Chapter 1 and 2 Summaries
Chapter 1 - Introduction
What is Tax?
• Compulsory payments by citizens to the government to cover public expenses.
• Why are these necessary? For the benefit of society, pay for public health and education.
• Who is responsible for setting tax laws? National Treasury with government and minister of
finance
• Who is responsible for collecting tax and enforcing tax law? SARS
Types of Tax
1.Direct
• Taxes posed on a person (Natural persons, companies…) Pay directly to SARS
- Income tax Normal income tax for everyone, we use a progressive tax structure
- Wealth tax RSA doesn’t have a specific tax. Transfer duty, estate duty etc.
- Corporate tax 28 % company tax
- Estate duty Any estate more than R3.5 million. First R30mil = 20%, then 25% for the rest
2. Indirect
• Taxes levied on transactions and collected by other parties on behalf of SARS
- Securities transfers tax (STT) Purchase and transfer of securities
- Customs and Excise duties Imported goods, excise means sin tax
- Transfer duties Levies on value of property acquired
- VAT 15%
- Environmental tax Plastic bags, C02 levies for vehicles, electricity levies
- Sugary Beverages levy 2.21 cents per gram > 4 gram per 100ml
Overview of Tax Policy
• The formulation of a tax policy is concerned with the design of a tax system that is capable of
financing the necessary level of public spending (By government) in the most efficient way possible.
• Tax principles must be taken into account when formulating the system
• Policy makers must determine who the liability will fall onto? Which income group is effected?
Tax Policy Components
,• 3 Components
- Tax base x
- Tax Structure
- = Tax incidence/liability
Tax Base
• The taxable amount, amount of which the percentage is applied on. Requires a determination of
what is taxable and what is not
For example:
- Income, we tax taxable income, taxable turnover, gross dividends
- Wealth, value of donations, value of property disposed as donation, taxable amount of
transferred security
- Consumption, taxable supply of goods and services (VAT)
Basically: Receive R50000 interest, R23800 is exempt, Tax base = R26200
How should Tax be levied? There are many different systems
1. All taxpayers pay the same R amount irrespective of resources; or
2. All taxpayers pay the same % of their income; or
3. Higher taxpayers should pay higher %
Tax Rate Structure and Incidence
• Expressed as:
- Fixed Percentage – VAT
- Fixed Rate – Excise duty on alcohol (Amount per a unit)
- Sliding scale – Variable % on someone’s income
• Different Rates
- Marginal Tax rate – Rate which will apply if tax base is increased by R1 (% on table)
- Statutory Tax Rate – Rate imposed on tax base from legislation (% on the table)
- Average Tax rate – (Tax Liability / Tax base)
- Effective Tax rate – Used to compare between different people. (Tax liability/ Total income)
Different Tax Systems
• Progressive system
, - Effective Tax rate increases as tax base increases, higher burden on higher income groups,
attempt to reduce inequality. Most economies use these – Higher Tax/Income for higher
earners
• Regressive system
- As tax base decreases, effective tax rate increases. Burden on the lower income groups. We
see this in flat fees and VAT as they do not consider wealth background.
• Proportional System
- Flat percent that everyone pays. Everyone’s effective rate is identical. Companies and trusts
Principles of Tax
• Tax Design is benchmarked against commonly accepted principles of a good tax system, preferred
principles depend on the governments
• Principles and Descriptions
- Equity Tax imposed according to people’s taxable ability
- Certainty Timing, amount and manner of tax payments should be certain
- Convenience Tax should be imposed at a manner and time convenient, should be easy
- Economic Efficiency Designed to not unduly influence economic decision making
- Administrative efficiency No unreasonable administrative burden, cost vs benefit
- Flexibility System can adjust in response to changing economic circumstances
- Simplicity Easy to understand and apply
Equity In focus
• What is deemed fair, differs between everyone
- Based on a concept of fairness
- If perceived to be unfair, erodes taxpayer confidence and negatively impacts compliance
behavior. (E-Tolls in Johannesburg)
- Fairness is subjective
• 2 Underlying Principles
- Ability to pay Taxed according to economic capacity, what you can pay
- Benefit Pay in proportion of benefit received from government
(Conflicting, higher income don’t use public services)
• Vertical Equity
- Redistribution of income using progressive tax tables
- High income earners pay more tax than lower income earners
• Horizontal Equity
, - Treating people equally, tax should be fair and equal
- People in the same income group should carry the same tax burden
- Look if a certain income group is paying the same amount
Chapter 2
• The legislative process states tax may not contradict the constitution or any other legislation
1.Green Paper Stipulate general view and idea of issue, public weighs in
2. White Paper More refined
3. Draft Money Bill Prepared and submitted by the national treasury to the minister of finance
4. Parliament Approved by parliament and president to become legislation
• Interpretation of Tax law
-Burden of Proof belongs to the taxpayer to claim exemption, deduction etc.
- Sources of tax law include regulations, Double tax agreements, case law, the interpretations act
• Rules of Interpretation
-Strict literal approach
-Purposive or contextual approach Required by constitution, history, objective, underlying values.
Need court
Contra Fiscum Rule – Provision has more than one interpretation, court must favor the taxpayer
Substance over form rule – Look at the substance rather than the form of a transaction or
agreement
Calculation of Normal Tax
• Tax base x Rate = Obligation
• Collection facilitated by
- PAYE
- Withholding tax
- Provisional tax
• Rates of tax are determined annually by minister of finance in budget speech
• Rebates are savings or discount on normal tax
- Natural persons only
Chapter 1 - Introduction
What is Tax?
