Introduction to tax law

Gross Income - Differentiate between “accrued to” and “received by”

- Differentiate between an amount that is income in nature
vs capital in nature
General deductions - General understanding of general deductions
- Application of section 11(a) of the ITA
Tax avoidance and tax evasion - Differentiate between tax evasion and tax avoidance
- Substance v form
- Impermissible tax avoidance
Tax administration - This section looks at the way income tax is administered
- Dispute resolution process

International aspects - Brief outline on international aspects of income tax

- Exchange of information
- Double tax agreements
Selected topics - Tax treatment of cryptocurrencies
Capital gains tax - Explain the basic principles relating to CGT
Why do we need taxes?

• Social contract–citizen has a responsibility to pay taxes and

government has a responsibility to deliver goods and services
• Is there a direct quid pro quo?
• Theories why people pay taxes:
• Fear of punishment/fear of shame (Coercion theory)
• Influence by social structure(Social influence theory)
• They value the good that government does (Public good theory)
• Paying taxes is akin to charitable donations (Tax Affinity Hypothesis)
• In exchange for service delivery by the state (Social contract)
Fundamental considerations for tax
policy
TAX BASE TAX STRUCTURE TAX INCIDENCE

- Income - Rate - Bears the burden of tax

- Wealth - Structure - Also consider indirect
- Consumption - Progressive burden
- Proportional
- Regressive
Pillars of Taxation–Adam Smith (1778)

• Equity principle
• Certainty Principle
• Convenience principle
• Economic efficiency principle
• Administrative efficiency principle
• The flexibility principle (OECD)
• The simplicity principle (OECD)
Equity principle

• Based on concept of fairness

• Ability to pay principle and benefit
principle
• Take into account economic
capacity, and Proportion of benefits
received from the state
• Vertical equity:
• Person with higher economic
capacity pays more
• Horizontal equity
• Persons of same economic
capacity pay the same
Certainty, Convenience, and Economic
efficiency
• Certainty:
• Time, amount and manner of taxation must be certain
• Convenience:
• Must make it easy and convenient for taxpayer to be tax
compliant
• Economic Efficiency:
• Tax must not unduly influence a person’s decision-making
• What about Pigouvian taxes?
Administrative efficiency, flexibility and
simplicity
• Administrative efficiency:
• Not impose unreasonable administrative burden
• Cost to administer must not exceed revenue
• Flexibility
• Adapt to modern business models and economic outlook
• Example: COVID-19 special relief
• Simplicity
• Must be easy to understand and apply
History of tax in South Africa

• 1652-1800: Customs and excise at colony level

• 1800-1961: Customs and excise and income tax
• 1962: Introduction of Income Tax Act
• 1978: Introduction of General Sales Tax
• 1991: Replace GST with Value Added Tax
• Today Complex tax
TAXES
• VAT: Burden on consumers
• Income Tax: Taxpayer/employer
• Withholding tax: Taxpayer/person withholding the tax
Interpretation of tax legislation
• Words?
• Old methods
• Literal interpretation
• Modern methods
• Purposive interpretation
• Objective approach Natal Joint Pension Fund v Endumeni Municipality 2012 (4)
SA 593 SCA –Balance between ordinary meaning of the text and the intention of
the legislator.
• Rules of interpretation
• Contra fiscum rule –when an ambiguity exists in the interpretation of the wording
• Substance over form –give effect to ‘intention’ of the parties rather than the
wording of an agreement or scheme.
Introduction
• Definition of gross income s1 of the Income Tax Act 58 of 1962
• S1 "gross income", in relation to any year or period of assessment,
means –
• (i) in the case of any resident, the total amount, in cash or otherwise,
received by or accrued to or in favour of such resident; or
• (ii) in the case of any person other than a resident, the total amount,
in cash or otherwise, received by or accrued to or in favour of such
person from a source within the Republic,
• during such year or period of assessment, excluding receipts or
accruals of a capital nature…
RESIDENCY

Resident Non-resident
Taxed on worldwide Taxed only on income
income from SA source

Natural
Legal entities
person
The concept of “resident”

• Residence of natural persons (par (a) of the definition of

“resident” in s1)
• Test: Ordinarily resident vs Physical presence test
• 1. Ordinarily residence test
• Ordinarily resident - the term is not defined in the Act and the
interpretation of the courts must be followed.
• Cohen v CIR: a person’s ordinary residence would be the country to
which he would naturally and as a matter of course return from his
wanderings.
• SARS Interpretation Note 3: Fact + each facts to be decided on its
own merits
• To consider: employment; intention; personal belongings
The concept of “resident”
• Residence of natural persons
• “Physical presence” test
• Not ordinarily resident and meets the physical presence test
• >91 days in aggregate during the current year of assessment,
and
• >91 days in aggregate during each of the previous 5 years of
assessment and
• >915 days in aggregate in previous 5 years of assessment.
The concept of “resident”
Ordinarily resident Physical presence test
Resident from day person becomes ordinarily Resident from the first day of the relevant year of
resident in South Africa assessment during which all the requirements of
the PP test are met.
Ceases to be non-resident from day person Cease to be a resident from the day that person
emigrates from South Africa ceases to be physically resident in South Africa if
the person remains physically outside South Africa
for a continuous period of 330 full days
immediately after this date.
Concept of “resident”
• Residence of persons other than natural persons (par (b) of the
definition of “resident” in s1)
• A person other than a natural person, for example, a company, close
corporation or trust is resident if it.
• Is incorporated, established or formed in the Republic.
• has its place of effective management in the Republic
• SARS Interpretation note 6 : place where key management and
commercial decisions that are necessary for the conduct of its
business as a whole are in substance made.
• Consistent with the OECD commentary on Article 4 Model Tax
Convention.