LML4804 TAX LAW SUMMARY NOTES

LML4804 TAX LAW SUMMARY NOTES. TAX LAW NOTES: STUDY UNIT 1 INTRODUCTION TO TAXATION State Expenditure and Financing: State expenditure is financed through: 1. Increasing the supply of money in the economy – minting own money; 2. Loans; 3. Generating own income. Generating states “Own Income” can be done by; 1. Sale or lease of property; 2. State enterprises and monopolies; 3. Taxes, duties, levies, and user charges. What is tax? Compulsory contribution, payable in money or in kind, to a taxing authority, aimed at funding public expenditure. It can’t be levied as a counter performance for identifiable public services and need. It does not necessarily take the taxpayers ability to pay nor the benefits received from the public services into account. Taxes, Duties and Levies: these terms are synonymous and are state income. They are just used “loosely” by lay people and politicians. User charges – these are charges linked to a specific type of service used. Income received from this service is used for that specific service. Examples: Toll Road Fees, Water and Electricity. The ideal tax system:  There must be a sufficient connection between the State and the taxpayer to justify the taxpayer’s tax liability.  The connecting factors: 1) SOURCE – income derived from a source within the Republic. 2) RESIDENCE – (income accrues to a resident of the taxpaying state). 3) CITIZENSHIP – income accrues to a citizen of the Taxpaying State. South Africa – predominant factor is source. CLS cc © LML4804 - TAX Notes Critical Law Studies CC © 2 The Tax Base:  The bases on how tax can be paid 1) Benefit theory: taxed in accordance with the benefits he receives from the various public services. (Impossible to determine how much a person benefits from a particular service/s). 2) Ability to pay theory: make a contribution corresponding to the sacrifice the tax requires of him and in the end everyone must make an equal sacrifice (has too many practical problems) – SA. 3) Ability to earn theory: ability to earn can also be used as a criterion but it’s problematic, i.e. if someone inherits money etc. THREE broad tax bases are commonly utilized: 1) INCOME 2) CONSUMPTION (expenditure) 3) WEALTH An equitable tax system: The “Ideal tax system = Equality criteria” – The Margo Commission mentioned the following criteria:  Tax neutrality – a person should not be influenced by the tax system to choose one course of action above another – so tax liability will be reduced.  Equity – horizontal equity requires that similar persons that are in similar circumstances will be taxed. Vertical equity means that taxpayers experiencing different circumstances will be taxed differently – equal sacrifices.  Certainty and simplicity – certain and simple to assess and collect.  Cost-effectiveness – cost of collecting tax shouldn’t be high. Direct and Indirect taxes: DIRECT: It is intended and expected that the person who is legally bound to pay the tax is the same person who will ultimately be poorer for paying the tax, e.g. tax on the person’s income. INDIRECT: The person who has the legal obligation to pay the tax is not necessarily the person who bears the tax in the end and thus becomes poorer. The taxpayer will pass on the tax to someone else, e.g. VAT. CLS cc © LML4804 - TAX Notes Critical Law Studies CC © 3 Progressive, regressive and proportional taxation: PROGRESSIVE: the greater the persons tax base, the greater his tax burden (SA – income tax). REGRESSIVE: the greater the persons tax base, the less of a tax burden he’ll have (VAT). PROPORTIONAL: everyone pays the same % of his or her tax base. CONCEPTS: Tax Base: It’s the specific source from which a taxing authority intends to derive tax revenue. Taxpayer: The person saddled with the liability of paying tax. Taxable value: The portion of tax base, expressed as an amount, to which the tax rate is applied. Tax rate: A % applied per unit of taxable value in order to calculate the amount of the tax payable (e.g. 14% VAT). Tax incidence: Formal incidence rests on the person who is legally obliged to pay tax but the effective incidence falls on the person who is made poorer by the imposition of the tax. Tax burden: Indication of the total impact of tax on a person. Tax law: Body of law dealing with the charging, assessment and collection of taxes. Working through tax legislation Checklist: 1. Establish what the tax base is. 2. Identify the possible tax payer. 