INTRODUCTION TO INCOME TAX FOR INDIVIDUALS THEORY AND PRACTICE 2021 André Neethling© Future Managers 2021 Al rights reserved. No part of this book may be reproduced in any form, electronic, mechanical, photocopying, or otherwise, without prior permission of the copyright owner ISBN: 978-0-63921-151-0 Eighth edition 2021 DALRG ‘To copy any part of this publication, you may contact DALRO for information and copyright clearance. Any unauthorised copying could lead to civil liability and/or criminal sanctions. Telephone: 086 12 DALRO (from within South Africa); +27 (0)11 712-8000 Telefax: +27 (0)11 403-9094 Postal Address: P O Box 31627, Braamfontein, 2017, South Africa wri dalro.co.zd Every effort has been made to trace the copyright holders, In the event of unintentional omissions or errors, any information that would enable the publisher to make the proper arrangements will be appreciated. FutureManagers Published by Future Managers (Pry) Led PO Box 13194, Mowbray, 7705 Tel (021) 462 3572 Fax (021) 462 3681 E-mail: info@futuremanagers.com| Website: wawwFuturemanagers.comiContents Module 1: Overview of income tax. 1.1 Introduction. 1.2 Overview of the Income Tax Act 1.2.1 The Budget. 1.2.2 Year of Assessment 1.2.2 The Income Tax Act. Distinction between direct and indirect tax 1.3.1 Direct taxes. 13,2 Indirect taxes. “Types of tax TA. “Tncome tax 14,2 Estate duty 1.4.3 Donations tax 14,4 Transfer duty 1.4.5 Turnover tax. 1.4.6 Tax on retirement funds. 1.4.7 Dividends tax. Value added tax (VAT) Customs duty, Excise duty. -mployment Insurance Fund (UIF) Skills Development Levy Air passenger tax Environmental levies 5 Sugar tax ion of fax revenue Applic Scheme of taxation. T.6,1__ Schematic presenta ng taxable 1.6.2 Schematic presenta ing tax payable for a natural person “The process of rendering a return, receiving an assessment and the remedies for a taxpayer T7.1 Rendering a return. (TRI2) IZ assessment (IT 34) 1.7.3 Remedies agai Complexity of tax issues Summary aleula -aletila Receivin; an assessment Module 2: Personal incame tax. Ri 22. Introduction. Personal income tax. 2.1.1 The calculation of normal tax 2.1.2 The calculation of net normal tax. he calculation. of the tax liability Personal taxable income Capital and other income The reduction process 2.5.1 Rental income excluded from gross income 2,5.2__Dividend income exempt from. gross incon 2,5.3__ Interest income exempt from gross income, 2.5.4 Deductions from income. ‘Summary 2 EG Fel lcd Sad Lada bd ld al a a 8 g 9‘Module 3: Gross income. (3.1 Introduction. 3.2 The general definition of gross income 2.1 Year or period of assessment Inthe case of any resident. ‘The total amount in cash or otherwise. 3.2.4 Received by or accrued to or in favour of 3.2.5 Froma source, or deemed to be, in the Republic Receipts of a capital nature 3.2.7 — Specific inclusions. 8.3 Summary: 30 Module 4: Exemptions from gross income for an individual 53 4.1 Introduction. 54 4.2. —Fxemprions applicable to Government employees or Institutions 34 4,3 Exemptions applicable to other persons oF institutions 54 43.1_Tnstitutions. 54) 4,3.2__ Amounts payable to a natural person 55 (3.3—Royaltes, foreign entertainers or sports persons and copyright. 57 4.3.4 Fringe benefits 37 43,5__ South African residents employed outside the Republic 60 4.3.6 Investment income Gl 4.3.7 Apportionment of investment income when persons are married in community of property. 68 44 — Summary. 7 Module 5: Expenses of an individual 5 5.1 Tatroduction. 76) 5,2 Allowable expenses in terms of the general deduction formula 76 5.2.1 The carrying on of a 76 Conditions to be met fora deduction to qualify in terms of Section 11(Q)..... 77 Expenditure and losses, ZZ ‘Actually incurred. TZ During the year of assessment 78 In the production of income 78 5.2.7 Not of a capital nature. 78 5.3__Non-allowable expenses: (Section 23). 79) 5.3.1 Transactions relating to specific circumstances. 85 5.4 Other allowable expenses 88) 5.4.1 Retirement fund contributions. 89 5.4.2. Donations (Section T8A) 102 5.5 Summary. 106 (Module 6; Allowances and fringe benefits i (6.1 Introduction to fringe benchits 12 6.2 Specific Fringe benefits 113 O.2.1 Assets acquired at less than actual-valuc of the asset (Paragraphs 2(a) and 5). 113. 6.2.2 Right of use of sundry assets (Paragraphs 2(b) and 6) 114 6.2.3 Right of use of motor vehicle (Paragraphs 2(b) and 7) 115 6.2.4 Meals, refreshments and meal vouchers and refreshment vouchers (Paragraphs 2(c) and 8) 123: 6.2.5_Accommodation (Paragraphs 2(d) and 9) 12463 C4 65 6.6 6.2.6 Free or cheap services (Paragraphs 2(c) and 10). 6.2.7 Benefits in respect of interest on loans (Paragraphs 2(f) and 11). 6.2.8 Subsidies in respect of loans (Paragraphs 2(g) and 12) 6.2.9 — Contributions to benefit fund (Paragraphs 2(0) and 12A) 6.2.10 Incurral of costs sclating to medical services (Paragraphs 2()) and 12B). 6.2.11 Benefits in-respect of insurance policies (Paragraphs 2(k) and 12C) 6.2.12 Valuation of contributions made by employers to certain retirement graphs 2()) and 12D) 6.2.13 Contributions made by employers to the Bargaining Council (Paragraphs 2(m) and 12E) 6.2.14 Payment of employee's debt or release of employee from obligation to pay-a debt (Paragraphs 2(h) and 13). 6.2.15 General. Summary on fringe benefits Allowances (Section 8(1)) 6.4.1 Entertainment allowance. 64.2 Travelling allowance (Section 8(1)(b)). Subsistence allowance Section 8(1)(c) 65.1 Actual Figures. 6.5.2__Deemed figures (Per regulation) 6.5.3 _Daytips. Summary Module 7: Prepaid taxes ZI 7.5 7.6 Tneroduction Definitions (Paragraph 1) “The reason and the responsibility for the payment of prepaid taxes Employee’ tax, 7.4.1 PAYE. Remuneration. 7.4.3 Deduction to determine the balance of remuneration 7.4.4 Method for calculating employec’s tax from_the balance of remuneration. 7.4.5__Annwal (once off) payments to employees 7.4.6 Completion of IRP'5 Provisional tax. 7.5.1 _ Who are provisional taxpayers? (Paragraph 1) 7.5.2__ When must provisional tax payments be made? x payment (Paragraphs 21(1)(a) and 19(1)() ional tax payment 7.5.3 First provision 754 Second pro 7.5.5 Third provisional tax payment (Paragraph 23) 7.5.6 Interest on underpayment of provisional tax 7.5.7 Calculation using the tax tables. 7.5.8 Calculation using, "Taxcale’ Summary Module 8: Retirement and resignation benefits Bt 82. Introduction Pension and annuities received 8.2. Explanation of the term ‘annuity’ 8.2.2__ Calculation of the taxability of 128 129) 130) 132, 132) 133) 134 134) 135 135 135 138) 145 145 145 145 145 151 152) 152) 153) 153, 153 153, 155 157 160) 164 165 166. 166 166 171 vid 178, 179) 179) 179) 183) 184 185 185 1858.3 Payments from pension, provident funds and retirement annuity funds 8.3.1 What is the difference between a pension fund, a provident fund and a etiment annuity fund? 8.3.2 Calculation of the “exempt portion” of payment from a pension, retirement annuity fund and provident fund and the allowable deductions (Paragraph (6)) 8.3.3 Taxation of resignation (withdrawal) benefits 8.3.4 Calculation of the payment from a retirement fund (Paragraph (5)) 8.3.5 Taxation of retirement benefits 8.4 Amounts received upon setiting from service 8.5 Summary. Module 9: Capital Gains Tax D1 9.2 roduction, definitions Asset ‘Disposal. 9.2.3 Proceeds. 9.2.4 Base cost. The basic computation I-gain oF capital loss? 9,3. Annyal exclusion. 9,3.3 The inclusion rate 9.4 Exclusions 9,5 Primary residence Primary residence. 95.2 Whatis a residenc 9.5.3 When will the sale of a primary residence be subject to C 9.5.4 Deemed period of ordinary residence 9,5.5 Deemed domestic usage despite letting, 9,5.6 Where the taxpayer and spouse hold a primary residence jointly 9.6 Roll-aver of capital gain ot loss 9,7 Summary ‘Appendices “Appendix: Ar Tax Table for Natural Persons Appendix B: Travelling Allowance ~ Rate per km ‘Appendix C: Taxation of Resignation. (withdrawal) benefits Appendix D: Taxation of Retirement and severance benefits expectancy. tables, Appendix E: Schedule of write-off periods ‘Appendix G: IRP'5 codes, Index. 