Accounting Paper 2

Taxation and Value Added Tax

Taxation in South Africa

In all countries adhering to a capitalistic economy, the forces of demand and supply
determine the goods and services offered by and to the citizens and business organisations.
If the population demands a certain product or service, then businesses would tend to be
formed to satisfy that demands, however the market factors cannot always be relied upon to
provide certain products or services on a scale and at a price that the country needs. The
market factor is also affected by economic conditions for instance, if the country has a
shortage of money, the demand for luxury goods will decline and certain suppliers might
close down the business. This is bad for the economy as they will no longer have essential
resources needed in order to survive.

Services like education, the justice system, police authorities, health services, roadworks and
so forth are free of charge to all South African citizens and are paid by the government.
However, the government need income in order to pay these services and this is where tax is
introduced. The Income Tax Act is a law passed in parliament which makes it compulsory for
every person and company to pay tax on the income earned by them. Tax is paid on a
monthly basis and is paid over to the South African Revenue Services (SARS).

Examples of tax

Pay As You Earn (PAYE) All employers are required to deduct this income tax from their
employees on a monthly basis and pay it over to SARS.
Unemployment This fund provides short-term relief to workers when they
Insurance Fund (UIF) become unemployed or are unable to work because of
maternity or adoption leave, or illness.
Excise duty This duty is levied as a specific duty on tobacco and liquor, some
cosmetics, televisions, audio equipment and motor cars.
Estate duty It is sax levied by SARS on your estate after your death. Your
estate is liable for estate duty if it exceeds the exemption or
estate duty abatement.
Income Tax It is a tax imposed on individuals or entities in respect of the
income or profits earned by them.
Transfer duty It is tax levied on the value of any property acquired by any
person by way of a transaction or in any other way.
Skills Development It is a levy imposed to encourage learning and development in
Levy (SDL) South Africa. It is determined by an employer’s salary bill. These
funds are to be used to develop and improve skills of
employees.
 Capital Gains Tax (CGT) A tax levied on profit from the sale of property or an
investment.
Value Added Tax (VAT) The tax that is charged on goods and services, levied at each
stage of a supply chain.
Customs duty Levied on imported goods

The general principles of Value Added Tax (VAT)

VAT is South Africa’s most widespread tax, applied equally to all individuals. It is charged on
the supply of goods or services by vendors, with a standard 15% VAT rate. The vendor
deducts the VAT paid to suppliers and pays the difference to SARS monthly, representing tax
on ‘value added’ by their business. This system effectively collects all tax revenues due.

Payment procedures and registration

Payment procedures for businesses with sales exceeding R1,000,000 per year are
compulsory.

Registered vendors are issued forms and submitted to SARS every second month.
Businesses with sales less than R1,000,000 can apply for voluntary registration, deducting
input taxes from output taxes. Non-registered businesses must pay 15% on cost prices to
suppliers, who will pay VAT to SARS. No business earning less than R50,000 can register as a
vendor. VAT regulations address liquidity issues for businesses selling on credit.

Zero-rated items
Zero-rated items are taxable supplies subject to a 0% tax rate, excluding goods or services
that would cause hardship to indigent consumers if 15% VAT were levied. These items
include brown bread, maize products, rice, lentils, beans, legumes, fruit, vegetables, milk,
cooking oil, eggs, canned pilchards, and paraffin. Fuel levies are included in pump prices.

VAT exempted items

VAT-exempted items are those not subject to VAT, such as interest rates, export services,
childcare services, educational services, and services provided by associations not for gain.
Examples include private sales of personal or domestic items, hobbies, and salaries and
wages. Zero-rated items can be charged VAT at any stage.

Evasion and avoidance of tax

Tax evasion is a criminal offense punishable by fines or imprisonment. It involves avoiding
tax payments by reducing purchases and transferring savings into tax-free investments.
However, it is illegal to evade tax, as it is a legal requirement to declare taxable income on
tax returns. Governments must combat tax evasion to cover expenses and prevent increased
tax rates, further disadvantaging honest taxpayers. In recent years, South Africa has
experienced declining tax rates due to increased tax efficiency.

