Welcome to

117127 (10389) Income Tax

 Activity 1.1 LG 1.2 p7
Purpose of taxation
1. Building infrastructure
2. Comply with social responsibility
3. Operational costs to provide services
Economic well being: Provide, roads, airports,
harbours, education, police, justice, tax
administration
Social well being: Provide schools, hospitals,
social grants, housing, basic services
 Activity 1.2 LG 1.3 p9
Main categories of taxpayers
- Individuals Entities
Direct Taxes:
Personal Income Tax collected
via systems of SITE, PAYE and
Provisional Tax
Indirect Taxes:
VAT 15%
Fuel Levy +/- 35%
Excise duty
Import duty
 Activity 1.2 LG 1.3 p9
Main categories of taxpayers
- Individuals Entities
Direct Taxes: Companies and Cc'c
Personal Income Tax collected Companies Tax 28%;
via systems of SITE, PAYE and Small business corporations 0-28%;
Provisional Tax Micro Business Turnover Tax 1-6%
Indirect Taxes: Trusts 45%
VAT 15% Dividends Tax 20%
Fuel Levy +/- 35% Partners pay as individuals
Excise duty
Import duty
 Activity 1.3.1 See Budget Highlights 2023 Additional Material
Breakdown of Government spending

The next slide is an extract from the Budget

Highlights document provided as additional
material.
For this activity compile your own list from the
list of the expenditure items and amounts to
reflect the Governments budgeted expenses as
in the list in the next slide and indicate the total
at the end.
Note that the amounts are in Billions of Rands
(Rbn).
Activity 1.3.1 See Budget Highlights 2023/24 Additional Material
Breakdown of Government spending
Expense Item Bn
Economic Development 237,6
Learning and Culture 457,1
Peace and security 227,3
Health 259,2
General Public Services 73,6
Community Development 259,7
Social Development 378,5
Payment for Financial Assets 4,1
Debt Service Costs 340,5
Contingency Reserve 5
Total 2242,6
 Activity 1.3.2
Emphasis of new budget
Government is focusing on remediation of past inequalities
through spending on learning and culture, social development,
health and community development.
The ability of government is however restricted by the following
aspects:
Decreased tax income due to:
• lower economic growth resulting in lower taxable incomes
for taxpayers
• mis-management at SARS.
Expenditure that is high as a result of
• total State debt and resulting increased debt service costs
• extraordinary high cost of remuneration to State employees
• amounts to be paid in support of failing SOE’s e.g Eskom
 Activity 1.4 LG 1.6 p11
Different ways attempted to improve tax collections
• PAYE speeded up collection of personal income tax from
employees
• Provisional Tax speeded up tax collections from
businesses and individuals
• Various tax amnesty opportunities increased tax paying
citizens.
• Improved administration.
• e-Filing system.
• Indirect taxes collected at source e.g. VAT vs GST.
• Vigilant on rich taxpayers and tax evasion.
 Activity 2.1a LG 1.1 p7
Tax

Tax is the financial charge or levy by a Government on

• the income of individuals and the profits of businesses
• economic activities (producing, trading, spending)
and is applied to fund the expenses of Government
 Activity 2.1a LG 1.1 p7
Tax
Tax is the financial charge or levy by a Government on
• the income of individuals and the profits of businesses
• economic activities (producing, trading, spending)
and is applied to fund the expenses of Government
 Activity 2.1a LG 1.1 p7
Tax

Tax is the financial charge or levy by a Government on

• the income of individuals and the profits of
businesses
• economic activities (producing, trading, spending)
and is applied to fund the expenses of Government
 Activity 2.1b LG 4.1.1 p37
VAT

Value Added Tax (VAT) is a consumption tax whereby

tax is collected on the added value as the product or
service proceed through the value chain
 Activity 2.1c LG 2.3.1.1 p16
PAYE
Pay As You Earn (PAYE) is a system whereby
Income Tax is collected from the employment
income of individuals. The employer deducts the
amount and pay it over to the state to
accumulate funds for the tax calculated at the
end of the tax year.
The status of such a person is a Personal
Taxpayer as opposed to a Provisional Taxpayer
 Activity 2.1e LG 2.4 p20
IRP5

A certificate issued by the employer indicating the

employment income, retirement fund contributions and
Ta deducted via PAYE deducted.
 Activity 2.1f LG 2.3.2 p16
Provisional Taxpayer

A person who earns income that is not employment income from which PAYE is collected
must register as a Provisional Taxpayer. The Provisional Taxpayer submit returns and
payments twice per year.
 Activity 2.3 LG 2.4 p20
IRP5 and IT3b