• Compulsory payments by citizens to the government to cover public expenses.
• Why are these necessary? For the benefit of society, pay for public health and education.
• Who is responsible for setting tax laws? National Treasury with government and minister of
finance
• Who is responsible for collecting tax and enforcing tax law? SARS
Types of Tax
1.Direct
• Taxes posed on a person (Natural persons, companies…) Pay directly to SARS
- Income tax Normal income tax for everyone, we use a progressive tax structure
- Wealth tax RSA doesn’t have a specific tax. Transfer duty, estate duty etc.
- Corporate tax 28 % company tax
- Estate duty Any estate more than R3.5 million. First R30mil = 20%, then 25% for the rest
2. Indirect
• Taxes levied on transactions and collected by other parties on behalf of SARS
- Securities transfers tax (STT) Purchase and transfer of securities
- Customs and Excise duties Imported goods, excise means sin tax
- Transfer duties Levies on value of property acquired
- VAT 15%
- Environmental tax Plastic bags, C02 levies for vehicles, electricity levies
- Sugary Beverages levy 2.21 cents per gram > 4 gram per 100ml
Overview of Tax Policy
• The formulation of a tax policy is concerned with the design of a tax system that is capable of
financing the necessary level of public spending (By government) in the most efficient way possible.
• Tax principles must be taken into account when formulating the system
• Policy makers must determine who the liability will fall onto? Which income group is effected?
Tax Policy Components
,• 3 Components
- Tax base x
- Tax Structure
- = Tax incidence/liability
Tax Base
• The taxable amount, amount of which the percentage is applied on. Requires a determination of
what is taxable and what is not
For example:
- Income, we tax taxable income, taxable turnover, gross dividends
- Wealth, value of donations, value of property disposed as donation, taxable amount of
transferred security
- Consumption, taxable supply of goods and services (VAT)
Basically: Receive R50000 interest, R23800 is exempt, Tax base = R26200
How should Tax be levied? There are many different systems
1. All taxpayers pay the same R amount irrespective of resources; or
2. All taxpayers pay the same % of their income; or
3. Higher taxpayers should pay higher %
Tax Rate Structure and Incidence
• Expressed as:
- Fixed Percentage – VAT
- Fixed Rate – Excise duty on alcohol (Amount per a unit)
- Sliding scale – Variable % on someone’s income
• Different Rates
- Marginal Tax rate – Rate which will apply if tax base is increased by R1 (% on table)
- Statutory Tax Rate – Rate imposed on tax base from legislation (% on the table)
- Average Tax rate – (Tax Liability / Tax base)
- Effective Tax rate – Used to compare between different people. (Tax liability/ Total income)
Different Tax Systems
• Progressive system
, - Effective Tax rate increases as tax base increases, higher burden on higher income groups,
attempt to reduce inequality. Most economies use these – Higher Tax/Income for higher
earners
• Regressive system
- As tax base decreases, effective tax rate increases. Burden on the lower income groups. We
see this in flat fees and VAT as they do not consider wealth background.
• Proportional System
- Flat percent that everyone pays. Everyone’s effective rate is identical. Companies and trusts
Principles of Tax
• Tax Design is benchmarked against commonly accepted principles of a good tax system, preferred
principles depend on the governments
• Principles and Descriptions
- Equity Tax imposed according to people’s taxable ability
- Certainty Timing, amount and manner of tax payments should be certain
- Convenience Tax should be imposed at a manner and time convenient, should be easy
- Economic Efficiency Designed to not unduly influence economic decision making
- Administrative efficiency No unreasonable administrative burden, cost vs benefit
- Flexibility System can adjust in response to changing economic circumstances
- Simplicity Easy to understand and apply
Equity In focus
• What is deemed fair, differs between everyone
- Based on a concept of fairness
- If perceived to be unfair, erodes taxpayer confidence and negatively impacts compliance
behavior. (E-Tolls in Johannesburg)
- Fairness is subjective
• 2 Underlying Principles
- Ability to pay Taxed according to economic capacity, what you can pay
- Benefit Pay in proportion of benefit received from government
(Conflicting, higher income don’t use public services)
• Vertical Equity
- Redistribution of income using progressive tax tables
- High income earners pay more tax than lower income earners
• Horizontal Equity
, - Treating people equally, tax should be fair and equal
- People in the same income group should carry the same tax burden
- Look if a certain income group is paying the same amount
Chapter 2
• The legislative process states tax may not contradict the constitution or any other legislation
1.Green Paper Stipulate general view and idea of issue, public weighs in
2. White Paper More refined
3. Draft Money Bill Prepared and submitted by the national treasury to the minister of finance
4. Parliament Approved by parliament and president to become legislation
• Interpretation of Tax law
-Burden of Proof belongs to the taxpayer to claim exemption, deduction etc.
- Sources of tax law include regulations, Double tax agreements, case law, the interpretations act
• Rules of Interpretation
-Strict literal approach
-Purposive or contextual approach Required by constitution, history, objective, underlying values.
Need court
Contra Fiscum Rule – Provision has more than one interpretation, court must favor the taxpayer
Substance over form rule – Look at the substance rather than the form of a transaction or
agreement
Calculation of Normal Tax
• Tax base x Rate = Obligation
• Collection facilitated by
- PAYE
- Withholding tax
- Provisional tax
• Rates of tax are determined annually by minister of finance in budget speech
• Rebates are savings or discount on normal tax
- Natural persons only
