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TAX2601/102/3/2018

Tutorial Letter 102/3/2018


PRINCIPLES OF TAXATION
TAX2601

Both semesters
Department of Taxation
STUDY GUIDE 1 OF 2

This tutorial letter contains learning units 1 to 4 as well as


additional questions to work through.

Bar code
TAX2601/102/3/2018

© 2018 University of South Africa

All rights reserved

Printed and published by the


University of South Africa
Muckleneuk, Pretoria

TAX2601/102/3/2018

Shutterstock.com images used

IMPORTANT INFORMATION:

Please register on myUnisa, activate your myLife e-mail address, and ensure that you
have regular access to the TAX2601-18-S1 OR TAX2601-18-S2 module site on myUnisa,
depending on which semester you are registered for.

Note: This is an online module; therefore, your module is available on myUnisa. However, in
order to support you with your studies, you will also receive certain study material in printed
format.
TAX2601/102/3/2018

CONTENTS
Page

LEARNING UNIT 0: THINGS TO KNOW BEFORE COMMENCING WITH YOUR STUDIES 6


0.1 Using myUnisa and the tools on myUnisa ................................................................... 6
Announcements ......................................................................................................... 7
Discussion Forums ..................................................................................................... 7
Learning Units ............................................................................................................ 7
0.2 E-Tutors ...................................................................................................................... 7
0.3 How to study this subject ............................................................................................. 7

LEARNING UNIT 1 ............................................................................................................... 10


1.1 Background ............................................................................................................... 11
1.2 The income tax act .................................................................................................... 12
1.3 SARS ........................................................................................................................ 16
1.4 Types of taxation ....................................................................................................... 16
1.5 Interpretation of tax law ............................................................................................. 17

LEARNING UNIT 2 ............................................................................................................... 28


2.1 Background ............................................................................................................... 30
2.2 Registration of taxpayers ........................................................................................... 30
2.3 Income tax returns..................................................................................................... 31
2.4 Assessments ............................................................................................................. 31
2.5 Dispute resolution ..................................................................................................... 32
2.6 TAX payments and refunds ....................................................................................... 33
2.7 Penalties ................................................................................................................... 33
2.8 TAX practitioners ....................................................................................................... 34

LEARNING UNIT 3 ............................................................................................................... 38


3.1 Background ............................................................................................................... 40
3.2 Sole traders ............................................................................................................... 40

3.3 Partnerships ............................................................................................................ 41


3.4 Companies (and dividends tax) ................................................................................. 41
3.4.1 Small business corporations...................................................................................... 42
3.6 Trusts ........................................................................................................................ 47
3.7 Farmers..................................................................................................................... 48

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CONTENTS (continued)
Page
3.8 Other taxpayers ......................................................................................................... 48
3.9 Collection of taxes from entities ................................................................................. 49
3.9.1 Calculation of provisional tax payments..................................................................... 49

LEARNING UNIT 4 ............................................................................................................... 60


4.1 Background ............................................................................................................... 62
4.2 Gross income ............................................................................................................ 63
4.3 Gross income: Special inclusions .............................................................................. 69
4.4 Exempt income ......................................................................................................... 70

SELF-ASSESSMENT – SOLUTIONS FOR EACH LEARNING UNIT .................................. 78

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Dear Student

This tutorial letter, together with tutorial letter 103, is your study guide. Information that is
intended to help you getting started with your online studies is also available in this document
(as well as under learning unit 0 on myUnisa): “Things to know before commencing with your
studies”.

We will use the myUnisa module website (for those of you who can go online) and tutorial letters
102 and 103 to direct you through the various sections of the module content. An electronic
version of the tutorial letters are also available under the Additional Resources tool on
myUnisa.

We wish you every success with your studies in taxation. Make the most of your opportunity to
learn about this dynamic and practical subject. We know that if you work through the study
guide and the selected sections of the prescribed textbook, and if you work through all the
examples, you should be successful in this module.

Regards

Your TAX2601 lecturers

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LEARNING UNIT 0: THINGS TO KNOW BEFORE COMMENCING WITH YOUR STUDIES

This learning unit provides you with guidelines on using myUnisa and e-tutors, as well as how
to study this subject. It will greatly benefit you to read this information.

Getting started with your studies on myUnisa

As a registered Unisa student, you will have access to the myUnisa learning portal.

EXAMPLE 1: myUnisa portal home page

From here, you may access various online resources to assist you in your studies. Ensure that
you have activated your myLife e-mail account and have familiarised yourself with the my
Studies @ Unisa brochure and other guidelines.

Once you have registered and have received your myUnisa login details, you will have access
to the module sites of all the modules you have registered for.

0.1 Using myUnisa and the tools on myUnisa


In this brief overview, we refer to those functions of myUnisa that you may encounter and need
on a regular basis. Down the left-hand side of your myUnisa module page, you will find a series
of options or functions, which are indicated by a green arrow in the graphic above. These
options are known as “buttons” because you can click on each of them in order to select and
open the “tool” that the button represents. These buttons start with Home, then follows
Assignments, etc, from the top down.

Now follows a brief overview of some of the myUnisa tools, of how some of them are related to
one another, and of how they will be useful to you.

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Announcements

While general announcements may be made under Home you must visit the Announcements
page regularly to make sure you are not missing an important bit of information. The announce-
ments may relate to a wide range of matters, for example module-specific arrangements,
information on assignments, resources, etc. If you have registered correctly on myUnisa, you
will receive an e-mail or SMS notification every time your lecturer posts a new announcement.
Always check the list of previous announcements to make sure that you have not missed any
important notices.

Discussion Forums

Online discussion forums are not the same as a chat room. Therefore, the myUnisa discussion
forums must not be used for personal messages to your lecturers or to fellow students. The
online Discussion Forum has an academic purpose. For this reason, the discussions will be
based on topics related to module outcomes and assessments, and supporting content.

Online discussions taking place in module discussion forums are perhaps more formal than
other public discussion forums. Remember that in an online class, discussion forums are used
in place of the face-to-face discussions or paper-based correspondence that you may be used
to. You should behave online just as you would if you were physically sitting in the room with
your lecturer or e-tutor and all your classmates.

Learning Units

Within the digital space known as Learning Units, you should find a collection of topics that
together comprise the syllabus for the module that you have enrolled for.

If you are not studying online, then refer to TUT102 and TUT103 to access the learning units
(in print format).

0.2 E-Tutors
You will be allocated to an e-tutor who is primarily assigned to give you additional tuition
support. You need to participate on the e-tutor pages on myUnisa during the course of the
semester.

You will receive information about your tutor (and the page to access, for example TAX2601-
18-S1-5E) from the University in due course. Please be patient and do not contact your
lecturers in this regard, as we will not be able to assist you.

0.3 How to study this subject


The learning units comprise what we call a “wraparound” guide, which means that we make
use of a prescribed textbook to which the learning units serves as a key. Remember that the
prescribed textbook is used by many other universities and therefore, it may contain topics that
are NOT relevant to your studies. It is therefore very important that you use the study guide
when working through the prescribed literature. As we do not always deal with topics in the
same order as in the prescribed book, it is important that you use the learning units to guide
you through the syllabus.

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It is important to note that taxation is an integrated subject:

 Firstly, taxation involves the application of acts. For this module, the relevant acts are the
Income Tax Act and the Tax Administration Act.
 Secondly, court cases assist us in interpreting the provisions of the acts. This means that
you will be exposed to case law.
 Thirdly, taxation has practical applications. You will need to learn how to apply the theory
to case studies or scenarios.
 Fourthly, the South African Revenue Service (SARS) issues interpretation notes and
general binding rulings that also govern the application of tax legislation.
 Lastly, the way in which you answer income tax questions, in a numerical format or in a
discussion, is important. In respect of the numerical questions, we assume that you have
a fundamental accounting and mathematical knowledge, while communication skills are
assumed in respect of the discussion-type questions.

With these parameters in mind, we offer the following suggestions on how to approach this
module and how to combine all the documents, tutorial letters and prescribed literature.

Suggested approach to the course

 We suggest that you set specific times aside for study. Depending on how many modules
you are enrolled for, you will need to draw up a programme for the semester, allowing a
certain amount of time for each subject, as well as a revision period just before the
examinations.
 Once you know on which days you will study taxation, decide which study units you will
work through at each date. Remember that you will need to be flexible, as some learning
units may take longer than others to work through.
 We suggest that you approach each learning unit as follows:

̶ Take the learning unit and see which chapter in the prescribed textbook is dealt with
in the learning unit that you plan to study; then read the applicable sections of the
chapter. By “read”, we mean just read, without taking notes. At this stage, you
merely need to get an idea of what is being discussed. If possible, do this reading
exercise the night before you are due to study the section.
̶ Now follow the specific instructions in the learning unit and work through it,
summarising from the prescribed textbook and working through the explanatory
examples. Remember that you will take in more if you make notes at the same time.
You might want to add to the notes later as you discover what is important, or you
might want to make new notes at a later stage; we have found that it helps you stay
focused if you write as well as read.

It is important to do the explanatory examples on your own and only then to look at
the answer, as this method will help you ascertain what you have understood.
Remember to take short breaks from time to time.

̶ Once you have worked through the entire learning unit, you may attempt answering
the longer questions at the end of the learning unit. Remember to attempt answering
these questions without looking at the solutions in order to see how much you have
understood.

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̶ After you have attempted answering the question, work through the solution by
comparing your answer to it. Don't worry if you made mistakes; this is an important
part of the learning process. Return to the relevant section of the chapter and restudy
the topic to help you understand why and where you went wrong.
̶ If you don't understand why your solution is wrong or why your solution differs from
the one in the prescribed textbook or in the learning units, contact one of your
lecturers. Refer to the welcome page for the contact details of your lecturers.

NOTES

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LEARNING UNIT 1

1
INTRODUCTION
STUDY PROGRAMME
LEARNING OUTCOMES
PRESCRIBED STUDY MATERIAL FOR THIS
LEARNING UNIT
SECTIONS OF THE PRESCRIBED
TEXTBOOK WHICH YOU MAY IGNORE

CONTENTS
1.1 Background
1.2 The Income Tax Act
1.3 SARS
1.4 Types of taxation
1.5 Interpretation of tax law
1.6 Calculating taxable income

POINTS TO PONDER
WRAP-UP
SELF-ASSESSMENT QUESTIONS
ASSESSMENT CRITERIA
Introduction
to the South
African tax
system

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INTRODUCTION

A government is responsible for the wellbeing of all its citizens; however, it needs money to be
able to provide the services required by its citizenry. Most governments in the world collect the
income they need to provide for their citizens through taxation. Taxation can take many forms.
In this learning unit, we would like to introduce you to the many forms of taxation in South Africa.

STUDY PROGRAMME

You should complete this learning unit in week 1 of the programme.

You should spend a minimum of six (6) hours on this learning unit.

LEARNING OUTCOMES

After you have completed this learning unit, you should be able to

 describe the South African tax system


 distinguish between direct and indirect taxes and the acts that govern them
 classify taxes
 state a legal precedent in South Africa
 rewrite the framework used for calculating taxable income, normal tax and tax liability

PRESCRIBED STUDY MATERIAL FOR THIS LEARNING UNIT

There is no prescribed chapter in the textbook for this learning unit.

SECTIONS OF THE PRESCRIBED TEXTBOOK WHICH YOU MAY IGNORE

Not applicable to this learning unit

CONTENTS

1.1 Background No prescribed text

It is the duty of any government to provide services to its citizens. To be able to provide these
services the government needs to have some form of income. Consequently, most
governments levy taxes in order to receive income to provide for the residents of the country.
The South African government has made provision for the following taxes, among other things:

 income tax, which also includes


o capital gains tax
o turnover tax
o dividends tax

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 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)

To understand the application of taxation you should have a good understanding of the way
taxes are levied in South Africa.

In this module, we will be mostly dealing with the application of the Income Tax Act.

Listen to the podcast “Welcome to TAX2601”.

You will find this in the module on myUnisa:

(TAX2601/additional resources/podcasts and videocasts/Welcome to


TAX2601)

1.2 The Income Tax Act No prescribed text

We will be looking at the laws and provisions that are contained in the Income Tax Act and the
Tax Administration Act. Each year, the government follows a certain process to update these
Acts and selected provisions are amended. The Income Tax Act was originally legislated in
1962 and it is amended annually. This section of the study guide will give you some background
on the way in which the Income Tax Act evolves each year.

The South African government has a fiscal year (like an accounting year) which runs from
1 April to 31 March each year. In February each year, the Minister of Finance announces the
government’s spending, tax and borrowing plans for the following three years. This is known
as the budget speech and usually takes place in the third week of February.

The budget speech is based on the National Budget. The National Budget is a plan showing
how much money will be spent on all the different services that the government must provide
and it makes provision for the taxes that will be imposed to pay for these services. Part of the
National Budget entails amended tax legislation.

The budget process starts with a three- to four-month process of review in both the national
and the provincial legislatures. After debate by parliament and referral to the standing
committee on finance for comment, the draft taxation bills are presented to the State President
for signature, and promulgated as an Act of parliament (it becomes law) when the Act is
published in the Government Gazette. When the bill becomes an Act (or law), the legislation
that was introduced in the budget speech becomes part of the original Income Tax Act.

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The Income Tax Act is affected every year by a number of amendment Acts. Before legislation
is passed by parliament, it is called a bill. A bill is always accompanied by an explanatory
memorandum, which explains the reasons for the amendments it contains.

Currently, the government issues two amendment Acts per fiscal year, namely the Taxation
Laws Amendment Act and the Taxation Laws Second Amendment Act. The amendment Acts
are usually promulgated between July and September.

The Taxation Laws Amendment Bill and the Taxation Laws Second Amendment Bill, once
signed by the President, become Acts of Parliament. They must be published promptly and
take effect at the dates at which they are published or, for specific provisions, at a date specified
in the Act. The term “date of promulgation” of an amendment Act means the date at which it is
published in the Government Gazette.

The Income Tax Act is divided into chapters and parts; each part has sections and each section
has paragraphs and sub-paragraphs. Attached to our Income Tax Act are eleven (11)
schedules. The following two pages illustrate the layout of the Income Tax Act. You do not need
to memorise this illustration, but it will give you an overview of what the Income Tax Act
contains.

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The Income Tax Act is administered by the Commissioner for the South African Revenue
Service (SARS).

1.3 SARS No prescribed text

SARS is headed up by a commissioner. The Income Tax Act at times refers to the
commissioner and gives him powers and duties. These powers and duties are delegated by
the commissioner to employees of SARS. The commissioner reports to a board of directors,
which, in turn, is accountable to the Minister of Finance.

SARS was established in terms of the South African Revenue Service Act as an autonomous
and independent section of the government. The South African tax regime is set by National
Treasury and administered by the Commissioner of SARS (CSARS). The CSARS used to be
called the Commissioner of Inland Revenue (CIR) and before that, the Secretary for Inland
Revenue (SIR). You will see these names once you start referring to case law.

1.4 Types of taxation No prescribed text

Governments of different countries have chosen different ways of levying taxation. Each
country or government will have different types of taxation and they could have a different basis
for taxation. In South Africa, taxpayers are taxed on the residence basis of taxation. This means
that persons, who are residents, are subject to taxation in terms of the Income Tax Act in
respect of all the income they earn, anywhere in the world. In learning unit 4, we will look at
ways of deciding whether an enterprise is a resident or not.

Where a person is not a resident, they will still be taxed in South Africa on income earned from
a South African source. This could lead to them paying tax on the same earnings in two
countries, also known as double tax. Therefore, in order to alleviate double taxation, South
Africa has entered into a number of double tax agreements, generally with its major trading
partners.

Taxation in South Africa can be classified according to a number of factors, namely what the
tax is levied on, the method used to calculate the tax, and who must pay the tax. The following
table explains the different types of tax that are found in South Africa, according to the
classifications.

Have a look at the table for an explanation of the tax and examples of South African taxes. You
need to be able to identify the different taxes.

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What taxes are levied on Method used to Who must pay the tax
calculate tax

Income Proportional tax Direct tax

These taxes are levied on This tax is levied at a fixed rate, The same person who earns
income that is earned, for example companies tax. the income pays the tax, for
for example income tax. example income tax and
capital gains tax.

Consumption Progressive tax Indirect tax

These taxes are levied on the The tax rate increases with the The seller bears the impact of
sale or use of commodities. amount of income earned, for the tax while the consumer
The taxes take the form of example income tax on natural pays the tax, for example VAT.
price increases and they are persons, micro businesses and
paid by the person purchasing small corporations.
or using the commodity, for
example VAT, excise duty and
customs duty.

