Taxation 200 – Semester 1
Contents
LA 1: Chapter 1 + 2: Tax in context ....................................................... 2
LA 2: Chapter 3: Gross Income ........................................................... 19
LA 2: Chapter 4: Specific Inclusions .................................................... 29
LA 2: Chapter 5: Exempt Income........................................................ 35
LA 3: Chapter 6: General deductions ................................................ 41
LA 3: Chapter 12: Special deductions and assessed losses ............48
LA 3: Chapter 13: Capital Allowances and recoupments .............. 52
1
,LA 1: Chapter 1 + 2: Tax in context
1. TAX SPECIALIST
Definition of Compulsory with purpose to raise revenue for government
tax where the revenue is intended for funding general
expenditure
in the provision of public goods and services,
to the shared benefit of the public as a whole
What our Constitution
country Highest legal status
consists of Supported by:
Legislative branch: people working in courts
Executive branch: government creates legislation/ approved
Judicial branch: executing legislation
Legislative branch
Fiscal policy and Monetary policy
Consist of SA economy – Primary/ Secondary/ Tertiary
All of the sectors flow into money – we want to earn income
– source of taxes
Executive branch
National treasury designs tax legislation
Approved by Minister of Finance and then executives
To administrate legislation – SARS – will collect taxes on
behalf of government
Judicial branch
Tax court – designed to hear tax cases
Judges that are tax proficient
2. ROLEPLAYERS OF TAX
2
,3. HISTORY OF TAX
4000BC Clay cones show people of Sumer were heavily taxed
Means for Ancient Kings to provide safety/ justice/ welfare
3500BC Tax in form of offerings/ voluntary gifts e.g., compulsory labour
Egyptians taxed from slaves to agricultural goods
Payments of grain at 20%
1750BC Kings in Mesopotamia/ China introduced tax-farming
State delegated its collection to cities which would delegate
this task to council of elders who would then delegate its power
to tax-farmers:
prosperous businesspeople who collected taxes
Payments of 25 – 50% of crop
1400BC Pharaoh enslaved Israelites
Israelites were freed/ lived without paying taxes for 400 years
But gave up freedom for a king
500BC Confucius developed guiding principles in China
Only 10% of tax should be collected
200BC Rosetta Stone inscription confirm amnesty to temples
30BC Emperor Augustus: master tax strategist
Negotiated collection of taxes with each provincial town
New system decentralized collection of taxes
Resulted in more taxes flowing into tax bureau
Lower taxes – better living conditions
180AD Greatest period of peace/ prosperity
Marcus Aurelius canceled all taxes
Decreased revenue of Rome
His successor had to reinstate extreme taxation
600 – 900AD Brought relief from taxation to who converted to Islam
Income of Sultan in Spain diminished
Royal revenues were collected for privilege of farming
New towns were created where tax was collected
1200AD Champagne
Fairs were held to increase revenue
Rulers increased taxes to pay for warfare
People lost livelihood/ property/ lives
Magna Carta was an example of people’s rejection
England
King John began transition from feudal modern fiscal state
Collection of taxes was unsuccessful due to resistance
Magna Carta: King could not levy taxes without consent of
parliament
1700 – Wars were greatest expense
1800AD Finance minister, Turgot wanted to implement shifts in tax
assessments from poor to rich
Thirteen colonies in British North America objected tax
Tax-farming came to an end with French Revolution
Sin tax was implemented
Adam Smith’s four points – a bad tax
3
, requires a large bureaucracy for administration
destroys funds needed for maintenance/ employment
encourages evasion
puts people through unnecessary examinations/ exposes them
to trouble/ vexation/ oppression
First income tax
British levied tax on income in 1799
Enough money to pay for/ win war against Napoleon
Adams: income tax corrupts social order – people justify tax
evasion through illegal means
1900AD first attempts at manipulating environmental behaviour through
tax policies
