TAX LAW (LML4804)

Taxes can be defined as compulsory payments that are imposed on citizens to raise
revenue in order to fund general expenditure, such as education, health and housing,
for the benefit of society as a whole.

The government formulate the tax policy in deciding the appropriate level of taxation to
be imposed.

Policies are courses of action taken by governments to ensure that their objectives are
achieved.

Components of tax policy

~ tax base (definition) x tax structure (rate structure) = tax incidence (tax liability)
Tax principles

TAX BASE

~The tax base is the amount on which tax is imposed.

~ economic income will not always be equal to the amount subjected to tax.

~ a tax base is broadly based on income, wealth or consumption:

◻ An Income tax base includes income earned or profits generated by taxpayers during
a year of assessment.

◻ A wealth tax base consists of the value of assets or property of a taxpayer.

◻ A consumption tax base encompasses the amount spent by taxpayers on goods and
services.

After determining the tax base, a percentage or unit is applied to this amount to
determine the tax liability.
TAX RATE STRUCTURE AND INCIDENCE

~The tax rate is expressed in percentage (15%) on the value of transaction or can be
expressed as an amount per unit (packet of cigarettes consumed in a country).

~ The following terminology is important in understanding tax rates:

◻ Marginal tax rate: This is the tax rate that will apply if the tax base increases by one
rand.

◻ Statutory tax rate: This is the tax rate that is imposed on the tax base as determined in
accordance with relevant legislation.

◻ Average tax rate: The average tax rate represents the rate at which tax is paid with
reference to the total tax base of a relevant taxpayer. This is determined by dividing the
total tax liability by the total tax base (i.e. Total tax liability / Total tax base). The tax
liability and the total tax base are determined having regard to relevant legislative
provisions.

◻ Effective tax rate: The effective tax rate can be determined by dividing the tax liability
by the total profit or income. The effective tax rate is often used as a measure to
compare the effective tax liabilities of different taxpayers.

Tax rates are usually determined with reference to one or more of the following
structures:

◻ Progressive tax rate structure: The tax rate increases as the tax base increases.

◻ Proportional tax rate structure: The tax rate does not change in line with the tax base
(a flat rate tax).

◻ Regressive tax rate structure: The tax rate increases as the tax base decreases.

The type of tax structure elected by policymakers would depend on a number of

aspects, one of which is the policy objectives to be achieved. Governments that aim to
achieve wealth redistribution, usually prefer progressive tax rates.

~ the tax burden is borne by the employee, even though it is paid by the employer -
incidence of taxation, i.e. who bears the true burden of a tax
PRINCIPLE OF TAXATION

The principles of a good tax system are generally referred to as:

◻ The Equity PrincipleThe Equity Principle: Tax should be imposed according to one’s
taxable ability or capacity.

◻ The Certainty Principle: The timing, amount and manner of tax payments should be
certain.

◻ The Convenience Principle: Taxes should be imposed in a manner or at a time that is

convenient for taxpayers.

◻ The Economic Efficiency Principle: Tax should be designed in a manner not unduly
influencing economic decision-making.

◻ The Administrative Efficiency Principle: The tax system should be designed in such a
manner as to not impose an unreasonable administrative burden on the taxpayer and the
revenue authorities.

◻ The Flexibility Principle: A good tax system should be designed in such a manner that it

accounts for changing economic circumstances.

◻ The Simplicity Principle: A tax should be designed in a manner that is easy to understand
and apply.

THE EQUITY PRINCIPLE

~The Equity Principle is based on the concept of fairness. A tax should be fair and should
also be perceived to be fair. If a tax is perceived to be unfair, it could negatively impact
taxpayers’ willingness to comply.

~ Equity is underpinned by the ‘ability-to-pay principle’ and the ‘benefit principle’.

In terms of the ability to pay principle, the tax liability imposed on a taxpayer should take
into account the economic capacity of the taxpayer (that is, how much can a taxpayer
afford to pay?).
The ‘benefit principle’ indicates that equity is established where a taxpayer pays tax in
proportion to the benefit received from a government (via tax revenue spending).

~The Equity Principle can further be subdivided into vertical and horizontal equity:6

◻ Vertical equity is achieved where a taxpayer with a greater economic capacity (or ability
to pay) bears a greater burden of tax than a taxpayer with a lesser ability.

◻ Horizontal equity is achieved where taxpayers with equal economic capacity bear an
equal tax burden.

