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INCOME TAX - 2601


TAX2601
STUDY UNIT 1 – Introduction
Governments collect the income they need through taxation in order to provide services to
citizens. (SA government has fiscal year 1 April – 31 March)

List taxes or duties that are collected by SARS

 Income tax (capital gains tax, turnover tax, dividends tax)


 Value added tax (VAT)
 Estate duty
 Excise duty
 Customs duty
 Transfer duty
 Air passenger tax
 Securities transfer tax
 Unemployment insurance fund (UIF)
 Skills development levy (SDL

The Income tax Act is administered by the Commissioner for SARS.

The SA tax regime is set by National Treasury and administered by the Commissioner of SARS
(CSARS).

In SA, taxpayers are taxed on the residence basis of taxation. Persons who are residents are
subject to taxation in respect of ALL the income they earn anywhere in the world.

Where person not a resident, will be taxed on income earned from a South African source –
could lead to double tax.

INTERPRETATION OF TAX LAW

The need for interpretation arise when Income tax Act not clear. Binding general rules are
issued by CSARS – these rules are binding on CSARS and taxpayers.

Interpretation notes are merely the opinion of SARS – are not binding. A taxpayer can object to
an assessment even if SARS has assessed that taxpayer in terms of an interpretation note.
When interpretation note provides guidance as to how commissioner intends to use discretion
– then interpretation note binding. A definition in the Income Tax Act will take precedence over
the definition in the Interpretation Act.

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Contra Fiscum Rule – where a provision of the Income tax Act has two interpretations, the
court will interpret the provision that places the smaller burden on the taxpayer.

LEGAL REMEDIES

Taxpayer / SARS (has a dispute on tax liability of taxpayer)

ADR (Alternative Dispute Resolution)

Tax Board (1st appeal to Tax Board, less than R500 000, consist of Advocate or Attorney)

Tax Court (no inherent powers such as High court, not a court of law – have persuasive
value. The court not bound by its own rulings)

High Court (one judge, case on appeal, 2 judges. Decision is binding)

Supreme Court of appeal (hears cases on appeal from lower courts)

Constitutional Court (highest court – no appeal against decision)

Service delivery and procedural issues

Taxpayers who have a service delivery issue or dispute with SARS may contact the SARS Service
Monitoring Office (SSMO) – operates independently of SARS branch offices – report directly to
the commissioner.

Other remedies: Lodge complaint with Public Protector or Tax Ombud.

CALCULATING TAXABLE INCOME

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QUESTIONS AND ASSESSMENT CRITERIA - STUDY UNIT 1

Q: On what basis are South Africans taxed in term of income tax?

A: South Africans are taxed on their world-wide income.

Q: State the application of:

a) Court decisions: Are used to guide taxpayers in their affairs. These decisions show how
the income tax was applied to a certain set of facts and will give rise to rules for
interpreting the income tax act.
b) Binding General Rules: assist in the interpretation of tax laws on matters that affect
taxpayers in general. They are binding on SARS and on taxpayers.
c) Media Releases: inform taxpayers of important information that the Commissioner
needs to share with them

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STUDY UNIT 2 – CHAPTER 9 – Administration, returns and
assessments.
(Page 32)
Question 2.1.1 – Discuss the process of registering as a taxpayer for the first time

A: John Majale (Pty) Ltd has to complete form IT77(C) and submit the signed and completed
form to any SARS branch office. The following is a list of the information the company will need
to complete on the form:
Registered name of the company
Trade name of company
Postal address, Registered address, Company Registration no,
Nature of business, Registration date of company with CIPC
Full banking details, Particulars of the public officer, Particulars of three main directors

Question 2.1.2 - Discuss the process that John Majale (Pty) Ltd should follow in order to
OBJECT to the Issued tax assessment

A: John Majale (Pty) Ltd has to:


 submit an objection to SARS within 30 days from the date of the assessment for the
current year.
 The objection must be in writing and must specify in detail the grounds upon which the
objection is made.
 The company could submit a copy of the financial statements for the current year and a
detailed income tax calculation to support the deductions on claims.
 The objection must be signed by the taxpayer. Therefore, the public officer of the
company should sign the objection
 The objection must be submitted using an ADR1 form

Question 2.1.3 – Discuss the procedure to appeal against the incorrect tax assessment

A: Will have to pay the outstanding amount of R4750 to SARS and then proceed to lodge an
appeal. Will have to appeal within 30 days of the notice of disallowing the objection. An ADR2
form is used for the notice of appeal, which must contain the details of the tax in dispute i.e.
the disallowance of the wear and tear deduction and the grounds of appeal.

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(Page 32)

Question 2.2 When an objection has been declined, what procedures can be follow to rectify
incorrect assessment?

A: Lodge an appeal:

 Pay the outstanding amount and lodge an appeal via efiling or manually to SARS.
 Appeal must be on the ADR2 form with details of tax dispute and the grounds for the
appeal
 If SARS still rejects the appeal, take matter to the Tax Board or Tax Court
 If the matter remains unsolved, take matter to High Court
 If still unresolved, take matter to Supreme Court

Question 2.3 (a) – Administrative steps to lodge an objection and appeal to SARS

HOW TO LODGE AN OBJECTION AND APPEAL TO SARS

 Complete an ADR1 form and submit it to SARS via efiling and set out detailed grounds
(reasons) of objection on the ADR1
 Submit supporting documents
 The objection must be submitted within 30 day of the date of assessment
 You must prove that the assessment is incorrect – burden of proof vests with taxpayer

 If objection still not resolved and SARS does not rectify the objection, you may lodge and
appeal to SARS by completing an ADR2 form and submitting it to SARS

 If the matter is still not resolved, it can be taken to the Tax Board, when amount is less
than R500 000.

 Thereafter, the party that loses the case can follow the normal SA legal precedent, going
to the High Court and the Supreme Court and even in certain cases to the Constitutional
Court.

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Question 2.3 (b) – SARS has to keep a register of all the disputes that it settles by means of
the Alternative Dispute Resolution (ADR) process.

List five elements that must be recorded by SARS when a dispute (objection) has been settled.

 The settlement agreement must be in writing


 There must be an explanation of how the issue was settled,
 How the issue will be treated in future,
 What each party agree to do about it,
 The withdrawal of the objection and appeal, and
 The arrangements for payment, if necessary
 The agreement is final unless the taxpayer does not pay the amount agreed upon, or if
there was fraud involved, or if not all the facts were given.
 SARS must alter the taxpayer’s assessment – this amount is final and cannot be subject
to further objection or appeal.

ASSESSMENT CRITERIA STUDY UNIT 2

Describe the process of assessment

Once SARS has received the tax returns (ITR12 – individuals, ITR14 – Co and CC), the
information on tax returns is processed and a tax assessment (IT34) is sent to the taxpayer. The
IT34 indicates the calculation of taxable income and normal tax for the year of assessment. The
IT34 also indicates if any tax is payable or refundable to the taxpayer for the year of
assessment.

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STUDY UNIT 3 – CHAPTER 3 & 8 – Different taxpayers.
Various taxpayers:

 Sole traders
 Partnerships
 Companies (including small business corporations, close corporations and micro businesses)
 Trusts
 Farmers

Sole Trader Partnershiop Companies


Method of tax
Provisional Provisional (partners) Provisional

Legal Entity Not separate taxpayer Not separate taxpayer Separate taxpayer

Tax rate Framework framework 28%


Partnership not assessed
as taxpayer, but partners
are.

All companies that are not public companies will be regarded as private companies. For tax
purposes, a close corporation is a private company

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RATES OF NORMAL TAX

Normal company or close corporation: 28%


Small Business Corporation: 0%, 7%. 21%, 28%
Long term insurer: 0%, 28%, 30%
Micro Businesses: taxed on turnover: 0%, 1%, 2%, 4%, 6%.
Trusts: 40%

SMALL BUSINESS CORPORATIONS (SBC)

A small business corporation is a special type of company for tax purposes – companies that
comply with the requirements get special tax concessions.

*Requirements for qualifying as a small business corporation*

o All shareholders must be natural persons


o None of the shareholders must hold shares in other companies, CC’s or Co-Ops
o The gross income must be less than R20 million
o Investment income and income from rendering of a personal service must not be more than
20% of the total revenue receipts and capital gains.
o The company must not be a personal service provider.

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MICRO BUSINESSES

Special type of enterprise – can be companies or sole traders (individuals).


Pay tax on taxable turnover - “turnover tax” - very low tax rates.

The profits are NOT subject to normal tax – thus not necessary to record trading stock at year-
end.
Also NOT necessary to keep a record of expenses.
The business is taxed on a receipts basis, NOT on accruals – therefore the amount of debtors
DOES NOT affect the tax calculation.
Trusts cannot qualify as micro businesses.

Qualifying turnover must not exceed R1 million.

Qualifying turnover is different from taxable turnover (If a capital receipt pushes the person’s
receipts over R1 million, it does not affect his registration as a micro business)

Qualifying turnover is:


 Total receipts
 from carrying on business activities
 excluding any amount of capital nature
 excluding any amount exempt from tax

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TAXABLE TURNOVER

Taxable turnover consists of:


 Revenue amounts received during the year of assessment
 from carrying on business activities
 in the republic
 including amounts in par 6
 excluding amounts in par 7

Inclusions – par 6

50% of all receipts of a capital nature from the disposal of


 immovable property used mainly for business purposes (other than trading stock)
 any other asset used mainly for business purposes

For companies and close corporations: 100% of investment income (excluding dividends and
foreign dividends)

Exclusions – par 7

 Investment income consists of:


 Rental on immovable property. (Rental on movables not included)
 Dividends and interest
 Proceeds from the disposal of financial instruments
 Royalties, annuities and similar income

 Amounts exempt from tax


 Any amount received by the registered micro business where that amount accrued to it
prior to its registration as a micro business, and that amount was subject to tax in terms of
the normal provisions of the Income tax Act
 Any amount received from any person by way of a refund in respect of goods or services
supplied by that person to that registered micro business.

The following persons do NOT qualify as micro businesses

See page 190 – 191 of textbook.

TAX PAYMENTS –MICRO BUSINESSES - A micro business pays tax called turnover tax on its
taxable turnover. This differs from other taxpayers for which tax is calculated on taxable
income.
Micro businesses do not pay tax according to the provisional tax collection method – they are
subject to interim payments and pay twice a year.

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STUDY UNIT 4 – CHAPTER – CAPITAL ALLOWANCES AND RECOUPMENTS

GROSS INCOME
 the total amount
 in cash or otherwise
 received by or accrued to or in favour of a person
 during the year of assessment
 excluding amounts of capital nature

STUDY UNIT 6 – CHAPTER 5 – CAPITAL ALLOWANCES AND RECOUPMENTS

Depreciation is NOT deductible for income tax.


Capital allowance is calculated in accordance with the act – there a capital allowance is
deductible

The Act makes provision for capital allowances in respect of capital assets:

 Repairs section 11 (d)


 Wear-and-tear allowance of movable assets – Section 11(e)
 Manufacturing assets – Section (s12C)
 Manufacturing Buildings (S13)
 Assets used by a small business corporation (12E)
 Accelerated allowances – advancing the manufacturing or other sectors – creates job
opportunities – Section 11( e)

The purchase price of an asset is NOT deductible – instead the cost is spread over the estimated
life of the asset – deducted as a capital allowance.

Repairs section 11 (d) (p.119)


In order for an asset to be repaired, there must be damage or deterioration to a part of the
original asset or structure and the intention of the taxpayer must be to restore the asset to its
original condition.

A repair is restoration by a renewal or replacement of a subsidiary part of the whole asset.

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A repair is different to an improvement. An improvement is the creation of a better asset, and
the associated costs of the improvement cannot be deducted under section 11(d)

The materials used do not need to be the same as the original material, so long as the intention
in using different materials is not to improve the asset.

Where an asset has been improved, no deduction is available for the notional costs that would
have been incurred it the asset had been merely repaired.

When an asset is improved, the result is a better asset, which possibly has improved the income
earning capacity.

Wear-and-tear allowance of movable assets – Section 11(e) (p.120)

Wear-and-tear allowances apply to movable assets and do not apply to structures and
works of a permanent nature such as buildings

See page 121 5.3.2. Interpretation note no 47 & Binding General Ruling no.7

Manufacturing assets – Section (s12C) (p.122 – 124) 5.4 SPECIAL DEPRECIATION ALLOWANCE

 The plant or machinery must be owned by the taxpayer (or acquired by the taxpayer under
and installment credit agreement)
 The allowance is NOT apportioned if the asset is only used for a part of a year.
 In order to qualify for the allowances, the asset must be acquired for a cost.
 The write off period:

FOUR YEAR WRITE OFF FIVE YEAR WRITE OFF


any new or unused machinery all used machinery and plant
or plant
Acquired and brought into use New or unused machinery which
on or after 1 March 2002 does not qualify for 4 year write
off
40% of the cost of the asset in 20% year 1
respect of the first year
20% year 2 20% year 2
20% year 3 20% year 3
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20% year 4 20% year 4
20% year 5

The above allowance may not be claimed by taxpayers whose business is banking,
financial services, insurance or rental business.

3 YEAR WRITE OFF

New or unused machinery or plant acquired and brought into use on or after 1 January 2012 for
section 11D research and development purposes.

50% in the year that plant, machinery or improvement is brought into use for the 1 st time
30% in year 2
20% in year 3

Manufacturing Buildings (S13)

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