2000AD Denmark was the first country in the world to implement a “fat
tax” on 1 October 2011 – repealed in 2012
Sugar tax was implemented 2018
Proposed at 2.29c per gram of sugar that equates to a 20% tax
incidence on 1; of soft drinks
tax will be levied from June 1 2019 on greenhouse gases
5. PRINCIPLES OF GOOD TAX SYSTEM
Equity Tax imposed according to taxable ability/ capacity
Unfairness could impact taxpayers’ willingness to comply
Equity is underpinned by:
Ability to pay principle
Benefit principle
Vertical Equity
Taxpayer with greater economic capacity bears greater
burden of tax
Horizontal Equity
Taxpayers with equal economic capacity bear equal tax
burden
Certainty Timing/ amount of tax payments should be certain
Uncertainty may impact economy of a country
Legislative provisions/ procedures should be transparent/
consistent
Convenience Tax should be imposed in a manner/ at a time that is
convenient for taxpayers- would increase compliance
Economic Doesn’t influence person’s economic decision-making
Efficiency E.g. if interest income is more taxed than dividend income –
taxpayers may rather invest in dividend-bearing investments
Could encourage desired behaviour – reduced alcohol
consumption because of taxes levied on alcohol
Administrative To not impose unreasonable administrative burden
Efficiency Tax system should cost less to implement/ maintain than tax
revenue is able to generate
4
, Revenue authority perspective:
Number of internal controls required
Design of organisational structure
Number of personnel required
Taxpayers’ perspective:
Keeping supporting documents in prescribed format
Frequency with which tax has to be submitted
Hiring of tax practitioner
Flexibility Accounts for changing economic circumstances
Tax buoyancy:
Measure if responsiveness of tax revenue to changes
Simplicity Should be designed so that it is easy to understand/ apply
6.TYPES OF TAX
Normal/ Pre-payments
income tax 1. Employees tax/ PAYE – deducted from salary
2. Provisional tax – paid to SARA twice a year
Capital Gains Liable when you dispose of an asset
tax = proceeds (sales price) – Base cost (cost price)
R40 000 exemption (deduct from capital gain)
Inclusion rate
Individual – 40%
Companies – 80%
E.g., R300 000 – R160 000
= R140 000 – R40 000
= R100 000 x 40%
= R40 000
Withholding a) Remuneration by employers to employees
tax (ss 10(1)(i)) employer must withhold employees’ tax from remuneration
and pay it to SARS
Prepayment of normal tax
Deducted from normal tax payable in calculation of final
normal tax
Amount subject to Employee Tax incentive Act 26 of 2013
b) Dividends by companies to beneficial owners
Payable on amount of any dividend paid
By resident/ non-resident company listed on recognized
stock exchange in SA
Dividends tax is a final tax
Final tax
c) Payments to non-residents
By resident paying non-resident and paid over to SARS
Tax liability is that of non-resident
No withholding tax on service fees paid to non-resident
Payments subject to withholding tax:
5
, 1. Non-resident sellers of immovable property -7.5/10/15%
Not final tax – reduces normal tax payable
2. Non-resident who receives royalties – 15%
Final tax
3. Interest received by non-resident – 15%
Final tax
4. Received by foreign entertainer/ sportsperson – 15%
Final tax
Turnover tax For businesses of annual turnover of R1mil or less
(ss48-48C) Calculated on taxable turnover of registered micro business
Not on taxable income
Dividends tax Can be considered withholding tax
(ss 64D – 64N) Payable at 20% on amount
Exceptions: headquarter/ oil-gas/ international shipping
companies
Beneficial owner remains liable
Dividend in specie: resident company remains liable
Final tax – needn’t submit annual return of income if dividends
are only income received
Donations tax To prevent avoidance of estate duty through gratuitous
(s54) distribution of wealth while resident is still alive
Tax on gratuitous transfer of wealth – not income
20% on cumulative value not exceeding R30mil
25% on cumulative value exceeding R30mil
Natural person exemption on R100 000 in tax year
Company exemption on R10 0000 in tax year
Value-added Value-Added Tax Act 89 of 1991
tax 15% on supply of goods/services by registered VAT vendor