THE CERTANITY PRINCIPLE

~ It is imperative that tax policy be finalized and certain long before its implementation and
that it is managed in a transparent manner to facilitate the creation of certainty.

~ Legislative provisions and procedures should be transparent and applied in a consistent

manner.

THE CONVENIENCE PRINCIPLE

~ taxes should be imposed in a manner or at a time that is convenient for taxpayers. The
Convenience Principle is all about making it easy for taxpayers to comply with tax
legislation and to pay their tax liabilities.

~ Paying tax via internet and not going straight SARS.

~ Inclusion of value-added tax in the retail selling prices of goods and services.

THE ECONOMIC EFFICIENCY PRINCIPLE

~ Tax is regarded as economically efficient if it does not unduly influence a person’s

economic decision-making.

~ Economic efficiency preserve tax base.

~ Where a tax is inefficient, taxpayers would be motivated to change their behavior in an

effort to avoid paying the tax.

~ A tax that is not economically efficient is not always negative from a policy perspective,
especially when it encourages desired behaviour.
~ A tax that is not economically efficient is not always negative from a policy perspective,
especially when it encourages desired behaviour.

THE ADMINISTRATIVE EFFICIENCY PRINCIPLE

~A tax system should not create a heavy burden for taxpayers or revenue authorities.

~Goal: it should be cheap to implement and maintain relative to the revenue it generates.

From the revenue authority’s perspective:

Administrative efficiency includes:

- use of internal controls to audit taxpayers.

- efficiency design of the tax authority’s structure.

- sufficient and well organised staff to enforce tax laws.

From the taxpayer’s perspective:

Efficiency includes:

- ease of keeping records and submitting required documents

- reasonable frequency of tax filings

- minimal need for hiring professionals to assist with tax submissions.

THE FLEXIBILITY PRINCIPLE

~ A tax system must be adapted to changing economic situations.

~ Also called tax buoyancy, how responsive tax revenue is to economic growth.

Key points:

- The global economic changes

- A tax must not become outdated
- Example: rise in e-commerce forces governments to reconsider taxation of cross
border sales.
THE SIMPLICITY PRINCIPLE

~ Tax law should be simple and easy for the average taxpayer to understand and apply.

Important that:

- Tax legislation is straightforward

- Supplementary materials support understanding

Government should consider:

- How many taxes exists

- What items are included/excluded from tax base
- How laws and support materials are structured

2 TAXATION IN SOUTH AFRICA

Important contributors to the transformation of South Africa’s tax system were:

◻ The Commission of Enquiry into Fiscal and Monetary Policy in South Africa (‘the
Franzsen Commission’) – issued two reports in 1968 and 1970 respectively;

◻ The Commission of Inquiry into the Tax Structure of the Republic of South Africa (‘the
Margo Commission’) – issued one report in 1986;

◻ The Commission of Inquiry into Certain Aspects of the Tax Structure of South Africa (‘the
Katz Commission’) – issued nine interim reports during 1994–1999; and

◻ The Davis Tax Committee inquiring into the role of the tax system in promoting ‘inclusive
growth, employment, development and fiscal sustainability’ in order to make
recommendations to the Minister of Finance – issued 25 reports from 17 July 2013 to 27
March 2018.

The legislative process:

 - The legislative process generally commences with the issuing of a Green Paper

- followed by the White Paper, the Draft Money Bill and, finally the Act of Parliament.
A Green paper is a policy document intended for public discussion, and it sets out a
Government Department’s general view of the matter under consideration.

- In South Africa, National Treasury is the Government Department that deals with
tax laws.
- The public is allowed to comment on the Green Paper.
- The National Treasury then considers any public comments received and may elect
to adjust the Green Paper for these comments.
- The adjusted Green Paper is then issued in the form of a White Paper.

A White Paper represents a more refined version of the Green Paper. A White Paper may
also be subjected to further discussions and commentary prior to it being transformed into
a draft set of legislation known as a Draft Money Bill.

