Summary Law of Taxation 411 Semester Notes 2020

Contents
1 Introduction........................................................................................................................................3
What is Tax?......................................................................................................................................3
2 Administration, Dispute Resolution and Interpretation....................................................................10
Administration: General..................................................................................................................10
Secrecy and Confidentiality.............................................................................................................10
Procedure for Collection..................................................................................................................13
3 Gross Income: General and Residence-Based Taxation....................................................................20
Introduction.....................................................................................................................................20
How is Taxable Income Determined?..............................................................................................20
Residence-Based Taxation...............................................................................................................21
4 Gross Income: Receipts and Accruals...............................................................................................27
Definition of Gross Income (GI))......................................................................................................27
5 Gross Income: Capital vs Revenue....................................................................................................39
Introduction.....................................................................................................................................39
The Tests..........................................................................................................................................39
6 Gross Income: Special Inclusions......................................................................................................62
List of Special Inclusions..................................................................................................................62
Exempt Income................................................................................................................................68
7 Gross Income: General Deductions...................................................................................................71
Introduction.....................................................................................................................................71
General Deduction Formula.............................................................................................................72
First Requirement: Expenditure and Losses.....................................................................................73
Second Requirement: Actually Incurred and Third Requirement: In Year of Assessment...............76
Fourth Requirement: In the Production of the Income...................................................................87
Fifth Requirement: Not of a Capital Nature.....................................................................................96
Sixth Requirement: Carrying on Any Trade....................................................................................110
Seventh Requirement: For Purposes of Trade...............................................................................113
8 Gross Income: Special Deductions..................................................................................................121
Introduction...................................................................................................................................121
Overlap, Unique Requirements.....................................................................................................121
Section 11......................................................................................................................................122
Pre-Trade Expenditure...................................................................................................................122
Legal Costs.....................................................................................................................................125
Repairs...........................................................................................................................................129
Assessed Loss and Balance of Assessed Loss.................................................................................139
9 Capital Gains Tax.............................................................................................................................142

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, Calculation of “Aggregate Capital Gain/Loss” (Phase 1)................................................................146
Main Elements...............................................................................................................................149
10 Anti-Avoidance.............................................................................................................................156
Tax Evasion v Tax Avoidance..........................................................................................................156
Tax Avoidance: Counter Measures................................................................................................156
Shams............................................................................................................................................158
Legislation......................................................................................................................................163




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,1 INTRODUCTION

Overview

- Definition
- History
- Constitution
- Classification of taxes
- Objectives of taxation
- What makes a good tax system?


What is Tax?


Definition

- Definition: legislation
o Definition in Income Tax Act 58 of 1962 (ITA)
 “’Tax’ means tax or a penalty imposed in terms of this Act”
o Definition in Tax Administration Act (TAA)
 “’‘Tax’, for purposes of administration under this Act, includes a tax, duty,
levy, royalty, fee, contribution, penalty, interest and any other moneys
imposed under a tax Act”
o Legislation does not help us much – definition not clear
- Definition: economics
o “Taxes are transfers of resources from persons or economic units to government
and are compulsory (or legally enforceable). There is not necessarily a direct
connection between the resources transferred to government and the goods and
services that it supplies.” - Black Calitz & Steenekamp
- Definition: tax law
o “…a monetary-based compulsory contribution payable by the public as a whole or a
substantial sector thereof to a government (at a national or subnational level).” -
Croombe et al.
o “Taxes … are general obligations for which:
 payments are compulsory and are enforced in terms of legislation
 no direct benefits accrue to taxpayers in exchange for payments made and
 benefits are returned to groups of people, not identifiable individuals.”
 Quote by Davis Tax Commission
 Committee that investigates SA’s tax system and makes
recommendations
o Definition by courts: see later
- Summary of definitions:
o Taxation is compulsory
o It is made by a natural or juristic person (or any other person defined by the Income
Tax Act as a ‘person’) to the government
o There is no direct link between what you pay and what you get back
 If we all pay our taxes we don’t necessarily see a direct benefit just to us
 Government uses the tax money for whatever general purpose they want to
use it for, eg police force, build a hospital or a school, etc


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, - Eg toll gate:
o It is more of a user charge than a tax because you do not need to use that road

History

- Tax developed simultaneously with the idea of an orderly society and government
o Ancient Egypt
o Roman times
- Virtually all societies impose tax
- Social contract
o In order to get services and to be properly governed taxes must be paid
o “Taxes are what we pay for a civilized society”
 Compania Generalde Tabacos de Filipinas v Collector of Internal Revenue
275 US 87 (1927) at 100
o “A state cannot exist without taxes. Society receives benefits from them”
 Pienaar Bros v C:SARS

Constitution

- Section 55(1)
o In exercising its legislative power, the National Assembly may—
 (a) consider, pass, amend or reject any legislation before the Assembly; and
 (This would include laws that tax people)
 (b) initiate or prepare legislation, except money Bills.
- Section 213: National Revenue Fund
o Certain limitations when money can be withdrawn from the fund
o All money gets paid into this fund
- Section 228: empowers province to impose taxes
o Limited power
 Type of taxes
 Act of parliament needed
 Why exercised
- Section 229: empowers municipalities to impose
o Rates on property
o Surcharges on fees for services provided by or on behalf of municipality
 Buy electricity from Stellenbosch municipality but they may levy a surcharge
on that electricity
o Other taxes if authorised by national legislation
o Limitations
- Section 77(1)
o A Bill is a money Bill if it—
 (a) appropriates money;
 (b) imposes national taxes, levies, duties or surcharges;
 (If government wants to impose taxes it has to do so by way of a
money bill)
 (c) abolishes or reduces, or grants exemptions from, any national taxes,
levies, duties or surcharges; or
 (d) authorises direct charges against the National Revenue Fund, except a
Bill envisaged in section 214 authorising direct charges.
- Money Bill
o There is a specific procedure to get a money bill through parliament

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