Quoted/ advertised prices deemed to include VAT
Vendor may claim tax it has paid as input tax
Indirect tax – total direct cost borne by final consumer
Transfer duty Transfer Duty Act 40 of 1949
Levied on cost price of fixed property
0%/ 3%/ 6%/ 8%/ 11%/ 13%
Wealth tax payable by purchase of property in SA
Estate Duty Estate Duty Act 45 of 1955
Levied on dutiable value of estate of deceased
20% on value not exceeding R30mil
25% on value exceeding R30mil
Abatement of R3.5mil available against net value
Deceases spouse’s unused abatement may be carried
forward to surviving spouse
Estate/ beneficiaries liable for duty
Securities Securities Transfer Tax 25 of 2007
transfer tax 0.25%
Payable by purchaser on transfer of
listed/ unlisted shares
shares of foreign companies
members’ interests in close corporation
6
,Customs/ Customs and Excise Act 91 of 1964
excise duties/ Customs duties on importation – protecting local market
levies Excise duties/levies on luxury/ non-essential goods
Unemployment Unemployment Contributions Act 4 of 2002
insurance Provide relief to employees during short periods of
contributions unemployment
Deducted from gross remuneration
Employee and employer make 1% contribution
Skills Skills Development Levy Act 9 of 1999
development Paid by employers only
levies
Taxpayers Natural persons
Companies
Trusts
SBC and micro businesses
Partnerships
Not for profit organisations
7. ELEMENTS OF TAX SYSTEM
7.1 Politics
What the government is doing – make decisions which impact tax impact
Happening in Parliament with regards to tax legislation
E.g., Government needed money in Covid times to sustain economy – diverted
income to health sector
7.2 Law
Definition The system of rules which a particular country or community
recognizes as regulating the actions of its members and which it
may enforce by the imposition of penalties.
Legislative 1. Issuing of Green Paper
process Policy document intended for public discussion
Sets out government department’s (National Treasury) view
Public comments are considered
Elects to adjust green paper
2. White paper
Refined version of green paper
Subjected to further discussions/ commentary
3. Draft money bill
Prepared/ submitted to Minister of Finance
Once approved - reviewed by State Law Advisors to ensure:
It doesn’t contradict Constitution
There are no technical errors
7
, Once approved – minister of finance must present to National
Assembly/ National Council of Provinces
Then published in Government Gazette
Amendments made where required
4. Act of Parliament
Becomes binding on one of following dates:
Act is published in Government Gazette
Determined in accordance with Act
Indicated in Government Gazette
Common law Audi alteram partem
"let the other side be heard as well"
no person should be judged without a fair hearing in which
each party is given the opportunity to respond to the evidence
against them
In pari materia
statutes must be interpreted in light of each other since they
have a common purpose for comparable events or items
Casus Omissus
a situation omitted from or not provided for by statute or
regulation and therefore governed by the common law
Tax Regulations (s107(1))
legislation: Duties of all engaged in administration of Act
Interpretation Limits of such persons
Act Nature/ contents of accounts to be rendered by taxpayer
Method of valuation of annuities/ fiduciary/ usufructuary/ other
limited interests in property
Double taxation agreements
Has effect of law once published/ approved by Parliament
Must be considered as it forms part of provision
Conflicting – DTA takes preference over Act
Definitions
If definition is in TAA, but not Act – definition in TAA will also
apply for purposes of Act
If definition is in Act, but not TAA – definition in Act also applies
for purposes of TAA
Inconsistencies between Act and TAA – Act prevails
Interpretation Act 33 of 1957
Provisions only apply if Income Tax Act doesn’t define term/
ambiguities exist
Definition in ITA takes precedence
If not defined within primary legislation/ Interpretation Act –
dictionary may indicate meaning
Meaning still uncertain/ incomplete – case law is examined
Interpretation notes
Don’t form part of legislation
Sets out interpretation of various provisions
