TAXATION 388
TEST 1
Chapters 1, 2, 3, 4, & 21
Notes made in the 2020 academic year
Tax email address:
TABLE OF CONTENTS
Chapter 1 ..................................................................................................................................................... 4
GENERAL PRINCIPLES OF TAXATION...................................................................................................... 4
Introduction to taxation: ......................................................................................................................... 4
Types of taxes ............................................................................................................................................. 4
1.1 Overview: tax policy .......................................................................................................................... 5
1.2 Tax base ............................................................................................................................................. 5
How should taxes be levied? .................................................................................................................... 6
1.3 Tax rate structure .............................................................................................................................. 6
1.4 Principles of taxation ....................................................................................................................... 10
Maxims of taxation (Adam Smith) ......................................................................................................... 10
Chapter 2 ................................................................................................................................................... 11
TAXATION IN SOUTH AFRICA ................................................................................................................ 11
2.2 Taxation in South Africa .................................................................................................................. 11
2.2.1 Brief history of taxation in South Africa ....................................................................................... 11
2.2.2 The legislative process ................................................................................................................... 12
2.2.3 Current tax legislation .................................................................................................................... 13
2.3 Administration of tax legislation..................................................................................................... 14
2.4 Interpretation of tax law.................................................................................................................. 14
2.4.1 Tax Legislation................................................................................................................................. 15
2.4.2 Judicial decisions ............................................................................................................................ 15
2.4.3 Rules of Interpretation.................................................................................................................... 16
2.5 Illustrating the components of normal tax and the interpretation of tax law in South Africa..... 16
2.5.1 The incidence of normal tax (s 5) .................................................................................................. 16
2.5.2 Rate structure of normal tax .......................................................................................................... 17
1
, 2.5.3 Tax base of normal tax ................................................................................................................... 18
Broken years of assessment .................................................................................................................... 20
Chapter 3 ................................................................................................................................................... 22
GROSS INCOME ....................................................................................................................................... 22
3.1 Basic Framework to Calculate a Person’s Taxable Income........................................................... 22
The definition of ‘gross income’ [s1(1)] .................................................................................................. 22
3.2. Determine if taxpayer is resident or non-resident ....................................................................... 23
3.3 Meaning of ‘total amount in cash or otherwise’ ............................................................................ 29
3.4 Received by or accrued to .............................................................................................................. 30
3.4.1 Meaning of ‘Received by’ .............................................................................................................. 30
3.4.2 Meaning of ‘accrued to’ ................................................................................................................. 31
3.4.3 Valuation of receipt or accrual ...................................................................................................... 31
3.4.4 Unquantified Amounts ................................................................................................................... 31
3.4.7 Cessation of income ....................................................................................................................... 32
3.4.8 Time of accrual of interest payable by SARS .............................................................................. 33
3.5 Year of assessment .......................................................................................................................... 34
3.6 Receipts and accruals of a capital nature ...................................................................................... 35
3.6.1 Nature of an asset ........................................................................................................................... 36
3.6.2 Intention of a company .................................................................................................................. 36
3.6.3 Business conducted with a profit-making purpose .................................................................... 37
(3.6.4 & 3.6.5 & 3.6.7) .............................................................................................................................. 37
Mixed purpose .......................................................................................................................................... 37
3.6.6 Receipts and accruals of a capital nature (continued) ............................................................... 38
3.6.8 Secondary purpose ......................................................................................................................... 39
3.6.9 Receipts and accruals of a capital nature (continued) ............................................................... 39
3.6.10 Receipts and accruals of a capital nature (continued) ............................................................. 40
Exercise 1 ................................................................................................................................................... 41
Considerations to take into account: Capital vs Revenue in nature ................................................. 43
Exercise 2: .................................................................................................................................................. 46
Chapter 21 ................................................................................................................................................. 50
SOURCE AND NON-RESIDENTS ............................................................................................................. 50
21.1 Overview ........................................................................................................................................ 50
21.2 Principles of South African taxation of cross-border transactions .............................................. 52
21.3 Sources (s 9) ................................................................................................................................... 54
Statutory Source Rules .......................................................................................................................... 54
21.3.1 Source of dividend income ......................................................................................................... 54
21.3.2 Source of interest income............................................................................................................ 55
21.3.5 Sources of amounts derived from the disposal of assets ....................................................... 56
21.3.8 Source of amounts received from a retirement fund .............................................................. 57
Common Law Source Rules .................................................................................................................. 58
Common law source principles............................................................................................................... 58