186 186 187 187 189 190 192 195 199 200 200 200 201 20) 202 207 207 208 208 208 209 210 210 210 20) 20) 20 22 22 27 218 219 220 22) 222 226 231 235Module 1 Overview of income tax After completing this module, you will be able to: Give a short overview of the Income Tax Act Distinguish betweendirect and indifect taxes Name the types of taxes levied in South Africa and briefly describe each type of tax Briefly describe the background as to how the Government applies tax revenue Give a schematic presentation of the taxation system Describe the procedure of how to calculate tax Understand the process from registering as a taxpayer to the issuing of an assessment Explain the remedies when a taxpayer disagrees with the outcome of his assessment11 1.2 1.2.1 1.2.2 Introduction This module will give you a background as to the reason why there is a tax system in a country. Furthermore, you will understand the process of introducing, tax and the reason for collecting tax specifically in South Africa ‘You will learn the difference between what is meant by direct and indirect taxes, and then the different types of taxes that are levied in South Africa are identified. The module concludes with a schematic presentation of how to arrive at taxable income, and the calculation of tax due by or to a taxpayer during a year of assessment Overview of the Income Tax Act The Budget Income tax legislation was first introduced in South Africa in 1914, Since then, the Income ‘Tax Act has undergone many changes. Presently, we are dealing with the Income Tax Act number 58 of 1962 (as amended). You will realise that the Act as it was promulgated in 1962 cannot be the same one that we are working with today, There were changes in the types of income that people are earning, deductions that are cla other changes as well. This means that changes to the Act have to be made on a regular basis. This is done every year during the Budget Speech by the Minister of Finance in Parliament. ‘We call these changes to the Income Tax Act ‘amendments’ to the Act. Reference to the present Income Tax Act is then made as follows: “The Income Tax Act number 58 of 1962, as he Minister normally delivers the Budget Speech during February of each year cd, different types of taxpayers that were established and a number of It is important to remember that the speech is based on input from all Government departments, The departments like Police Services, Education and Health, etc. plan for thei estimated income and expenses for the following year. We call this a budget. The National ‘Treasury, by means, of the Department of Finance under the auspices of the Minister of Finance, then combines all these income and expenses in one document which is then referred to as the Budget Speech, In his speech, the Minister then outlines the revenue from which Government will fund its expenses, The income is levied by means of taxes that are levied on residents and in some instances non-residents (refer to Module 3) of the Republic of South Africa. Again, your attention is drawn to the fact that a budget refers to a period in the future, In the case of Government, it refers to the year that starts on 1 April during that year till the end of the year in March the following year. For the 2021 tax yi 1 April 2020 till 31 March 2021. This is referred to as an accounting year. During this period of 12 months Government has to budget for their income and exp 1, that period is thus Year of Assessment This must clearly be distinguished from a normal individual taxpayer. Im the case of an individual taxpayer, it will refer to the year commencing 1 March 2020 and ending on 28 February 2021. We call this a ycar of assessment or a tax year.- {| Module 1» Overview of income tax || A natural person will thus have a year of assessment that runs for a different period to that of Government. A natural person will therefore have to include all his income and deduct all his, ‘expenses for this year of assessment, Please note that other tax entities may have different yeats of assessment than that of a nacural person, a= The 2021 calendar year runs from 1 January 2021 til 31 December 2021. The 2021 year of assessment for an individual taxpayer will run from March 2020 to 28 February 2021. This means that during 2021 only the months of January and February will overlap for the calendar year and year of assessment The reason for this is that the Minister of Finance has already delivered his Budget Speech for the year 2021 during February 2020. Its a budget for the year ahead. As taxpayers, we are already contributing towards this income stream via taxes that are levied during the 2022 budget period, as from 1 March 2021. Unfortunately all textbooks referring to Income Tax are written and published before the new Budget Speech is delivered in March of a specific year, This is one of the reasons why the subject Income Tax always refers to a period that has already gone by. For this year, we will thus be working with the 2021 year of assessment Sore The Government’ process and aim of a Budget is normally for period(s} of more than a year, but forthe scope ofthis book period ofa yearis used. Now that we understand more about the Budget, it is necessary to look atthe workings af the Income Tax Act. 1.2.2 The Income Tax Act ‘As seen from the above paragraph, the Income Tax Act is normally amended annually during the Budget Speech in February. Ie is, however, possible for Parliament to approve changes to the Act during any period in a year. The biggest changes occur during February. ‘The Income Tax Act consists of three Modules, Module One deals with the administration of the Act, Module ‘Two with the taxes and Module Three with the general provisions of the Act. Module Two of the Income Tax Act deals with the taxes levied in terms of the Income Tax Act and consists of: + Normal tax (payable by individuals and other types of taxpayers on taxable income, which includes capital gains and losses) Donations tax (on assets transferred by taxpayers) Dividends tax (on dividends on shares paid by companies to their shareholders) Withholding taxes (on income received by non-residents) Turnover tax (certain types of taxpayers on their turnover)|| introduction to income Tax for individuals: Theory and Practice 2021 | 1.3 The Income Tax Act contains 112 Sections and a further 11 Schedules to the Act. The purpose of the Schedules to the Act is to explain a certain Section of the Act in more detail. Schedule One (Farming) Schedule Two (Taxation on lump sum benefits) Schedule Three (Repealed) Schedule Four (Employees and Provisional Tax) Schedule Five (Repealed) Schedule Six (Turnover Tax § Schedule Schedule Eight (Capital C Schedule Nine (Public Benefit Activities) Schedule Ten (Oil and Gas Activities) Schedule Eleven (Government Grants Exemptions) Over and above these Sections and Schedules, there are v: decided court cases on disputes between South African Revenue Services (SARS) and taxpayers. Taxpayers and tax practitioners can rely on the judgments handed down by the courts on the interpretation of the Income Tax Act. A taxpayer has to adhere to the provisions of the Income Tax Act when rendering his income § have made interpretation and practice notes on which they can rely for clarifying cer tions, SA tax return, To assist taxpayers with certain incerpr the Act. These notes, howev. binding on the taxpayer and SARS, They will only act as a guideline. do not form part of the Income Tax Act and are therefore not If a taxpayer does not agree with the assessment issued by SARS upon rendering his return of income and expenditure for a year of assessment, there are various a taxpayer to express his dissatisfaction with SARS’ interpretation, This can be done by means of objections and appeals that can be fought in a Tax Court, High Court or even the Constitutional Court. As described above, the Minister of Finance, by means of the National Treasury, is responsible ing up the budget and promulgating the Income’Tax Act. The Income however, administered by the South African Revenue Services (SARS). over South Africa and are run by the Commissioner of SARS (CSARS). for dea SARS' Head Office is located in Pretoria. A big advantage is that SARS are v through the electronic sphere. Annual returns can mostly be done through a sy known as Filing Distinction between direct and indirect tax nd privileges to the residents of South Africa. For this idents, Governme This information is useful for om which sources they will Government provides social welfare it needs income. This income is collected by lev will need to know from which sources they re drawing up the National Budget, as Government can estimate receive their income. ‘Taxes are collected via direct or indirect taxes. A discussion on these two taxes follows,13.1 1.3.2 14 {| Module 1+ Overview of income tax || Direct taxes “These taxes can best be described as taxes paid on the income that a person has received, An example will be income tax (normal tax): This is a tax paid on the interest or business income that a person has earned, Normal persons