment Acts. The Income Tax Act is
divided into chapters and parts; each part has sections and each section has paragraphs and sub-
paragraphs.
Types of taxes
Governments of different countries have chosen different ways of levying taxation. Each country or
government will have different types of taxation and they could also have a different basis of taxation.
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
that they earn, anywhere in the world.
, Where a person is not a resident, they will still be taxed in South Africa on income earned from a
South African source. This could lead to paying tax on the same earnings in two countries, also
known as double tax. Therefore, in order to alleviate double taxation, South Africa has entered into a
number of double tax agreements, generally with its major trading partners.
Taxation in South Africa can be classified according to a number of factors: what the tax is levied on,
the method used to calculate the tax or who must pay the tax.
Taxes levied on
Income- these are taxes that are levied on income which is earned e.g. income tax
Consumption- these are taxes that are levied on the sale or use of commodities. These taxes take
the form of price increases and are paid by the person purchasing or using the commodity e.g. VAT,
excise duty, customs duty
Wealth –levied on the transfer of property e.g. capital gains tax, estate duty, donations
Other- levied on specific transactions e.g. transfer duty; securities transfer tax, fuel levy, dividend tax
Method used to calculate tax
Proportional tax- levied at a fixed rate e.g. companies tax
Progressive tax- the tax rate increases with the amount of income earned e.g. income tax on natural
persons, micro businesses and small corporations.
Regressive tax- tax rate decreases with the amount of income earned. There is no such tax in South
Africa
Who must pay the tax?
Direct tax- the person who earns the income pays the tax e.g. income tax and capital gains
Indirect tax- the seller bears the impact of the tax while consumer pays the tax e.g. VAT
Interpretation of tax law
The taxation rules (commonly referred to as provisions) contained in the Income Tax Act are not
always clear and straightforward. In practice, this often results in different interpretations by SARS,
taxpayers, accountants and the general public. Because of these differences of opinion and grey
areas in the Act, the courts are often called upon to determine what the real intention of the legislature
was when the provisions were enacted.
NOTES
,STUDY UNIT – 1 INTRODUCTION
Learning outcomes:
Describe the basic principles of taxation
Describe the South African annual taxation process
List the different Acts and the taxes that they make provision for
Distinguish between direct and indirect taxes
Classify taxes
State the rules for interpreting statutes
State the application of court decisions, general binding agreements, interpretation notes,
practice notes and media releases
Rewrite the framework for calculating taxable income and tax liability
Introduction
It is the duty of any government to provide services for its citizens. In order to provide these ser-vices
the government needs to have some form of income. Consequently, most governments levy taxes in
order to earn income to provide for the residents of the country. The South African government has
made provision for the following taxes, among others:
• Income tax, which also includes:
• Capital gains tax
• Turnover tax
• Dividends 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)
In order to understand the application of taxation it is important that you have a good foundation in the
way taxes are levied in South Africa.
Income tax act
Each year a process is followed by the government in order to update the Income Tax Act and
selected provisions are also amended. 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) which runs from 1 April to 31
March each year. In February each year, the Minister of Finance (currently Mr. Nhlanhla Nene)
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 of how much
money is going to be spent on all the different services that the government must provide and it also
makes provision for the taxes that will be imposed to pay for these services. Part of the National
Budget entails amended tax legislation.
The budget process starts with a three- to four-month process of review in both the national and
provincial legislatures. After debate by Parliament and referral to the Standing Committee on Finance
for comment, the Draft Taxation Bills are presented to the State President for signature, and
promulgated as an Act of Parliament (becomes law) when the Act is published in the Government
Gazette. When the Bill becomes an Act (or law), the legislation that was introduced in the Budget
speech becomes part of the original Income Tax Act.
The Income Tax Act is affected every year by a number of Amendment Acts. The Income Tax Act is
divided into chapters and parts; each part has sections and each section has paragraphs and sub-
paragraphs.
Types of taxes
Governments of different countries have chosen different ways of levying taxation. Each country or
government will have different types of taxation and they could also have a different basis of taxation.
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
that they earn, anywhere in the world.
, Where a person is not a resident, they will still be taxed in South Africa on income earned from a
South African source. This could lead to paying tax on the same earnings in two countries, also
known as double tax. Therefore, in order to alleviate double taxation, South Africa has entered into a
number of double tax agreements, generally with its major trading partners.
Taxation in South Africa can be classified according to a number of factors: what the tax is levied on,
the method used to calculate the tax or who must pay the tax.
Taxes levied on
Income- these are taxes that are levied on income which is earned e.g. income tax
Consumption- these are taxes that are levied on the sale or use of commodities. These taxes take
the form of price increases and are paid by the person purchasing or using the commodity e.g. VAT,
excise duty, customs duty
Wealth –levied on the transfer of property e.g. capital gains tax, estate duty, donations
Other- levied on specific transactions e.g. transfer duty; securities transfer tax, fuel levy, dividend tax
Method used to calculate tax
Proportional tax- levied at a fixed rate e.g. companies tax
Progressive tax- the tax rate increases with the amount of income earned e.g. income tax on natural
persons, micro businesses and small corporations.
Regressive tax- tax rate decreases with the amount of income earned. There is no such tax in South
Africa
Who must pay the tax?
Direct tax- the person who earns the income pays the tax e.g. income tax and capital gains
Indirect tax- the seller bears the impact of the tax while consumer pays the tax e.g. VAT
Interpretation of tax law
The taxation rules (commonly referred to as provisions) contained in the Income Tax Act are not
always clear and straightforward. In practice, this often results in different interpretations by SARS,
taxpayers, accountants and the general public. Because of these differences of opinion and grey
areas in the Act, the courts are often called upon to determine what the real intention of the legislature
was when the provisions were enacted.