21.3.4 Source of rental income ............................................................................................................... 58
21.3.6 Source of income from services rendered ................................................................................ 59
21.5 South African taxation of income of non-residents ..................................................................... 60
2
, 21.5.2 Withholding taxes ................................................................................................................... 60
Withholding taxes on Immovable Property .......................................................................................... 62
Withholding taxes on Interest ................................................................................................................. 65
Withholding taxes: Summary ................................................................................................................ 67
Chapter 4 ................................................................................................................................................... 68
SPECIAL INCLUSIONS .............................................................................................................................. 68
4.1 Special Inclusions Fundamentals .................................................................................................... 68
4.2 Annuities .......................................................................................................................................... 68
4.3 Alimony payments........................................................................................................................... 70
4.4. Services ........................................................................................................................................... 70
4.5 Restraint of trade ............................................................................................................................. 72
4.6 Services: Compensation for termination or variation of employment ......................................... 73
Thought Process (4.6) ............................................................................................................................... 75
4.9 Lease Premiums .............................................................................................................................. 76
4.10 Compensation for Imparting Knowledge and Information ........................................................ 76
4.11 Leasehold Improvements ............................................................................................................. 77
4.12 Fringe benefits .............................................................................................................................. 78
4.13 Proceeds from the disposal of Certain Assets............................................................................. 78
4.14 Dividends ....................................................................................................................................... 79
4.19 Amounts required to be included in taxpayer’s ‘income’ .......................................................... 79
Guidance on Section Referencing ........................................................................................................ 82
Relevant Tables for Chapter 4 .............................................................................................................. 83
Table 1 – Subtotal method: Comprehensive framework for 2020 year of assessment .................. 83
Table 2 – Natural persons including special trusts, insolvent and deceased estates ..................... 84
Table 3 – Retirement lump sum benefits and severance benefits..................................................... 84
3
, CHAPTER 1
GENERAL PRINCIPLES OF TAXATION
INTRODUCTION TO TAXATION:
CLASS DISCUSSION:
1. What is tax?
• Relationship between government & citizens from a tax perspective:
• A compulsory payment
2. Why are taxes necessary?
• You pay taxes so that the government can render certain services using the tax
revenue
3. Who is responsible for setting the tax laws?
• The National Treasury
• Information given via the Budget Speech
4. Who is responsible for collecting tax and administering tax laws?
• SARS: administers the tax process
TYPES OF TAXES
Direct versus Indirect taxes
DIRECT TAXES:
• Taxes imposed on individuals, companies and other taxpayers
• Examples:
o Income taxes (Personal Income Taxes are the biggest revenue to the government
for tax) [388]
§ Paid by individuals on their personal income
o Wealth taxes
§ Not in SA, but levied through things like Transfer Duties instead
o Corporate taxes [388]
§ Companies
o Estate duty
4
TEST 1
Chapters 1, 2, 3, 4, & 21
Notes made in the 2020 academic year
Tax email address:
TABLE OF CONTENTS
Chapter 1 ..................................................................................................................................................... 4
GENERAL PRINCIPLES OF TAXATION...................................................................................................... 4
Introduction to taxation: ......................................................................................................................... 4
Types of taxes ............................................................................................................................................. 4
1.1 Overview: tax policy .......................................................................................................................... 5
1.2 Tax base ............................................................................................................................................. 5
How should taxes be levied? .................................................................................................................... 6
1.3 Tax rate structure .............................................................................................................................. 6
1.4 Principles of taxation ....................................................................................................................... 10
Maxims of taxation (Adam Smith) ......................................................................................................... 10
Chapter 2 ................................................................................................................................................... 11
TAXATION IN SOUTH AFRICA ................................................................................................................ 11
2.2 Taxation in South Africa .................................................................................................................. 11
2.2.1 Brief history of taxation in South Africa ....................................................................................... 11
2.2.2 The legislative process ................................................................................................................... 12
2.2.3 Current tax legislation .................................................................................................................... 13
2.3 Administration of tax legislation..................................................................................................... 14
2.4 Interpretation of tax law.................................................................................................................. 14
2.4.1 Tax Legislation................................................................................................................................. 15
2.4.2 Judicial decisions ............................................................................................................................ 15
2.4.3 Rules of Interpretation.................................................................................................................... 16
2.5 Illustrating the components of normal tax and the interpretation of tax law in South Africa..... 16
2.5.1 The incidence of normal tax (s 5) .................................................................................................. 16
2.5.2 Rate structure of normal tax .......................................................................................................... 17
1
, 2.5.3 Tax base of normal tax ................................................................................................................... 18
Broken years of assessment .................................................................................................................... 20
Chapter 3 ................................................................................................................................................... 22
GROSS INCOME ....................................................................................................................................... 22
3.1 Basic Framework to Calculate a Person’s Taxable Income........................................................... 22
The definition of ‘gross income’ [s1(1)] .................................................................................................. 22
3.2. Determine if taxpayer is resident or non-resident ....................................................................... 23
3.3 Meaning of ‘total amount in cash or otherwise’ ............................................................................ 29