w the higher their earnings or taxable income becomes. This is due to the Fact that the tax applicable to natural persons increases with a percentage increase the higher the tax income becomes. The minimum percentage starts at 0% and increases to 45%. This is ary, commission, pay more tax referred to as a progressive tax. A company, that is not a natural person, pays a fixed rate of tax on their taxable income. ‘The present rate is 28%. This is referred to as a proportional tax. Indirect taxes In this instance, a tax is only levied if you enter into a transaction to acquire a service or product. When you enter into such a transaction you will receive goods or services to consume. If you do not enter into a transaction, you will not receive any goods or services; therefore no consumption takes place on your side, A tax will thus be paid on the consumption of goods and services. ‘The best known example of an indirect tax is value added tax (VAT), Every time that you enter into a transaction to acquire goods or services on which the standard rate of 15% VAT is, applicable, this tax will normally be included in the price you pay. If you did not enter into the transaction, you would not have paid the tax. Another example of an indirect tax will be the n taxes’ that you pay. If you purchase cigarettes or liquor, a tax known as excise duty is do not smoke or purchase liquor, you will not pay this indirect tax. included in the price. If you Government receives more than 50% of their taxes from income tax (normal tax), along with VAT, that accounts for between 25% and 30% of Government's revenue. This isa useful indicator to plan the income and cash flow for its budget purposes. Types of tax Government needs to have a broad base of taxation to ensure that it covers a wide net of possible avenuics to levy tax. Over and above income tax and VAT described above there is also a necessity to levy taxes on the transfer of wealth, to protect local manufacturers from imported products, to pay pensions and unemployment benefits and to provide for education and training SARS are not responsible for the administration ofall these taxes but arc responsible for the recovery or callecting of these and other taxes. ‘These taxes will be identified and briefly discussed in the following paragraphs.1.4.1 Income tax Under the heading of income tax, the following taxes can be identified: (these are not separate taxes, but form part of income tax as such) Normal tax + This isa tax that is levied on the taxable income (income less certain allowable deductions) of taxpayers, ‘The term ‘assessed tax’ can be used, The progressive normal tax tables or proportional rates will apply Capital gains tax (CGT) “This tax is levied when a person sells (disposes of) certain capital assets ata profit (gain). This gain is normally artived at by deducting the price oF aequlacon (teferred to asthe bate com) \ from the selling price (referred to as the income from disposal Kyl . of the asset). Normally, ifthe selling price is more than the price of acquisition, a gain is made. This gain (less certain exclusions) is included in taxable income, ‘The normal tax tables will apply, (Note that a capital loss as opposed to a capital gain will not be allowed as a deduction in a year of assessment, ‘The capital loss will be set off against capital gains in future years of assessment.) Pay as you earn (PAYE) * This tax is deducted from a taxpayer's remuneration (refer to Module 7) and paid over to SARS on a monthly basis by an employee's employer. ‘This amount of PAYE will be set off against assessed tax when an annual income tax return is rendered, + “The reason for levying this tax isto lessen the burden of paying a huge amount of assessed tax on assessment. Provisional tax + This tax is deducted from a taxpayer's income other than remuneration, (Examples are interest, rental income and business income). ‘The taxpayer will have to make two six- monthly payments (at the end of August and February) in a year of assessment. This amount of provisional tax will be set off against assessed tax. + ‘There is also a third payment (top up payment). + ‘The reason for levying this tax isto lessen the burden of paying a huge amount of assessed tax on assessment. Estate duty + Estate duty is levied on the netto value of a natural person's estate after his death. The net value is arrived at after certain deductions and exclusions and an exemption of R35 million, ernment reasons that itis fair that they must share in the wealth accumulation of a taxpayer over his lifespan. They had provided certain resources and incentives to the taxpayer to accumulate this wealth Furthermore, this wealth is transferred to beneficiaries who will normally not be responsible for the payment of tax on this new wealth, + ‘The tax is levied at 20% of the net estate up to a value of R30 million, + If the dutiable amount of an estate excceds R30 million, the tax rate is increased to 25% from R30 000 0011.4.3 1.4.4 1.4.5 1.4.6 1.4.7 {| Module 1 Overview of income tax || Donations tax + As opposed to estate duty, donations tax is levied on the transfer of assets by a taxpayer whilst he is stil alive + Certain relief applies to CGT + ‘The tax is levied at 20% if it does not exceed R30m. If the is 25%, After an annual deduction of R100 000 per annum. + The same reasoning for estate duty will apply to donations tax. luc exceeds R30m, the tax rate Transfer duty + This tax is payable by all persons on the transfer of fixed property situated in South Africa + Relief applies to CGT. + The tax is levied at a progressive rate from 3% to 13% after an exemption of the frst R100 000 of the value of a fixed property. Turnover tax * ‘The turnover tax applies to all micro-businesses with a ‘qualifying turnover’ that does not exceed RI million per year of assessment. © This tax jinates the rendition of the following returns to SARS: = income tax capital gains tax provisional tax dividends tax (to a certain extent) - VAT. top | Tshaws Shaya ‘The tax is levied at a progressive rate from 0% to 3% on turnover exceeding R335 000, Tax on retirement funds + Whist being in employment, a person has to save for the day when he retires. This can be done by inve ing in a pension, provident or retirement annuity fund the fund will pay you a lump sum benefit which must then be invested to last you for the rest of your life. Alternatively, you can take the amount upon resignation should that happen before you retire. + This payment from a retirement fund will be taxed at a progressive rate from 0% to 36%. The tax-free portion and rates of tax depend on whether you have retired or resigned from our employment certain payments upon the termination of your duties with your employer will also be taxed according to the rules of a retirement benefit © When you ret Dividends tax + A company declaring a dividend in cash to a shareholder must withhold 20% tax on the dividend before paying it to a shareholder. * (Certain dividends declared by a company will attract no tax or a tax at a reduced rate.)1.4.8 Value added tax (VAT) + Value added tax (VAT) is an indirect tax that is levied at 15% V._A.T on all transactions of goods and services in South Africa + Certain goods and services will be exempt from VAT, or attract VAT at 0%. + All businesses must register as VAT vendors when their sales exceed Rim for a ovelve-month period, + ‘These registered vendors will collect the VAT from the consumers and pay it over to SARS. 1.4.9 Customs duty + This isa tax levied on the import of goods into South Africa, + A reason for this tax is to protect the South Aftican economy from other countries dumping their excess goods in South Africa. * Another reason is to levy a tax on luxury, of what SARS deem to be non-essential goods. + ‘There isa tax-free amount of R5 000 on goods brought into South Africa, and then a fixed tariff of 20% on goods to the value of R20 000. If these amounts are exceeded, a duty according to schedules from the Customs’ Act will apply. 