Serve as guidelines
8
Contents
LA 1: Chapter 1 + 2: Tax in context ....................................................... 2
LA 2: Chapter 3: Gross Income ........................................................... 19
LA 2: Chapter 4: Specific Inclusions .................................................... 29
LA 2: Chapter 5: Exempt Income........................................................ 35
LA 3: Chapter 6: General deductions ................................................ 41
LA 3: Chapter 12: Special deductions and assessed losses ............48
LA 3: Chapter 13: Capital Allowances and recoupments .............. 52
1
,LA 1: Chapter 1 + 2: Tax in context
1. TAX SPECIALIST
Definition of Compulsory with purpose to raise revenue for government
tax where the revenue is intended for funding general
expenditure
in the provision of public goods and services,
to the shared benefit of the public as a whole
What our Constitution
country Highest legal status
consists of Supported by:
Legislative branch: people working in courts
Executive branch: government creates legislation/ approved
Judicial branch: executing legislation
Legislative branch
Fiscal policy and Monetary policy
Consist of SA economy – Primary/ Secondary/ Tertiary
All of the sectors flow into money – we want to earn income
– source of taxes
Executive branch
National treasury designs tax legislation
Approved by Minister of Finance and then executives
To administrate legislation – SARS – will collect taxes on
behalf of government
Judicial branch
Tax court – designed to hear tax cases
Judges that are tax proficient
2. ROLEPLAYERS OF TAX
2
,3. HISTORY OF TAX
4000BC Clay cones show people of Sumer were heavily taxed
Means for Ancient Kings to provide safety/ justice/ welfare
3500BC Tax in form of offerings/ voluntary gifts e.g., compulsory labour
Egyptians taxed from slaves to agricultural goods
Payments of grain at 20%
1750BC Kings in Mesopotamia/ China introduced tax-farming
State delegated its collection to cities which would delegate
this task to council of elders who would then delegate its power
to tax-farmers:
prosperous businesspeople who collected taxes
Payments of 25 – 50% of crop
1400BC Pharaoh enslaved Israelites
Israelites were freed/ lived without paying taxes for 400 years
But gave up freedom for a king
500BC Confucius developed guiding principles in China
Only 10% of tax should be collected
200BC Rosetta Stone inscription confirm amnesty to temples
30BC Emperor Augustus: master tax strategist
Negotiated collection of taxes with each provincial town
New system decentralized collection of taxes
Resulted in more taxes flowing into tax bureau
Lower taxes – better living conditions
180AD Greatest period of peace/ prosperity
Marcus Aurelius canceled all taxes
Decreased revenue of Rome
His successor had to reinstate extreme taxation
600 – 900AD Brought relief from taxation to who converted to Islam
Income of Sultan in Spain diminished
Royal revenues were collected for privilege of farming
New towns were created where tax was collected
1200AD Champagne
Fairs were held to increase revenue
Rulers increased taxes to pay for warfare
People lost livelihood/ property/ lives
Magna Carta was an example of people’s rejection
England
King John began transition from feudal modern fiscal state
Collection of taxes was unsuccessful due to resistance
Magna Carta: King could not levy taxes without consent of
parliament
1700 – Wars were greatest expense
1800AD Finance minister, Turgot wanted to implement shifts in tax
assessments from poor to rich
Thirteen colonies in British North America objected tax
Tax-farming came to an end with French Revolution
Sin tax was implemented
Adam Smith’s four points – a bad tax
3
, requires a large bureaucracy for administration
destroys funds needed for maintenance/ employment
encourages evasion
puts people through unnecessary examinations/ exposes them
to trouble/ vexation/ oppression
First income tax
British levied tax on income in 1799
Enough money to pay for/ win war against Napoleon
Adams: income tax corrupts social order – people justify tax
evasion through illegal means
1900AD first attempts at manipulating environmental behaviour through
tax policies
