TAX2601_ Principles Of Taxation_ EXAM PACK.

TAX2601_ Principles Of Taxation_ EXAM PACK. Pension fund and Benefit fund Contributions by the employer  Contribution to pension funds and benefit funds will be allowed as deductions in the funds of the employer as long as they are deemed not to be excessive.  For the expenditure not to be limited by the commissioner it should not exceed 10 % of the approved remuneration payable to employees. Enmities to force employees and their dependents  If the employee resigned due to old age or ill health then any payment made to them or their dependants will deductible as when it is incurred by the former employer. Trading Stock  Special rules pertain to trading stock and are contained in section 22 of the income tax Act.  Opening stock and purchases are deducted from income of a tax payer in any year of assessment.  Closing stock is added to income of the taxpayer in any year of Assessment. Donations to Public Benefit Organisation  Any donation to a public benefit organisation (e.g. S.P.C.A.) that are accompanied by a section 1A receipt are deductible from the income of the taxpayer, provided the donation does not exceed 10% of the taxable Income of the tax payer before the deduction. Prohibited Deduction Certain expenses may not be deducted even if the meet the requirement of s11 (a) and include the following (a) Issued losses – losses that will be reimbursed will not be allowed as a deduction. (b) Taxes , penalties or interest on taxes will not be allowed as a deduction (c) Expenses incurred to produce exempt income. (d) Non trade expenditure (e) Restraint of trade payments (to be earlier deducted as provided for (f) Fines and corrupt activities LSLSS 16 Prepaid Expenses  Prepaid expenses are limited to R100 000 if the prepayment is for a period longer than 6 months into the next coming year of assessment and the expenditure exceed R100 000.  If the expenditure in excess of 6 months exceed R100 000 in aggregate, no deductions will be available to the taxpayer and those deductions will only be claimed in the year of assessment to which they relate to. Capital Allowance  A taxpayer will be allowed to deduct part of expenditure that was incurred in buying Capital assets or on assets used in the production of Income for the taxpayer.  The capital allowances that can be claimed by a taxpayer will be claimed under specific rules in the Income tax Act. Repairs and improvement section 11 (d)  Repairs are costs that are incurred to keep an asset in the same working order it was before. (CIR vs African products manufacturing co. Ltd).  It does not matter if the materials used, as long as the productive capacity of the asset is not matter of the materials used, as long as the productive capacity of the asset is not enhanced it will be regarded as a repair and be deductible under section 11 (d).  An improvement is an expenditure that improves the productive capacity of an asset either by changing the units it produces or extent its useful life.  Improvements are not deductible at once as a deduction but will be allowed over the write off period of the asset as provided for by legislation or General Binding Ruling. Capital Allowances Section 12C  For assets used in the process of manufacturer various deductions are available depending on the nature of the taxpayer when they first used the asset.  For taxpayer (Normal) who use assets in a process similar to manufacture two types of deductions are available.  For new and unused assets the will be written off as follows LSLSS 17  40% in the first year  20% in the following 3 years Used Assets For used assets that are used for the first year by the taxpayer deductions will be available at 20% per year over 5 years.  Deductions under section 12 C are not prorated for time. Is assets actually bought by a taxpayer for asset inherited or trading.  There will be section 11(e) available. Small business corporations (section 12E)  Small business corporations that uses assets in a process similar to manufacture the manufacturing assets are written off in full in the year the taxpayer first brings them into use.  For Non manufacturing Assets used by small business corporation they are allowed as follows – 50% in the First year 30% in the second year 20% in the third year  General wear and tear allowances (section 11 (e) )  Section 11(e) allowances is available for any asset that has a value, that is it can be used on inherited assets, trade inns etc.  Section 11 € is used in connection with general binding ruling 7 which gives the number of years over which the asset may be written - off.  Section 11 (e) alliances are prorated for the number of months they have been used in the current year of assessment. That is the deductions is multiplied by the number of months the asset has been used in the business. LSLSS 18 Buildings used in a process of manufacture section 13 (1)  Building costs excluding land are allowable under section 13 9(c) of the Income tax at 5% provided that the build are used majorly (above 50%) to produce taxable income.  This allowance is available for buildings erected after 1 October 1999. This allowance is not apportioned for part of the year. Commercial Building s13 (quoin)  Applies only to new and unused building or improvements erected after 01 April 2007.  The allowance granted will be at 5% for each year of assessment not apportioned for part of the year.  