2024/01/18

TAX2601
2024
Learning unit 1 presentation

TAKE NOTE
This presentation does not in any way replace the content in the learning unit content
document. The learning material in the content document, together with the prescribed
textbook, represents the full syllabus and must be studied in its entirety in order to enable a
student to pass the module.

Learning unit 1
Topics
• Tax law
• Objection and appeal
• Different types of tax imposed in South Africa
• Normal tax framework

LU 1 and 2 are assessed in assessment 2 (Quiz 2) and is then NOT assessed again.
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What is tax?
Tax is a compulsory contribution to state revenue.

Why do we pay tax?

We pay tax because of the social contract (compact) between the state and its citizens. The
state offers its citizens protection and creates prosperity and to enable the government to do
this, the citizens need to fund the government by paying taxes.
Different taxes imposed in South Africa

Tax law
• Tax is in its essence a law subject, therefore the term – tax law.
• Tax law consists of primary and secondary legislation as well as the interpretation of tax
law (which includes case law). We also include the objection and appeals process in LU1.

Administration of tax legislation ‐ SARS

• The South African Revenue Service (SARS) was established ito the SARS Act and is an
autonomous and independent section of government.
• SARS enforces the tax legislation.
• The Income Tax Act gives the Commissioner of SARS certain powers and duties. The
terms Commissioner and SARS are sometimes used interchangeably.

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Primary legislation
• The so‐called “rules” of tax are stipulated in an Act which is approved by parliament and
duly signed by the President to become law.
• In TAX2601 we will mainly deal with the Income Tax Act and to a limited extent the Tax
Administration Act (TAA).
• There are a number of other tax acts as well which you will encounter at some time in
your studies:

• The Income Tax Act and the TAA are amended on an annual basis and is linked to the
budget process of the government. The fiscal year of the government is from 1 April to 31
March. This annual process is explained on pages 4‐5 of the content document.
• The tax acts are referred to as primary legislation.

The structure of the Income Tax Act (ITA)

• The Income Tax Act consists of CHAPTERS AND PARTS and then sections as well as eleven
Schedules .
• The sections are mostly used to reference the stipulations in the act and these sections
also have paragraphs, sub‐paragraphs and provisos.
• The original Income Tax Act was promulgated in 1962. The original TAA in 2011.
• Amendment Acts are published annually and stand as separate acts. However, the Income
Tax and Tax Administration Amendment Acts are incorporated into the original IT and TA
acts.
• The official title of the amended ITA is:
• The Income Tax Act No. 58 of 1962 (as amended).
Secondary legislation
• In addition to the stipulations in the acts, the Minister and SARS also issues Regulations
and Notices, etc.
• Regulations and Notices (and Double Tax Agreements) are binding on SARS and taxpayers
and is referred to as secondary legislation. 6

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SARS’ Legal Counsel web page

• https://www.sars.gov.za/legal‐counsel/

Interpretation of legislation
Tax statutes are not always clear and unambiguous and must be interpreted.
There are certain laws and “tools” available for interpretation and these are:
• SARS’s Interpretation Notes (Practice Notes) and Binding General Rulings (BGR’s).
• The Interpretation Act 33 of 1957.
• Rules of interpretation of statutes.
• Case Law.
Interpretation Notes (and BGR’s) are NOT binding on the taxpayer. An Interpretation Note
only sets out SARS’s interpretation on a specific matter.
There are also Binding Class Rulings (BCR’s) and Binding Private Rulings (BPR’s) that have
different binding authorities. More on this on:
https://www.sars.gov.za/legal‐counsel/interpretation‐rulings/published‐binding‐rulings/

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Rules of interpretation
• Terms are usually defined in the primary legislation.
• Section 1 (and elsewhere) in the Income Tax Act (ITA) contains many definitions of terms.
• If a term is not defined in either the ITA or in another tax act, then the Interpretation Act
should be consulted for guidance.
• If a term is defined in both the ITA and the Interpretation Act, the ITA takes precedence,
unless the context indicates otherwise.
• If the term is not defined in the primary legislation or in the Interpretation Act, the
ordinary dictionary meaning may provide guidance or alternatively case law must be
consulted.

• For example:
• The term “day” is not defined in the TAA even though some of its requirements (s46)
refers to days (not business days). “Business days” is defined in the TAA.
• In this instance we consult the Interpretation Act (section 4) that stipulates that “day”
refers to calendar day (and not business day).
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Rules of interpretation
• The original intention of the legislator is usually explained in the Explanatory
Memorandum that is published together with the amendment bill.
• See: https://www.sars.gov.za/legal‐counsel/preparation‐of‐legislation/explanatory‐
memoranda/
• Contra ficum rule means that where a provision or stipulation in the Act is open to more
than one interpretation, the interpretation that favours the taxpayer must be followed.
• This is also in agreement with the spirit and purport of the Bill of Rights.

• For more information on the approaches to the interpretation of statutes see page 11.