2000AD Denmark was the first country in the world to implement a “fat
tax” on 1 October 2011 – repealed in 2012
Sugar tax was implemented 2018
Proposed at 2.29c per gram of sugar that equates to a 20% tax
incidence on 1; of soft drinks
tax will be levied from June 1 2019 on greenhouse gases
5. PRINCIPLES OF GOOD TAX SYSTEM
Equity Tax imposed according to taxable ability/ capacity
Unfairness could impact taxpayers’ willingness to comply
Equity is underpinned by:
Ability to pay principle
Benefit principle
Vertical Equity
Taxpayer with greater economic capacity bears greater
burden of tax
Horizontal Equity
Taxpayers with equal economic capacity bear equal tax
burden
Certainty Timing/ amount of tax payments should be certain
Uncertainty may impact economy of a country
Legislative provisions/ procedures should be transparent/
consistent
Convenience Tax should be imposed in a manner/ at a time that is
convenient for taxpayers- would increase compliance
Economic Doesn’t influence person’s economic decision-making
Efficiency E.g. if interest income is more taxed than dividend income –
taxpayers may rather invest in dividend-bearing investments
Could encourage desired behaviour – reduced alcohol
consumption because of taxes levied on alcohol
Administrative To not impose unreasonable administrative burden
Efficiency Tax system should cost less to implement/ maintain than tax
revenue is able to generate
4
, Revenue authority perspective:
Number of internal controls required
Design of organisational structure
Number of personnel required
Taxpayers’ perspective:
Keeping supporting documents in prescribed format
Frequency with which tax has to be submitted
Hiring of tax practitioner
Flexibility Accounts for changing economic circumstances
Tax buoyancy:
Measure if responsiveness of tax revenue to changes
Simplicity Should be designed so that it is easy to understand/ apply
6.TYPES OF TAX
Normal/ Pre-payments
income tax 1. Employees tax/ PAYE – deducted from salary
2. Provisional tax – paid to SARA twice a year
Capital Gains Liable when you dispose of an asset
tax = proceeds (sales price) – Base cost (cost price)
R40 000 exemption (deduct from capital gain)
Inclusion rate
Individual – 40%
Companies – 80%
E.g., R300 000 – R160 000
= R140 000 – R40 000
= R100 000 x 40%
= R40 000
Withholding a) Remuneration by employers to employees
tax (ss 10(1)(i)) employer must withhold employees’ tax from remuneration
and pay it to SARS
Prepayment of normal tax
Deducted from normal tax payable in calculation of final
normal tax
Amount subject to Employee Tax incentive Act 26 of 2013
b) Dividends by companies to beneficial owners
Payable on amount of any dividend paid
By resident/ non-resident company listed on recognized
stock exchange in SA
Dividends tax is a final tax
Final tax
c) Payments to non-residents
By resident paying non-resident and paid over to SARS
Tax liability is that of non-resident
No withholding tax on service fees paid to non-resident
Payments subject to withholding tax:
5
, 1. Non-resident sellers of immovable property -7.5/10/15%
Not final tax – reduces normal tax payable
2. Non-resident who receives royalties – 15%
Final tax
3. Interest received by non-resident – 15%
Final tax
4. Received by foreign entertainer/ sportsperson – 15%
Final tax
Turnover tax For businesses of annual turnover of R1mil or less
(ss48-48C) Calculated on taxable turnover of registered micro business
Not on taxable income
Dividends tax Can be considered withholding tax
(ss 64D – 64N) Payable at 20% on amount
Exceptions: headquarter/ oil-gas/ international shipping
companies
Beneficial owner remains liable
Dividend in specie: resident company remains liable
Final tax – needn’t submit annual return of income if dividends
are only income received
Donations tax To prevent avoidance of estate duty through gratuitous
(s54) distribution of wealth while resident is still alive
Tax on gratuitous transfer of wealth – not income
20% on cumulative value not exceeding R30mil
25% on cumulative value exceeding R30mil
Natural person exemption on R100 000 in tax year
Company exemption on R10 0000 in tax year
Value-added Value-Added Tax Act 89 of 1991
tax 15% on supply of goods/services by registered VAT vendor
Quoted/ advertised prices deemed to include VAT
