Summary TAX3702 - Notes Pack 2021.

CHAPTER 1A INTRODUCTION TO THE TAXATION OF INDIVIDUALS – CALCULATION OF TAXABLE INCOME Table of Contents 1. STRUCTURE AND DISCUSSION OF THE INCOME TAXATION CALCULATION .................................................................................... 2 2. GROSS INCOME ............................................................................................................................................................................... 3 2.1 AMOUNTS OF REMUNERATION RECEIVED FROM AN EMPLOYER ........................................................................................... 3 2.2 BUSINESS INCOME ................................................................................................................................................................... 3 2.3 INVESTMENT INCOME .............................................................................................................................................................. 3 2.4 PAYMENTS FROM FUNDS ......................................................................................................................................................... 3 2.5 SPECIAL INCLUSIONS ................................................................................................................................................................ 4 2.6 DEEMED INCOME FOR INDIVIDUALS ....................................................................................................................................... 4 2.7 OTHER CONSIDERATIONS ......................................................................................................................................................... 4 3. EXEMPT INCOME ............................................................................................................................................................................ 4 4. DEDUCTIONS ................................................................................................................................................................................... 4 5. ASSESSED LOSSES ............................................................................................................................................................................ 5 6. CASH ALLOWANCES ........................................................................................................................................................................ 5 7. CAPITAL GAINS ................................................................................................................................................................................ 5 8. ILLUSTRATION OF A BASIC TAX CALCULATION ............................................................................................................................... 5 TAX3702 - Notes Pack. 2 2 1. STRUCTURE AND DISCUSSION OF THE INCOME TAXATION CALCULATION Tax years for individuals begin on the 1 st day of March and run till the end of February of the following year. The following structure is used to do the income tax calculation for individuals. This format should be learnt Gross income (s1) XXXX (A) Includes any remuneration received from employers (including fringe benefits) Includes business income Includes investment income Includes payments from funds Includes special inclusions Includes deemed income Less: Exempt income (s10) (XX) (B) Includes exempt income items for individuals --------- Income XXXX (A–B=C) Less: General Deductions (XXX) (D) Includes allowable deductions general deduction formula Includes other expenditure when section 23(m) does not apply Less: Assessed losses (XXX) (E) Includes SA assessed losses Includes foreign assessed losses (if there is foreign income) Includes ring fencing of losses for various trades --------- Taxable income from activities XXXX (C-D-E=F) Add: Cash allowances such as travel allowances XXXX (G) Add: Taxable capital gains XXXX (H) Less: Pension, Provident, Retirement annuity fund deductions (XXX) (I) Less: Donations deduction (XXX) (J) --------- Taxable income XXXX (F+G+H-I-J) ===== Normal tax per the tables XXX Less: Rebates (XXX) Less: Tax credits (XXX) Less: Medical tax credits Less: Section 6 quat rebates (XXX) Net normal tax payable XXX Less: Employees taxation paid (XXX) Less: Provisional tax paid (XXX) Net normal tax payable/refundable from SARS XXX The basics of each of the above will be discussed in this chapter. 3 3 Persons should understand  Amounts need to be included in gross income before they are treated as exempt income  Income is gross income less exempt income.  Taxable income is the amount after all gross income, exempt income and deductions have been taken into account.  An individual is taxed on taxable income earned from 1 March to 28/29 February of the next year. 2. GROSS INCOME Any revenue that conforms to the gross income definition as included per section 1 of The Income Tax Act will be included in gross income. The following are the common types of income that relate specifically to individuals 2.1 AMOUNTS OF REMUNERATION RECEIVED FROM AN EMPLOYER Amounts of remuneration received from an employer are included in gross income. These include the following:  Salary  Commission  Bonus  Fringe benefits such as company car and residential accommodation provided to staff members  Share options granted to the company  Antedated salaries and pension  Variable remuneration such as overtime payments and leave pay payments  Gratuities and lump sums received from an employer  Annuities received from an employer  Severance benefits received from an employer 2.2 BUSINESS INCOME Individuals may also run businesses in their own name. These businesses may be sole traders when owned 100% by themselves, or partnerships when owned with other parties. 