1.4.10 Excise duty coms duty refers to goods that are imported into South Africa, where excise duties refer to a tax on locally manufactured goods, “This tax will normally be referred to as the ‘sim taxes’ as itis levied on alcohol and tobacco. It is, howe, 1 on other locally manufactured luxury goods and non-essential goods. + ‘The tax on fuel is known as the fuel levy. ‘The following taxes are collected by SARS, but they are not responsible 24 for the administration thereof 1.4.11 Unemployment Insurance Fund (UIF) * + SARS are only responsible for the collection of these taxes + Emplo up toa per month.) + The employer must also contribute the same amount towards this fund. In total, 2% of remuneration (to the maximum of R148.72 + R148.72) will thus be paid to SARS by the employer + ‘The Department of Labour is responsible for the administration and payment of benefits to employees who: — were retrenched or who were asked to leave the services of an employer (not resigned out of free will), or are deceased and benefits are paid to the dependents of the deceased, or = are to0 ill to work, oF 1s must collect 1% of the employee’ remuneration ly this amount is R148. certain maximum. (Preset — receive it as a benefit on maternity leave. NOTE These payments are only made as a short-term relie'to the categories of employees mentioned above.1.4.12 1.4.13 1.4.14 1.4.15 15 {| Module 1+ Overview of income tax || Skills Development Levy + SARS collects this tax from employers + ‘The Department of Labour is responsible for the administration of the Act + Employers have to pay the tax at 1% of the remuneration of employecs. + ‘The employers can claim an amount from the Department of Labour for the training of their employees Air passenger tax * Air travelers pay VAT on local flights, but no VAT is payable on international fights. + This tax is thus only levied on international travel from a South Affican airport + SARS introduced this tax to help boost the economy. * The tax is R190 on international flights and R100 to the BLNS countries. Environmental levies Carbon dioxide (CO2) emission levy + ‘The reason for introducing this tax is to encourage the buyers of new passenger vehicles to buy smaller cars that will use less fuel, and thus be more environmentally friendly. * R127 per tonne Plastic bag levy + ‘The reason for the introduction of this tax was to help curb the use of plastic bags by consumers and to protect the environment from all the litter + 25 per bag ‘Tyre levy + R2,30 per kg to help in the littering of the environment when disposed of. Sugar tax + 2,21 per gram exce communica ng 4 grams per 100 ml, Help to prevent and control non- ble diseases and to help prevent and control obesity Application of tax revenue ppl se We started this module by discussing the National Budget process Government consists of National Government and Local Government. National Government consists of a number of departments. Each of these departments has to pay employees, purchase fixed! and non-fixed assets and run their department’ income and expenses The same will apply for the nine provinces of South Africa and the various local authorities or municipalities. These entities will also receive income through rates and taxes, but are still dependant on National Government for their existence. As residents of South Africa, we enjoy the privileges of a road network, police service cducation system, basic services like water and elect Example 2.2 Using the tax tables Mr Joseph is 32 years old and not married, He furnished the following information for the ccurrent tax year: Taxable Income 228 000, Required talculate Mr Joseph's normal tax for the year Answer ‘Taxable income 228 000 Determine the category on the tax tables where R228 000 falls. ‘This is between R205 900 and R321 600 By what amount does R228 000 exceed the beginning of the scale, that is 228 000 R228 000 ~ R205 900 205 900 32.150 Apply the specific rate of R22 100 x 26% 5 746,00 Add the fixed amount from the table which is in this case 37 062,00 Normal Tax 42 808,00 wv +-—‘Marginal and Average rates of tax From the previous examples you have learnt how to calculate normal tax, From example 2.2 you would have noticed that the specific tax scale started at R205 900, Any amount between R205 900 ancl R321 600 would be taxed at a rate of 26%. This is called the marginal rate of tax. This means that every rand that you have earned that falls between these parameters will be taxed at a marginal rate of 26%. The maximum marginal tax rate is reached at a taxable income of R1 577 300, For every rand that you earn above this amount you will pay tax at the marginal rate of 45%, The normal tax as calculated in example 2.2 amounted to R42 808,00. If one divides the amount of normal tax with the taxable income you will arrive at the average rate of tax that a taxpayer will pay. In this example, one will divide the R42 808,00 by R228 000 and arrive at an average rate of tax of 18,78%. This means that the taxpayer is paying 18,78 cents on every rand that he has earned on a taxable income of R228 000. 2.1.2 The calculation of net normal tax Now that we know how to use the tax tables and determine normal tax, the next step will be to calculate net normal tax. To arrive at net normal tax, you will have to deduct the rebates. What are these rebates? Foreign tax rebates (Section 6 quat) A South African resident, who has earned income in a foreign country, has to include this income in his taxable income in South Africa, Remember, a South African resident all income from a worldwide source as gross income in South Africa, because this is where he lives. If there was tax deducted in this foreign country from the foreign income, the South African resident can claim this foreign tax as a rebate from his normal tax. \s to include “The forcign tax rebate cannot result in a refund to the taxpayer as itis limited to the normal tax per definition of an individual. The excess can be carried forward to the next year and added to foreign taxes in that year of assessment Normal tax rebates (Section 6) A natural person will qualify for the Following rebates: + Primary rebate (all individuals) R14 958 ‘The reason for the primary rebate is to ensure that individuals whose taxable income is very low will not have to pay tax. We call this the tax threshold. IF a taxpayer’ taxable income is less than the tax threshold, he will not pay tax in South Africa, To arrive at the tax threshold, you need to divide the primary rebate by the lowest rate of tax [=> Example 2.3 How to calculate the tax threshold Determine the primary rebate 14958 Determine the lowest rate of tax mee 18% Divide the primary rebate by the lowest rate of tax (thy “Tax threshold for the current year is 83 100 18=F ode 2 Personal income tr |] z+ 2 ‘sesdytba NOTE {all individuals over the age of 65 on the last day of the tax year) will be entitled co a further ‘The reduction (pro rata) of rebates, The Act specifically mentions that an individual must have been, or should have been 65 or 75 0n the last day ofthe tax year to qualify for the secondary and tertiary rebates. This means that, should an raaincaet aiacrreyie stored nesrea(a tevetarned eee rebate of R8 199 before 28/29 February ofthe tax year; he would still be entitled to the This acts as further rebate. relief for the elderly over 65. The amount that is allowable as aprimary.and secondaryand tertiary *— Tertiary rebate rebate {where applicable) must be reduced in relation to the number of (all individuals over days that he was alive during the year of assessment, This includes the the age of 75 on primary, secondary and tertiary rebates (if applicable). the last day of the tax year) will be The other instances where rebates fr an individual willbe reduced entitled to a farther are where a taxpayer dies or is declared insolvent and again where rebate of R2736 heis rehabilitated or if he leaves South Africa and becomes a non: ‘This acte’ai'a Further: resident relief for the elderly over 75, [=> Example 2.4 Deduction of foreign tax rebates and normal tax rebates Mr Herero is 70 years of age and not married. He furnished the followi current tax year. 1g information for the ‘Taxable income R158 000 (Included in the taxable income is an amount of R20 000 that he received from a foreign country. Foreign tax deducted amounts to R1 200) Required Calculate Mr Serero’s net normal tax liability for the current tax year. Answer ‘Taxable Income (given) 158.000 Normal tax per tables (158 000 x 189%) 28 440 Less Rebates 24.357 Primary Secondary Foreign Tax rebate Net normal tax 4083 19 ||| introduction to income Tax forindividuals: Theory and Practice 2021, } => Example 2.5 Calculating the rebate(s) for a person who has died during the tax year Mr Parker died on 31 May of the current tax year, a week before his 75th birthday. His accountant furnished the following information for the current tax year. ‘Taxable Income 228 000 Required Calculate the late Mr Parker's net tax liability for the tax year Answer Taxable income 228 000 Determine the category on the tax tables where R228 000 falls. This is between R205 900 and R321 600 By what amount does R228 000 exceed the starting amount of the specific tax scale? 