IRP 5 is a certificate issued by the employer indicating the employment income,

retirement fund contributions and PAYE deducted for the tax year.
IT3b is a certificate issued by financial institutions stating the amount of interes
earned for the tax year.
IT3a is a certificate issued by insurers stating the total amount contributed to
Retirement Annuities for the tax year.
The certificates are issued to enable the taxpayer to compile the annual tax
return and to inform SARS of the taxpayer’s income and deductions.
 Activity 2.4 LG 2.5 p22
Consequences of not registering for tax and not submitting returns

Non-compliance to registration and submission of

returns is a criminal offence and is punishable with fines
and jail sentence.
Each citizen has the moral and legal responsibility
regarding tax.
Interest is chargeable on outstanding and arrear taxes.
 Activity 2.5 LG 2.3.2 p16
When will a person qualify as a Provisional Taxpayer
A person who earns income that is not employment
income from which PAYE is collected must register as a
Provisional Taxpayer.
Examples are persons in self-employment and
employees who earn income that is not employment
income. Examples are rent, interest, business income
such as part time mechanical work, hairdressing, selling
beauty products etc.
Persons who only receive employment income are
Normal Taxpayers
 Activity 2.6 LG 2.3.2 p16
How is the individual affected by Provisional Taxpayer
status

A Provisional Taxpayer must calculate the tax liability,

submit a return and pay the provisional payment
twice a year at end of August, the 1st provisional
return and payment, and end of February, the 2nd
provisional return and payment. Under payment can
be rectified with a 3rd provisional payment on or
before 30 Sept.
 Activity 3.1.1-3.1.2 - Tax calculation for Mr. Abrahams

In Activity 1 and 2 we mostly dealt with concepts and terminology.

Activity 3 is more applied knowledge and calculation of tax.
In this Activity we are going to do tax calculations. I will do it step
by step and want you to do the calculations as we proceed and also
understand the logic behind it.
 Activity 3.1.1-3.1.2 - Tax calculation for Mr. Abrahams

Please note we are doing 3.1.1 and 3.1.2 at the same time.
Person Monthly Annual Bonus Salary + Pension Taxable Tax
Salary Salary Bonus Contrib. Income payable
@ 7.5 %

Mr A Abrahams 12000

Mr A Abrahams 19000
Activity 3.1.1-3.1.2 - Tax calculation for Mr. Abrahams
 Activity 3.1.1-3.1.2 (7)
Tax calculation for Mr. Abrahams
Attached are the income tax tables used to calculate income tax.
The tax tables are in brackets of income and are progressive meaning as income
increase the % tax on the income in the bracket increase. Income for the year are
divided into the brackets and the % for that bracket is applied on the income in
that bracket.
In other words the highest % is not applied on the total income but the higher
percentages apply only on that part of the income that falls in that bracket.
 Activity 3.2.1
Tax on overtime earnings, bonusses and commissions
All income including overtime earnings, bonusses and
commissions are added to the salary and the total
income is taxed in terms of the progressive tax tables.
Additional income increase the total that is taxed but is
not taxed in a different way or at a different rate.
 Activity 3.3
Additional income
The overtime was added on to the salaries and bonus to establish a total taxable
income. As the amounts increased the tax payable increased as well. In the case
of Mr. Naidoo the income exceeded the 1st bracket and some income was taxed
at a marginal rate of 26%.
If a person that earns employment income also receive income from other
sources like rent, interest and business income such as part time mechanical
work, hairdressing, selling beauty products etc. it is added to the employment
income and the total income is taxed. The same tax tables and rates will apply to
all the income.
 Activity 4.1 LG 4.1 p36
Examples of indirect taxes
• Value Added Tax – 15%
• Fuel Levy – 38% (24% plus RAF Levy 14%)
• Sin Tax – Levied on alcohol and tobacco
products and gambling
• Customs Duty (Import Duty) – Levied on
goods imported
• Excise Duty – Levied on a range of luxury
goods such as electronic goods and
cosmetics and paid by manufacturers
 Activity 4.2.1 LG 4.1.1 p37
Basic principles of VAT
Vat is an expenditure tax paid by the buyer and levied throughout the
production and retail cycle. Traders/Dealers subtract tax paid (input tax)
from tax collected (output tax) and pay over the balance to SARS.
Principles:
• Neutrality – Same rate apply to all expenditure
• Equity – Treat everybody the same
• Effective, productive and simple – cheap to collect and simple to
calculate
Vat Exempt or Zero-Rated items
• Basic foodstuffs e.g. Brown bread, Maize meal, Fresh milk, fruit and
vegetables
• Rent and financial services
• Fuel – already taxed by fuel levy
 Activity 4.3 LG 4.1 p36
Reason for indirect taxes

• Oldest form of tax, older than income tax,

and part of the tax system.
• It broadens the base of tax collection by
taxing everybody that spends money.
• It is easy and inexpensive to collect
 Activity 4.5.1 LG 4.1 p36
Examples of indirect taxes