Vendor may claim tax it has paid as input tax
Indirect tax – total direct cost borne by final consumer
Transfer duty Transfer Duty Act 40 of 1949
Levied on cost price of fixed property
0%/ 3%/ 6%/ 8%/ 11%/ 13%
Wealth tax payable by purchase of property in SA
Estate Duty Estate Duty Act 45 of 1955
Levied on dutiable value of estate of deceased
20% on value not exceeding R30mil
25% on value exceeding R30mil
Abatement of R3.5mil available against net value
Deceases spouse’s unused abatement may be carried
forward to surviving spouse
Estate/ beneficiaries liable for duty
Securities Securities Transfer Tax 25 of 2007
transfer tax 0.25%
Payable by purchaser on transfer of
listed/ unlisted shares
shares of foreign companies
members’ interests in close corporation
6
,Customs/ Customs and Excise Act 91 of 1964
excise duties/ Customs duties on importation – protecting local market
levies Excise duties/levies on luxury/ non-essential goods
Unemployment Unemployment Contributions Act 4 of 2002
insurance Provide relief to employees during short periods of
contributions unemployment
Deducted from gross remuneration
Employee and employer make 1% contribution
Skills Skills Development Levy Act 9 of 1999
development Paid by employers only
levies
Taxpayers Natural persons
Companies
Trusts
SBC and micro businesses
Partnerships
Not for profit organisations
7. ELEMENTS OF TAX SYSTEM
7.1 Politics
What the government is doing – make decisions which impact tax impact
Happening in Parliament with regards to tax legislation
E.g., Government needed money in Covid times to sustain economy – diverted
income to health sector
7.2 Law
Definition The system of rules which a particular country or community
recognizes as regulating the actions of its members and which it
may enforce by the imposition of penalties.
Legislative 1. Issuing of Green Paper
process Policy document intended for public discussion
Sets out government department’s (National Treasury) view
Public comments are considered
Elects to adjust green paper
2. White paper
Refined version of green paper
Subjected to further discussions/ commentary
3. Draft money bill
Prepared/ submitted to Minister of Finance
Once approved - reviewed by State Law Advisors to ensure:
It doesn’t contradict Constitution
There are no technical errors
7
, Once approved – minister of finance must present to National
Assembly/ National Council of Provinces
Then published in Government Gazette
Amendments made where required
4. Act of Parliament
Becomes binding on one of following dates:
Act is published in Government Gazette
Determined in accordance with Act
Indicated in Government Gazette
Common law Audi alteram partem
"let the other side be heard as well"
no person should be judged without a fair hearing in which
each party is given the opportunity to respond to the evidence
against them
In pari materia
statutes must be interpreted in light of each other since they
have a common purpose for comparable events or items
Casus Omissus
a situation omitted from or not provided for by statute or
regulation and therefore governed by the common law
Tax Regulations (s107(1))
legislation: Duties of all engaged in administration of Act
Interpretation Limits of such persons
Act Nature/ contents of accounts to be rendered by taxpayer
Method of valuation of annuities/ fiduciary/ usufructuary/ other
limited interests in property
Double taxation agreements
Has effect of law once published/ approved by Parliament
Must be considered as it forms part of provision
Conflicting – DTA takes preference over Act
Definitions
If definition is in TAA, but not Act – definition in TAA will also
apply for purposes of Act
If definition is in Act, but not TAA – definition in Act also applies
for purposes of TAA
Inconsistencies between Act and TAA – Act prevails
Interpretation Act 33 of 1957
Provisions only apply if Income Tax Act doesn’t define term/
ambiguities exist
Definition in ITA takes precedence
If not defined within primary legislation/ Interpretation Act –
dictionary may indicate meaning
Meaning still uncertain/ incomplete – case law is examined
Interpretation notes
Don’t form part of legislation
Sets out interpretation of various provisions
Serve as guidelines
8