Wealth Regressive tax

These taxes are levied on The tax rate decreases with


the transfer of property, for the amount of income
example capital gains tax, earned.
estate duty and donations There is no such tax in
tax. South Africa

Other

These taxes are levied on


specific transactions, for
example transfer duty,
securities transfer tax, fuel
levy and dividend tax.

FIGURE 2: Classification of taxes in South Africa

Do the self-assessment test, “Types of taxation in South Africa”, on


myUnisa.

1.5 Interpretation of tax law No prescribed text

The taxation rules (commonly referred to as provisions) contained in the Income Tax Act are
not always clear and straightforward. In practice, this often results in different interpretations by
SARS, taxpayers, accountants and the public. Because of these differences of opinion and

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grey areas in the Act, the courts are often called upon to determine what the real intention of
the legislature was when the provisions were enacted.

SARS, as the administrator of the Income Tax Act, also issues binding general rulings,
interpretation notes and practice notes on certain of these taxation rules in order to provide
taxpayers with clarity and guidance. The need for interpretation will only arise when a provision
in the Income Tax Act is not clear.

1.5.1 Interpretation rules

As stated above, the Income Tax Act is not always clear. The rules are often complicated and
the wording that is used may have more than one meaning. Sometimes, certain rules give
SARS discretion in the way it should apply certain provisions of the Income Tax Act. In order
to deal with this confusion, the commissioner may issue binding general rulings or interpretation
notes (previously called practice notes).

Binding general rulings are issued by the CSARS, at his or her discretion, in respect of the
application or interpretation of tax law on a matter of general interest or importance. These
rulings are binding on SARS and on taxpayers.

Interpretation notes are merely the opinion of SARS regarding the interpretation and application
of various legislative provisions. They do not form part of the Income Tax Act, and are also not
binding on SARS, except if they are a binding private or class ruling. Therefore, a taxpayer can
object to an assessment, even if SARS has assessed that taxpayer in terms of an interpretation
note. The purpose of the interpretation notes is, thus, to set out how SARS will interpret or apply
certain provisions. A court of law may also not agree with an interpretation note. However, the
exception to this rule is when the interpretation note provides guidance on how the
commissioner intends using his or her discretion. In this instance, the interpretation note will be
binding on SARS and therefore have the same effect as the law.

Most of the definitions of the words and terms used in the Income Tax Act can be found in
section 1, but sometimes other sections contain definitions as well. When interpreting the
wording used in the Income Tax Act, you should follow these guidelines:

 Apply the literal meaning first. Words should be limited to their simplest, ordinary, most
obvious meaning (“clear and unambiguous”). If this meaning is clear, then it must be applied
even if it gives rise to unfair results.
 Take note of the real intention of the legislator. When a provision is introduced to the Income
Tax Act for the first time, it is usually discussed in an explanatory memorandum. This
explanation will generally give the intention for introducing the provision, which, in turn, will
indicate the intention of the legislator. The purpose behind the words must after all be
determined.
 Apply the contra fiscum rule. According to this rule, where a provision of the Income Tax
Act has two interpretations, the court will interpret the provision in terms of the interpretation
that places the smaller burden on the taxpayer.

In light of the above “tips” on interpreting legislation, you need to remember that hardship (when
a taxpayer becomes liable for payment of taxation) is not an excuse or a way out. Even if a
provision leads to hardship for a taxpayer, it cannot be interpreted differently to alleviate that
hardship.

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The laws of interpretation will not solve all disagreements between SARS and taxpayers and
often, the disagreement must be fought on the legal stage.

1.5.2 Legal remedies

When a taxpayer disagrees with SARS regarding an assessment, the disagreement can be
legally resolved through different overarching remedies, including the alternative dispute
resolution (ADR) process, the tax board or the tax court. If this process fails to solve the
problem, then the higher courts need to be approached.

Taxpayer/SARS

(has a dispute on tax liability of taxpayer)

Case concerns constitutionality of legislation


Lodge an objection on an NOO (notice of objection) form

Lodge an appeal on an NOA (notice of appeal) form

ADR (alternative dispute resolution)

Tax Board

Tax Court

High Court

Supreme Court of Appeal

Constitutional Court

 Request for reasons

A taxpayer, who is aggrieved by an assessment, may request SARS to provide the reasons
for the assessment prior to lodging an objection. The request must be in the prescribed
form and manner and be delivered to SARS within 30 days from the date of assessment.
This period may, however, be extended as prescribed by the Act.

Note that a “day” is defined as a business day (not a Saturday, Sunday or public holiday
and the period between 16 December and 15 January of the next year, both days inclusive).

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 Lodging an objection

A taxpayer, who wishes to object to an assessment, must deliver a notice of objection within
30 days after the delivery of reasons from SARS, if so requested. Where the taxpayer has
not requested reasons, the notice of objection must be delivered within 30 days after the
date of assessment. A taxpayer, who lodges an objection to an assessment, must specify
the grounds of the objection in detail on the notice of objection (NOO) form (for SARS eFiling
users) or the ADR1 form (for taxpayers not registered on SARS eFiling), depending on the
type of tax. SARS must notify the taxpayer of the allowance or disallowance of the objection
and the basis for it within 60 days after delivery of the taxpayer's objection.

The NOO is available on the SARS eFiling service only and it must be completed online
using the relevant functionality on eFiling. The NOO form is applicable to the following types
of tax only:

 Personal income tax (administrative penalties and assessed tax)


 Corporate income tax (CIT – assessed tax including additional tax only)
 Value-added tax (VAT)

The alternative dispute resolution for objection (ADR1) is applicable to the following tax
types:

 PAYE assessment
 income tax for trusts
 Other taxes (e.g. donations tax, dividends tax, etc)

 Lodging an appeal

A taxpayer, who wishes to appeal against the assessment, may lodge a notice of appeal
by completing the notice of appeal (NOA) form or an ADR2 form, depending on the type of
tax. Such a taxpayer must indicate on the NOA form (or ADR2) whether they wish to make
use of the alternative dispute resolution procedures or not. The notice of appeal must be
delivered within 30 days after SARS has delivered the notice of disallowance of the
objection. In the notice of appeal, the taxpayer must specify in detail the grounds for
disputing SARS’s basis for the decision to disallow the objection as set out in the notice of
disallowance, and/or any new grounds on which the taxpayer is appealing.

 Alternative dispute resolution (ADR)

Should a taxpayer indicate on the NOA form that they wish to make use of the alternative
dispute resolution procedures, SARS and the taxpayer may use this process to settle any
type of dispute that relates to a dispute on interpretation of facts. To settle does not mean
that the taxpayer or SARS has to accept one or the other’s interpretation; it just means that
both parties must agree on the tax in question.

SARS has to keep a register of all the disputes that it settles by means of this process.

 The Tax Board

Any taxpayer, who disagrees with SARS on any decision of the commissioner, has to
appeal to the Tax Board first, provided that the

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 amount in question is less than R500 000 (this may be changed by the Minister of
Finance), or
 the commissioner and the taxpayer mutually agree to make use of the tax board, or
 the taxpayer or the commissioner does not object to the tax board making a ruling

The Tax Board consists of an advocate or attorney. If necessary, an accountant or


representative of the commercial community will also be present. Where the board consists
of more than one member, the advocate or the attorney will chair the board.

It is very important to note that the taxpayer must appear in person (or a representative, in
the case of a juristic person) and if he or she fails to arrive for the hearing, SARS may
continue with the assessment as issued, and the taxpayer cannot appeal against it again.
The decision is only binding on the parties before the board. If the taxpayer or the
commissioner is still not happy after the Tax Board’s decision on the issue, they may take
the matter to the Tax Court.

 The Tax Court (previously the Special Court for Hearing Income Tax Appeals)

If an ADR process was unsuccessful in resolving a disagreement, or if the Tax Board has
referred an appeal, the Tax Court is next in line to try to solve the disagreement between
SARS and the taxpayer.

The Tax Court is a creature of statute, meaning it has no inherent powers such as the High
Court. Although the Tax Court is not a court of law, its rulings have persuasive value to the
parties concerned. The powers of the Tax Court are clearly set out in Part D of the Tax
Administration Act. The Tax Court consists of a judge of the Supreme Court (who will be
the court president), an accountant (who has been selected from the panel of members
appointed in terms of section 120 of the Tax Administration Act) and a representative of the
commercial community. The taxpayer may represent himself or herself in the Tax Court.

The Tax Court will always hear a case between SARS and the taxpayer anew or from the
beginning. It is important to note that the outcome of a hearing of a case by the Tax Court
is only binding between SARS and the specific taxpayer, and the case does not set any
legal precedent. The Tax Court is therefore not bound by its own rulings.

In both the meeting of the Tax Board and the hearing of the Tax Court, the onus of proof
is always on the taxpayer. The only exception to this rule is when an estimate of an
assessment was made; then the onus of proof is on the commissioner.

When the taxpayer or SARS is not satisfied by the decision of the ADR process, the Tax
Board or the Tax Court, he or she may appeal to the High Court.

 High Court (previously called the Supreme Court)

The High Court will try any case that is too serious for the Tax Board or the Tax Court, or
where a case is being appealed (i.e. where a taxpayer or SARS wants to change a
decision).

Cases of the High Court are heard by one judge or, where it is a case on appeal, by at least
two judges. However, important issues are adjudicated by three judges (a full bench). High
Courts have the right to hear a case in the defined provincial area (at present, there are

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fourteen provincial divisions of the High Court) in which they are situated, and their
decisions are binding on all other High Courts.

A judgment of the Supreme Court of Appeal is binding on all the lower courts such as the
High Court and the Tax Court – a concept known as legal precedent.

Because of this legal precedent, you also need to know about court decisions and
judgments when looking at the Income Tax Act and all the rules contained in it, as these
decisions affect the application of the Income Tax Act in practice.

 Supreme Court of Appeal (previously called the Appellate Division)

This is the highest court (except for the Constitutional Court) and it has the final say on all
matters, except those that are constitutional issues. This court only hears cases that are on
appeal from lower courts.

Three to five judges hear and decide on all cases in this court. The final decision of this
court is the one supported by the majority of the judges hearing the case. This court is
based in Bloemfontein.

 Constitutional Court

The Constitutional Court is the highest court in South Africa and it deals with issues of a
constitutional nature. A taxpayer will appeal or challenge a decision by the commissioner
in the Constitutional Court when a dispute concerns the constitutionality of legislation. There
is no appeal against the decision of the Constitutional Court.

1.5.3 Citation of court cases

When you refer to court cases, it must be done in a specific way, so that people can identify
where the decision was made and when. It is done as follows:

<names of parties> <year of the law report in which the case was published> <volume
number> <abbreviation indicating the court that delivered judgment> at <page number and
paragraph>

The names of the parties should be in italics and the citation should be to the South African
Law Reports wherever possible.

The abbreviations for the courts are as follows:

(ITC)/(SATC) Tax Court


(HC) High Court
(SCA) Supreme Court of Appeal of South Africa
(CC) Constitutional Court

When you want to use the principles decided in a court case, you need to refer to the specific
case. Here are some examples of the ways in which court cases will be referred to:

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A tax board decision Special Board Decision No 74.

An old Tax Court decision ITC 1 SATC 50

A new Tax Court decision ITC 1843 (2010) 72 SATC 229

A High Court decision Mokoena v Commissioner for the South African


Revenue Service [2010] ZAGPJHC 79

Supreme Court of Appeal OLD CASE


decisions Baikie v CIR 1931 AD 496 (‘AD’ stands for Appellate
Division).

NEW CASES
Singh v Commissioner for South African Revenue
Service 2003 (4) SA 520 (SCA), 65 SATC 203;
Stevens v CSARS [2006] SCA145 (RSA)

A Constitutional Court decision Van der Merwe and Another v Taylor NO and Others
(CCT45/06) [2007] ZACC16; 2007 (11) BLCR 1167
(CC); 2008 (1) SA 1 (CC)

1.5.4 Service delivery and procedural issues

Taxpayers, who have a service delivery issue or dispute with SARS, may contact the SARS
Complaints Management Office (CMO), which operates independently of SARS branch offices
and reports directly to the commissioner.

The purpose of the CMO is to act as a complaints office in order to assist taxpayers who are
having difficulty in resolving problems of a procedural nature with SARS. The CMO has no role
to play in adjudicating on the substance of a taxpayer’s dispute with SARS regarding tax liability
or legal rights.

Other remedies available to an aggrieved taxpayer include lodging a complaint with the Public
Protector and the Tax Ombud as envisaged under the Tax Administration Act.

 Public Protector

The Public Protector will only deal with complaints from taxpayers who have tried to solve
the problem themselves. The Public Protector may nevertheless provide information to a
taxpayer concerning suitable alternative relief if the matter cannot be resolved through its
office.

 The Tax Ombud

The Tax Administration Act incorporates an independent tax ombud, whose purpose it is to
look after the interests of taxpayers. The Tax Ombud must address and review any
complaint from a taxpayer in terms of the matters described under the Tax Administration
Act. The Tax Ombud may not review tax legislation or tax policy or practice generally
prevailing, but only matters involving or relating to service delivery or matters of an
administrative or procedural nature.

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1.6 Calculating taxable income No prescribed text

In this module, we will be exploring the principles of income tax. The calculation of tax depends
on the type of taxpayer. We will look at different taxpayers in learning unit 3. The type of
taxpayer will determine the rate at which tax will be paid. However, to calculate tax we need to
calculate what we call “taxable income”, as the tax calculation will be based on this amount.
Taxable income is calculated for a year. For individuals, the year runs from 1 March to 28/29
February, and for other entities, it will be the same as their financial year. We refer to a “tax
year” as a year of assessment. We generally refer to the year of assessment in terms of the
two years that it covers; therefore, we will refer to the 2017/2018 year of assessment and in
some instances, we do not mention the first year and only refer to it as the 2018 year of
assessment. For other taxpayers, like companies, the year of assessment is the same as their
financial year. Dates of changes to the Acts therefore become very important because the
change in legislation will sometimes affect an item during a year of assessment.

For income tax, the framework that we use to calculate taxable income is similar for all
taxpayers and therefore, we would like to introduce you to this framework at the beginning of
the module.

TABLE 1: Basic framework for calculating taxable income

R
Income XXX
Less: Deductions and allowances (XXX)
Taxable income before capital gains tax XXX
Plus: Taxable capital gain XXX
Taxable income XXX

This framework provides you with a structure and an order for doing your calculations. It looks
similar to a statement of comprehensive income, which you have dealt with in accounting.
However, as you now know, income tax is governed by an Act and it will differ from accounting.
You will need to learn this framework. It is almost like a skeleton for tax and everything that we
do will add to the basic skeleton. What you learn in the learning units that follow and in other
taxation modules will be like adding meat, muscles and clothes to the basic bone structure or,
as we refer to it, to the framework. We will be expanding on each of the above parts of the
framework during this module and in others that follow.

Without looking at your study guide, draw up the basic framework for calculating
taxable income.

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Refer to the table above.

Once taxable income has been calculated, the taxpayer’s tax liability needs to be calculated.
The calculation of tax liability depends on the type of taxpayer that you are dealing with, as the
rate of tax differs depending on the taxpayer.

TABLE 2: Framework for the calculation of tax liability based on taxable income

R
Using taxable income as calculated in table 1, calculate normal
tax, depending on the type of taxpayer XXX
Less: Prepaid taxes (such as provisional tax) (XXX)
Tax owing to SARS or (tax refundable by SARS) XXX

Tax liability refers to the amount that a taxpayer will have to pay to SARS at the end of a year
of assessment. SARS will calculate the normal tax and reduce this amount by any prepaid
taxes (provisional tax and/or employees’ tax) that the taxpayer has paid over to SARS during
the year of assessment. If the prepaid taxes are not enough to cover the normal tax, then the
taxpayer still owes SARS more taxes and must pay the balance. If the prepaid taxes are more
than the normal tax, then SARS will refund the excess prepaid taxes to the taxpayer.

Go to the Discussion Forum (Learning unit 1/Leereenheid 1) and discuss


any concepts that you don’t understand.

OR:

If you do understand the concepts, answer those students who have posted
questions.

POINTS TO PONDER

 Could governments collect income in ways other than through tax?


 Could South Africa increase VAT and do away with income tax?

WRAP-UP

 Government needs money to offer services.