To understand indirect tax we must first understand direct tax which

are paid directly to SARS by the taxpayer such as income tax and
where the taxpayer is registered and known by SARS.
Indirect Tax, on the other hand, is collected by dealers and retailers
and paid over to SARS. In these instances no record exist of who
paid the tax and there is no direct relationship between SARS and
the taxpayer.
 Activity 4.5.2 LG 4.1.6 p39
Implications in a change in fuel levy
The cost of fuel widely affects the economy. All
goods and services are subject to transport
costs.
A rise in the fuel levy directly affect people’s
finances through cost of their own transport.
It also affect prices of all goods e.g. food,
clothes, furniture, vehicles, etc.
Rising prices create inflation that in turn lead to
increased interest rates and slower economic
growth.
 Activity 4.6 LG 4.1.7 p40
Relevance and appropriateness of Sin Tax

Sin tax is levied on goods and activities such as

alcohol, tobacco and gambling that have a
harmful effect on the health and lives of people.
If people are using these goods, they will be a
bigger liability on the country’s health system
and have shorter economic lives. It make people
poor and dependent on the State.
Sin Tax is to offset this negative impact on the
State’s financial resources and to discourage
people from these activities and behaviours
 Activity 5.1 LG 5.1 p41
Inherent characteristics of tax avoidance
Tax avoidance is legal steps to pay less tax.
The taxpayer arrange tax affairs in a legal way to
pay less tax.
An example is to increase contributions to
retirement funds.
Persons with high financial wealth make use of
Trusts to avoid Estate Duty and Income Tax.
 Activity 5.2 LG 5.2 p42
Inherent characteristics of tax evasion
Tax evasion is not paying tax by using illegal
methods and it is a crime.
Examples are:
• Not declaring income
• Not registering for tax
• Claiming fictitious and non-deductible
expenses
• Incorrect reporting
Tax evasion is a crime and punishable with fines
and jail sentence.
 Activity 5.3 LG 5.3 p43
Sources of personal income

• Salaries and wages

• Commission
• Interest
• Rent
• Business income
• Fees
• Pension and annuities
• Allowances
 Activity 5.4 LG 5.4 p43
Way SARS apply to check taxpayers’ information

• Reporting by 3rd parties e.g. Employers IRP5, Financial

Institutions IT3b
• Scrutinize VAT and Income Tax records
• Comparison of tax returns to other records such as Deeds
Office, National Vehicle Register, etc.
• Observing lifestyles
• Following paper trails
 Activity 5.5 LG 5.5 p44
Tax records to be kept by taxpayers
Salaried persons:
• IRP 5
• IT3a, IT3b
• Certificate from medical scheme and medical costs
• Vehicle records
Businesses:
• All invoices and records of transactions used to compile financial
statements
All Tax records must be kept for 5 Years
 Activity 5.6 LG 5.6 p44
Moral obligation of taxpayers
All citizens should be patriotic and law abiding
Country must have infrastructure and
Government services which is used by all
citizens e.g. Roads, schools, hospitals,
education, health, safety, security, etc.
All citizens make use of these services and have
a moral obligation to contribute their share.
 Summative Assignment Q1
Analyze Tax return
In this Activity you have to study the Tax Return after p26 and answer the
Questions on P23

In the last question you have to indicate whether the person is a Provisional
Taxpayer (Provisional Taxpayer Yes or No).
Consider the type of income and Activity 2.5 LG 2.3.2 p16 for your reply and
give reason.
 Summative Assignment Q2.1
Why pay Tax to SA Government
See Activity 1.1 and LG 1.2 p7 for guidance.
 Summative Assignment Q2.2
Tax responsibility
Tax Responsibility and Non-compliance - Activity 2.4, 5.5, 5.6; LG
2.5 p22, 5.6 p44
Tax avoidance - Activity 5.1 LG 5.1 p41
Tax evasion - Activity 5.2 LG 5.2 p42
Record keeping - Activity 5.5 LG 5.5 p44
 Summative Assignment Q3 - Government Budget
QUESTION 3 (3.1 to 3.4 See Budget Highlights; Activity 1.3.1, 1.3.2)
Collect newspaper clippings or articles or reports from the internet regarding the SA
government’s current budget. Summarise the article and highlight the following:
1) Main focus areas of the budget and graphically illustrate the proposed spending
of the budget;
2) Reference to access of services to all citizens;
3) Redress of previous inequalities in government’s spending;
4) The repayment of the national debt;
5) Refer to Indirect Tax naming at least 3 sources and indicate the reason and
importance as revenue source in the budget. (Activity 4.1-4.6)
Your answer must be in the form of an essay of +/- 500 words with at least the above
headings contained in the content.