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Tax disputes
The TAA provides for an Objection and Appeals process.
• Taxpayer may request reasons from SARS for an assessment (within 30 days of the date of the
assessment). Commissioner must within 30 days show that reasons were given and if not it has 45
days in which to provide reasons (with a possible extension of a further 45 days).
• The taxpayer may also lodge an objection to an assessment (within 80 days from the date of the
assessment). Use ADR1 (physical submission) / NOO (e‐filing submission) and provide the grounds
for the objection.
• If an objection complies with the requirements, the Commissioner has 60 days to decide on it.
• It is not possible to list all the days here – remember that the quiz is an open book quiz and you
can refer back to the learning material, however, you need to be prepared.
• Once the objection process has been exhausted, a taxpayer may lodge an appeal (Notice of Appeal
(ADR2 (physical submission) / NOA (e‐filing submission).
• When appealing, the taxpayer must indicate whether the ADR process must be followed or
whether it wants to proceed to litigation.
• Upon choosing litigation, the appeal goes to either the Tax Board (< R1mil) or the Tax Court (>
R1mil).
• Burden of proof (TAA s 102) – see learning unit 2 11

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Case law
• Once the Objection process has been exhausted, a taxpayer may appeal and in stead of
choosing the ADR process, may choose to litigate.
• Litigation will follow this route:
• Tax Board ‐> Tax Court ‐> Provincial Division of the High Court ‐> Supreme Court of Appeal.
• Over the years many court decisions have laid down interpretations of the tax statutes in
South Africa that are still applied today.
• The English law principle of stare decisis is accepted in South African law. This is called
legal precedence.
• It means that lower courts are bound by (the ratio decidendi part of the) decisions of
higher courts. (The higher court sets the precedence).
• However, the stipulations in an Act still remains the main authority. If government do not
agree with a Court decision, it can change the Act to enact its goal with the law, as long as
the stipulation does not go against the Constitution of the Republic of South Africa. The
constitution is the supreme law of South Africa.
• Information on the citation of case law is on pages 16‐17 is important for your studies.
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Different types of tax

Tax Tax base
Normal tax for Income tax ‐ imposed on
companies and trusts income
Normal tax for natural Income tax – imposed on
persons and SBC’s income
Value added tax (VAT) Consumption tax ‐ imposed
on the sale or use of
commodities
Capital gains tax (CGT) Wealth tax – imposed on the
transfer of property/wealth
Estate Duty Wealth tax – imposed on the
transfer of property/wealth
Donations Tax Wealth tax – imposed on the
transfer of property/wealth
Example
27% (previously 28%) fixed company tax rate
(proportional tax)
Sliding scale rates for natural persons and small
business corporations
(progressive tax)
Fixed rates of 15% and 0%
Fixed rates
Fixed rates
Progressive rates (recently)

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Normal tax
• In South Africa, income tax is imposed on the income of any “person”.
• The term “person” includes both natural persons and legal entities.
• The liability for income tax is calculated on an annual basis and is referred to in the Income Tax Act
as normal tax.
• Normal tax is levied at either a fixed rate (proportional tax) or at sliding scale rates (progressive
tax).
• A progressive tax rate means that the higher the tax base the higher the rate of tax.
• Certain entities like companies, close corporations and ordinary trusts are taxed at a fixed rate of
normal tax 27% (previously 28%), whereas natural persons (including special trusts) and small
business corporations are taxed at progressive rates.
• Normal tax is calculated on “taxable income” on an annual basis, which is for a “year of
assessment” (y.o.a).
• The year of assessment for natural persons (and special trusts) always end on 28 February.
• The y.o.a of Companies, Close Corporations and Trusts coincides with their financial year.
• The 2023 y.o.a for an individual is – 1 March 2022 – 28 February 2023.
• The 2023 y.o.a for a company with a December financial year‐end, will be 1 January 2023 – 31
December 2023. 14

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Normal tax framework

• There is a difference between Net Profit for accounting and Taxable Income for tax
purposes.
• In practice, the net profit is used and adjusted to calculate taxable income.
• However, for purposes of this module, we teach you to use the so‐called Tax Framework to
calculate taxable income.
Normal tax framework for companies and SBC’s R
Gross income XXX
Less: Exempt income (XXX)
Income XXX
Less: Deductions and allowances (XXX)
Less: Assessed losses (XXX)
Add: Amounts included in taxable income (recoupments) XXX
Taxable income before capital gains XXX
Add: TAXABLE capital gain XXX
TAXABLE INCOME XXX 15

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Framework for the calculation of normal tax liability

Normal tax libility R
Normal tax liability @ 27% or calculated on sliding scale rates XXX
Less: Rebates (XXX)
Normal tax liability for the y.o.a XXX
Less: Prepaid taxes (provisional tax paid) (XXX)
Normal tax due to / refundable by SARS (on assessment) (XXX)

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Tax rates
• Effective tax rate (ETR) ‐ normal tax liability for the y.o.a / total income (accounting)
• Average tax rate (ATR) – normal tax liability for the y.o.a / taxable income
• Marginal tax rate ‐ important concept to grasp for decision making purposes
• Applies when using progressive tax rates where the tax rate increases as the income
increases
• The marginal rate is the tax rate applied to the last Rand of income earned.

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