3. Ascertain the date or period of liability. 4. Establish the taxable value. 5. Determine the taxable rate. 6. Establish the date of payment. 7. Are there any exemptions. CLS cc © LML4804 - TAX Notes Critical Law Studies CC © 4 STUDY UNIT 2 THE SOUTH AFRICAN TAX SYSTEM TAXES LEVIED BY THE NATIONAL SPHERE OF GOVERNMENT All of the imposts levied by the national sphere of government are administered by the South African Revenue Service (SARS). The most important taxes administered by the SARS are Income tax on individuals. Income tax on companies, Value-added tax (VAT), Estate duty, Donations tax, Capital gains tax Income, Transfer duty, Stamp duties, Secondary tax on companies, etc. TAXES LEVIED BY THE PROVINCIAL SPHERE OF GOVERNMENT Section 228 of the Constitution states that a provincial legislature may impose “taxes, levies and duties other than the income tax, value-added tax, general sales tax, rates on property or customs duties”. It also states that these may not be exercised in a way that materially and unreasonably prejudices economic activities. TAXES LEVIED BY THE LOCAL SPHERE OF GOVERNMENT Section 229 of the Constitution stipulates that municipalities may impose rates on property (i.e. immovable property tax) and other taxes “appropriate” to local government. However, such taxes may not be levied in a way that materially and unreasonably prejudices economic activities. Municipalities may not levy an income tax, value-added tax, general sales tax or customs duties. SOURCES OF SOUTH AFRICAN TAX LAW Legislation and case law Legislation: The Constitution and various tax statutes. Tax-related cases: South African Law Reports, South African Tax Cases Reports and Juta’s Tax Law Reports. Although judgments of the Tax Court do not constitute precedents, they have some persuasive value. Secondary sources Textbooks and journals. TAX LAW AND THE BILL OF RIGHTS (Equality, non-discrimination and administrative justice). The Bill of Rights (in the 1996 Constitution) Section 7 of the Constitution states that the Bill of Rights is a cornerstone of democracy in South Africa. It helps one determine the constitutionality of a taxing statute and/or the constitutionality of the administrative actions taken by SARS. A juristic person, as a taxpayer, can take the tax authorities to task for possible unconstitutional administrative action. CLS cc © LML4804 - TAX Notes Critical Law Studies CC © 5 Substantive tax law: the most important rights in the Bill of Rights relate to equality (s9), privacy (s14), freedom of trade, occupation and profession (s22) and property (s25). Procedural tax law: the most important rights are access to information (s32), just administrative action (s33) and access to courts (s34). THE INTERPRETATION OF TAX STATUTES The primary rule regarding interpretation is that the ordinary grammatical meaning of the words must be applied. If there is ambiguity or uncertainty, one must apply the secondary rules of interpretation. ~ In dubio contra fiscum rule This is the secondary rule that imposes a burden upon a subject (the tax payer). The interpretation, which is less cumbersome to the subject, must be endorsed as the true intention of the legislature. COMMON LAW According to English law the courts have the discretion to negate certain steps or transactions aimed solely at tax avoidance and with no other commercial value. This rule of English law is not part of South African law. In South African Pulp and Paper Industries Ltd v CIR, the appellant (SAPPI) leased a plantation for a period of 30 years. SAPPI acquired the right to fell the trees and the Commissioner stated that the contract concluded by SAPPI could not have been a lease, but rather another limited real right, as it gave SAPPI a right to consume. The Commissioner argued that SAPPI was liable for transfer duty. SAPPI argued that it was a contract of lease as the saligna trees felled would regenerate within the 30 year period of the lease. The court found in favour of SAPPI. In Bozzone v SIR, the taxpayer contended unsuccessfully that the contract in terms of which he could mine sand and clay for a 20-year period was a “normal” lease. As the contract implied a right to consume, the court ruled it was not a lease and the appellant was liable for transfer duty.