228 000 “Taxable Income less starting amount of the tax scale is 205.900 R228 000 less R205 900 “22 100,00. Apply the specific rate of tax, which in this case is 26% 26% x R22. 100 5 746,00 Add the fixed amount from the table which is in this case 37 062,00 Normal Tax 42 808,00 Less Rebates 25 893 Primary 14958 Secondary 8199 Tertiary (He would have been 75 on 28 February 2021) 2736 “The rebates have to be allowed in the ratio to the number of days the taxpayer was alive 652645 Number of days alive 92x total rebates x 25 893 Divide by number of days 365 in the tax year Net normal Tax 36 281,55 Medical schemes tax credit (Section 6A) SARS allows relief for medical contributions because the Government cannot provide medical care forall residents at State hospitals, For those taxpayers that do belong to a medical fund and can afford to make use of a private hospital, Government will allow certain relief from tax payable. Payment of medical fund contributions or medical expenses Any amounts paid by the estate of a deceased taxpayer are deemed co have been paid by the taxpayer on the day before his death, This means that the amounts expended on medical «for the taxpayer until the date of his death matter are claimed by the executor in the assess and not in his estate. 20{| Module 2+ Personal income tax || ‘Where amounts were paid by the employer, and included as a taxable fringe benefit as such for the taxpayer (employee), it is deemed to have been paid by that taxpayer (employes). “The taxpayer can then claim the medical tax credits and additional medical expenses credit as a deduction, Remember that when medical fund contributions paid by the employer were included as a fringe bencfit, it is deemed that the taxpayer has made such contributions, + Aperson will be allowed to firstly claim a medical schemes credit as a rebate against normal tax, + Medical Scheme Fees Tax Credit is a rebate which reduces the normal tax a person pays. + ‘This rebate is non-refundable and cantt be carried over to the next year of assessment, In other words, this rebate will cut your normal tax to a lesser amount or nil, however it cant create a negative amount, ‘The person will be alowed to firstly claim the medical rebate ifs + He has paid the contributions to the medical scheme, ot ; + His employer paid the contributions to the medical scheme, and these. €Q Discovery contributions were included as a fringe benefit in his gross income. Health ‘The amount of the medical schemes tax credit per month for the current tax year ist + R319 in respect of benefits to the person. + A furcher R319 in respect of his first dependant. * A further R215 in respect of each additional dependant. These credits are for each month that the fees were paid to the medical scheme. Example 2.6 Calculating the medical schemes tax eredit ME Siyabonga, 28 years old furnished the following information for the current tax year: He is married to Ms Siyabonga, 27 years old and they have two children aged 3 and 5. He is a member of a medical fund and has paid a total of R2 400 per month to the medical fund for himself and his family. ‘Taxable income 228 000 Required Calculate Mr Siyabonga’s net normal tax liability for the current tax year, Answer ‘Taxable income (given) 228 000 Normal Tax 42 808,00 Less Rebates 27774 Primary 14958 Medical scheme fees tax credit (1 068 x 12) 12 816 Taxpayer 319 i First Dependant ~ wife 319 21+Second Dependant ~ Child aged 5 215 ‘Third Dependant ~ Child aged 3 215 Rebate per month 1068 Rebate per year (month x 12) Net normal tax 15 034,00 Additional medical expenses tax credit (Section 6B) From 1 March 2016, the excess medical scheme fees, together with the qualifying out of pocket medical expenses will be converted to the Additional Medical Expenses Tax Credit. ‘What qualifies as out-of: pocket medical expenses? Amounts paid and not recovered during the year of assessment in respect of + Services rendered and medicines supplied by a registered medical practitioner, dentist, optometrist, homeopath, naturopath, osteopath, herbalist, physiotherapist, chiropractor or orthopedist; + Hospitalisation in a registered hospital or nursing hom Home nursing by a registered nurse, midwife or nursing assistant, including when supplied by any nursing agency; + Medicines prescribed by a registered physician and acquired from a pharmacist; + Medical expenses incurred and paid outside South Africa which is similar to the above expenses; Any expenses as prescribed by the Commissioner as a result of any physical impairment or disability Who is a dependant? A dependane is: * A sspouse (i.e. husband or wife) + A child and the child of a spouse (e.g, son, daughter, step son, step daughter, adopted child) who was alive during any portion of the year of assessment, and who on the last day of the year of assessment — Was unmarried and was not or would not, had he or she lived, have been: Older than 18 Older than 21 years and was entirely or partly dependent for maintenance on the person and has not become = Older than 2¢ and has not become liable to pay normal tax for the year and was a full-time student at an educational institution of a public character; or In the case of any other child, was incapacitated by a disability from maintaining himself or herself and was entirely or partly dependent for maintenance on the person and hasnt become liable to pay normal tax for that year. + Any other member of a person's family for whom he or she is liable for family care and support (c.g. mother, father, mother-in-law, father-in-law, brother, sister, grandparents, grandchildren.) y other person who is recognised as a dependant of that person in terms of the rules of a medical scheme or fund. le to pay normal tax for the year ars and was entirely or partly dependent for maintenance on the person 2{| Module 2+ Personal income tax || Calculation of Additional Medical Expenses Tax Credit ‘The Additional Medical Expenses Tax Credit will depend on a taxpayer's age and whether the taxpayer, spouse or any of their children has a disability. This further medical expenses tax credit amount is deducted from the normal tax paya ble by a person who is a natural person, ‘Taxpayer over 65 or with a disability of the taxpayer, his spouse or child Ifa taxpayer falls in this category he is eligible for 33,3% of the aggregate of the full medical scheme contributions in excess of three (3) times the medical tax credit * Calculate the total of the annual medical scheme fees tax eredit. + ‘Then calculate the annual medical fund contributions. + Next one has to deduct 3 times the annual medical scheme fees tax credit from this amount of annual medical fund contributions. + To this subtoral one then adds the qualifying medical expenses. + From this total one is allowed 33,3% as additional medical expenses tax credit rebate, x. Reference is made toa disability to the taxpayer, his spouse or child, not to any dependant. NOTE Medical Schemes Tax Credit ~ More than one person pays contributions to medical scheme for a dependant (Sect 6A(3A)) If more than one person pays to a medical scheme on behalf of a dependant, the medical tax credit should be apportioned to the amount paid by the person in relation to the total amount paid. This could happen where two children contribute towards the medical scheme on behalf of a parent. ‘To summarise: ‘Total Amount of the Medical Tax Credit x (Either R319 or R215) [=> example 26.1 Medical Schemes Tax Credit ~ More than one person pays contributions to medical scheme for a dependant Aphiwe contributes R1 000 to his mother’s medical scheme and his sister Zondo contributes a further R1 500 of the total monthly contributions of R2 500 to the Precise Medical Scheme. ‘Their mother isa dependant as defined of both of them. Both Aphiwe and Zondo are the Aphiwe is married to Xolisa and she is a member on his fund. His total contributions to the Exact Medical Fund amounts to R5 000 per month. Zondo is the only member of her medical fund and her contributions to the Actual Medical Fund amounts to R2 800 per month. n members of their respective medical funds, 23 +Required Calculate the medical tax credits that Apihwe and Zondo are entitled to. Answer Aphiwe Main Member Aphiwe 319,00 First Dependant on scheme ~ Wife Xolisa 319,00 Additional Dependant ~ Mother ‘Total Amount of the Medical Tax Credit paid by th * Total contributions paid to fund on behalf of dependant 86 ‘Total monthly medical tax credit for Aphiwe R724,00_ Zondo Main Member Zondo 319,00 First