 This money is collected mainly in the form of taxes.
 Taxes may take on many forms.
 Through income tax, most of the money that the South African government needs is
collected.
 To be able to calculate income tax a framework is used.

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Now that you have completed this learning unit, please revise the learning
objectives and make sure that you have attained all of them.

This learning unit is a foundational learning unit and your understanding of the principles that
we have discussed here, especially the calculation of the tax liability and the legal precedent,
will have to be applied in the learning units that follow, as well as in the rest of your studies in
taxation.

SELF-ASSESSMENT QUESTIONS
Solutions may be found at the end of this document.

QUESTION 1

(No marks are allocated to these questions, as they are simply to test your recall of foundational
knowledge.)

(1) List as many of the taxes that are levied in South Africa as you can remember.
(2) On what basis are South Africans taxed in terms of income tax in South Africa?
(3) Redraw the framework for calculating taxable income.
(4) Redraw the framework for calculating the tax liability of a company.
(5) To which dates does the 2018 year of assessment refer with regard to

(a) a taxpayer who is an individual?


(b) a taxpayer that is a company?

ASSESSMENT CRITERIA

We could assess this learning unit in assignments or in the examination by asking you to

 describe the South African annual taxation process


 list the different taxes that the South African government makes provision for
 distinguish between direct and indirect taxes
 classify taxes
 state the rules for interpreting statutes
 state the application of court decisions, general binding agreements, interpretation notes
and practice notes
 rewrite the framework for calculating taxable income and tax liability

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NOTES

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LEARNING UNIT 2

2
INTRODUCTION
STUDY PROGRAMME
LEARNING OUTCOMES
PRESCRIBED STUDY MATERIAL FOR
THIS LEARNING UNIT
SECTIONS OF THE PRESCRIBED
TEXTBOOK WHICH YOU MAY IGNORE

CONTENTS
2.1 Background
2.2 Registration of taxpayers
2.3 Income tax returns
2.4 Assessments
2.5 Dispute resolution
2.6 Tax payments and refunds
2.7 Penalties
2.8 Tax practitioners

POINTS TO PONDER
WRAP-UP
SELF-ASSESSMENT QUESTIONS
ASSESSMENT CRITERIA
Administration,
returns and
assessments

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I NTRODUCTION

This learning unit discusses the administrative procedures to be followed during a year of
assessment. These procedures form a process, which can be summarised as follows:

A person registers as a
taxpayer.

The taxpayer receives a tax


return.

The taxpayer earns income and


receives an IRP5 or IT3, or prepares
The taxpayer completes the tax a financial statement.
return indicating income and
submits it to SARS.

The taxpayer receives an


assessment from SARS.

Decision The taxpayer accepts the return


and pays any outstanding tax.

If the taxpayer disagrees with the


assessment, he/she follows the
objection procedures (see later).

The rules and procedures for each step in the above-mentioned process will be discussed, as
well as the objection process and the future action that may be instituted.

STUDY PROGRAMME

You should complete this learning unit in week 2 of the programme.

You should spend a minimum of six (6) hours on this learning unit.

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LEARNING OUTCOMES

After you have completed this learning unit, you should be able to

 discuss the taxation administrative process from the point of registering as a taxpayer to
receiving an assessment and paying the assessed tax when it becomes due
 discuss the rules for objections, appeals and dispute resolution

PRESCRIBED STUDY MATERIAL FOR THIS LEARNING UNIT

Chapter 9 in the prescribed textbook

SECTIONS OF THE PRESCRIBED TEXTBOOK WHICH YOU MAY IGNORE

 9.11
 9.17

CONTENTS

2.1 Background Textbook: sections 9.1 to 9.4

In learning unit 1, the tax legislation and the provisions of the Income Tax Act were discussed.
You were also introduced to SARS and the different types of taxation applicable to South
African taxpayers. The interpretation of tax law was also discussed and you were presented
with the basic framework for calculating taxable income and a tax liability. The Tax
Administration Act contains certain procedures that have to be followed in order to ensure that
all tax due is collected. This is achieved through the Commissioner who has certain
discretionary powers and who must make certain decisions. If the taxpayer does not agree with
such a decision, he/she can lodge an objection and, if the dispute is not resolved, further steps
may be taken.

Read sections 9.1 to 9.4.

Textbook: sections 9.5 and 9.6


2.2 Registration of taxpayers

Any person (including an individual, company or trust), who becomes liable for any normal tax
at any time or who becomes liable to submit any income tax return, unless a specific tax act
provides otherwise, must apply to register within 21 business days after becoming obliged to
register.

The person, who applies to be registered as a taxpayer, has to visit a SARS branch. Once
SARS has processed the application, the applicant will be issued with an income tax reference
number.

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SARS currently requires all employees receiving any form of employment income to register
as taxpayers and to acquire income tax reference numbers. Therefore, all salaried employees
will be registered for tax purposes by their employers if they have not already been registered
for tax.

2.3 Income tax returns Textbook: section 9.7

The source documents used as the basis for the assessment process are called tax returns or
ITR12 (for individuals) and ITR14 (for companies or close corporations). These returns are
designed by SARS and available on SARS eFiling for taxpayers to complete. The Act contains
rules regarding who should, or should not, receive and submit returns. Various administrative
regulations and stipulations in the act prescribe how and in what way returns should be
submitted.

As discussed previously, the tax return forms the basis for the South African tax system. The
information the taxpayer fills in on the return is used to calculate the taxpayer’s tax liability. This
information can be obtained in two ways: The information for salaried taxpayers is obtained
from, among other things, an IRP5 (proof of salary income), while for businesses, it is obtained
from the annual financial statements.

Study section 9.7.

2.4 Assessments Textbook: section 9.8

Once SARS has received the tax returns, the information on the returns is processed and a tax
assessment (ITA34) is sent to the taxpayer. The ITA34 indicates the calculation of taxable
income and normal tax for the year of assessment. The ITA34 also indicates if any tax is due
by or refundable to the taxpayer for the year of assessment.

Where a taxpayer fails to submit a return or submits the return after the due date, SARS may

 issue an estimated assessment


 issue an additional or a reduced assessment
 withdraw an assessment

Study section 9.8.

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2.5 Dispute resolution Textbook: section 9.9

If taxpayers are not satisfied with an assessment, they may lodge an objection. You will notice
that for every step in the process, specific rules, especially date rules, should be complied with.
If these rules are not complied with, SARS or the court could reject the case without hearing it,
and the taxpayer would be liable for the tax as assessed.

Study section 9.9.

The objection and appeal procedures for the taxpayer can be summarised as follows:

Receives assessment
from SARS

(ITA34)

Accepts assessment and pays the


Correct
assessed tax or receives a refund
Yes
No
Lodges an objection on
an NOO form via eFiling
with SARS (or ADR1)
Accepts new assessment and
Yes pays revised assessed tax or
Rectify receives a refund

No
Lodges an appeal

(NOA or ADR2 form)

Alternative Tax
Board/Tax
Dispute Court
resolution

You should know and understand the following about objection and appeal:

 It is the taxpayer’s responsibility to prove that the assessment is incorrect; in tax terms,
we say that the burden of proof vests with the taxpayer.
 The prescribed objection procedure must be followed.

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 The prescribed appeal procedures against a disallowed objection must be followed.


 The alternative dispute resolution (ADR) process must be followed.
 The taxpayer should take note of the way in which tax is paid in the case of a pending
objection and appeal.

A taxpayer may enter into an ADR with SARS at any time. The purpose of this process is to
settle tax disputes in a speedier, more cost-effective manner and, as far as possible, out of
court. Both parties must agree that the ADR procedures can be followed. However, this process
may be stopped at any time and the case referred to the courts. If the option of taking the matter
to court is chosen, the matter will generally be taken first to either the tax board or the tax court,
depending on the value and merits of the case. Thereafter, the party that loses the case may
follow the normal South African legal precedent, firstly going to the High Court, then the
Supreme Court of Appeal and even in certain cases, to the Constitutional Court (refer to
learning unit 1).

You need to know the rules of objection and appeal and be able to recall the
process in a theory question.

Textbook: sections 9.10, 9.12 and


2.6 TAX payments and refunds 9.13

Tax must be paid by the date notified by SARS (may be found on the assessment) and must
be paid in a single amount or in terms of an instalment payment agreement. Tax must be paid
regardless of whether or not there is an objection or appeal is pending or not. SARS may
allocate a payment received against an amount of penalty or interest or the oldest amount of
tax outstanding (this is known as first-in-first-out principle).

If a taxpayer owes SARS a tax amount, which is not paid in full by the effective date or if a
taxpayer is due a refund, interest accrues on the outstanding balance of tax due or the refund
at a prescribed rate that the Minister may fix from time to time by notice in the Government
Gazette. The interest accrues for the period from the effective date the tax is due/payable to
the date the tax is paid.

Read sections 9.10, 9.12 and 9.13.

2.7 Penalties Textbook: sections 9.14 and 9.15

The Commissioner may impose an administrative non-compliance penalty in certain cases, for
example if a taxpayer fails to keep proper records or obstructs a SARS official. The penalty
may comprise a fixed amount or may be percentage based. The fixed-amount penalty is
charged in terms of a prescribed table in the Tax Administration Act. The percentage-based
penalty is prescribed in the particular Act, for example, a matter regarding income tax will be in
the Income Tax Act and a VAT matter will be in the VAT Act.

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There is also an understatement penalty, which relates to an omission or an incorrect statement


in a return. This penalty is also determined in accordance with a prescribed table in the Tax
Administration Act.

Read sections 9.14 and 19.15.

2.8 TAX practitioners Textbook: section 9.16

Any person, who provides advice to any other person regarding any Act administered by the
Commissioner or who completes or assists in completing a return, must register as a tax
practitioner in the prescribed manner and form.

Read section 9.16.

POINTS TO PONDER

 Why is it necessary to have formal rules for the administrative


procedures?
 Why are decisions by SARS subject to objection and appeal?
 Who should register as a taxpayer?

WRAP-UP

Having completed this learning unit, you should now be able to discuss or describe the
following concepts, which were covered in the study material:

 powers and duties of the commissioner


 returns
 assessments
 objection and appeal
 settlement of disputes
 registration of tax practitioners

Every taxpayer must submit a return of income earned during a tax year. He/she is then
assessed on this income by the Commissioner, who determines the amount of tax payable by
the taxpayer for such a tax year. If the taxpayer is not satisfied with the tax assessed, he/she
may lodge an objection to such an assessment and, if the objection is disallowed, appeal to
either the Tax Board or the Tax Court. If the taxpayer agrees with the assessment or is
successful in his/her objection and appeal, he/she must pay the tax when it becomes due or is
payable; otherwise, interest will be charged on the outstanding amount of tax. If a taxpayer
does not submit a return, he/she will be guilty of an offence and liable to a fine or imprisonment
if convicted. Additional tax may also be imposed on him/her in certain circumstances.

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Please complete the self-assessment, “Administration, returns and


assessments”, on myUnisa.

SELF-ASSESSMENT QUESTIONS

Solutions may be found at the end of this document.

QUESTION 2.1 (13 marks, 16 minutes)

(1) Discuss how John Majale (Pty) Ltd, a newly registered South African company, will
register as a taxpayer for the first time. Also, list what information the company will need
to complete on the form. Please visit SARS’s website to assist you with this. (5)

(2) John Majale (Pty) Ltd does not agree with the tax assessment issued by SARS for the
current year of assessment. A wear-and-tear allowance of R12 500 claimed as a
deduction on the submitted income tax return was disallowed as a deduction in the
assessment process. The ITA34 tax assessment issued by SARS reflects an amount of
R4 750 due and payable to SARS. Discuss the process that John Majale (Pty) Ltd should
follow in order to object to the issued tax assessment. (5)

(3) SARS has declined the objection lodged by John Majale (Pty) Ltd to the tax assessment
issued by SARS. Discuss what procedure John Majale (Pty) Ltd may follow to appeal
against the incorrect tax assessment. (3)

QUESTION 2.2 (5 marks, 6 minutes)

Majuba (Pty) Ltd was issued its 2017 ITA34 tax assessment on 31 January 2018. The ac-
countant of Majuba (Pty) Ltd has reviewed the issued assessment and he disagrees with the
disallowance of a capital allowance claimed of R15 500. The ITA34 reflects an amount of
R6 875 due to SARS, payable on or before 31 March 2018. The accountant submitted an
objection against the issued tax assessment on 4 February 2018 and SARS declined the
objection on 15 March 2018.

REQUIRED MARKS

Discuss what procedures, if any, Majuba (Pty) Ltd may follow to rectify the 5
incorrect 2017 tax assessment.

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QUESTION 2.3 (15 marks, 18 minutes)

Beauty (Pty) Ltd, a resort and spa company, received its income tax assessment (ITA34) for
the year of assessment ended 31 March 2018.

An advertising expense of R18 000 was claimed as a deduction. This amount was paid in
monthly instalments of R1 500 each (for a twelve-month period) to an advertising agency to
promote the company’s products and services.

The deduction was disallowed by the Commissioner on the grounds that the amount is capital
in nature, as it will create an enduring benefit.

You have been appointed as the accountant of Beauty (Pty) Ltd and you believe that the
amount is revenue in nature. You would like to lodge an objection to the SARS regarding the
R18 000 advertising expense.

REQUIRED MARKS
(a) What are the administrative steps to lodge an objection and appeal to 5
SARS?
(b) SARS has to keep a register of all the disputes that it settles by means 5
of the alternative dispute resolution (ADR) process. List five elements
that must be recorded by SARS when a dispute (objection) has been
settled.
(c) List five taxes or duties that are collected by SARS. 5

ASSESSMENT CRITERIA

This learning unit is very important with regard to tax practice, as SARS may use various forms
of penalties and interest when taxpayers are not tax compliant, for example not submitting tax
returns, making late payments for taxes due, or even failing to declare income for tax purposes.

In assessing this learning unit in assignments and examinations, we could ask you to

 discuss the process of registering as a taxpayer for the first time


 describe the process of assessment
 describe the process of objection and appeal if a taxpayer is not satisfied with an
assessment

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NOTES

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LEARNING UNIT 3

3
INTRODUCTION
STUDY PROGRAMME
LEARNING OUTCOMES
PRESCRIBED STUDY MATERIAL FOR THIS
LEARNING UNIT
SECTIONS OF THE PRESCRIBED TEXTBOOK
WHICH YOU MAY IGNORE

CONTENTS
3.1 Background
3.2 Sole traders
3.3 Partnerships
3.4 Companies (and dividends tax)
3.5 Micro businesses
3.6 Trusts
3.7 Farmers
3.8 Other taxpayers
3.9 Collection of taxes from entities

POINTS TO PONDER
WRAP-UP
SELF-ASSESSMENT ACTIVITIES
ASSESSMENT CRITERIA Different
types of
taxpayers

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INTRODUCTION

The type of entity used to operate an enterprise has a direct influence on the tax liability of the
specific business or enterprise. Income tax legislation provides for various taxpayers, namely,
individuals (whether sole traders or partnerships), companies (this category also includes close
corporations) and trusts. This learning unit examines the profile of each of the various types of
business entities and explains the tax implications for each type.

The Income Tax Act has a specified structure or framework that must be applied to determine
the taxable income of a taxpayer. This framework applies to all taxpayers, irrespective of the
specific entity type. The framework was already discussed in learning unit 1 and it will be
referred to throughout the study guide. You should know this framework well.

STUDY PROGRAMME

You should complete this learning unit in weeks 2 and 3 of the programme.
You should spend a minimum of three (3) hours in week 2 and three (3) hours in week 3 on
this learning unit.

LEARNING OUTCOMES

After you have completed this learning unit, you should be able to
 list the different types of taxpayers (as discussed in this learning unit) and explain the
specific characteristics of and tax consequences for each type
 know and apply the requirements of the definition of a small business corporation or micro
business to a given scenario
 calculate the tax liability for each of the different entities by choosing and using the
applicable tax rates
 calculate the first, second and third provisional tax payments of a company

PRESCRIBED STUDY MATERIAL FOR THIS LEARNING UNIT

Chapters 3 and 8 in the prescribed textbook

SECTIONS OF THE PRESCRIBED TEXTBOOK WHICH YOU MAY IGNORE

 Ignore the learning objectives found at the beginning of chapters 3 and 8. Apply those
given in this learning unit.
 3.2.1–3.2.2
 3.8.4–3.8.8
 3.9–3.10
 8.3.10–8.3.11
 8.3.13–8.3.14
 8.4–8.8

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CONTENTS

3.1 Background No prescribed text

Various business entities may be considered in which to operate a business. Before choosing
the most appropriate entity type for an enterprise, however, a variety of economic and other
factors should be considered. Furthermore, each entity type has unique tax consequences in
line with the Income Tax Act that may affect this decision.