Where a tax payer buys also bought part of the building after 21 October 200 without constructing it the cost must be adjusted to 55 % of the cost of acquisition if the part is acquired or 30% if it is an improvement to the building that is acquired. Residential units and sale of low cost units on loan account  A residential unit is a building or a self-contained unit used for residential accommodation excluding building used hotels.  An allowance of 5% per annum to taxpayers who own such units will be available if the following conditions are met.  A tax payer owns reward unused residential units  The units are used by the taxpayer for purposes of trade  The Units are in the republic and the taxpayer owns at least 5 of the residential units.  If the residential units are low cost residential units n additional 5 % allowance maybe claimed.  A low cost residential unit is either A standalone unit costing less than R200 000 and the monthly rental charged does not exceed 1% of cost (2000) or An apartment whose cost does not exceed R250 000 and the monthly rental does not exceed 1% of the cost (R2500). LSLSS 19 If the employer sell a low cost residential unit to any of his employed through an interest free loan an additional 10% allowance may be claimed as a deduction in any year of assessment. An amount paid back by the employee to the employer will deemed to be recoupment and be included in the taxpayer income. Disposal of Assets on which allowance have been claimed Where a taxpayer disposes of assets where allowances have been claimed previously, Grunted allowances that are recovered by the taxpayer will be treated as recoupment. If the assets on which allowances where being claimed is sold at below its Income tax value a scrapping allowance will arise and be granted as a deduction (s116)). Recoupment or scrapping allowance is calculated follows R Proceeds / cost (whichever is lower) xxxx Less income tax value (xxx) Recoupment / (scrapping allowance if negative) xxxx Income tax values calculated as follows R Cost xxxx Less Accumulated wear and tear / allowances claimed (xxxx) Income tax value xxxx This calculation and adjustment is to be done every time a temperature disposes of an allowance asset (Depreciable assets for temperatures) No scrapping allowances are available for buildings though. LSLSS 20 Types of Tax payers Tax payer will be treated differently for purposes, depending on their nature. Sole traders Sole traders are not tax payers as defined, so the individuals running the sole proprietorship will be in their individual person. The tax will be calculated as per the tax tables that apply individuals and tax will be applied on a sliding scale. Partnership As w ell as sole traders, partnerships are also not a legal concept and not tax entity as well. Partners will be the one’s taxed on their individual persons on the tax tables on their profit sharing ratios. Deductions to partners will also be available to the partners on their profit sharing ratios. Companies Are separate legal entity and taxpayer in its own right, companies are owned by shareholders but are taxed separately. Tax on companies is calculated on their taxable income as calculated from the tax framework. There are different types of companies which have different tax rates applicable to its table income. Normal companies are taxed a t 2% of their taxable income. Small business corporations.  This is a special type of company for tax purposes. To be regarded as a small business corporation, companies have to meet the following criteria. Section [12(E (4))].  Gross income in any year of assessment does not exceed R20 Million  None of the shareholders/members has any interest in any other company 5% interest in listed companies, cooperatives. LSLSS 21  Not more than 20% of all the total receipts and accruals other than capital receipts consist of investment income and income from rendering of services.  Small business corporations are taxed on a sliding scale as follows on taxable income not exceeding R63556 @ 0% taxable income exceeding R63556 – R350 000 @ 7% Taxable exceeding R350 000 Close Corporations Are regarded the same as companies for tax purposes Micro businesses  Are a special type of easily for tax purposes and can be either companies or individuals.  Micro business are taxed on a simplified tax system called turnover tax.  Trusts may never be regarded as micro businesses and the following may never qualify as micro businesses  Persons with interest is in other companies  Personal services providers and labour brokers  Investment income and professional service providers if more than 20% comes from investment income or rendering professional services. Taxable Turnover Qualifying turnover means total receipts from the carrying on of business activities and does not exceed R1 million. 50% of all capital receipts will be included in taxable income. Levying of turnover tax R0 - R50000 0% R150 000-R300 000 1% LSLSS 22 R300 000 – R500 000 R1500 + 2% of amount above R300 000 R500 000 – R750 000 R5500+4% f amount above R500 000 R750 000 and above R15500+0% of amount above R750 000 Trusts  Trusts are a tax vehicle and estate planning vehicle to form a trust deed is required that specifies the beneficiaries of their trust specifies their rights and obligations of the parties involved in the trust.  A trust is a separate entity for tax purposes and will be taxed in its own right.  There are various types of trusts, normal trusts are taxed at 40% on their taxable income and special trusts are taxed on the same basis as individuals.