Tax 1: Introduction and Gross Income

Question 1

What are 4 reasons a CFP should know tax?

Answer 1

1. Tax is an expense and needs to be minimized - what is the client’s disposable income and/or net investment return?
2. Estate duty - what heirs, beneficiaries will receive after tax.
3. CGT - net return after disposal of capital assets?
4. Donations and transfer duty

Question 2

What is “income”?

Answer 2

= Gross income LESS exemptions

Question 3

What is “taxable income”?

Answer 3

= Income LESS Deductions + Taxable CG + Taxable allowances

Question 4

What is “gross income”?

Answer 4

Total amount in CASH or otherwise, received by or accrued to a taxpayer/resident/non-resident EXCL capital amounts.

Question 5

Complete: “Tax is paid ______ or may have already been paid every _______ by the employer. This is called ______.

Answer 5

annually; month; PAYE

Question 6

A taxpayer can be a…. (name 4)

Answer 6

Natural person, CC, Trust, Deceased estate

Question 7

What is subtracted from Taxable income? (2)

Answer 7

Rebates; Employees’ tax/provisional tax (i.e. tax already paid by employer)

Question 8

Name two types of rebates…

Answer 8

1. Personal rebates (age); 2. Medical rebates

Question 9

Complete: “Companies pay a _______ rate (__%) and individuals use a _____ scale. The higher the taxable income, the ________ the tax rate.”

Answer 9

flat; 28; sliding; higher

Question 10

Which type of income is taken into account for the tax thresholds?

Answer 10

Taxable income

Question 11

What are the dates for tax year of assessment?

Answer 11

1 March to 28 Feb

Question 12

When is apportionment used during a tax year? (3)

Answer 12

Year of birth, death or insolvency

Question 13

What needs to be apportioned during a tax year, when applicable?

Answer 13

Personal rebates only

Question 14

What is a tax threshold?

Answer 14

The point at which tax becomes payable by the individual

Question 15

What percentage is withheld by companies on behalf of a shareholder for dividends?

Answer 15

15%

Question 16

Which must be included in the individuals gross income, gross dividend or net dividend (after tax)?

Answer 16

Gross dividend; but is FULLY exempt

Question 17

What is a receipt?

Answer 17

Amount “beneficially received”, physically received for the benefit of the individual

Question 18

What is an accrual?

Answer 18

When a taxpayer is “unconditionally entitled” to an amount e.g. after delivering a product or service – even though not yet physically received.

Question 19

Which is included first in the gross income of the YOA, receipt or accrual?

Answer 19

Which ever comes FIRST.

Question 20

Is trading stock included or excluded from Gross Income?

Answer 20

It is speculative in nature and therefore deemed as income

Question 21

Is capital included or excluded from Gross Income?

Answer 21

Excluded, except for specific inclusions

Question 22

What are the 2 tests to determine tax residence and which test is done first?

Answer 22

ordinarily resident test & physically resident test - ordinarily resident test is always first

Question 23

What makes a company, CC or trust a resident for tax purposes?

Answer 23

Whether the company, CC or trust was incorporated in RSA or not

Question 24

How does the “ordinarily resident” test work?

Answer 24

Ask which country is your home, or where do your return after your wanderings. Where your principal home or residence is.

Question 25

When does one cease to be ordinarily resident?

Answer 25

At emigration

Question 26

When is the physically resident test done?

Answer 26

Only if person is NOT ordinarily resident

Question 27

What are the 3 tests (in order) for the physically present test?

Answer 27

1. >91 days in current year 2. >91 days in EACH OF previous 5 yrs 3. >915 days in TOTAL for previous 5 yrs

Question 28

If all 3 requirements are met for the physically resident test, what must still be checked?

Answer 28

If person was physically outside RSA for CONTINUOUS period of 330 full days

Question 29

What is the year of assessment when the person passed/failed the test for physical residence?

Answer 29

Either resident or not, BACKDATED from 1 March of CURRENT YOA.

Question 30

Complete: "RSA residents are taxed on _______ income."

Answer 30

worldwide

Question 31

Complete: "Non-res's are taxed on _______ income."

Answer 31

RSA (i.e. within RSA borders)

Question 32

What are the minimum and maximum tax rates for individuals?

Answer 32

Min 18% and max 40%

Question 33

Name 5 tax-free benefits for employees.

Answer 33

1. Short term loans, not regularly granted,

Question 34

When calculating the determined value of a vehicle, does it IN- or EXCLUDE VAT?

Answer 34

INcludes VAT! -- always

Question 35

When calculating the determined value of a vehicle, what is not included in the cost price?