3.4 Received by or accrued to .............................................................................................................. 30
3.4.1 Meaning of ‘Received by’ .............................................................................................................. 30
3.4.2 Meaning of ‘accrued to’ ................................................................................................................. 31
3.4.3 Valuation of receipt or accrual ...................................................................................................... 31
3.4.4 Unquantified Amounts ................................................................................................................... 31
3.4.7 Cessation of income ....................................................................................................................... 32
3.4.8 Time of accrual of interest payable by SARS .............................................................................. 33
3.5 Year of assessment .......................................................................................................................... 34
3.6 Receipts and accruals of a capital nature ...................................................................................... 35
3.6.1 Nature of an asset ........................................................................................................................... 36
3.6.2 Intention of a company .................................................................................................................. 36
3.6.3 Business conducted with a profit-making purpose .................................................................... 37
(3.6.4 & 3.6.5 & 3.6.7) .............................................................................................................................. 37
Mixed purpose .......................................................................................................................................... 37
3.6.6 Receipts and accruals of a capital nature (continued) ............................................................... 38
3.6.8 Secondary purpose ......................................................................................................................... 39
3.6.9 Receipts and accruals of a capital nature (continued) ............................................................... 39
3.6.10 Receipts and accruals of a capital nature (continued) ............................................................. 40
Exercise 1 ................................................................................................................................................... 41
Considerations to take into account: Capital vs Revenue in nature ................................................. 43
Exercise 2: .................................................................................................................................................. 46
Chapter 21 ................................................................................................................................................. 50
SOURCE AND NON-RESIDENTS ............................................................................................................. 50
21.1 Overview ........................................................................................................................................ 50
21.2 Principles of South African taxation of cross-border transactions .............................................. 52
21.3 Sources (s 9) ................................................................................................................................... 54
Statutory Source Rules .......................................................................................................................... 54
21.3.1 Source of dividend income ......................................................................................................... 54
21.3.2 Source of interest income............................................................................................................ 55
21.3.5 Sources of amounts derived from the disposal of assets ....................................................... 56
21.3.8 Source of amounts received from a retirement fund .............................................................. 57
Common Law Source Rules .................................................................................................................. 58
Common law source principles............................................................................................................... 58
21.3.4 Source of rental income ............................................................................................................... 58
21.3.6 Source of income from services rendered ................................................................................ 59
21.5 South African taxation of income of non-residents ..................................................................... 60
2
, 21.5.2 Withholding taxes ................................................................................................................... 60
Withholding taxes on Immovable Property .......................................................................................... 62
Withholding taxes on Interest ................................................................................................................. 65
Withholding taxes: Summary ................................................................................................................ 67
Chapter 4 ................................................................................................................................................... 68
SPECIAL INCLUSIONS .............................................................................................................................. 68
4.1 Special Inclusions Fundamentals .................................................................................................... 68
4.2 Annuities .......................................................................................................................................... 68
4.3 Alimony payments........................................................................................................................... 70
4.4. Services ........................................................................................................................................... 70
4.5 Restraint of trade ............................................................................................................................. 72
4.6 Services: Compensation for termination or variation of employment ......................................... 73
Thought Process (4.6) ............................................................................................................................... 75
4.9 Lease Premiums .............................................................................................................................. 76
4.10 Compensation for Imparting Knowledge and Information ........................................................ 76
4.11 Leasehold Improvements ............................................................................................................. 77
4.12 Fringe benefits .............................................................................................................................. 78
4.13 Proceeds from the disposal of Certain Assets............................................................................. 78
4.14 Dividends ....................................................................................................................................... 79
4.19 Amounts required to be included in taxpayer’s ‘income’ .......................................................... 79
Guidance on Section Referencing ........................................................................................................ 82
Relevant Tables for Chapter 4 .............................................................................................................. 83
Table 1 – Subtotal method: Comprehensive framework for 2020 year of assessment .................. 83
Table 2 – Natural persons including special trusts, insolvent and deceased estates ..................... 84
Table 3 – Retirement lump sum benefits and severance benefits..................................................... 84
3
, CHAPTER 1
GENERAL PRINCIPLES OF TAXATION
INTRODUCTION TO TAXATION:
CLASS DISCUSSION:
1. What is tax?
• Relationship between government & citizens from a tax perspective:
• A compulsory payment
2. Why are taxes necessary?
• You pay taxes so that the government can render certain services using the tax
revenue
3. Who is responsible for setting the tax laws?
• The National Treasury
• Information given via the Budget Speech
4. Who is responsible for collecting tax and administering tax laws?
• SARS: administers the tax process
TYPES OF TAXES
Direct versus Indirect taxes
DIRECT TAXES:
• Taxes imposed on individuals, companies and other taxpayers
• Examples:
o Income taxes (Personal Income Taxes are the biggest revenue to the government
for tax) [388]
§ Paid by individuals on their personal income
o Wealth taxes
§ Not in SA, but levied through things like Transfer Duties instead
o Corporate taxes [388]
§ Companies
o Estate duty
4
