Unit 2.2 Taxable Income: Individuals and Business (17)

Question 1

What is taxable income

Answer 1

Section 1 of the Act provides different definitions of taxable income but it is quite simply the net income of a person on which their tax will be calculated.
Net implies that it is the income remaining after subtracting any allowable deductions. Thus certain income amounts are taxable and certain expenses are allowed as deductions against this income to arrive at the amount on which the tax will be calculated.
The amount of income you earn in a period is not necessarily the same amount as the amount on which you will be taxed. Not all income is subject to income tax, some of it is excluded.

Question 2

The formula for calculating taxable income

Answer 2

Gross income
LESS: Exempt income
= Income
LESS: Allowable deductions
ADD: Taxable portion of capital gains
= TAXABLE INCOME

Question 3

Gross income of an individual

Answer 3

Refers to all earnings made by an individual, these earnings can be in the form of cash or other assets. Eg: salary, commission, bonuses, interest on our investments.

Question 4

Gross income of an individual also includes the value of

Answer 4

Fringe benefits – company car, company housing

Question 5

Gross income of an individual would not include

Answer 5

Income if it is of a capital nature. This refers to when we dispose of an asset. If the selling price > purchase price then you have made a capital gain.
Capital gain = Selling price – Cost price

Question 6

Not all capital gains are taxable, the taxable portion of capital gains is

Answer 6

Only certain assets and certain portions of capital gains are subject to tax. So only the taxable portion of any capital gains made is added in.

Question 7

While all of an individual’s income must be declared to SARS, not all of it will be taxed. Some income will be considered

Answer 7

Exempt income – some of the below may be considered exempt income
* interest earned on an investment
* dividends received from an investment

Question 8

Allowable deductions are typically

Answer 8

Expenses such as retirement contributions and medical expenses for individuals and expenses from the income statement for businesses.
Allowable deductions can be of a capital nature (capital allowance) or a non-capital nature (revenue)

Question 9

It is possible after the taxable income has been calculated that the individual is entitled to some

Answer 9

Tax credits – these relate to medical aid contributions.
Since March 2012, a person’s taxable income may need to be calculated without first deducting these contributions as allowable deductions. Only once the tax due has been derived from the taxable income is this tax due amount reduced by the credit.

Question 10

In the language of income tax the taxable income of a business is slightly different to

Answer 10

The profit of a business in that certain items of income are exempt from income tax and certain expenses are not allowable as deductions.

Question 11

The basic formula for the calculation of taxable income for a business is the same as that of an individual.

Answer 11

Gross income
LESS: Exempt income
= Income
LESS: Allowable deductions
ADD: Taxable portion of capital gains
= TAXABLE INCOME

The basic income statement of a business:

Turnover [Gross income]
LESS: Cost of Sales [Allowable deductions]
Gross profit
ADD: Other operating income including interest received [GI]
Gross operating income
LESS: Operating expenses including interest paid [AD]
NET PROFIT [Net Profit]

The turnover and other income is the gross income from which exempt income or non-taxable income is subtracted.
Cost of sales and operating expenses are allowable deductions

Question 12

A business income includes

Answer 12

All income earned of a capital nature. It can be from various sources such as sales, services rendered, rent received, interest received, dividends received, etc

Question 13

The total income of a non-capital nature on the income statement is equivalent to

Answer 13

The gross income from a tax perspective.
From this we must deduct any income that qualifies as exempt income

Question 14

For taxation purposes the gross income amount must exclude

Answer 14

Any income of a capital nature
Not because it is not subject to tax, but rather because it is dealt with separately
After calculating income we must add the taxable portion of a capital gain.
Taxable capital gain refers to the portion of the gain, arising from the disposal of capital assets, included in a taxpayers taxable income.

Question 15

From a tax perspective The expenses on the income statement constitute the

Answer 15

Allowable deductions from a tax perspective. The expenses consumed in the production of income and reported on the income statement. Such as cost of sales, wages and salaries, rent paid, interest paid, bad debts, advertising, entertainment, stationery, etc
Need to determine which expenses are allowable deductions.
Ie. Expenses (income statement) not necessarily same as allowable deductions (tax perspective)

Question 16

The classification of income and expenses is slightly different in that they have to be allowable from a tax perspective. In terms of reconciling the net profit amount as per income statement to the taxable income reported for tax purposes, the following steps can be followed:

Answer 16

• Subtract exempt income (including total capital gains) from net profit (decreases taxable income)
• Add back non-allowable expenses to net profit (increases taxable income)
• Add taxable portion of capital gains to net profit (increases taxable income)
• Arrive at taxable income of business

Question 17

Penalties or fines

Answer 17

These can be included under expenses on income statement to reduce its internal net profit. However from a tax perspective this must be excluded in the calculation of taxable income (ie. Not an allowable deduction)