The various taxpayers discussed in this learning unit are

 sole traders
 partnerships
 companies (including small business corporations, close corporations and micro
businesses)
 trusts
 farmers

It is important to note that South African resident taxpayers and non-resident


taxpayers are dealt with separately for income tax purposes. In this learning
unit, only the profiles of South African resident taxpayers will be studied (with
non-resident entities and their tax rate merely being referred to). Non-resident
entities are discussed briefly in learning unit 4.

3.2 Sole traders Textbook: sections 3.2.3 and 3.2.4

A sole trader is not a separate legal entity and is therefore not a separate taxpayer. The profits
made from the business must be added to the taxpayer’s income from other sources, for
example interest earned, in order to calculate the taxpayer’s total taxable income. Taxable
income is calculated by applying the income tax framework.

Read sections 3.2.3 and 3.2.4 in the prescribed textbook and the example on
multiple trades.

Once the taxpayer’s taxable income has been determined, his/her tax liability is calculated by
using the tax table (used for individuals – refer to Appendix A in the prescribed textbook) and
thereafter, the rebates are deducted.

Sole trader individuals pay tax on their profits in terms of the provisional tax collection method
(see 3.9).

For tax purposes, salaries are also considered income from a trade. As we are not dealing with
individuals in this module, we will not deal with the taxation of salaried taxpayers. You will learn
about salaried taxpayers in TAX3702. If you would like to know what is considered trade
income for tax purposes, you may have a look at the definition of “trade” in section 1 of the
Income Tax Act.

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3.3 Partnerships Textbook: section 3.3

A partnership is not a separate legal entity and is therefore not a separate taxpayer.
Accordingly, the individual partners will each be taxed on their share of the partnership profits,
which they will add to their income from other sources in order to calculate their taxable income.
In others words, the partnership is not assessed as a taxpayer, but the individual partners are.
The income tax framework is applied to calculate taxable income.

A partner’s tax liability is calculated by using the tax table (used for individuals – refer to
Appendix A in the prescribed textbook) and thereafter, the rebates are deducted. The partners
in a partnership pay tax on the partnership profits according to the provisional tax collection
method (see 3.9).

Read the introduction to section 3.3 only in the prescribed textbook. You may
ignore the “Additional notes on partnerships” (including the example), as they
discuss sections of the Act that deal with deductions with which you are
unfamiliar at this stage. These will be covered in later learning units.
Partnerships will not be examined in this module.

3.4 Companies (and dividends tax) Textbook: sections 3.4 and 3.7

A company is a separate legal entity and is therefore a separate taxpayer. Companies are
owned by shareholders but, because the company is a separate taxpayer, the company profit
is not added to the shareholders’ income from other sources to calculate taxable income.

The taxable income of the company is calculated according to the tax framework and then the
applicable tax rate is applied to calculate the tax liability of the company. The company tax rate
is currently 28%.

Study section 3.4.1.

Without looking at your textbook, list the types of entities that fall into the definition
of a company for income tax purposes. You will need to be able to identify these.

Read section 3.4.2 in your prescribed textbook and work through


the example.

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This process may also be illustrated by means of a time line, as follows:

____________________________________________________________________________

January February March April July/Nov Dec January February March


2018 year (budget 2018 2018 (tax 2018 2019 (budget 2019
ends speech) year year legislation year year ends speech) year
ends ends finalised) ends ends

2017 Income Tax Act 2017 Income Tax Act 2018 Income Tax Act
2017 budget speech rates 2018 budget speech rates 2018 budget speech rates

Study sections 3.4.3 to 3.4.7.

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

You must know the tax rates of the different companies. We will provide you
with the small business corporation and micro-business tax tables in an
examination, but you will have to know how to apply these rates. You may
ignore the rates for a personal service provider, long-term insurer and passive
holding company, as they do not form part of this module.

The profits of the company are distributed to the shareholders by means of a dividend.

Study section 3.7 and work through the dividend example.

Note: This module does not cover dividends tax in any further detail. You will
cover dividends tax in more detail in the module TAX3701.

Companies pay tax according to the provisional tax collection method (see 3.9).

3.4.1 Small business corporations Textbook: section 3.5

A small business corporation (SBC) is a special type of company for tax purposes. Companies,
complying with the requirements, get special tax concessions.

Study section 3.5.

You must know the definition of a small business corporation. You should be
able to determine whether a company meets all the requirements to qualify as
a SBC.

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There are two major tax benefits of being an SBC:


1. The tax rate of an SBC is considerably lower than that of a normal company. While most
other companies pay tax at a rate of 28% on their taxable income, an SBC will pay tax
according to a sliding scale (see Appendix A in the prescribed textbook):
 0% tax on the first R75 750 of taxable income
 7% tax on the amount by which taxable income exceeds R75 750, but is less than
R365 000
 21% tax on the amount by which taxable income exceeds R365 000, but is less than
R550 000 plus R20 248
 28% tax on the amount by which taxable income exceeds R550 000 plus R59 098
2. The immediate write-off (100%) of all plants or machinery used in a manufacturing
process or similar process in the year of assessment in which it is brought into use for the
first time. Furthermore, an accelerated write-off allowance for depreciable assets (other
than manufacturing assets) is available at 50% of the cost of those assets in the tax year
during which the assets were brought into use for the first time, at 30% in the second year
and at 20% in the third year. This will be discussed later in learning unit 6 (under capital
allowances).
Note: Remember that a SBC will still (other than the benefits mentioned above) calculate
taxable income as learned in learning unit 1. The entity will still calculate income, as will be
discussed in learning unit 4. They will still qualify for all other deductions that will be treated in
learning units 5 and 6, and they will still be liable to calculate taxable capital gains that will be
discussed in learning unit 7.

CalcM𝑐 2 (Pty) Ltd is a small business corporation as defined in the Income Tax
Act. CalcM𝑐 2 (Pty) Ltd had a taxable income of R600 000 during the 2018 year
of assessment.

Calculate the normal tax of CalcM𝑐 2 (Pty) Ltd for the 2018 year of assessment.
(See Annexure A in your prescribed textbook for the table.)

R
Taxable income 600 000
Normal tax 73 150
(R59 098 + ((R600 000 – R550 000) x 28%)

Explanation

Step 1: Determine the bracket which will be applicable to CalcM𝑐 2 (Pty) Ltd when
you look at the tax table of a small business.

CalcM𝑐 2 (Pty) Ltd would fall in the last category, as the taxable income exceeds
R550 001.

Step 2: Determine the fixed amount of tax that CalcM𝑐 2 (Pty) Ltd is liable to pay.

The fixed amount of tax is R59 098 as stated in the table for small businesses.

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Step 3: Determine the marginal amount that CalcM𝑐 2 (Pty) Ltd would need to
pay.

The table reads that CalcM𝑐 2 (Pty) Ltd needs to pay 28% tax of the amount
above R550 000. The marginal amount will thus be calculated as follows:
(R600 000 – R550 000) x 28% = R14 000.

Step 4: Determine the total amount of normal tax by adding up the fixed amount
of tax (step 2) and the marginal amount of tax (step 3).

Normal tax: R59 098 + R14 000 = R73 098

Work through the example of ABC CC as the taxpayer.

You will see that the first step is to determine whether ABC CC qualifies as an
SBC; then the taxable income is calculated. You will soon learn how to calculate
the taxable income of a company by applying the tax framework; therefore, do
not spend too much time on this. Rather see if you can work out the tax liability
of the SBC by applying the applicable tax table.

If ABC CC did not qualify as an SBC, it would be taxed at a rate of 28%, like a
normal company.

SBCs pay tax in terms of the provisional tax collection method (see 3.9).

3.4.2 Close corporations (CC) Textbook: section 3.6

For taxation purposes, a close corporation is considered a company.

Study section 3.6.

Close corporations pay tax in terms of the provisional tax collection method (see 3.9).

3.5 MICRO BUSINESSES Textbook: chapter 8

For tax purposes, a micro business is a special type of enterprise. Micro businesses can be
companies or sole traders (individuals).

A simplified tax system, called turnover tax, was introduced on 1 March 2009 and it is available
to all entities that qualify as “micro businesses”. This simplified tax system provides for a single
tax, called turnover tax, which is a substitute for income tax, capital gains tax, value-added tax
and dividends tax (partially). The system was introduced mainly to reduce the tax compliance
burden of small businesses. A micro business pays tax on its taxable turnover at very low tax

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rates according to a specific table. A micro business will not calculate taxable income as
discussed in learning unit 1.

Study sections 8.1 to 8.3.2 and work through the examples.

You will see the first step is determining the entity's qualifying turnover. This qualifying
turnover is merely a method to determine whether a person/entity qualifies as a micro business.

Work through the examples in the prescribed textbook and make a list of what
amounts must be included and excluded when determining qualifying turnover.

TGIF (Pty) Ltd (TGIF) had the following income for the last 12 months:

R
Cash sales 520 000
Sales to debtors 100 000
Disposal of equipment (received in cash) 50 000

Calculate the qualifying turnover of TGIF.

TGIF’s qualifying turnover is R520 000. Remember that the qualifying turnover
includes receipts only from carrying on business activities, and it does not
include receipts of a capital nature.

Once the entity qualifies as a micro business, the next step is to calculate the taxable turnover.
The taxable turnover is the taxable amount to which the rates in the specific table (refer to
section 8.2 in the prescribed textbook) are applied.

Study sections 8.3.3 to 8.3.6 and work through the examples.

Work through the example in section 8.3.4 and make a list of what amounts must
be included and excluded when determining the taxable turnover of a micro
business.
In the example (in section 8.3.4), note that only 50% of the capital receipts, that
is, the proceeds from the sold equipment used mainly for business purposes,
was added to the business turnover to get to the taxable turnover. The capital
receipts obtained from the sale of the primary residence were not added to the
turnover, as they were not used mainly for business purposes, and are thus
subject to capital gains tax, which you will deal with in learning unit 7.

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Study sections 8.3.7 to 8.3.9.

Make a summary of the persons who are disqualified from registering as a micro
business. Remember, trusts do not qualify as micro businesses.

You can find the solution in your prescribed textbook.

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,
however, subject to interim payments, and pay tax twice a year.

Study section 8.3.12.

Interim payments may also be illustrated on a timeline:

6 months 6 months

1 March 2017 31 August 2017 28 February 2018


1st payment: 2nd payment:
Estimated taxable turnover Estimated taxable turnover
x applicable tax bracket x applicable tax bracket
= Tax payable for the year = Tax payable for the year
÷2 Less: 1st payment of
= 1st payment 31 August 2018
= 2nd payment

Blue Swallow CC is a registered micro business. On 31 August 2017, it was


estimated that the taxable turnover for the year will be R500 000. On
28 February 2018, the estimated taxable turnover amounted to R620 000.
Calculate the first and the second interim payments to be made by Blue Swallow
CC.

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First interim payment

R
Estimated taxable turnover 500 000
Tax on R500 000 (R500 000 – R335 000) x 1% 1 650
First interim payment (R1 650 ÷ 2) 825

Second interim payment

Estimated taxable turnover 620 000


Tax on R620 000 (R1 650 + ((R620 000 – R500 000) x 2%)) 4 050
Less: First interim payment (825)
Second interim payment 3 225

Work through the examples at the end of the chapter (section 8.9).

Example 1 deals with a company. Did you notice that the running costs and
repairs were not taken into account? This is because tax is only paid on taxable
turnover. If the CC were not registered as a micro business, it would be taxed
as a CC at 28%. Then taxable income would need to be calculated taking the
expenses into account.

Example 2 deals with an individual taxpayer. You will see that all of Mr S’s in-
come received, other than the turnover of the micro business, is taxed normally
(using the tax table for individuals) and then the rebate is applied. His micro
business turnover is taxed separately according to the rates applicable to a
micro business. The two tax amounts are then added together as the total tax
that Mr S owes. Remember that you are not required to do a tax calculation of
an individual for this module.

3.6 Trusts No prescribed text

Trusts are established as a vehicle for tax and estate planning purposes. Accordingly, assets
are sold or transferred to the trust to be managed by a trustee for the benefit of the beneficiaries.
What a trust does with assets or profits depends on what is found in the trust deed. A trust deed
is a legal document that is drawn up by the original donor to the trust and it contains the set of
rules that governs the trust. Trusts have also been used to limit a taxpayer's tax liability. For
this reason, certain provisions in the Act have been created to ensure that tax avoidance does
not occur.

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A trust is a separate legal entity and is therefore a separate taxpayer. Trusts can run
businesses or hold assets and investments that earn income. The profit earned by a trust can
either be held in the trust or be distributed to the beneficiaries of the trust. The distribution will
depend on the trust deed.

In this learning unit, we will not discuss the mechanisms of trusts. What you must know is that
a trust is taxed at a flat rate of 45%. The income distributed by a trust to a beneficiary (if the
beneficiary is an individual) will be taxed as taxable income of the beneficiary using the tax
tables; thereafter, the rebates are deducted.

Trusts pay tax according to the provisional tax collection method (see 3.9).

3.7 Farmers No prescribed text

In terms of the Income Tax Act, farmers are another type of taxpayer with special provisions
relating to the calculation of taxable income and tax payable. Depending on the type of farming,
many years may pass during which farmers have to pay for expenses without earning an
income and then, when they start harvesting or slaughtering, they earn all their income in one
year. Farming also requires farmers to improve their farms and spend money on assets on
which other businesses might not have to spend money, such as running electricity from main
lines to their barns and other farming operations or building subsidiary roads. Because of the
importance of farming to the economy, special tax provisions apply to farmers. The special
provisions for farmers are contained in the First Schedule to the Income Tax Act.

These special provisions or rules relate to livestock (opening stock valuation, purchases and
closing stock valuation), capital development expenditure (expenditure on assets like dams,
electricity, roads, etc) and capital allowances (expenditure on purchasing farming assets).

The decisions of many court cases have laid a clear foundation for what is considered farming
income, as this is an important concept when it comes to the taxation of farmers.

In this module, we will not be examining these special provisions; however, you do need to be
aware that, if you come across a farmer in practice, different rules are governing the taxation
of farmers.

Farmers, who are sole proprietors, may elect to be taxed according to the tax tables or in terms
of a special averaging tax calculation. In terms of their farming income, farmers are provisional
taxpayers.

3.8 Other taxpayers No prescribed text

We have not dealt with all types of taxpayers in this learning unit and we are not going to.
However, you should be aware that there are some other very specific taxpayer types that are
taxed according to special provisions. Some of these are mining companies, gold mining
companies, retirement funds, plantation farmers, venture capital companies, and others.

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3.9 Collection of taxes from entities Textbook: section 3.8.1

Salaried taxpayers make provision for their annual tax liability by paying employees’ tax on
their salary on a monthly basis. Employees' tax does not differ from income tax; it is merely a
method used by SARS to collect the tax that is due to them. In the case of employees’ tax,
SARS makes the employer responsible for deducting, collecting and paying over the tax before
it pays salaries to its employees.

Most of the taxes of the taxpayers, which we have discussed in this learning unit, are based
on the profits that businesses make during a year. As the South African government cannot
fund the running of the country if it only receives taxes from taxpayers once a year, SARS has
another method for collecting tax from taxpayers other than salary earners. This is called provi-
sional tax. Provisional tax is not another tax but rather a method of collecting taxes. You will
be required to calculate the provisional tax payments for companies only.

Study section 3.8.1.

3.9.1 Calculation of provisional tax payments Textbook: sections 3.8.2 and 3.8.3

The basic amount is used when calculating both the first and the second provisional tax
payments.

The basic amount is deemed to be as follows

1. The taxable income assessed by the Commissioner, for the latest preceding year of
assessment less

 taxable capital gain

2. The latest preceding year of assessment is deemed to be

 the assessment relating to the preceding year of assessment,


 where a notice was issued more than 14 days before the date at which the current
provisional payment should be submitted to the Commissioner.

This means that if the assessment (e.g. is received within 14 days before the first
provisional payment should be made, then that assessment can’t be used for the
calculation of the first provisional payment. The assessment received before this,
should be used in the calculation.

3. The basic amount must be increased by 8% per annum if


 the basic amount must be calculated more than 18 months after the preceding
assessment (This means that the period from the end of the last year of assessment
to the date at which the provisional payment must be made, is more than 18 months)
AND

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 it is in respect of a year of assessment that ended more than a year after the end of
the preceding year of assessment

For example:

2015 year of 2016 year of 2017 year of 2018 year of


assessment assessment assessment assessment

6 months 6 months

1st 2018 2nd 2018


Not > than 1 year and not >
payment on payment on
than 18 months; thus, no
31/8/2017 28/2/2018
adjustment

> 1 year, but not > than 18 months; thus, no


adjustment

>1 year and > than 18 months; thus, increase by 8%


for 2 years

>1 year and > than 18 months; thus, increase by 8% for


3 years

The increase in the assessed amount by 8% per annum is from the end of the year of
assessment last assessed to the end of the current year of assessment in respect of
which the calculation is done. For example, if the 2015 assessment is used for the
calculation of the provisional payment for the 2018 year of assessment, it must be
increased with 8% for 2016, 8% for 2017 and 8% for 2018.

Foodie (Pty) Ltd has a 31 March 2018 year-end. The first provisional tax
payment is due on 30 September 2017. The accountant, Mr Fast Fingers,
realises that he needs the basic amount to calculate the first payment. The
2017 taxable income has not been assessed yet. The 2016 year of
assessment was assessed on 20 September 2017 and the taxable income
was R400 000. The 2015 year of assessment was assessed on 30 April 2015
and the taxable income was R320 000.

Assist Mr Fast Fingers to calculate the basic amount.

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R
2015 year of assessment 320 000
Adjustment (R320 000 x 8% x 3 years) 76 800
= Basic amount 396 800

Notes

The 2017 year of assessment cannot be used, as the taxable income has not
been assessed yet.

The 2016 year of assessment was assessed on 20 September 2017. This is


within 14 days before the first payment is due, and it cannot be used.

The 2015 year of assessment can be used. However, an adjustment might be


necessary. An adjustment is made when the assessment is (1) older than 1
year AND if (2) the 18 months rule applies.

Is 31/03/2015 (end of last year of assessment) to 30/09/2017 (date at which


the provisional payment must be made) more than 1 year? YES. (1)

Is 31/03/2015 (end of last year of assessment) to 30/09/2017 (date at which


the provisional payment must be made) more than 18 months? YES. (2)

Both requirements are therefore met, and the 2015 assessment should be
adjusted by 8% per annum. We would therefore adjust it by 8% for the 2016,
2017 and 2018 years (2018 is included, as we are calculating the potential tax
for this period).

FIRST PROVISIONAL TAX PAYMENT

Calculation of the first provisional tax payment:

(1) Determine the basic amount.


(2) Calculate the normal tax (multiply it by the applicable tax rate for the type of taxpayer).
(3) Divide by 2.

= First provisional tax payment

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SECOND PROVISIONAL TAX PAYMENT

Calculation of the second provisional tax payment:

(1) For a taxpayer with a taxable income of R1 million or less, start with the lower of the
basic amount or the estimated taxable income.

For a taxpayer with taxable income of more than R1 million, start with an estimated
taxable

income that was seriously calculated.

(Refer to the explanation in your prescribed textbook).

(2) Calculate the normal tax (multiply it by the applicable tax rate for the type of taxpayer).
(3) Less: First provisional tax payment

= Second provisional tax payment.

THIRD PROVISIONAL TAX PAYMENT

Calculation of the third provisional tax payment:

(1) Determine the actual taxable income.


(2) Calculate the normal tax (multiply it by the applicable tax rate for the type of taxpayer).
(3) Less: First provisional tax payment.
(4) Less: Second provisional tax payment.

= Third provisional tax payment.

Study sections 3.8.2 and 3.8.3

Work through the example on the provisional tax (under section 3.8.3) of a
company only.

In this example, the amount due that is calculated last will be the third top-up
payment that the company must make. The payment must be made by
31 December 2018 to avoid interest being charged on the outstanding
amount.

You may ignore the note section at the bottom of the example that deals
with the 20% penalty.

After working through the example, you should be able to calculate the first,
second and third top-up provisional tax payments for a company.

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POINTS TO PONDER

 Why must companies pay income tax?


 Why did the government introduce the turnover tax system for micro
businesses?

WRAP-UP

 In order to calculate the taxable income, a tax framework is used irrespective of the type
of taxpayer/business entity.
 Different taxpayers pay different rates of tax.
 Specific requirements must be met before certain business entities will qualify as a small
business corporation or a micro business.
 Certain taxpayers must register as provisional taxpayers and must make provisional tax
payments.

The following is a summary of the different types of taxpayers:

Taxpayers

Individuals/sole
traders and Companies and
Trusts
partners in close corporations
partnership

Taxed in respect of
Taxed at a flat rate
the tax table and See diagram below
(currently 41%)
rebate(s)

The following diagram summarises the classification and income tax rate for companies.
(Remember, in the examination you must be able to identify the type of company that is being
discussed.)

Companies

SA companies and Small business Non-resident Personal service


Micro businesses
close corporations corporations companies provider

Sliding scale
Flat rate: 28% Turnover tax system Flat rate: 28% Flat rate: 28%
(tax table)

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Now that you have completed this learning unit, please revise the learning
objectives and make sure that you have attained all of them.

This learning unit is a foundational learning unit. Your understanding of the different types of
taxpayers that we have discussed here, especially companies, the requirements of small
business corporations and micro businesses, and the calculation of the tax liability for the
taxpayers discussed will have to be applied in the learning units that follow, as well as in the
rest of your studies in taxation. The focus of this module is on companies, and you will not be
required to calculate the taxable income of an individual or trust.

Do the self-assessment, “Taxpayers and tax liabilities”, on myUnisa.

SELF-ASSESSMENT QUESTIONS

Solutions may be found at the end of this document.

QUESTION 3.1 (23 marks, 28 minutes)

Miriam Dube and her mother are the only shareholders of Organic Foods (Pty) Ltd. The
company was incorporated in February 2017 and it started trading on 1 April 2017. Miriam and
her mother do not have any kind of other shareholding. The only income they have is from
selling organic vegetables, which they grow on a small plot that they own, at food markets on
weekends. They only accept cash from customers, which amounted to R540 000 for the year
of assessment ending 31 January 2018. A friend of the family is an accountant and performed
some tax calculations for the company.

Below are some of the calculated amounts (as at 31 January 2018) pertaining to the year of
assessment.

R
Taxable income 320 000
Qualifying turnover 540 000
Taxable turnover 580 000
Cash/revenue receipts 540 000
Capital receipt from the sale of equipment 80 000
First provisional tax payment nil
Second provisional payment ?

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QUESTION 3.1 (continued)

REQUIRED MARKS
(a) Determine whether Organic Foods (Pty) Ltd will qualify as a small busi-
ness corporation or a micro business, or not. List the requirements you
have to consider and which are applicable to the facts provided. 13
(b) Assume Organic Foods (Pty) Ltd qualifies as a small business
corporation. Calculate the tax liability for the year of assessment ending
31 January 2018. 2
(c) Assume Organic Foods (Pty) Ltd qualifies as a micro business.
Calculate the tax liability for the year of assessment ending 31 January
2018. 3
(d) Assume Organic Foods (Pty) Ltd did not qualify as a small business
corporation or micro business. How will Organic Foods (Pty) Ltd be
taxed? Calculate the second provisional tax payment that must be
made by Organic Foods (Pty) Ltd and indicate by what date it must be 5
paid.

QUESTION 3.2 (10 marks, 12 minutes)

Lovebird (Pty) Ltd is one of your clients. The financial year of assessment ends on the last day
of March. Lovebird (Pty) Ltd is not considered a small business corporation as defined or
a micro business.

Lovebird (Pty) Ltd’s most recent tax assessments have been as follows:

 2017 tax assessment (assessed on 1 September 2017), with taxable income of R200 000
 2016 tax assessment (assessed on 1 December 2016), with taxable income of R160 000

The 2018 financial statements were finalised during July 2018. On 31 July 2018, the accountant
calculated that the company would have a taxable income of R300 000 for the 2018 year of
assessment.

REQUIRED MARKS

Calculate all the provisional tax payments payable by Lovebird (Pty) Ltd for the 10
2018 year of assessment.

QUESTION 3.3 (11 marks, 13 minutes)

Using the same information as in question 3.2, let us assume that Lovebird (Pty) Ltd’s most
recent tax assessments are as follows:

 2016 tax assessment (assessed on 21 September 2017), with a taxable income of


R200 000
 2015 tax assessment (assessed on 2 February 2016), with a taxable income of R160 000

The 2017 year of assessment has not been assessed yet.

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QUESTION 3.3 (continued)

REQUIRED MARKS

Calculate all the provisional tax payments payable by Lovebird (Pty) Ltd for the 11
2018 year of assessment.

QUESTION 3.4 (10 marks, 12 minutes)

Peter Disney runs a toyshop as a sole trader. He purchases toys and also manufactures his
own toys. Peter is registered as a micro business with effect from 1 March 2017. Peter earned
the following income and incurred the following expenses during the 2018 year of assessment.

Receipts and expenses R


Sale of toys (note 1) 750 000
Receipts from the sale of manufacturing equipment (note 2) 200 000
Interest income 70 000
Refunds for plastic purchased (note 3) 50 000
Running expenses relating to the toy shop 200 000
Purchase of toys and other materials 100 000

Notes

Note 1: Peter usually sells all of the toys for cash, but on 28 February 2018, he was owed
R2 000 for toys purchased by his friend Millie Spyrus. Millie paid this amount in March 2018
and it is included in the R750 000 (sale of toys amount) above.

Note 2: Peter purchased this equipment during 2013 for R400 000 and the tax value at the
date of sale is R250 000. He sold the equipment on 1 April 2017 for R200 000.

Note 3: The plastic was not the right quality for the making of toys and was returned to the
supplier during the year of assessment. Peter received a refund of R50 000.

REQUIRED MARKS

Calculate Peter’s tax liability for his 2018 year of assessment, in accordance 10
with the turnover tax system.

Source: (Adapted from Roeleveld, Warneke & West 2013 [Questions on SA tax])

QUESTION 3.5 (17 marks, 20 minutes)

During the 2016 year of assessment, Betty Blue (Pty) Ltd acquired a 70% shareholding in a
South African company called Natural Lashes (Pty) Ltd that manufactures mascara using only
organic ingredients. Betty Blue (Pty) Ltd and the only director of Natural Lashes (Pty) Ltd are
the shareholders of the company. Betty Blue (Pty) Ltd and the director do not hold any other
shareholding in other companies.

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QUESTION 3.5 (continued)

Natural Lashes (Pty) Ltd had a turnover of R1,5 million for the December 2017 year end from
the sale of mascaras alone. It also received income from consulting fees of R220 000. These
consulting fees are earned by the director, as he is known to be a research expert in the field
of organic ingredients. Natural Lashes (Pty) Ltd also had a capital gain of R87 000 that resulted
from the sale of one of its mixing machines. The company does not earn any investment in-
come.

The financial accountant at Betty Blue (Pty) Ltd has asked you to advise them on whether
Natural Lashes (Pty) Ltd can qualify as a small business corporation and be taxed accordingly
or not.

REQUIRED MARKS

Determine whether Natural Lashes (Pty) Ltd would qualify as a small business 17
corporation. You must discuss each requirement, apply it to the facts you are
given above, and reach a conclusion.

QUESTION 3.6 (10 marks, 12 minutes)

Sunshine (Pty) Ltd is not a small business corporation as defined. Its year of assessment ends
on 31 March each year. Its records show the following:

Tax year Taxable income Date of assessment

2016 R1 200 000 4 April 2017

2017 R1 354 980 15 September 2017

2018 R1 784 432 (estimated – not yet assessed)

REQUIRED MARKS

(a) Calculate the first and second provisional tax payments for the 2018 year
of assessment. Clearly state at which date the payment must be made. 9
(b) For the first provisional tax payment for the 2018 year of assessment,
what will the basic amount be if the 2017 assessment was issued on
20 September 2017? 1

QUESTION 3.7 (18 marks, 22 minutes)

Peter Prune and Lydia Lemon are the only shareholders of Frutula (Pty) Ltd. The company
started trading on 1 June 2017 after incorporation in April 2017. Peter and Lydia have no
shareholding in any other company. The company’s only income is generated by selling fruit at
informal markets for which it only accepts cash payments from customers. The fruit is
purchased on a daily basis from the fresh produce market in Johannesburg.

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QUESTION 3.7 (continued)

You are employed as a tax practitioner at XBM Accountants and Auditors and received the
following information and calculations via an e-mail from the accountant of Frutula (Pty) Ltd
regarding the period ending on 28 February 2018:

R
Cash/revenue receipts 650 000
Capital gain (cash) from the sale of redundant equipment used mainly for
business purposes 55 000
Interest received (from 1 June 2017 to 28 February 2018) 17 500
Taxable turnover (excluding capital gain and interest received) 610 000
Qualifying turnover 680 000
Taxable income (excluding interest received and capital gain) 385 000
First provisional tax payment made on 31 August 2017 30 250

REQUIRED MARKS

(a) List the requirements for qualifying as a small business corporation as 5


defined for the 2018 year of assessment.

(b) Calculate the final tax liability of Frutula (Pty) Ltd for the year of assess- 4
ment ended 28 February 2018 if it qualifies as a small business corpora-
tion.

(c) Calculate the tax liability of Frutula (Pty) Ltd for the year of assessment 4
ended 28 February 2018 if it qualifies as a micro business.

(d) Calculate the final tax liability of Frutula (Pty) Ltd for the year of assess- 5
ment ended 28 February 2018 if it does not qualify as a small business
corporation or a micro business. Also, calculate the second provisional tax
payment that should be made by Frutula (Pty) Ltd and state by which date
such payment must be made to SARS.

ASSESSMENT CRITERIA

 We could assess this learning unit in assignments or in the examination by asking you to
do the following:
 Calculate the tax liability for the different taxpayers using the applicable tax rates.
 Apply the tax dispensations applicable to taxpayers in calculating the taxable income of a
company (also for a small business corporation; capital allowances in this regard will be
covered in learning unit 6).
 Determine whether a taxpayer meets the definition of a small business corporation or a
micro business by applying the theory learnt to a practical situation.
 Calculate provisional tax payments, specifically for companies.

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NOTES

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LEARNING UNIT 4

4
INTRODUCTION
STUDY PROGRAMME
LEARNING OUTCOMES
PRESCRIBED STUDY MATERIAL FOR THIS
LEARNING UNIT
SECTIONS OF THE PRESCRIBED
TEXTBOOK WHICH YOU MAY IGNORE

CONTENTS
4.1 Background
4.2 Gross income
4.3 Gross income: special inclusions
4.4 Exempt income

WRAP-UP
SELF-ASSESSMENT QUESTIONS
ASSESSMENT CRITERIA
Income of a
business
entity

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INTRODUCTION

The structure or framework that must be applied to determine a taxpayer’s taxable income was
discussed in learning unit 1. Below is an expanded version of this framework showing some of
the components.

In this learning unit, the first two components of the framework, namely gross income (the
general definition as well as specific inclusions) and exempt income, will be discussed to show
you how to calculate a taxpayer’s income for a year of assessment.

Definition
Gross income
Specific
Income Less: inclusions
exempt
income
Less:
General
deductions
Deductions Specific
deductions
gives
Capital
allowances
Taxable income
before capital gains
Plus:

Taxable capital gain

gives

Taxable income
Gross income represents all income items, whereas exempt income represents the income
items that are included in gross income (either by means of the general definition or specific
inclusions), but which should be deducted from gross income as a result of their tax-exempt
status.

STUDY PROGRAMME

You should complete this learning unit in weeks 3 and 4 of the programme.

You should spend a minimum of four (4) hours in week 3 and nine (9) hours in week 4 on
this learning unit.

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LEARNING OUTCOMES

After you have completed this learning unit, you should be able to

 state the criteria contained in the definition of gross income (together with the applicable
case law) and apply them in a practical situation
 apply the special inclusions to a taxable income calculation
 apply the exempt income to a taxable income calculation

PRESCRIBED STUDY MATERIAL FOR THIS LEARNING UNIT

Chapter 2 in the prescribed textbook

SECTIONS OF THE PRESCRIBED TEXTBOOK WHICH YOU MAY IGNORE

 2.1
 2.2.5
 2.2.6
 2.2.7
 2.3 (the introduction)
 2.3.1
 2.3.2
 2.3.4
 2.3.5
 2.3.6
 2.3.7
 2.4
 2.5
 2.6

CONTENTS

4.1 Background No prescribed text

In learning unit 1, you were introduced very briefly to the framework that must be used when
calculating taxable income and, ultimately, tax liability. In this learning unit, we will discuss the
first component of the framework, namely income. As you can see from the diagram in the
introduction to this learning unit, we have expanded the framework to show that, for tax
purposes, income is made up of gross income and exempt income. In this learning unit, we will
look at what each of these terms means and what is included or excluded by these terms. The
other components of the framework will be dealt with in later learning units. Gross income is a
definition contained in section 1 of the Income Tax Act, but before we discuss the definition of
gross income, you need to understand the concepts of resident and non-resident. This is
necessary because the gross income definition distinguishes between South African residents
and non-residents. The implication of this is that the rules used to calculate gross income for

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South African residents differ to those used for the calculation of the gross income of non-
residents.

A person other than a natural person (in other words, a business entity such as a company or
a close corporation) is a resident of the Republic of South Africa if it is

 incorporated, established or formed in the Republic, or


 has its place of effective management in the Republic

The first requirement is a matter of fact and is therefore not really open to any interpretation.
The second requirement, namely the place of effective management, is not always as easily
determinable and therefore, SARS has issued interpretation note 6 to clarify what is meant by
"place of effective management".

Have a look at interpretation note 6 on SARS's website


(http://www.sars.gov.za/AllDocs/LegalDoclib/Notes/LAPD-IntR-IN-2012-
06%20-%20Resident%20Place%20Effective%20Management.pdf).

Read paragraph 3.4 of this document specifically to gain an understanding of


which circumstances may indicate the place of effective management of an
entity. You will not be required to list these circumstances, but they will give
you a better understanding of what this term means.

You first need to determine whether an entity is a resident for tax purposes,
because

 residents are taxed on all (worldwide) income, according to the


residence basis of taxation
 non-residents are taxed on income received from a South African
source only, or income which is deemed to have been received from a
South African source

The source of income is where the income has its origin. To determine the source of income
two aspects need to be considered:

 the cause of the income


 the location of that originating cause

The source rules do not form part of this module and will be dealt with in detail in TAX3701. For
the purposes of this module, you will only be required to apply the gross income definition to
residents. Non-residents will be dealt with in TAX3701.

4.2 Gross income Textbook: sections 2.2.1 to 2.2.4

Once you have established that the taxpayer is a resident of the Republic, you need to consider
whether an amount, which is received by the taxpayer, must be included in its gross income or
not. We now turn to an explanation of the definition of gross income as it applies to residents.

Below is an extract from the Income Tax Act (s 1) which contains the definition of gross income.

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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
or deemed to be within the Republic, during such year or period of assessment,
excluding receipts or accruals of a capital nature

From the above definition, you can see that before an amount may be included in the gross
income of a taxpayer, that amount must comply with all the requirements or criteria for the
definition of gross income, namely

 the total amount


 in cash or otherwise
 received by, accrued to, or in favour of a person
 during the year of assessment
 excluding amounts of a capital nature

Over and above these requirements, which must ALL be met, the definition also includes

 amounts (whether of a capital nature or not), which are specifically listed after the
definition

We refer to this list as specific inclusions. We will discuss these specific inclusions later in this
learning unit.

The criteria contained in the definition of gross income have to be complied with, and the
interpretation of each concept contained in the definition has been tested in the South African
courts over decades. Not all the criteria are easily interpreted in different situations and as a
consequence of decided tax cases, many important legal principles have been established. As
you will remember, we introduced you to what is called "legal precedent" in learning unit 1. It is
the application of this legal precedent that informs us how to apply some of the principles of the
definition of gross income in situations where interpretation is not straightforward.

You will need to learn the names (only the names, not the numbers that have been added for
the sake of completeness) of the tax court cases mentioned in this learning unit, as you will be
required to list them under the appropriate criteria for the gross income definition when you
consider whether an amount should be included in gross income or not. It is not necessary to
learn the content (the facts and conclusion) of these tax cases, as this will be considered in
detail in TAX3701.

We will now discuss each of the criteria for the definition of gross income separately. For each
criterion, read the applicable paragraph in the prescribed textbook first. Then we will introduce
to you one or two applicable court cases that will provide insight when applying the criteria.

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4.2.1 Total amount in cash or otherwise

Study sections 2.2.1 and 2.2.2 of the prescribed textbook.

As determining an "amount" is not always straightforward, we apply the ruling in Commissioner


for Inland Revenue v Butcher Bros (Pty) Ltd 13 SATC 21 (A) 1944. In this court case it was
established that where an asset is received other than in cash, an "ascertainable money value"
needs to be determined and the onus is initially on the Commissioner to prove that an "amount"
has accrued to the taxpayer.

4.2.2 Received by, accrued to, or in favour of

Study section 2.2.3 of the prescribed textbook.

In Geldenhuys v Commissioner for Inland Revenue 14 SATC 419 (A) 1947, it was suggested
that an amount is only "received" by a taxpayer if it is received by him (her) "on his (her) own
behalf ad for his (her) own benefit".

In CIR v People's Stores (Walvis Bay) (Pty) Ltd 52 SATC 9, it was confirmed that the meaning
of "accrued to" is the amount "to which he has become entitled".

An amount must be included in income at the earliest date of it being received or accrued.
Therefore, if an amount has accrued on 1 April, but it was only received on 30 April, then the
amount is regarded as income on 1 April. It will not be included again on 30 April, as it has
been taken into account already.

4.2.3 Year of assessment

This criterion is implied in the definition because tax payable is calculated on an annual basis,
therefore we need to decide into which "tax year" an amount of income will fall. This could have
implications if the rate of tax were to change.

A company's year of assessment is the same as its financial year. For example, if the
company's financial year end is on 31 March 2018, then the year of assessment will be
1 April 2017 to 31 March 2018.

Only an amount received or accrued in a particular year of assessment will be included in gross
income for that year of assessment.

This criterion is generally a matter of fact and very few court cases have dealt with it.

The debate that takes place in terms of this criterion is in which year an amount is accounted
for if it accrues in one year and is received in a later year of assessment. This was discussed
under the previous heading.

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4.2.4 Excluding amounts of a capital nature

Study section 2.2.4 of the prescribed textbook.

Capital is compared to a tree and revenue to the fruit of the tree (CIR v Visser 8 SATC 271).
For example, in a manufacturing business, the plant, equipment and machinery represent the
"tree" and the items produced the "fruit".

As the capital nature often depends on many variables, the courts have established tests that
can be used to assist in deciding whether income is of a capital nature or not. These tests are
often loosely grouped into two main groups:

 subjective tests
 objective tests

The subjective tests (as mentioned under the headings in section 2.2.4 of the prescribed
textbook) that are applied to determine whether an amount is of a capital nature or not relate
to the

 nature of the receipts


 sale of assets
 intention
 continuity
 change of intention

When the courts look at objective tests (matters of fact) they will consider the following as
indications:

 manner of acquisition
 period for which the asset is held
 manner of disposal
 nature of the asset disposed of
 reason for the receipt
 legal nature of the transaction
 accounting treatment of the transaction

Consider the following case study. This will help you understand how the above tests are ap-
plied in practice.

Case study

Mint (Pty) Ltd has been carrying on the business of growing herbs for many
years on the land it owns. This is the only business of the company. During
the 2008 year of assessment, Mint (Pty) Ltd bought an additional farm from a
deceased estate at a favourable price. At the time, the company did not need
the additional land, but it decided to hold it until it was required for planting
herbs at a later stage. Because of the economic recession, the company

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decided that it no longer required the land for future use and sold the farm in
February 2018 as land suitable for livestock farming. The amount was
received in cash by Mint (Pty) Ltd on 5 March 2018.

REQUIRED

Would the amount received by Mint (Pty) Ltd for the sale of the farm be capital
in nature for the year of assessment ended 31 March 2018?

Solution

In order to determine whether an amount received by a taxpayer is of a capital


nature, you need to apply the subjective and objective tests and base them on
all the facts to determine the nature of the amount.

Manner of acquisition – The property was acquired by means of a market-


related transaction.

Intention on acquisition – The taxpayer's intention was to acquire the farm as


an income-producing asset (an investment intention).

Change of intention – The fact that the taxpayer acquired the farm knowing
that he could sell it at a profit is not a clear indication that the asset was
acquired with a speculative intention (in other words, buying an asset at a
favourable price for the purpose of selling it shortly afterwards at a profit). In
addition, the fact that it has decided to sell the farm would not automatically
indicate a change in the taxpayer's intention.

Period for which the asset was held – The company held the asset for almost
eight years.

Nature of the asset disposed of – The asset is a farm, which can be used as
an income-producing asset in Mint (Pty) Ltd’s business.

On the given facts, it can be argued by Mint (Pty) Ltd that it acquired the farm
with the intention of developing it as a produce farm. Owing to the economic
recession, however, this did not transpire, and since the land was surplus to
its requirements, a decision was made to sell the property.

The sale of the property amounted to the sale of a capital asset and not the
sale of an asset to make a profit. The proceeds would therefore be of a capital
nature and not included in gross income.

When studying the definition of gross income, make a detailed summary of


each criterion that an amount must comply with before it can be included in
gross income. You should be able to apply the principles discussed to
determine whether an amount should be included in the gross income of a
taxpayer and state the applicable case law.

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Although amounts of a capital nature are excluded from gross income, such amounts could
nevertheless be subject to income tax in accordance with the Eighth Schedule to the Act, which
regulates capital gains tax (CGT). This topic is discussed in learning unit 7 of this module.

Work through the following practical example:

Gross income

Bank A receives a deposit of R1 000 on 1 March from Trading (Pty) Ltd. This
money is deposited into a savings account at the bank as an investment. Six
months later, Trading (Pty) Ltd withdraws the amount and the bank pays the
company an amount of R1 050, comprising R1 000 original capital invested
and R50 interest earned.

REQUIRED

Determine, giving reasons, whether

(a) the amount of R1 000 received by Bank A will be gross income


(b) the amount of R1 050 received by Trading (Pty) Ltd is gross income

Solution

To establish whether the money received by Bank A on 1 March and the


money received by Trading (Pty) Ltd six months later should be included in
the gross income of the respective taxpayers, the following approach is useful:

 What is the specific principle, from the definition of gross income, which
applies to the amount or receipt?
 How can this specific principle be applied to this amount or receipt?
 What is the conclusion if the principle is applied?
This approach can be illustrated by the application of the above example:

(a) The receipt of R1 000 by Bank A

Principle: “Received” means that a taxpayer receives an amount for his/her


own benefit (Geldenhuys v. Commissioner).

Application: Bank A receives the amount on behalf of Trading (Pty) Ltd to


keep as a deposit in its name.

Conclusion: The amount is not received on behalf of and for the benefit of
Bank A; therefore, it will not be included in the gross income of Bank A.

(b) The receipt of R1 050 by Trading (Pty) Ltd

Principle: Capital amounts are excluded from gross income. Capital


represents the "tree" and the income derived from the capital represents the
"fruit" of the tree (CIR v. Visser).

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Application: The original amount invested, namely R1 000, represents the


“tree” (capital) which has earned “fruit” (interest) of R50.

Conclusion: The invested capital received by Trading (Pty) Ltd will be


excluded from gross income, since it is capital in nature, but the income
(interest) will be included in gross income, as it is revenue in nature.

Do the self-assessment, "Gross Income Definition", on myUnisa.

4.3 Gross income: Special inclusions No prescribed text

The definition of gross income includes a list of specific amounts in paragraphs (a) to (n) (of
the definition in the Act), which are included over and above the amounts already included in
gross income under the general definition of gross income discussed in 4.2. This means that,
although an amount may be excluded from the definition of gross income because it did not
comply with any one of the criteria of the definition, the specific inclusions contained in
paragraphs (a) to (n) have the effect that amounts covered by the provisions of these
paragraphs are nevertheless included in the gross income of the taxpayer.

You do not need to know all the specific inclusions, as some of them relate to individuals and
will be dealt with in TAX3702. The special inclusions relating to a business entity are discussed
in the paragraphs that follow.

4.3.1 Lease premiums

A lease premium is an amount that the lessee (person renting the property) pays to the lessor
(person owning the property and who is renting it out) in addition to the monthly rental. It is a
once-off payment usually at the beginning of the lease period. The full amount of the lease
premium is included in the lessor's income in the year of assessment in which it is received or
when accrued to the lessor.

4.3.2 Leasehold improvements

A lease agreement may specify that the lessee be obliged to erect/effect improvements on the
leased land or to the leased buildings. This means that the person who is renting the property
will incur costs to improve or extend the property, thereby increasing the value of the asset for
the lessor (owner). The value of the improvements effected to the property must be included in
the gross income of the lessor in the year of assessment in which the agreement was
concluded. The value to be included is the amount stipulated in the lease agreement as the
value to be expended on the lease improvements. If the actual value of the improvements (e.g.
R700 000) is more than the amount stipulated in the agreement (e.g. R550 000), then the
amount to be included in gross income remains the amount in the agreement (R550 000). (The
lessee is able to claim a deduction for the leasehold improvements over the period of the lease
– this will be dealt with in TAX3701.)

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4.3.3 Proceeds from the disposal of certain assets

If a taxpayer sells an asset that was manufactured, produced, constructed or assembled by


him, then the full proceeds received by him must be included in gross income. In other words,
this disposal will not be treated as a transaction of a capital nature because he manufactured
the asset. Note that the proceeds will still be included in gross income, even if he used the
asset as a capital asset and then disposed of at a later stage.

4.3.4 Dividends

Any amount received or accrued by way of dividends (local and foreign dividends) is included
in gross income. There are exemptions pertaining to certain dividends (dealt with in section
4.4), but the dividend received or accrued must still be included in gross income first.

4.3.5 Key-man insurance policy proceeds

An insurance policy can be taken out on the lives of certain people in a business entity, for
example the director or a specific employee. When this person is not available to the company
any longer, the policy will pay out an amount to the business entity. This amount is included in
the gross income of the business entity, if the business entity was entitled to claim the insurance
premiums in the current or previous year of assessment (in terms of s 11(w) of the Income Tax
Act, which is dealt with in TAX3701).

4.3.6 Recoupments

When a taxpayer sells a capital asset, the recoupment (for income tax purposes) pertaining to
this transaction must be calculated. (This calculation is dealt with in learning unit 6 of this
module.) The recoupment amount must be included in gross income.

4.4 Exempt income Textbook: section 2.3.3

You now have an understanding of which items will be included in gross income – either by
means of the gross income definition or by means of the sections pertaining to special
inclusions. The next component of the framework, namely exempt income, is deducted from
gross income. Exempt income refers to certain types of income that are included in gross
income but that the Income Tax Act does not want to subject to tax, that is, they are not
regarded as income (refer to the framework at the beginning of this learning unit) and are
therefore deducted from gross income to calculate total income.

Be very careful with your use of terminology. Exempt income is very different
from deductions.

When we refer to income, we say that it is either taxable or exempt


(depending on the rules).

Exemptions are contained in section 10 of the Income Tax Act, and may exempt the taxpayer
(e.g. public benefit organisations) from paying normal income tax or may exempt the type of
income (e.g. government grants received) fully or partially from normal income tax.

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Some of the taxpayers that are exempt from tax include

 any level of government in the Republic


 any institution, board or body, which as its principal objective conducts scientific, technical
or industrial research
 body corporates established in terms of the Sectional Titles Act 95 of 1986
 share-block companies established in terms of the Share Blocks Control Act 59 of 1980
 public-benefit organisations
 pension funds, retirement annuity funds and benefit funds
 recreational clubs approved by the Commissioner in terms of section 30A of the Income
Tax Act
 Public benefit organisations mainly comprise non-profit companies
incorporated with the main objective of advancing public benefit activities
and approved as such by SARS. These activities include educational,
religious, cultural and environmental conservation activities.
 The exemptions in respect of certain taxpayers apply to normal income
tax only, and such taxpayers may still be liable for other forms of
taxation, such as value-added tax (VAT).

The types of income, which are exempt for a South African enterprise, are the following:

 dividends (see section 2.3.3 in the prescribed textbook)


 government grants (An amount received from government in terms of any programme or
scheme that has been approved in the national annual budget process will be exempt
from normal tax.)

Without looking at the previous pages of your study guide or prescribed


textbook, list the categories of taxpayers that are exempt from normal income
tax, as well as the forms of exempt income.

You may find the answer in our notes in the preceding text, or in the prescribed
textbook. Did you remember them correctly?

