TAX2601_ EXAM REVISION PACK. Study Questions and Solutions.

TAX2601_ EXAM REVISION PACK. Study Questions and Solutions. Principles Of Taxation. 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). 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) Less income tax value xxxx (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. 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. 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% 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. Collection of taxes from taxpayers Salaried employees make provision for their annual tax liability by paying employees tax (P.A.Y.E) on a monthly basis. Employers are responsible for collecting P.A.Y.E and paying it over to SARS. Other business entities or taxpayers who obtained other income other than from employment will pay their tax liability through Provisional tax. Provisional tax Payment It is not another tax but a way of collecting tax for SARS. Provisional tax payments are made twice per year with an optional third payment of provisional tax payment available. To provide for provisional tax, a tax payer estimates his/her taxable income and pays half of the tax due in the first payment and the second provisional tax is calculated on the revised taxable income of the taxpayer. There are special rules that apply to the calculation of provisional tax payments and in summary are as follows. For taxpayers whose taxable income does exceed R1000 000, the Provisional tax is calculated as follows: i. Estimate the taxable income ii. Calculate tax payable and divide by 2 and that will be the 1 st provisional tax payable. iii. For the second payment a revised estimate is used, as long as the taxable income no penalties will be payable. If the estimate that the taxpayer makes is less than 90% of his actual taxable income penalties might be levied by the commissioner. If the taxable income of the taxpayer is done R100 000 the estimate should be 80% of the taxable income, otherwise penalties will be imposed by the commissioner. If the taxpayer cannot estimate his/her taxable income the commissioner may use his previous taxable income to levy the provisional tax. If the last assessed taxable income is greater than the taxpayer estimated taxable income the commissioner may use that to levy the taxpayers provisional tax if the last assessment is older than 1 months it should be adjusted and it will be adjusted upwards by % to arrive at the commissioners estimates taxable income from which to levy provisional tax. Capital Gains tax Capital Gains tax is a tax that is payable as disposal of assets. For Capital gains to be chargeable there should have been a disposal or lancination of property or assets. Capital gains is not separate term as it is pulled into the taxable income of a taxpayer by section 26A of the Income tax act. Capital gains became liveable in South Africa from 1 October 2001. To calculate capital gains one has to look at the eight schedule of the income tax act. Assets acquired after 1 October To calculate Capital gains for assets that are disposed of that where acquired after 1 October 2001 will be calculated as follow R Proceeds (Amount obtained on s ale of Asset) xxxx Less : recoupment (wear and tear allowances previously claimed) (xxxx) Adjusted proceeds recovered) Xxxx (xxxx) Less : Base costs (xxxx) Cost of acquisition Xxxx Less wear and tear allowances claimed (xxxx) Costs to sell asset(the capital asset) xxxx Capital gain Xxxx Inclusion rate for companies at 66.6% xxxx Capital gains will be included in the taxable income of a taxpayer at 66.6% of the capital gain. Assets acquired before 1 October 2001 For assets that were acquired before 1 October 2001 a value for calculating capital gains for tax purposes will have to be established. And there were specific rules that have been laid out by legislation (Time apportioned base cost). The Law laid out the following options for the taxpayer The 20% here the taxpayer has the option to deduct 20% of the proceeds obtained from the disposal of the asset as the base cost. The Law also makes provision for the taxpayer to have obtained the value of the asset on 1 October 2001. The cost involved in obtaining that value will be included in the base cost of the asset. Also included in this will be expenditure to improve the asset after 1 October 2001. Time apportioned Base cost – this is a formula provided for by legislation to calculate the base cost of an asset, being disposed that was acquired before 1 October 2001. The way to calculate Capital Gains in this case will be as follows: