Week 4: Introduction To Taxation

Question 1

Who pays tax?
- Direct vs Indirect Tax

Answer 1

Persons
- Natural, companies, estates, trusts and non-profit taxpayers

Direct
- Paid directly to SARS
- I.e Income Tax, Withholding Tax’s, Dividends tax, Turnover tax

Indirect
- Paid to another person who collects and pays it over to SARS
- I.e VAT, Donations Tax, Transfer duty, excise duty

Question 2

What is Gross Income?

Answer 2

The starting point of the taxable income calculation:
- The total amount
- In cash or otherwise
- Received by, accrued to or in favor of a person
- During the year or period of assessment
- Excluding receipts and accruals of a Capital nature

Question 3

What are exemptions?

Answer 3

• Items included in gross income that are excluded from taxable income
  I.e
• South African dividends exemption
• Natural Persons interest exemption
  R23 800 for persons below age 65
  R34 500 for persons at least 65 years of age

Question 4

Tax avoidance vs Tax evasion

Answer 4

Avoidance = Legal. It is the legal use of tax laws and rules in such a way that it reduces the tax burden and results in you paying the lowest possible tax. Not illegal, not always ethical and aggressive tax avoidance is targeted by SARS.

Evasion = Illegal steps to avoid paying tax. I.e understating the amount of tax you owe. If you are caught evading taxes - Criminal charges and high penalties

Question 5

Normal tax principles

Answer 5

Any person who earns a taxable income is subject to normal tax on their income (income tax)
- If income exceeds a certain amount
- If taxable income is calculated using a framework, made up of several elements, calculated in accordance with the law
- Payable to SARS

Question 6

What is each year called and when does it start/end?

Answer 6

Year of assessment
Individuals - 28 Feb

Companies - 31 December

Question 7

Why are exemptions above (Income - Deductions)

Answer 7

• An amount can only be exempted if its included in gross income [i.e Dividends is exempt from tax]
• Income is defined in the income tax act, and thereafter deductions are applied to income for any expenses incurred.

Question 8

Dividends and Interest exemptions

Answer 8

D earned from a South African company are exempt for all taxpayers

Interest earned from South African Investments included in gross income is exempt:
- up to R23 800 per year (Under 65)
- up to R34 500 per year (Over 65)

Question 9

What are deductions?

Answer 9

A reduction in taxable income for any expenses that a taxpayer may incur during the year of assessment
- Can be specific (contributions to Pension or retirement fund)
- Criteria - It must be incurred in the production of income, in the course of trade and not of capital nature
Trade = Activities that generate income

Individuals are very limited in their deductions since a lot of expenditure does not produce income

Question 10

Example
Samuel Andrew is 67. During the current year of A, he earned R550 500. No other income or deductions. Calculate the taxable income of Sam for the year of assessment?

Answer 10

Gross Income 550 000
Exemptions (0)
Income 550 000
Deductions (0)
Taxable Income 550 000

Question 11

Capital Gains

Answer 11

All Gross income and deductible amounts that are of a capital nature.
- Levied on all sales of assets for all persons [40% for individuals and 80% companies)
- Individuals: -Up to R40 000 of their capital gains excluded
-Get certain asset disposals excluded, such as private
Cars but not a house (but it does have exclusions)
(Introduced in 2001)

Question 12

Capital gains tax components

Answer 12

Proceeds on sale of an asset(selling price) and the base cost

Base cost - Original cost of the asset when bought, less any wear and tear allowances claimed. (Depreciation claimed)

Question 13

Capital loss

Answer 13

When the base cost exceeds proceeds - loss can only be used to reduce future/other capital gains, does not get included into taxable income.

Question 14

Taxable Income Framework

Answer 14

Gross Income (starting point) X
Exemptions (X)
——————————————————————
Income X
Deductions (X)
Taxable Capital Gains X
——————————————————————
Taxable Income X
———
Normal Tax(28% Companies) X

Question 15

Example
Woxy owned a holiday house, which she bought for R2 000 000 on January 2021. On Feb 1 2022, She sold it for R4 000 000. It didn’t deprecate. Calculate the taxable capital gain?

Answer 15

Proceeds R 4 000 000
Base Cost (2 000 000)
———————
Capital Gain 2 000 000
Annual Exclusion (40 000)
———————
Net Capital Gain. 1 960 000
Taxable Capital Gain 1 960 000 * 40% = 784 000

Question 16

The statement of p/s for Yesbus Ltd for year ended 30 June was as follows:

Sales 1000
COS. (400)
Profit on sale of vehicle 100
Profit before Tax 700

Calculate capital gain to be included in taxable income when the carrying amount was R500

Answer 16

Gross Income (sales) 1000
Cost of sales (deduction) 400
Proceeds on sale of car(500+100). 600
Base Cost (500)
Capital gain 100
Taxable Capital gain(100*80) 80
—————
Taxable Income 680

Question 17

What happens when you have negative taxable income?

Answer 17

No tax is paid, in the year of assessment and the assessed loss reduces the taxable income of the next year

When Assets are in capital loss, SARS does not include the loss into taxable income at the inclusion percentage. SARS carries it forward as an assessed capital loss to the next year and reduces for future.

Question 18

Reminder:
What is the tax percentage for companies and people?

Answer 18

People - Tax tables
Businesses - 28%

Question 19

What are rebates?

Answer 19

Only for individuals
Once you calculate Tax per the tables, the amount of tax is then reduced by the rebate. They reduce Normal tax not taxable income.

Question 20

Rebates for:
Primary Secondary and Tertiary
(65+) (75+)

Answer 20

Primary: 15 714

Secondary: 8 613

Tertiary: 2 871