Although certain amounts may be exempt from income tax (e.g. dividends in certain circum-
stances), note that these amounts are nevertheless first included in gross income and then
exempted. Once the second component of the framework, namely exempt income, has been
calculated, the relevant exempt amounts are deducted from gross income. The result of this
calculation is "income".

Go to the Discussion Forum, Learning unit 4/Leereenheid 4, and discuss


any concepts that you don’t understand. If you do understand, answer those
students who have posted questions.

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WRAP-UP

In this learning unit, the components of gross income (i.e. the gross income definition and
special inclusions) and exempt income were studied. The calculation of “income”, which
includes the components of gross income and exempt income, were thus dealt with.

Income is like the contents of a basket – the amounts contained in the


basket are subject to income tax.

Using this analogy, in line with the definition of gross income, certain
amounts are put into the basket.

The special inclusions make us put more into the basket than we may have
included in the basket during the first round.

Finally, exempt income provisions allow us to take some amounts out of


the basket.

Remember, however, that you cannot take an amount out of the basket if it
was not in the basket in the first place.

Therefore, what is left in the basket is what we refer to as income.

SELF-ASSESSMENT QUESTIONS

QUESTION 4.1 (17 marks, 20 minutes)

Sports Football (Pty) Ltd owns the Sports Football team. Sports Football (Pty) Ltd receives
income in the form of gate sales and prize money. Recently, it sold two players, namely Big A
and Star Ball, to Westville Football (Pty) Ltd. Big A was sold for R5 000 000 and Star Ball for
R25 000.

Big A

Big A started playing football eight years ago for the Sports Football under-24 team and, after
signing a life-service contract, was trained by Sports Football (Pty) Ltd until he was the number
one striker in the country.

Star Ball

Star Ball was snapped up at a bargain price from Hasbeen Football Club for R3 000. When
purchasing Star Ball, the board of directors of Sports Football (Pty) Ltd realised he would not
suit the style of play used by its team, but anticipated being able to sell Star Ball at a quick
profit. This happened only eight weeks after purchasing him.

REQUIRED MARKS

Discuss what amount, if any, Sports Football (Pty) Ltd should include in its 17
gross income.

Source: Adapted from De Swardt, Hamel, Mitchell, Nieuwoudt, Stark & Venter 2014 (Tax workbook)

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QUESTION 4.2 (14 marks, 17 minutes)

The following case studies all contain an accrual amount.

Springs CC

Blue Water Ltd declared a final dividend of R12 a share on 14 February 2018 payable to
shareholders registered in its share register on 1 March 2018. The dividend was actually paid
on 15 March 2018. Springs CC holds 5 000 shares in Blue Water Ltd.

Wire (Pty) Ltd

On 1 January 2018, Wire (Pty) Ltd made a 6,5% fixed-deposit investment for 12 months with a
local financial institution. The fixed deposit (together with interest) can only be withdrawn after
the 12-month period has lapsed.

Fencing Ltd

Fencing Ltd manufactures wood fencing. On 1 February 2018, it completed a wood fence to be
erected around a cricket field. On 10 March 2018, this fence was sold for R50 000 and delivered
to a cricket club, but no amount was received.

Watch-it (Pty) Ltd

Watch-it (Pty) Ltd carries on the business of a building contractor specialising in the erection of
sports pavilions. On 31 January 2018, it completed the building of a pavilion for the Blues
Cricket Club. In terms of the building contract, 90% of the contract price is due and payable on
completion of the pavilion and 10% of the contract price is to be retained as “retention monies”
until a final certificate is issued by the engineer six months after the completion of the pavilion.
The contract price of the Blues Cricket Club contract is R4 500 000.

Cotton Ltd

Cotton Ltd sells sporting equipment. On 20 February 2018, it sold a set of night-cricket strips
(shirts and flannels) on credit to a rugby club for R4 500. Cotton Ltd undertook to deliver the
strips on 13 March 2018.

REQUIRED MARKS

Apply the accrual principles to each of the above case studies to determine 14
the date of accrual of the amount in question.

Using the last case study (Cotton Ltd), also indicate the accrual principle and
date of accrual if the delivery of the strip was a condition of the sale.

Source: Adapted from Mitchell & Mitchell 2014. (Graded questions)

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QUESTION 4.3 (9 marks, 11 minutes)

(1) Stripes CC is a manufacturing business. The close corporation was the owner of a life
policy taken out on the production supervisor (Sam). The policy matured on Sam’s 60th
birthday (on 31 January 2018) and Stripes CC received R100 000. Sam retired shortly
after his 60th birthday and Stripes CC used the R100 000 to give Sam a long-service
award.

(2) Lights (Pty) Ltd sold one of its manufacturing machines to another company for
R50 000. At the date of sale, the machine had a “nil” tax value and the accountant
calculated that the tax recoupment from this transaction was R50 000.

REQUIRED MARKS

Discuss whether the amounts referred to in each of the above case studies 9
should be included in the gross income of the respective taxpayers.

Source: Adapted from De Swardt, Hamel, Mitchell, Nieuwoudt, Stark & Venter 2014 (Tax workbook)

QUESTION 4.4 (15 marks, 18 minutes)

Property CC owns several buildings, which it rents out. Property CC’s year end is on
28 February 2018. On 1 January 2018, Property CC concluded a lease agreement with Desks
(Pty) Ltd. The agreement provided for the following clauses:

 Desks (Pty) Ltd would pay Property CC a lease premium of R50 000 on the signing of the
lease agreement on 1 January 2018.

 Desks (Pty) Ltd is obliged to improve the property to the extent of R500 000 by converting
part of the warehouse into offices. The actual cost of the improvements was R525 000. The
improvements were completed on 30 April 2018.

 Desks (Pty) Ltd would pay a monthly rental of R6 000 per month to Property CC. The
building was used by Desks (Pty) Ltd from 1 January 2018, but the company only started
paying the monthly rentals to Property CC on 1 May 2018 (after the leasehold improve-
ments were completed).

REQUIRED MARKS

Discuss whether the amounts referred to in each of the above clauses should 15
be included in the gross income of Property CC for the 2018 year of
assessment in terms of the definition of gross income and special inclusions.

Source: Adapted from De Swardt, Hamel, Mitchell, Nieuwoudt, Stark & Venter 2014 [Tax workbook]

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QUESTION 4.5 (10 marks, 12 minutes)

Dinepe Fela (Pty) Ltd (Dinepe) is a South African company that sells contemporary art.
Dinepe’s financial year ends on 31 March. On 28 March 2018, it sold an artwork worth
R10 000 to an advertising company. The advertising company purchased the artwork to hang
it in their reception area. Instead of paying cash for the artwork, the advertising company offered
Dinepe an advertising campaign, also worth R10 000. On 30 March 2018, Dinepe accepted the
advertising campaign instead of cash. The campaign would consist of 10 monthly advertise-
ments in a local newspaper, commencing during April 2018.

REQUIRED MARKS

Discuss whether the receipt of the advertising campaign would constitute 10


gross income for Dinepe Fela (Pty) Ltd, as defined in the Income Tax Act 58
of 1962 for the year ending 31 March 2018.

QUESTION 4.6 (10 marks, 12 minutes)

Brand Guru (Pty) Ltd is a South African resident company that earns its income through
branding all newly registered companies’ names, images, logos and the printing of business
cards. The year of assessment ends on 31 March 2018. The following receipts and accruals
relate to its current year of assessment:

Receipts and accruals Notes R


Consultation fees 1 285 000
Company logos designed 2 165 000
Business cards 3 10 000
Lease premium and rent 4 805 000
Sale of building B 5 2 000 000

Notes

1. Consultation fees

Brand Guru (Pty) Ltd earned consultation fees of R285 000 during the year of assessment
in the Republic for company name and logo ideas proposed to clients.

2. Company logos designed

An amount of R165 000 was received from Botswana with regard to company logos
designed for newly registered companies in Botswana.

3. Business cards

Brand Guru (Pty) Ltd entered into a contract to produce business cards for Lucky Pet
(Pty) Ltd. In terms of the contract, Lucky Pet (Pty) Ltd will pay the R10 000 owing for the
business cards on 1 May 2018 only. The business cards were designed and printed on
15 March 2018.

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QUESTION 4.6 (continued)

4. Lease premium and rent

On 1 July 2017, Brand Guru (Pty) Ltd entered into a lease contract with Busy Bee (Pty)
Ltd. From 1 July 2017, a monthly rental amount of R45 000 is payable to Brand Guru
(Pty) Ltd for the lease of building A. A lease premium of R400 000 was also paid to Brand
Guru (Pty) Ltd on 1 July 2017.

5. Sale of building B

Brand Guru (Pty) Ltd sold building B in Pretoria for R2 000 000. It has been rented out
for the past 10 years.

REQUIRED MARKS

Calculate the total gross income amount of Brand Guru (Pty) Ltd for the year 10
of assessment ending 31 March 2018. Give brief reasons why an amount is
included in gross income or not. Assume that there are no double-tax
agreements in force with Botswana.

ASSESSMENT CRITERIA

We could assess this learning unit in assignments or in the examination by asking you to

 determine, with reference to the criteria established, whether a specific legal entity will be
classified as a resident for tax purposes
 list the requirements of the gross income definition, together with the applicable case law;
 apply the requirements of the gross income definition to a practical situation, providing
reasons why an amount should be included in gross income or not
 state the year of assessment in a practical situation
 apply the subjective and objective tests to determine whether a transaction is of a capital
nature or not
 determine, in a practical case study, which amounts are specifically included in gross
income
 determine, in a practical case study, the amounts that will be exempt from income tax
 apply the special inclusions to a taxable income calculation
 apply exempt income to a taxable income calculation
 calculate income (as defined)

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NOTES

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SELF-ASSESSMENT
SOLUTIONS
– SOLUTIONS FOR
EACH LEARNING
UNIT

Solutions to self-assessment questions in


learning unit 1

Solutions to self-assessment questions in


learning unit 2

Solutions to self-assessment questions in


learning unit 3

Solutions to self-assessment questions in


Self-
learning unit 4 assessment

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Solutions to self-assessment questions in learning unit 1

QUESTION 1.1

(1) The South African government has made provision for the following taxes, among other
things:

 income tax
o capital gains tax
o turnover tax
o 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)

(2) South Africans are taxed on their worldwide income.


(3) Please check what you have answered against the framework in the text. It is important
that you know this framework, as you will use it in all future tax modules, including this
module.
(4) Please check what you have answered against the framework in the text. It is important
that you know this framework, as you will use it in all future tax modules, including this
module.
(5) (a) 1 March 2017 to 28 February 2018
(b) Their financial year ends in 2018.

Solutions to self-assessment questions in learning unit 2

QUESTION 2.1

(1) John Majale (Pty) Ltd has to visit any SARS branch office and apply to register. (1) The
following information has to be completed on the application for registration:
 registered name of the company
 trade name of the company (only if different from the registered name)
 postal address
 registered address
 company registration number (issued by CIPC)
 nature of the business
 turnover (may be an estimate for first registration)
 registration date (with CIPC)

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QUESTION 2.1 (continued)

 full banking particulars of the company


 particulars of the public officer (representative for the company)
 particulars of the three main directors/shareholders of the company
 income details such as whether the company will be trading, if the company should
also be registered for provisional tax, the estimated taxable income and the financial
year end of the company
(Max 5)

(2) – John Majale (Pty) Ltd has to submit an objection to SARS within 30 days from the
date of the assessment for the current year. (1)
– The objection must be in writing and must specify in detail the grounds upon which
the objection is made. (1) John Majale (Pty) Ltd could therefore submit a copy of the
financial statements for the current year of assessment and a detailed income tax
calculation to support the deduction of the wear-and-tear claim of R12 500. (1)
– The objection must be signed by the taxpayer. Therefore, the public officer of the
company should sign the objection. (1)
– The objection must be submitted by completing the NOO form. (1)
Total (5)

(3) – John Majale (Pty) Ltd will have to pay the outstanding amount of R4 750 to SARS
(1) and then proceed to lodge an appeal.
– John Majale (Pty) Ltd will have to appeal within 30 days of the notice of disallowing
the objection. (1)
– An NOA form is used for the notice of appeal, and it must contain the details of the
tax in dispute, that is, the disallowance of the wear-and-tear deduction and the
grounds for the appeal. (1)
Total (3)

QUESTION 2.2

Majuba (Pty) Ltd may lodge an appeal via eFiling or manually to SARS and it will (2)
have to pay the outstanding amount of R6 875 to SARS by 31 March 2018.
The appeal will be on the NOA form containing the details of the tax dispute and (1)
the grounds of appeal.
If SARS rejects the appeal, Majuba (Pty) Ltd may take the matter to the Tax Board (1)
or Tax Court first.
If the matter remains unresolved, Majuba (Pty) Ltd could take the matter to the High (1)
Court.
The last option available will be to take the matter to the Supreme Court. (1)

Max 5

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QUESTION 2.3

PART A – How to lodge an objection and appeal to SARS

Complete the NOO form, submit it to SARS via eFiling, and set out the detailed grounds
(reasons) (1) for the objection on the NOO form. (1)
The supporting documentation (1) must be submitted.
The objection must be submitted within 30 days (1) of the date of the assessment.
You must prove that the assessment is incorrect (1) (burden of proof vests with the taxpayer).
If the objection is still not resolved and SARS does not rectify the objection, you may lodge
an appeal (1) to SARS by completing an NOA form and submitting it to SARS.
If the matter still cannot be resolved, it can be taken to the Tax Board (1), since the amount
is less than R500 000.
Thereafter, the party that loses the case may follow the normal South African legal precedent,
firstly going to the High Court and then the Supreme Court (1) and even in certain cases, to
the Constitutional Court.
Name any five Max (5)

PART B – Five elements that must be recorded by SARS when a dispute (objection) has been
settled

The settlement agreement must be in writing. (1)


An explanation must be given of how the issue was settled, (1)
how the issue will be treated in future, and (1)
what each of the parties agree to do about it, as well as information on (1)
the withdrawal of the objection and appeal, and (1)
the arrangements for payment, if necessary. (1)
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. (1)
SARS must alter the taxpayer’s assessment; this amount is final and cannot be
subject to further objection or appeal. (1)
Name any five Max
(5)

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QUESTION 2.3 (continued)

PART C – Five taxes or duties that are collected by SARS

Income tax (1)


Value-added tax (1)
Estate duty or estate tax (1)
Excise duty (1)
Customs duty or import duty/tax (1)
Transfer duty (1)
Air passenger tax (1)
Securities transfer tax (1)
Unemployment Insurance Fund (UIF) (1)
Skills development levy (SDL) (1)
PAYE (employees’ tax) (1)
Dividends tax (1)
Turnover tax (1)
Name any five Max
(5)

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Solutions to self-assessment questions in learning unit 3

QUESTION 3.1

(a) Will Organic Foods (Pty) Ltd qualify as an SBC or a micro business?

Requirements SBC? Micro business?


Shareholders – All shareholders are natural All shareholders are natural
natural persons persons (1) persons (1)
Shareholders Shareholders don’t hold Shareholders don’t hold shares in
don’t shares in other companies, other companies, CCs or co-opera-
hold shares CCs or co-operatives (1) tives (1)
Gross income or Gross income is less than Qualifying turnover is less than
qualifying R20 million (1) R1 million (1)
turnover
Investment None (1) None (1)
income
Private company Yes (1) Yes (1)
Year end Not a requirement Year end is on 31 January and not
on the last day of February (1)
Conclusion Qualifies as SBC (1) Does not qualify as a micro bu-
siness, as the year end is not the
last day of February (1)

Note: Show the detailed requirements clearly in an assignment or examination. The above
is a comparison for illustration purposes; the specific requirements are thus not listed in
detail.
R
(b) Taxable income 320 000 (1)
Taxable income is between R75 751 and R365 000; therefore:
Tax liability is 7% of the amount over R75 750
= (R320 000 – R75 750) x 7% 17 098 (1)

(c) Taxable turnover 580 000 (1)


Taxable turnover is between R500 000 and R750 000; therefore:
Tax liability is R1 650 + 2% of the amount above R500 000
= R1 650 + (2% x (R580 000 – R500 000)) 3 250 (2)

(d) Organic foods (Pty) Ltd will be taxed as a company at a tax rate of 28% (1)
The second provisional tax payment to be made
Taxable income (note below) 320 000 (1)
Tax liability for the year (rate of 28%) 89 600 (1)
Amount payable is 89 600
Less: First provisional tax payment (nil) (1)
Amount due/payable 89 600

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QUESTION 3.1 (continued)

The amount is payable on 31 January 2018. (1)

Note:

When calculating the second provisional tax payment, consider the following:

If the taxpayer has taxable income of less than R1 million, the taxpayer may use the lower of
the basic amount or the taxable income for the year (which has been seriously calculated).
Since this is Organic Foods (Pty) Ltd’s first year of assessment, it does not have a basic amount
(i.e. a previous assessment) and must therefore use the estimated taxable income of R320 000
(seriously calculated).