Dependant on scheme ~ Mother Total Amount of the Malicl hx Cede |X Contribution paid by the taxpayer ‘Toal conributions paid to Fund on behalf of dependant 9 x 1.300 319 F500 191,40 Total monthly medical tax credit for Zondo R510,40 [p> Example 2.7 Person over 65 years and older or with a disal taxpayer, spouse or child Mr AB is 65 years old and he has contributed R3 200 per month to a medical scheme for himself and his wife from the beginning of the tax year. His qualifying medical expenses by the end of the tax year amounted to R30 000. ty to the Required Calculate the amount of medi al scheme fees tax credits and additional medical expenses credit that Mr AB can claim for the current tax y 24=F ode 2 Personal income tr |] Solution: dard monthly medical scheme fees R3 200 p.m. X12 R319 + R319 = ROBE pum. eae = R38 400 pa, R638 x 12 = 7 656 per year Additional medical expenses ex eredie Annual contributions less 3x medical tax credits R38 400-3 x7 656) 38 400 - R22 968 RIS 432 Excess plus medical expenses X 33.3% R15 432 + 30000 R45 432 x 33,3% R15 129 ‘Therefore, Mr AB's tax liability will be reduced by: R22 785 Medical schernes tax credit R7 656 Plus Additional medical expenses credit RIS 129 Calculation for all other taxpayers + Persons below 65 years are entitled to 25% of the aggregate of the full medical scheme contributions in excess of four (4) times the medical tax credit + Plus all other qualifying out of pocket medical expenses (excluding medical scheme contributions), only to the extent that the amount excceds 7,5% of the taxable income excluding retirement fund lump sums and severance benefits. = One has to calculate the medical contributions for the year = Deduct four times the medical tax credits for the year = Add the out of pocket medical expenses = Arrive ata subtotal ~ Deduct 7,5% of taxable income — Allow 25% of this amount [=> Example 2.8 Person under 65 years M6 Scott is 45 years old and she has contributed R3 800 to a medical scheme per month on behalf of herself and her two children. For the current tax year she ineurred R24 000 in qualifying medical expenses, Her taxable income for the current tax year is R280 000. Required Calculate the amount of medical scheme fees tax credits and additional medical expenses credit that Ms Scott can claim for the current tax year. 25 +Answer idard monthly medical scheme fees tax credits ara onee Additional medical expenses tax enedit Se ‘Therefore, Ms Scott's tax liability will be reduced by: Medical schemes tax credit Plus Additional medical expenses credit 26 3 800 pam. x 12 R319 + R319 + R215 = R847 pum. R847 x 12 = R10 164 pa. Annual contributions less 4 x medical tax eredis R45 600 — (4 %¢ 10 164) 45.600 - 40656 Ra 944 Exces plus medical expene Rags + R24 000 R28 944 7.5% taxable income 75% x 280 000 : R21 000 Exces plus medical expense less 7,5%6 of taxable income Raed R21 000 R7 944 Allow 25% of this amount R7944 x 25% = 1.986 12150 RIO 164 RI 986[=p {| Module 2+ Personal income tax || Example 2.8.1 Calcul taxpayer over 65 1g the medical schemes tax credit and the additional medical expenses tax credit (The same scenario would apply to a taxpayer, his spouse or child who is disabled.) Mr De Allende, 68 years old, furnished the following information for the current tax year: He is a member of a medical fund and has paid a total of R3 800 per month to the medical fund for himse refunded by the medical fund, Taxable income Required Calculate Mr De Allende’s net normal tax liability for the current tax year. Answer ‘Taxable income Determine the category on the tax tables where R518 000 falls, ‘This is between R445 100 and R584 200 By what amount does the taxable income exceed the starting, amount of the specific tax scale? Apply the specific rate of tax, which in this case is 36% 36% x R72 900 ‘Add the fixed amount from the table which is in this case Normal Tax Less Rebates and his wife. He paid qualifying, medical expenses of R36 000 that was not 518 000 518 000 445.100 72.900 26 244,00 105 429,00 131 673,00 50 332,46 Primary 14958 Secondary (over 65) 8194 Medical scheme fees tax credit payer 319 First Dependant (wife) 319 Rebate per month 638 Rebate per year (month x 12) 7 656 Additional medical expenses tax credit Qualifying medical expenses (given) 36.000 Add Excess medical scheme contributions 45 600 ~ 22 968 22.632 Calculation of excess medical schemes credit Actual Contributions (given R3 800 x 12) 45 600 Deduet Medical scheme tax credit x three R7 656 x 3 = 22 968 ‘The additional tax credit is 33,3% of this amount 58 632 (The total of qualifying medical expenses plus the ‘excess medical schemes credit) 33,30% x 58 632 = 19 524,46 Net normal tax (131 673,00 ~ 50 332,46) 23-152 7 656 19 524,46 81 340,54 a&. NOTE The calculation would have been exactly the same if the taxpayer, his wife or child was disabled, except forthe aver 65 rebate that would not have been allowed. [=> 28 Example 2.8.2 Calculating the medical schemes tax credit and the addi ‘Taxpayer under 65 nal medical expenses tax ere ME Sibuyo, 28 years old, furnished the following, information for the current tax year: He is a member of a med: medical fund for himself, his wife and a child who is 6 years old. al fund and has paid a total of R4 800 per month to the He paid qualifying medical expenses of R40 000 that was nat refunded by the medical fund. ‘Taxable income Required Calculate Mr Sibuyos net normal tax liability for the current tax year. Answer ‘Taxable income Determine the category on the tax tables where R598 000 falls. ‘This is between R584 200 and R744 800 By what amount does R598 000 exceed the starting amount of the specific tax scale? ‘Taxable Income less starting amount of the tax scale is R598 000 less R584 200 Apply the specific rate of tax, which in this ease is 39% 39% x R13 800 Add the fixed amount from the table which is in this ease 598 000 598 000 584 200 13 800 5 382,00 155 505,00 160 887,00 28 145,50 [14958 10.236 2:951,50 Normal Tax Less Rebates Primary 14958 Medical scheme fees tax credit ‘Taxpayer 319 First Dependant (wife) 319 Second Dependant (child) 215 Rebate per month 853) Rebate per year (month x 12) 10 236 Additional medical expenses tax credit Qualifying medical expenses (given) 40000 Excess medical scheme contributions 16 656 Actual Contributions (R12 x R4 800) 57 600 Medical scheme tax eredit x four R10 236 x 4= 40944x {| Module 2+ Personal income tax || Subtotal (Qualifying medical expenses + excess) 56 656 Less 7,5% of taxable income (7,5% x 598 000) 44 850 ‘Total (Subtotal ~ 7,5% of taxable income) 56 656 ~ 44 850 11 806 ‘The additional tax credit is 25% of this amount 25% x R11 806 = R2 951,50 Net normal tax 132.741,50 NOTE The frst step is to determine the actual contributions less four times the medical tax credits forthe year. To this the qualifying medical expenses must be added. From this subtotal one has to deduct 7,5% of taxable income. 25% of the medical expenses and excess contributions after the 7.5% calculation of taxable income must then be applied to determine the additional medical expenses tax credit. a-— This concludes the discussion on rebates and how to arrive at normal tax. You have to remember that rebates can never result in an amount of tax to be refunded to a taxpayer 2.2.3 [=> The calculation of the tax liability To calculate the tax liability, you will have to deduct the amount of prepaid taxes paid by the taxpayer. (Refer to Module 7 for the calculation of these amounts.) You simply have to deduct the prepaid taxes, which consist of the employee's tax withheld by the employer from the employee during the tax year and provisional tax paid by the taxpayer on any other taxable income. In ll che examples, you were given the taxable income. It is now necessary to understand what type of income forms part of taxable income. Example 2.9 Calculating the tax liability Mr Thulane who is 28 years old furnished the following information for the current tax year: ‘Taxable Income 1790 000 Pre-Paid taxes paid Employee's tax 262.000 Provisional tax 375 000 Required alculate Mr ‘Thulane' tax lability for the current tax year. 292.3 30 Answer ‘Taxable Income (given) 1.790 000 Normal tax per tables Taxable Income 1790 000 less minimum of specific tax scale 1.577 300 | 559 464 rence x 45% 212700 |_95715 Normal tax per tables 656 179 Less rebate Primary 14958 Net normal tax 640.221 Less Pre-paid taxes __] 637000 Employees tax 262.000 Provisional tax 375.000 Tax liability (amount due to SARS) 3221 Example 2.9.1 1, What is Mr Thulane’s marginal tax rate? 2, What is Mr Thulane’s average tax rate? Answers 1. Tax rate per tax scale is 45%. 