2.3 INVESTMENT INCOME Individuals may earn investment income and this will be included in their gross income. This may include  Rent  Interest  Local dividends  Foreign dividends  Royalties When individuals are married in community of property, investment income may be split 50:50 between the married couple. In addition, if the individual has a share in a controlled foreign company, amounts may be included in terms of section 9D 2.4 PAYMENTS FROM FUNDS Amounts are received by individuals from funds. These include:  Pensions  Annuities  Lump sums All of these are included in gross income. Lump sums from funds are not taxed on the individual tax table, but on the lump sum tax table on withdrawal or on death or retirement. 4 4 2.5 SPECIAL INCLUSIONS Various amounts received by individuals are specifically included in gross income. These include:  Annuities received by the individual  Alimony and maintenance payments  Amounts received for services rendered or by virtue of employment  Know how payments  Fringe benefits (discussed under remuneration previously)  Dividends (discussed under investment income earlier)  Recoupments 2.6 DEEMED INCOME FOR INDIVIDUALS Various amounts received by individuals are deemed to be included in a taxpayer’s gross income. 2.7 OTHER CONSIDERATIONS Cash allowances such as travel allowances and entertainment allowances were not included as amounts of remuneration received from an employer above. This is because they are not included in gross income. Cash allowances are governed in terms of section 8(1) and cash allowances are added to taxable income (and not gross income). As such, these cash allowances are shown after the RAF deduction in a taxation calculation but before a donations deduction. 3. EXEMPT INCOME Exempt income are amounts of income that are exempt from taxation. This means that even though a person earns the income, this income is not subject to taxation. An example of this is SARS allows amounts received in terms of the Unemployment Insurance Fund (UIF) to be exempt from vat. Thus if R10,000 is received from the UIF, R10,000 is included in gross income and the full R10,000 is exempt from income. Exempt income specific to various types of gross income will be discussed in the chapters discussed under gross income previously. 4. DEDUCTIONS Deductions are amounts that are expenses that can be taken off income for tax purposes. Deductions are different from exempt income in that deductions may be claimed for expenditure or losses incurred by a taxpayer, whilst exempt income deals with types of income that are not taxable. Section 23(m) disallows certain deductions. Individuals may claim various deductions in terms of the general deduction formula, assessed losses and specific deductions in respect of pension contributions, retirement annuity fund contributions, provident fund deductions (from 1 March 2014) and donations deductions. 5 5 In addition, some deductions are available for individuals where salary or restraint of trade amounts are repayable to the employer. Losses from trades may also be claimed as a deduction. 5. ASSESSED LOSSES Assessed losses may arise from  SA losses  Foreign losses In addition, ring fencing of losses may occur when losses are made on various trades. Foreign assessed losses can only be set off against foreign income. SA losses can be set off against all income earned. 6. CASH ALLOWANCES Cash allowances are included into taxable income as per section 8(1) after the retirement annuity fund deduction. 7. CAPITAL GAINS This is the gain or loss made on selling a capital asset. Profits from a scheme of profit making are included in gross income. Capital gains are made when an individual sells an asset that was not acquired in a scheme of profit making. Such an example would be the sale of a residential home. This home is bought to stay in, not as a scheme of profit making. The first R40,000 capital gain is excluded from capital gains each tax year for living individuals and R300,000 for deceased individuals. 40% of the capital gain is included in taxable income for individuals. 8. ILLUSTRATION OF A BASIC TAX CALCULATION The following illustration should be understood ILLUSTRATION – BASIC TAX CALCULATION Mr A is 78 years old earned the following during the year  Commission received of R230,000  Expenses of R5,000 were incurred to earn the commission  Unemployment Insurance Fund amount of R14,000 received (Assume all is exempt)  Profit of R340,000 made on the sale of his holiday home. His family has stayed there for the past ten December holidays.  He received an entertainment allowance of R10,000  He paid an amount of R4,000 to a retirement annuity fund. Assume the full R4,000 is deductible.  He made a donation of R2,000 to a public benefit organisation. Assume the full R2,000 is deductible. Mr A has an assessed loss of R30,000 carried forward from a previous year. Calculate the taxable income of Mr A.