QUESTION 3.2

2018 first provisional tax payment

Note R R
Basic amount – taxable income as per
2017 assessment 1 200 000 (1)

Normal tax payable x 28% 56 000 (1)


For six months (divide by 2) 28 000 (1)

The first provisional payment for 2018 is payable six months before the
last day of the year of assessment; therefore, on 30 September 2017.

2018 second provisional tax payment R R


The lower of the basic amount or an estimate of
taxable income may be used
– Basic amount – taxable income as per 2017 2
assessment 200 000 (1)
– Estimate for 2018 – not available on
31 March 2018; therefore use basic amount
Normal tax payable x 28% 56 000 (1)
Less: First provisional payment (28 000) (1)
Second provisional payment 28 000
The second provisional payment is due on the last day of
the year of assessment, ending on 31 March 2018.

2018 third provisional tax payment – due on R R


30 September 2018

Actual taxable income for 2018 300 000 (1)


Normal tax payable x 28% 84 000 (1)
Less: First provisional tax payment (28 000) (1)
Less: Second provisional tax payment (28 000) (1)
Amount due 28 000

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QUESTION 3.2 (continued)

Notes:

(1) The taxable income assessed in the 2017 assessment is used as the basic amount
because it was received on 1 September 2016, more than 14 days before the provisional
payment is to be made (i.e. 30 September 2017).
(2) The basic amount for the 2018 second provisional payment does not need to be adjusted
by 8%, as the 2017 assessment is not more than 18 months before the current year and
it is not more than 1 year.

QUESTION 3.3

2018 first provisional tax payment


Note R
Basic amount – taxable income as per 2015 assessment 1 160 000 (1)
Plus: (8% x 3 years) 2 38 400 (1)
198 400
Normal tax payable x 28% 55 552 (1)
For six months (divide by 2) 27 776 (1)
he first provisional payment for 2018 is payable six months before the last day
of the year of assessment; therefore, on 30 September 2017.

2018 second provisional tax payment


The lower of the basic amount or an estimate of taxable income may be used
R
Note
– Basic amount – taxable income as per 2016 assessment 3 200 000 (1)
Plus: 8% x 2 years 32 000 (1)
232 000
– Estimate for 2018 – not available
on 31 March 2018; therefore, use basic amount
Normal tax payable x 28% 64 960
Less: First provisional payment (27 776) (1)
Second provisional payment due to SARS 37 184

The second provisional payment is due on the last day of the year of
assessment, ending on 31 March 2018.

2017 third provisional tax payment – due on 30 September 2018


R
Actual taxable income for 2018 300 000 (1)
Normal tax payable x 28% 84 000 (1)
Less: First provisional tax payment (27 776) (1)
Less: Second provisional tax payment (37 184) (1)
Amount due to SARS 19 040

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QUESTION 3.3 (continued)

Notes

(1) The taxable income in the 2015 assessment isused as the basic amount. The 2016
assessment was received within 14 days before the provisional payment is to be made
(i.e. on 30 September 2017), and it can therefore not be used.

(2) The 2015 assessment is more than 18 months before the first payment is due and the
basic amount is older than 1 year. Therefore, according to that assessment, the basic
amount must be increased by 8% for each year, that is, 2016, 2017 and 2018 (3 years).

(3) The basic amount (latest assessment of 2016) for the 2018 second provisional payment
will be adjusted by 8%. The provisional payment is due more than 18 months after the
end of the latest year of assessment (31/03/2016 to 31/03/2018 is more than 18 months
and more than 1 year) and it will be increased by 8% for each year; therefore, 2017 and
2018 (2 years).

QUESTION 3.4

(1) Calculate the taxable turnover


R
Sale of toys R750 000 – R2 000. The amount owed 748 000 (2)
at year end by Millie is not included, as it
has not yet been received

Receipts from the sale of R200 000 x 50% 100 000 (1)
manufacturing equipment

Interest income Peter is a natural person, and interest is – (1)


therefore not included in taxable turn-
over (paragraph 7 exclusion)

Refunds for plastic Refunds are not included in taxable turn- – (1)
purchased over as per paragraph 7 exclusions

Running expenses of shop Not taken into account for the calculation – (1)
of taxable turnover

Purchase of toys Not taken into account for the calculation – (1)
of taxable turnover
Taxable turnover 848 000

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QUESTION 3.4 (continued)

(2) Calculate the tax liability


R
Taxable turnover 848 000 (1)
Tax liability R6 650 + ((R848 000 – R750 000) x 3%) 9 590 (2)

QUESTION 3.5

(1) The company must be a close corporation, a co-operative or a private company. (1)
Natural Lashes is a private company. (1)
(2) All the shareholders of the company must be natural persons. (1)
Not all the shareholders are natural persons. Betty Blue (Pty) Ltd is not a natural
person and the director is a natural person. (1)
(3) The gross income for the year must not exceed R20 million. (1)
The gross income of turnover and consulting fees (R1 500 000 + R220 000) are less
than R20 million. (1)
(4) The shareholders may only have permitted shareholdings. (1)
This is not applicable, since this requirement applies to all shareholders that are
natural persons. This is not the case, since one of the shareholders is not a natural
person. (1)
(5) The investment income and income from a personal service must not make up more
than 20% of the revenue receipts and capital gains. (1)
The company has no investment income. (1)
The consulting fees of R220 000 are considered income from a personal service. (1)
This meets the definition of a personal service, as the service is rendered by a person
who holds a share in the company, (1) being the director, and the service is in the
field of research. (1)
Therefore: 20% x (revenue receipts + capital gains) = 20% x (R1 500 000 + R220 000
+ R87 000 (1))
= R361 400 is the limit. (1)
The R220 000 personal service income is less than the limit of R361 400. (1)
Conclusion (1): Natural Lashes does not qualify as a small business corporation
because not all the shareholders are natural persons, which is a requirement.

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QUESTION 3.6

(a) First provisional tax payment (payable on 30 September 2017) (1)


R
Basic amount 1 354 980 (2)
(must use 2017 assessment, as it was received more than 14 days
before the provisional payment is due)

Tax on R1 354 980 (28%) 379 394 (1)


x 50% for the first payment 189 697 (1)

Second provisional tax payment (payable on 31 March 2018) (1)


Taxable income is more than R1 million; therefore based on estimated
taxable income 1 784 432 (1)

Tax on R1 784 432 (28%) 499 641 (1)


Less: First provisional payment (189 697) (1)
Amount payable 309 944

(b) As it is received less than 14 days before the provisional payment is


due, the 2016 taxable income will be used as the basic amount. It
will not be adjusted, as the provisional payment is not due more than
18 months after the end of the 2016 year of assessment (31/3/2016
to 30/9/2017 is not more than 18 months), although it is due more 1 200 000 (1)
than 1 year after the 2016 year of assessment.

QUESTION 3.7

Part A – Requirements for qualifying as a small business corporation (section 12E)

All the shareholders must be natural persons. (1)


None of the shareholders must hold shares in other companies, CCs or co-operatives. (1)
The gross income must be less than R20 million. (1)
Investment income and income from the rendering of a personal service must not be
more than 20% of the total revenue receipts and capital gains. (1)
The company must not be a personal service provider. (1)

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QUESTION 3.7 (continued)

Part B – Final tax liability as a small business corporation

R
Taxable income – provided 385 000
Taxable capital gain (R55 000 x 80%) 44 000 (1)
Interest received 17 500 (1)
Taxable income for 2018 446 500
Tax liability: Fixed amount 20 248 (1)
21% on taxable income > R365 000 17 115
37 363
Less: First provisional tax payment made (30 250) (1)
Final tax liability for 2018 7 113

Part C – Calculation of tax liability as a micro business

R
Taxable turnover (excluding interest and capital gain) 610 000 (1)
50% on the disposal of redundant equipment used mainly for business
purposes 27 500 (1)
100% of interest received 17 500 (1)
Taxable turnover 655 000
Tax liability is R1 650 + 2% of the amount above R500 000 (2% x 4 750 (1)
R155 000)

Part D – Calculation of the final tax liability and second provisional tax payment for 2018

R
Taxable income – provided 385 000
Taxable capital gain (R55 000 x 80%) 44 000 (1)
Interest received 17 500 (1)
Taxable income for 2018 446 500
SA normal tax at 28% 125 020 (1)
Less: First provisional tax payment (30 250) (1)
Amount due as the second provisional tax payment 94 770
The amount is payable on/before 28 February 2018 (1)

Note: There is no basic amount, as no previous assessment has been


received (first year of trade). Therefore, the estimated taxable income is
used to calculate the second provisional tax payment.

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Solutions to self-assessment questions in learning unit 4

QUESTION 4.1

Sports Football (Pty) Ltd

For an amount to be included in Sports Football (Pty) Ltd’s gross income, the receipt or accrual
must satisfy the requirements of the gross income definition. (1) Gross income is defined as

 the total amount (1)


 in cash or otherwise (1)
 received by, accrued to, or in favour of the resident (1)
 during the year of assessment, (1)
 not of a capital nature (1)

The first four requirements of the gross income definition are satisfied with the receipts or
accruals for the two players, Big A and Star Ball. (1) You need to determine, however, whether
the receipts or accruals are "of a capital nature". (1) If the receipt were of a capital nature, then
it would not be included in Sports Football (Pty) Ltd’s gross income.

In order to determine whether an amount received by a taxpayer is of a capital nature, one


needs to determine whether the taxpayer’s intention (1) with the acquisition and subsequent
disposal of the asset was that of investment (capital) or speculation (revenue).

Big A

It is clear that Big A was an income-producing asset (1) as far as Sports Football (Pty) Ltd was
concerned. Sports Football (Pty) Ltd had been using Big A for a long period (eight years) (1) to
produce income. Therefore, Big A must be regarded as a capital asset. (1) The R5 000 000
received for Big A would be "of a capital nature" and would not be included in Sports Football
(Pty) Ltd’s gross income. (1) (A capital gain could arise on the disposal of Big A, but this issue
is not part of the requirements of this particular question.)

Star Ball

It is equally clear that Star Ball was purchased as an asset with the intention of making a profit
from his re-sale. (1) Star Ball was purchased because of the bargain price asked for him and
Sports Football (Pty) Ltd never intended using Star Ball as an income-producing asset. The
short period that Star Ball was held also indicates a revenue intention. (1) Star Ball was
therefore sold in the undertaking of a profit-making scheme, which is not of a capital nature. (1)
The R25 000 received for Star Ball would therefore be of a revenue nature and should be
included in Sports Football (Pty) Ltd’s gross income. (1)

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QUESTION 4.2

The principle involved in the determination of the date of accrual is the date when the taxpayer
is entitled to the amount, (1) as established in the People's Stores court case. (1)

Springs CC

Springs CC becomes entitled to the dividend only if it holds the shares on 1 March 2018. (1)
Therefore, the date of accrual is 1 March 2018, (1) even though the dividend is payable only
14 days later. (1)

Wire (Pty) Ltd

The interest on the fixed deposit accrues at the end of the 12-month fixed period. Until that time,
Wire (Pty) Ltd has no right to any interest. (1) Therefore, 31 December 2018 is the date of accrual
of the interest (1)

Fencing Ltd

An amount of R50 000 accrued on 10 March 2018 when the fence was sold, (1) although no
amount had been received by Fencing Ltd by that date. (1)

Watch-it (Pty) Ltd

An amount equal to 90% of R4 500 000 (R4 050 000) accrued to Watch-it (Pty) Ltd on
31 January 2018. (1) The remaining 10% (R450 000) accrues only when the final engineer’s
certificate is issued, (1) which is not earlier than 31 July 2018.

Cotton Ltd

Cotton Ltd became entitled to the sale value of the night-cricket strip on 20 February 2018, which
is when the contract of sale was concluded. (1)

If the delivery of the strip had been a condition for the sale to be concluded, then there is an
obligation on Cotton Ltd to deliver the goods before it has a right to the sale price. (1) If the goods
were delivered on 15 March 2018, that would be the date of the accrual. (1)

QUESTION 4.3

(1) Stripes CC received R100 000 from a key-man insurance policy. The proceeds from an
insurance policy is capital in nature; (1) therefore, this amount will not be included in gross
income according to the gross income definition. (1) Stripes CC would have qualified for a
tax deduction for the premiums on this policy (1) and the close corporation is thus required
to include the R100 000 in its gross income in terms of the special inclusion provisions of
the gross income definition. (1)
(2) The manufacturing machine is an income-producing asset; (1) therefore, the sale of this
machine is capital in nature (1) and it would not be included in the gross income of Lights
(Pty) Ltd according to the gross income definition. (1) However, the tax recoupment of
R50 000 is required to be included in Lights (Pty) Ltd’s gross income (1) in terms of the
special inclusion provisions of the gross income definition. (1)

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QUESTION 4.4

Lease premium

The premium received by Property CC is of a capital nature (1) and therefore does not form
part of its gross income according to the gross income definition. (1) However, a lease premium
received is taxable (1) under the special inclusion provisions of the gross income. (1) The
R50 000 premium is therefore included in gross income.

Leasehold improvements

The leasehold improvement on Property CC’s property is of a capital nature (1) and this amount
will therefore not be included in gross income according to the gross income definition. (1)
However, in terms of the special inclusion provisions of the gross income definition, (1) this
amount is required to be included in Property CC’s gross income. (1) The amount to be included
in gross income is the amount stipulated in the agreement; therefore, R500 000 (1) is taxable.

The accrual of the leasehold improvements takes place in the year of assessment when the
right to have improvements effected has accrued to the lessor. The accrual therefore occurs
on the date that the agreement is concluded. (1)

As the R500 000 amount is stipulated in the lease agreement, the R500 000 accrued on the
day the agreement was entered into, that is, 1 January 2018. It is therefore included in Property
CC’s 2018 gross income. (1)

Rentals

Rental income satisfies all the requirements of the gross income definition, as the total amount
(1) is received by, has accrued to, or is in favour of the resident (1) in cash or otherwise (1)
during the year of assessment, (1) and it is not of a capital nature. (1)

The lease agreement was signed on 1 January 2018 and in terms of this agreement, rentals
accrue from this date (1) at a rate of R6 000 a month. The fact that payment of the rentals
occurs from 1 May 2018 only does not alter the fact that rentals of R6 000 a month accrued to
Property CC as from 1 January 2018. (1) Two months of rentals, amounting to R12 000 in total,
are therefore included in gross income for the 2018 year of assessment. (1)
(Max 15)

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QUESTION 4.5

Definition Application Marks


In the case of a Dinepe is a resident (South African) company that received (3)
resident, amounts in an advertising campaign (satisfies the “otherwise” of gross
cash or otherwise income definition) in return for its artwork, since a value can
be placed on it.
Received by, accrued Dinepe is unconditionally entitled to an advertising cam- (2)
to such a resident paign; therefore, it has accrued to Dinepe or it is for its own
benefit.
During year of The artwork was sold on 28 March 2018 and Dinepe accep- (2)
assessment ted the advertising proposition instead of the cash on
30 March 2018. Therefore, it falls in the year of assessment
ending on 31 March 2018.
Excluding receipts or Dinepe is in the business of selling contemporary art (its (2)
accruals of a capital trading stock); thus, the accrual of an advertising campaign
nature is not capital in nature/not an enduring benefit.
Conclusion The requirements of the gross income definition have all (1)
been met; therefore, the receipt of the advertising consti- (1)
tutes gross income of Dinepe Fela (Pty) Ltd for the period
ending on
31 March 2018.
Max 10
QUESTION 4.6

Consultation fee Received by Brand Guru 285 000 (1)

Company logos designed Resident company – worldwide income 165 000 (1)
(1)
Business cards Accrued (1) at year end – therefore 10 000 (1)
included
Lease premium Specific inclusion (1) – par (d) of gross 400 000 (1)
income definition

Rent received – building A R45 000 x 9 – source Republic 405 000 (1)

Sale of building B Capital in nature (1) Nil (1)

Gross income 1 265 000

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NOTES

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