2. Average tax rate = Normal tax 100 ee taxrate = Fevable income ~ 1 655 179 ~ 100 1790 000 1 = 36,60% Personal taxable income Under this heading, we will discuss the different types of income that an individual taxpayer can ear, This can consist of normal earnings, other income, foreign income and capital income. Earnings consist of income that you receive from employment. The general term that is referred to is remuneration, You are remunerated for the work that you perform, Examples are ‘wages, salary, bonus, overtime and commission, The important factor is that there has to be an ‘employee ~ employer relationship. Another form of earnings that an individual may carn will be where he is self-employed. This falls outside the ambit of remuneration. Other income consists of rental, dividends and interes \come will include investment income, pension, annuities, royalties, etc. Investment 524 2.5 {| Module 2+ Personalincome tax || Foreign income that a South African resident receives could include amounts from investments made in a forcign country. The resident will then receive rental, interest and dividends from these foreign investments, It could also be that a resident is employed in a foreign country and will eeceive remuneration from this country. It must be remembered that not all these types of income are taxable income; however, if you are a South African resident, all such amounts have to be included in gross income, The income might be exempt to arrive at taxable income, but we will discuss this in the next module, Capital and other income Capital income as such is specifically excluded from the general definition of gross income. Examples will be the winnings from a Lotto draw, inheritances, the selling of your motor car and all other receipts of a capital nature. } ‘To help you to understand the concept of when an amount must be excluded from gross income as a capital amount, you can ask yourself whether you have entered into the transaction with the purposes to trade or not. If your answer is to trade, then it is normal gross However, the general definition of gross income then ends with the following proviso: “ bur including ... (whether of a capital nature or not) so received or accrued as are described hereunder, namely...” ‘The proviso then includes specific amounts that would normally be of a capital nature Examples are: annuities, maintenance, amounts received from your employer upon retiring from employment, lump sum benefits from retirement funds, restraint of trade payments, ete ‘The general definition of gross income thus excludes receipts of a capital nature, but the proviso to the definition specifically includes certain of these amounts. (Refer to Module 3.) The reduction process You should remember the schematic presentation of how to calculate taxable income that was his was gross income less exemptions which equaled income. Income less deductions is taxable income. The reduction process builds on this and explains how you start with gross income, Gross income and income are then reduced by certain exclusions which will then result in taxable income. Gross income and exemptions will be discussed in detail in the next module, In this module, we will only explain simple examples of how to arrive at income and taxable income. discussed in Module 1. ‘We discussed earnings carlier in the module, This will be included in gross incom: irrespective of where you have actually received it or not from a South African source. The point to remember is that a South African resident must declare all income from a worldwide source as gross income in South Africa, We will also include investment income (interest, dividends and rental) as gross income. 31}2.5.1 2.5.2 2.5.4 32 ‘We have now determined gross income. The next step is to exempt certain incomes that ‘were included as gross income to arrive at income, From earnings, you might in cercain circumstances exclude, for example, salary, pension or a bonus that were eared in a foreign country. This exemption in terms of Section 10(1)(0) will be discussed in Module 4. Rental income excluded from gross income If fixed property is situated outside South Africa, it is possible that the rental income that you will receive from this property depend on where the propert I be excluded. [F the property is not fixed property, it will used before excluding it from gross income, oF not. Dividend income exempt from gross income Dividends are income that you receive by investing in shares in a company. Dividends received from investments that you have made in. a company inside or outside South A\ If the dividends are received from a foreign company, they will be partially exempted. If the dividends are received from a South African company, the company that pays the dividend will withhold dividends tax at 20%, before paying the dividend to the sharcholder, The sharcholder will thus only receive 80% of the actual dividend declared to him. As the dividend was already taxed by the company, SARS thought it wise to exempe the dividend income in the hands of the individual. Interest income exempt from gross income Interest received is normally income on loans made o' investments that you have made. Because the Government wants to encourage South Africans to save, certain exemptions are allowed against interest received. (Refer to Module 4) It is sufficient co only mention these exemptions on interest at this moment: For a taxpayer under 65 years of age ~ the first R23 800 from interest from a South African source will be tax free (exempt). For a taxpayer over the age of 65 ~ in total, an amount of R34 500 will be tax free (exempt). Once all the allowable exemptions are excluded from gross income, we are left with income, Deductions from income Income less deductions will result in taxable income, It is, however, imperative to remember the sequence of deductions to be allowed. You cannot step out of this sequence. The reason for this is that certain of the deductions are calculated on the totals following a specific deduction, The list of deductions is as follows: + the general deduction formula + retirement fund(s) contributions + donations to approved institutions ‘These deductions will be discussed in detail in Module 5. At present, itis necessary to remember the order of deductions Once you have arrived at taxabl ‘The result of the reduction process is taxable income. possible to calculate tax.[=> {| Module 2+ Personal income tax || Example 2.10 How to apply the reduction process Mr Wiley, a South African resident, who is 66 years old furnished the following information for the current tax year: Receipts Salary from ASBA bank in South Africa 200 000 Bonus from ASBA bank in South Africa 25.000 Interest from BNF bank in South Africa 36 000 Di dend from 'TNM company in South Africa 18.000 Expenses (fully deductible) Pension fund contributions 14 000 Retirement Annuity fund contributions 1700 Required Calculate Mr Wiley’s taxable income. You have to make use of the reduction process to arrive at the answer. Answer Gross Income 279 000 Salary from ASBA bank in South Africa 200 000 Bonus from ASBA bank in South Africa 25.000 Interest from BNF bank in South Africa 36.000 Dividend from 'TNM company in South Africa 18 000 Less Exemptions 52.500 Dividend from TNM company in South Africa 18 000 (South African company, all dividends are exempt) Interest from BNF bank in South Africa 34 500 (The taxpayer is older than 65) Income 226 500 Less deductions 15 700 Retirement Funds Contributions Pension fund contributions 14 000 Retirement Annuity fund contributions 1.700 (In examples that follow in the following chapters it will be expected of you to be able to calculate these deductions) Taxable Income 210 800 332.6 Summary This module has showed you how to apply the reduction process, starting, with gross income and arriving at taxable income. ‘The whole procedure of calculating tax, commer and how to arrive at the tax liability, was discuss 1g with taxable income The next module will show you a more detailed discussion on which amounts to include in {gross income, what exemptions to allow and the calculation of the deductions, ie 2a 2.2 23 24 25 Activity 2 Mr GR Smith is 78 years of age. His raxable income for the current year of assessment is 265 821 Required Calculate Mr Smith’ tax liability for the current tax year Explain in your own words the meaning of the ‘tax threshold’ Calculate the amount of taxable income that a taxpayer, aged 72, must earn before he will be liable for income tax during the current tax year Mr AD Peterson is 29 years of age, divorced and has two unmarried children under the age of 18, He furnished the following information for the current tax year: Income ‘Taxable income from a South African source for the year 328 985 Foreign taxable income for the year 56 000 Medical fund contributions per month to the medical fund 1245 ‘The employee pays all the contributions to the medical fund He paid the following taxes during the eax year: ‘Taxes on foreign taxable income 12.200 Employee's tax 22.500 Provisional tax 5.600 Required Calculate the tax liability of Mr Pecerson for the current tax year Calculation of the Additional Medical Tax Credit for a person with a disability. During the current year of assessment, Nickie (aged 34) earned a salary of R380 000 (excluding any taxable benefit). He contributed R46 900 towards ABC Medical Aid Scheme, of which the employer paid R24 000. His employer withheld employees’ tax of R40 864 from his remuneration of R404 000 (R380 000 + R24 000), after accounting for the medical tax credit. Nickie submitted the necessary form ITR-DD, requited by SARS to be completed and signed by a registered medical practitioner. The medical practitioner confirmed that Nicki's four-year-old daughter is a person with a disability, since she has a moderate to severe hearing impairment in both cars.{| Module 2+ Personal income tax || ickie claims R32.691 for two hearing aids for the daughter and also other allowable out-of-pocket medical expenses of R9 232. He has kept proof of all expenses the main member on the ABC Medical Aid Fund, with two dependants and his a spouse uughter. All amounts were correctly reflected on Nickie’s IRP5 certificate, and he was not entitled to any other exemption or deduction during the current year of assessment. ability clearly indicating the calculation of the medical tax credits and additional medical tax creditsIntroduction t Theory and PracticeModule 3 Gross income After completing this module, you will be able to: + Explain the term gross income and the definition according to the Act + Apply the principlesas handed dowit\in court cases pertaining to gross income Understand and apply the concepts of gross income + Understand that due to a person is included as gross income: the concepts of accrual vs received + Indicate the conditions that must apply for capital amounts to be excluded from gross income + Indicate the conditions for amounts to be included in gross income Gain background knowledge of Sections 7, 8 and 9 of the Act Indicate that deductions previously allowed are to be included in gross income when they are recovered + Identify and understand the specific inclusions as gross income + Understand the difference between a capital receipt and a receipt of revenue nature3.1 Introduction From the previous modules, you would have gathered that gross income is the starting point of taxation, For an amount to be recognised as taxable income, it first has to be included as gross income. Only after the application of the reduction process will you arrive at taxable income. “This implies che second pillar of the reduction process, which is the concept of exemptions. Exemptions will be discussed in this module, whereas the third pillar, which is deductions, will be discussed in Module 5. ‘The starting point of gross income is to determine what is specifically included in gross income. 3.2 The general definition of gross income cd as follows: Gross income is defined in Section One of the Act and can be summ in relation to any year ot period of assessment + in the case of any resident + the total amount in cash or otherwise received by or accrued to oF in favour of such a resident Or in the ease of a person who is not a resident the total amount in cash or otherwise received by or accrued to oF in favour of from a source within, or deemed to be within the Republic. But excluding, + receipts or accruals of a capital nature But including + specific inclusions whether of a capital nature oF not Each of these specific headings will now be discussed. Year or period of assessment A year of assessment or the tax year for an individual will be the period from 1 March ill 28/29 February the next year. For the current tax year, the year would have commenced on 1 March 2020 and will end on 28 February 2021 A period of assessment refers to where an individual's year of assessment is less than 12 months. This will happen where a person is born, dies, is declared insolvent or is rehabilitated during the year of assessment. Please note that the year of assessment is not reduced where you commence employment or immigrate to South Africa, when you emigrate from South Africa the rebate is apportioned. Refer to the section on rebates to refresh your memory about the implications where a year of assessment is for a period of less than a year. In the case of any resident ‘As mentioned before, a South African resident will have to include all his receipts from a worldwide source in his gross income. ‘The Act specifically distinguishes between a r resident. Let us frst discuss whether a person is seen as a South ident and a non- African resident or not. 38{| Module3 Gross income || Please note that the Act refers to residency and not citizenship. This means that even if the taxpayer has not obtained citizenship in South Africa, he can still be liable to include his receipts or accruals as gross income in South Africa, It is thus important to determine residency. Ordinarily resident As a starting point to determine whether a person is an ordinarily resident of South Africa or not, the fact of where you reside is an important factor to consider. It isa fact that mostly citizens that were born and grew up in the Republic will fall in this first category of residency. Persons that have immigrated to South Africa, and now live here permanently, will fall into a second category. The question that now arises is what happens when such South African residents leave the borders of the Republic for a period of time, This period can even be for more than a tax or calendar year. This means that a taxpayer could nor have set foot in South Africa for a considerable time, even not at all, during a year of assessment. To answer the question whether a person is an ordinarily resident of South Africa or not, one has to refer to judgments handed down in various court cases. There are two important cases that refer to ordinary residency. + The first case is that of Cohen v CIR(13 SATC 362). In this case, the taxpayer had spent an unbroken period of more than one year outside South Africa. He subsequently returned to South Africa after a period of just less than two calendar years. During this period of absence, the taxpayer still received investment income in South Africa, He reasoned that this income should not be included in his gross income as he was not living in South Africa, and as such nor ordinarily resident during his period of absence from South Aftica. “The judge mentioned in his judgment that a person's ordinarily place of residence was the country to which he returns to after his ‘wanderings. The taxpayer thus had to include this investment income as gross income in South Africa, as this was the place where he returned to after his ‘wanderings’. * In the case of CIR v Kuttel (54 SATC 298), it was established that the term residency is broader than ordinarily resident, IF you then look at ordinary resideney, it means that this is where you have your usual or principal place of residence. Nothing prevents you from being, temporarily absent from your normal place of residency. The fact is that you have to have a place which you call your normal place of residency. Other important judgments handed down were: + The place of residency must thus have been settled and certain and not temporary and casual. + Apperson will have to live a life in a particular place with a degree of permanency. ‘An important fact of being a resident of the Republic is thus to determine permanency when looking at ordinary residency. Physical presence test ‘When deciding whether a taxpayer is a ‘resident’ in South Africa will also include the physical presence test. This means that, even if the taxpayer falls outside the scope of being, an ordinarily resident of South Africa, he can still be declared a resident, if the physical est apy there is no need to apply the physical presence test. The physical presence test, which only applies to natural persons, can be summarised as follows: ies. However, if it was determined that a taxpayer is an ordinarily resident of the Republic, 39 |