Process for Draft Money Bill

- Draft Money Bill should be prepared and submitted by the National Treasury to the
Minister of Finance.
- Once Cabinet approval has been obtained, the Draft Money Bill must be reviewed
by the State Law Advisers to ensure that it does not contradict the Constitution and
other existing laws, and that there are no technical errors.
- Upon obtaining the approval of the State Law Advisers, the Draft Money Bill is then
introduced by the Minister of Finance in Parliament to the National Assembly and
the National Council of Provinces.
- The Draft Money Bill is then published in the Government Gazette for public
comment.
- A consultative process is applied, and amendments are made where required.
- Only after the Draft Money Bill has successfully passed through Parliament, will it
be submitted for assent by the President.
- Once assented by the President, the Draft Money Bill becomes an Act of Parliament
and becomes binding on one of the following dates:
◻ the date the Act is published in the Government Gazette
◻ the date determined in accordance with the Act, or
◻ the date as indicated in the Government Gazette
CURRENT TAX LEGISLATION

1. Normal tax
Normal tax is imposed by the Act and is commonly referred to as income tax.

2. Withholding tax (Fourth Schedule, ss 9(2)(b), 10(1)(h), 10(1)(i), 10(1)(l), 10(1)(lA),

35A, 47A–47K, 49A–49H, 50A–50H, 64D and 64E)

What is withholding tax?

- A tax at source: deducted before payment is made.
- Responsibility lies with the payer (e.g. company, employer) to deduct the tax
before paying he recipient.
- Usually applies to non-residents
- Only the net amount (after tax) is paid.
- Payer must submit tax to SARS on behalf of the payee.
- Final liability rests on the person receiving the payments.
- Can be full or partial depending on the law.
- Designed to ease tax collection and ensure compliance.

(a) Taxes withheld on payments of remuneration by employers to employees

- Employers must withhold employees’ tax (PAYE) and pay it to SARS.
- Not a final tax: it's a prepayment of normal tax.
- Tax amount is calculated as per the Fourth Schedule.
- Relief available under Employment Tax Incentive Act (until 28 Feb 2029):
Aims to help qualifying employers hire youth and inexperienced workers.

(b) Taxes withheld on payments of dividends by companies to beneficial owners

- Dividends Tax:

~ Withheld on dividends by resident or non-resident companies listed on SA

stock exchanges.

~ Paid to beneficial owners (as defined in s 64D)

~ Applies to cash dividends and dividends in specie (non-cash) - s 64E

~ It is a final tax
 ~ Applies to both resident and non- resident beneficial owners.

(c) Taxes withheld on payments to non-residents

-Used by countries to collect income tax on income earned by non- residents
from local source.
-Withheld by resident payer and paid to SARS
-The resident acts as a middleman. The tax liability rests with the non-resident.
-Withholding tax rates may be reduced by a Double Taxation Agreement (DTA)
between South Africa and another country.
-Applies to 4 types of payments made to non-residents that are subject to
withholding tax.

TYPES OF WITHHOLDING TAXES ON NON-RESIDENTS

◻ Withholding tax on payments to non-resident sellers of immovable property: s 35A

- Non-resident selling immovable property is SA is subject to withholding tax on

the selling price:
- 7.5 for individuals
- 10% for companies
- 15% for trusts
- The tax is not final. Its a prepayment of normal tax.

◻ Withholding tax on royalties: ss 49A–49H

- Royalties received by non-resident from a resident are subject to withholding tax on

gross amount.
- Rate:15% fixed under s 10(1)(1)
- Final tax in SA, may be reduced under a DTA.

◻ Withholding tax on interest: ss 50A–50H

- Interest received by or accrued to a non-resident is taxed at a fixed rate of 15%

 - Final tax may be exempt from normal tax under:
- s 9(2)(b), s 10(1)(h) & s 10(1)(i)

◻ Withholding tax on payments to foreign entertainers and sportspersons: ss 47A–47K

- Fixed rate of 15% on amounts earned in South Africa

- Applies to any entertainer or sportsperson performing in South Africa.
- Tax is final
- Exempt from normal tax under s 10(1)(iA)

3. Turnover tax (ss 48 – 48C)

- Turnover tax is incorporated in the Sixth Schedule to the Act.

- It provides for an elective turnover tax for micro-businesses with an annual turnover of R1
million or less.

- Definition: Turnover tax is a tax calculated on the taxable turnover of a registered micro
business, and not on its taxable income.

-This method eliminates the need for keeping detailed records of expenditure.

-An important feature of the turnover tax regime is that the imposed tax liability is aligned
with the tax liability under the current income tax regime, but on a simplified base, with
reduced compliance requirements.

4. Dividends tax (ss 64D–64N)

- Imposed by Act.

- also considered a withholding tax because of method of collection.

- Fixed at 20% of the dividend amount.

- Deducted by company paying the dividend. Liability rests with the beneficial owner (as
defined in s 64D). If it’s a dividend in specie, the resident company is liable.

- It applies to resident companies, non-resident companies listed on a recognised SA stock

exchange.

- Exceptions (not subject to Dividends Tax): are Headquarter companies, oil and gas
companies and international shipping companies.
- A reduced rate may apply depending on the Double Taxation Agreement (DTA).

- Final tax in South Africa.

- If dividends are the only source of income, the taxpayer does not need to submit a tax
return.

5. Donations Tax (s 54)- imposed by the Act

- Donations tax is a tax on the gratuitous transfer of wealth (property) and not a tax
on income.

- calculated at a fixed rate of 20% on the cumulative value of donations not

exceeding R30 million, and at a fixed rate of 25% on the cumulative value of
donations exceeding R30 million.
- An annual exemption of up to R100 000 of the value of all donations made during
the tax year is available to a taxpayer that is a natural person and, in the case of a
company, an exemption of up to R10 000 in respect of the value of all casual gifts.

6. Value Added Tax (VAT)

- Imposed by the Value Added Tax 89 of 1991

- Output tax is levied at 15% (since 1 April 2018) on the supply of goods or services by a
registered VAT vendor in South Africa.

- In terms of s 65 of the VAT Act, all quoted and advertised prices are deemed to
include VAT.
- In certain instances, an enterprise registered as a VAT vendor may claim the VAT it
has paid, back from SARS in the form of input tax.
- VAT is an indirect tax with the total direct cost being borne by the final consumer, as
the consumer cannot claim the amount back from SARS.

7. Transfer duty
 - Transfer duty is levied in terms of the Transfer Duty Act 40 of 1949 on the cost price
of fixed property using a sliding scale (0%, 3%, 6%, 8%, 11% and 13%).
- It is a wealth tax payable by the purchaser on the acquisition of property as defined
in section 1(1) of the Transfer Duty Act (generally, fixed property situated in South
Africa).

8. Estate duty

- A tax called ‘estate duty’ is levied in terms of the Estate Duty Act 45 of 1955.
- It is levied on the dutiable value of the estate of a deceased person at a fixed rate of
20% of the dutiable value that does not exceed R30 million and 25% of the amount
that exceeds R30 million. An abatement of
- R3,5 million is available against the net value of the estate, while a deceased
spouse’s unused abatement may be carried forward to a surviving spouse.
- The purpose of estate duty is to tax the transfer of wealth from the deceased estate
to the beneficiaries. It is usually the estate that is liable for the estate duty.

9 Securities transfer tax

- Securities transfer tax is imposed by the Securities Transfer Tax Act 25 of 2007 at
the rate of 0,25% of the taxable amount of the transferred security (generally, the
value of any shares purchased).
- It is payable by the purchaser on the transfer of both listed and unlisted shares in
companies incorporated in South Africa, as well as on the transfer of shares of
foreign companies listed on any recognised stock exchange in South Africa.
- It is also payable on the transfer of members’ interests in a close corporation. No
securities transfer tax is payable on the issue of shares.

10 Customs and excise duties and levies Two taxes are imposed in terms of the Customs
and Excise Act 91 of 1964:

◻ Customs duties are imposed on the importation of goods into South Africa with the aim
of protecting the local market.

◻ Excise duties and levies are imposed on certain luxury or non-essential goods
manufactured and/or consumed in South Africa.
11 Unemployment insurance contributions

- determined with reference to remuneration of specified employees as per the

Unemployment Insurance Contributions Act 4 of 2002.
- The purpose is to provide relief to employees during short periods of
unemployment.
- The amount contributed by the employee is deducted from the employee’s gross
remuneration. Contributions are made by both the employer and employee in equal
parts (1% of gross remuneration is paid by each).
- The maximum monthly salary for determining the unemployment insurance
contribution per month moved to R17 711,58 from 1 June 2021.

12 Skills development levies

- determined with reference to the remuneration of specified employees as per the

Skills Development Levies Act 9 of 1999. Contributions are made by employers
only.

Administration of tax legislation

- SARS is the government department dealing with South African tax administration.
- The Commissioner of SARS is responsible for carrying out the function of collecting
taxes and ensuring compliance with tax laws (s 2(1)).
-