Answer 35

Finance costs (i.e. interest)

Question 36

What is the percentage used for determined value of a vehicle a. with a maintenance plan; and b. without a maintenance plan?

Answer 36

a. 3.25% b. 3.5%

Question 37

Why is it important to keep a logbook of kilometers traveled?

Answer 37

In order to apply for tax reduction of business km's traveled

Question 38

True/False: When employer reimburses the employee for fuel expenses, the employee can still claim a tax reduction.

Answer 38

False -- no reduction when employer reimburses the client

Question 39

What is PAYE?

Answer 39

Advance payments by employer to SARS | Deducted from salary every month

Question 40

What is provisional tax?

Answer 40

For individuals with income OTHER THAN remuneration/salary E.g. royalties, business income etc Paid BI-ANNUALLY (twice a year)

Question 41

What is "normal tax" vs. "income tax"?

Answer 41

Normal tax is paid by individuals and falls under the Income Tax Act no 58 of 1962

Question 42

What is the total rebate for 76 year old person?

Answer 42

Primary rebate + Secondary rebate + Tertiary rebate (i.e. total of all 3)

Question 43

What is the qualifying age for a) primary rebate; b) secondary rebate; and c) tertiary rebate?

Answer 43

a) any age b) 65 yrs and older c) 75 yrs and older

Question 44

If a (living) parent donates an asset to a minor, the ______ is taxed on the resulting income.

Answer 44

parent

Question 45

True/False: Companies are exempt from certain tax.

Answer 45

False -- only individuals have exemptions

Question 46

Name at least 4 specific inclusions in Gross Income

Answer 46

``` Annuities Payments for services rendered (or TO BE rendered) Restraint of trade payments Lump sum from termination of employment Key man insurance policies FRINGE BENEFITS Lump sums from funds e.g. from RA ```

Question 47

What is an annuity?

Answer 47

Fixed annual, repetitive payment; where | one person has the right to receive it and the other the obligation to pay it

Question 48

Name two types of annuities

Answer 48

Voluntary | Compulsory

Question 49

What are examples of "payments for services rendered"?

Answer 49

Christmas bonus, danger pay, retirement gift

Question 50

What is the difference between "payments for services rendered" and "fringe benefits"?

Answer 50

PerPSR = cash amounts, fringe benefits = non cash benefit e.g. company car

Question 51

Person A gives a music lesson, but Person B receives the cash a few days later on behalf of A. Who is taxed for the lesson fees?

Answer 51

Person A -- always the person who actually renders the service

Question 52

What is a restraint of trade payment?

Answer 52

Payment to an employee to prevent them from starting the same, competitive business as their employer

Question 53

What are the two criteria that can be used for a restraint of trade?

Answer 53

Limit type of business within a designated area | Limit business for a specific period

Question 54

Mr X is retrenched, but passes away before he could receive his package. Should the amount due to him be included in gross income or his estate?

Answer 54

The amount was accrued (unconditionally entitled) to Mr X BEFORE his death and will therefore be included in his gross income and NOT his estate

Question 55

A lump sum of R100 000 is paid to Mr Z from his RA . R20 000 of it is exempt. How much should be included in the gross income? Should the normal tax tables be applied?

Answer 55

The balance of R80 000 should be included and taxed using the SPECIFIC tax tables.

Question 56

What is a fringe benefit?

Answer 56

Extras (other than salary and bonuses) provided by the employer to an employee e.g. a company car or laptop

Question 57

If an employer contributes to an insurance policy of an employee, what is considered to be the fringe benefit?

Answer 57

The contribution amounts

Question 58

Name at least 4 taxable fringe benefits

Answer 58

Company car Residential accomodation(provided by employer) Medical Aid Scheme contributions Acquisition of assets e.g. a gold watch as a gift

Question 59

What are the 3 valuation rules for the acquisition of assets?

Answer 59

Movable asset purchased for the employee = @cost Trading stock of business = LOWER of cost or MV Other cases = MV on date of awarding asset

Question 60

Mr X receives a long-service award of R6000. What amount is exempt?

Answer 60

Only up to R5000 (ever!)

Question 61

Which part of of company car usage is taxable?

Answer 61

Private use only

Question 62

Home to work travel is considered _______ travel.

Answer 62

private -- therefore taxable

Question 63

If an employee pays rent to the employer, how is the fringe benefit calculated?

Answer 63

FB = Value of property LESS rental payments made by employee

Question 64

If the employer rents the accommodation provided to the employee, how is the value of fringe benefit calculated?

Answer 64

The value is the GREATER of the normal formula used OR the rent paid by the employer

Question 65

True/False: Medical aids and medical insurance is exactly the same.

Answer 65

False