GAAP PRINCIPLE
Generally Accepted Accounting Principles (GAAP) is a set of rules governing the accounting
profession.
The accountant needs to adhere to certain rules or principles when deciding on adjustments to
avoid the abuse of thereof.
Applying GAAP ensures that financial statements are:
1. Understandable
2. Useful
3. Relevant
4. Reliable
5. Timely
6. Verifiable
7. Neutral
8. Comparable and consistent
The following concepts/principles are important for an accountant to adjust figures if they are
to be reliable:
The Business Entity concept
The Historical Cost concept
The Going-concern concept
The Matching concept
The Prudence concept
The Concept of Materiality
The financial affairs of a business are kept entirely separate
from the financial affairs of the owner. The owner’s
expenses or income should not be recorded in the books of
the business.
This concept is based on the rule that assets will be valued
at historical cost i.e., the amount which was originally paid
for them (cost price). Land and buildings which were
acquired in 1990 for R90 000 will be reflected in the
financial statements as R90 000 in the year of 2000 even
though the value may have doubled or even trebled since
the purchase.
Financial statements are prepared on the assumption that
the business will continue operating for the foreseeable
future.
This concept has a two-sided effect:
 Expense and income must be recorded in the
correct time period
 If an expense has been incurred with the effect of
producing income, then these two items must be
matched against each other in the same financial
statements.
This concept is based on the assumption that financial
results are presented in a conservative manner, possibly
even in a pessimistic manner. An account will not consider
any expected income but will make provision for
anticipated losses even if he is not entirely certain of the
exact amount.
This concept covers the disclosure of items which are of
importance to readers of financial statements. Only
material items are shown in the financial statements. The
 reason for this is to assist the readers of financial
statements in their understanding of the figures provided.

Budgeting

A budget is drawn up by any person or business and is used to plan for the future. There are
different types of a budget, e.g., cash, capital, sales, etc, but in all cases they are looking to
the future. The starting point will generally be the present situation and then, based on the
acquired information or statistics, they will try to predict the future.

Types of budgets
 Personal budget
 Cash budget
 Zero-based budget
 Production budget

Personal budgets
These are budgets generally drawn up monthly by individuals to manage their own cash
position. Households are also an example of a personal budget where the family plans for the
future – what cash income they can expect to receive and payments that need to be made. If
receipts for the period are more than the payments for that same period, a cash surplus will
result. On the other hand, if the receipts are lower than the payments, then this will result in a
shortfall (or deficit). A part or all of the surplus could be saved.

Cash budget
A cash budget is an estimation of the cash coming into the business (inflows) and an
estimation of the cash going out of a business (outflows) for a specific period. Cash
budgeting is used to decide whether the business has sufficient cash to pay for day-to-day
obligations. The cash budget also indicates whether the business has a large amount of money
in the bank that is unused for long periods of time or whether the business must rely on a
bank overdraft to meet its operational obligations.

Zero-based budgets or increment budgets

Every expense in the business is analysed according to what its needs or services are and
what the cost of paying for those needs or services will be within a definite time period. A
zero-based budget means that the budget is started from scratch and the calculations for the
year are worked out. This would always be done the first time a budget is drawn up, but it can
be done at any point in the future.

Ethics
Basic principles
1. Integrity - Being honest and having good moral principles
2. Objectivity - Be impartial, honest, no conflict of interests. Base decisions on real
facts, not personal feelings
3. Professional competence and due care – Ability to perform tasks well by having
technical skill, knowledge and experience
4. Confidentiality – Not disclosing information obtained doing your job
5. Professional behaviour – Relates to how a person acts/ behaves in the workplace e.g.
polite, friendly, considerate etc.
6. Technical standards – Employees should be properly qualified for the job

King code
- Relates to good corporate governance in SA
- Provides guidelines to implement good business practices in organisations
- Good, ethical leadership characteristics are:
 Discipline
 Transparency
 Accountability
 Fairness
 Sustainability
 Independence
 Responsible management

Control of assets

1. Fixed assets
Aim: - Public does not steal assets
- Staff do not steal assets
- Staff do not use them for their personal benefit
 Have a fixed asset register
 Use technological devices
 Have enough staff and staff collusion

2. Debtors
 Each debtor must have a credit limit
 They must be aware of credit terms
 Strict control of payments and non-payment. Interest charged on overdue amounts

3. Stock
 Prevent theft of stock by the public and staff
 Must be bought only when authorized
  Must be kept safely and rotated so as not to become too old
 Must be recorded correctly

4. Controls for cash

 Receipts must be entered in the CRJ promptly
 Check receipts against CRJ entries and reconcile
 Different people must receive cash, make entries on reconcile.

Manufacturing
Direct labour Labour involved in production rather than
administration, maintenance, and other support
devices.
Indirect labour The workers who are not directly involved in producing
goods or supplying services, or the cost of paying those
workers.
Direct materials (raw materials) Components that go into manufacturing the product.
Indirect materials Goods that, while part of the overall manufacturing
process, are not integrated into the final product.
Factory overhead costs How much it costs to produce the products.
Prime cost Expenses directly related to the materials and labour
used in production.
Variable costs Costs that change as the volume of production
changes.
Fixed costs An expense that does not change when sales or
production volumes increase or decrease.
Work-in-progress The cost of unfinished goods in the manufacturing
process including labour, raw materials, and overhead