Milpark Education Taxation Study Guide PDF

Taxation TAXN01-6  Milpark Education Email: [email protected] Address: Deneb House 3rd Floor, 368 Main Road Observatory...

Taxation TAXN01-6  Milpark Education Email: [email protected] Address: Deneb House 3rd Floor, 368 Main Road Observatory Cape Town, 7925 PO Box 44235, Claremont, 7735 © Milpark Education (Pty) Ltd No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means – electronic, electrostatic, magnetic tape, mechanical, photocopying, recording or otherwise.  Information Our commitment to our students is to maintain a friendly, fast and efficient communication service. We aim to respond to queries within 48 hours (Monday to Friday, between 08:00 and 17:00). Please follow our instructions in order to have your queries addressed as soon as possible. Sometimes you may struggle with difficult parts of the module and you may feel that you are at risk of not achieving success in your course – please contact us so that we can provide the necessary assistance and support. We provide a tutor line that we encourage you to use. 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Such content is in essence part of tuition and constitutes an integral part of the learning experience in the classroom and at a distance. Note Links to websites and videos were active and functioning at the time of publication. We apologise in advance if there are instances where the owners of the sites or videos have terminated them. Please contact us in such cases. Note A glossary is provided at the end of this study guide to clarify some important terms. © Milpark Education (Pty) Ltd Taxation TAXN01-6 24a iv  Note Any reference to masculine gender may also imply the feminine. Singular may also refer to plural and vice versa. © Milpark Education (Pty) Ltd Taxation TAXN01-6 24a v  Table of contents Module introduction VIII Aim of the study guide viii Scenario viii Module purpose XI Module outcomes XII TOPIC 1 GROSS INCOME, EXEMPT INCOME AND ALLOWABLE DEDUCTIONS 13 1.1 Introduction 13 1.2 Gross income 14 1.3 Passive income exemptions (exempt income) 16 1.4 Allowable deductions 17 Summary 18 Self-Assessment Questions 19 TOPIC 2 CAPITAL ALLOWANCES, RECOUPMENTS AND CGT 23 2.1 Introduction 23 2.2 Capital allowances 24 2.3 Various allowances 26 2.4 Recoupment 27 2.5 Capital gains tax 27 Summary 30 Self-Assessment Questions 30 TOPIC 3 CALCULATE THE TAX LIABILITY OF AN INDIVIDUAL 33 3.1 Introduction 33 3.2 Types of taxes that individual taxpayers could be liable for 34 3.3 Income for individuals (including fringe benefits) 35 3.4 Exemptions 36 3.5 Deductions 37 3.6 Tax liability and tax tables 37 3.7 Employees’ tax and final tax 38 3.8 Taxation of amounts received as a result of retirement 38 3.9 Pension, pension preservation, provident, provident preservation and retirement fund 39 3.10 Divorce 39 3.11 Capital gains tax 40 Summary 40 Self-Assessment Questions 40 © Milpark Education (Pty) Ltd Taxation TAXN01-6 24a vi TOPIC 4 TAX LIABILITY OF BUSINESS ENTITIES 44 4.1 Introduction 44 4.2 Types of business entities 44 4.3 Provisional tax 46 Summary 48 Self-Assessment Questions 48 TOPIC 5 VAT, TURNOVER AND DONATIONS TAX 51 5.1 Introduction 51 5.2 Other types of taxes 51 5.3 Value-added tax (VAT) 52 5.4 Turnover tax 54 5.5 Donations tax 56 Summary 57 Self-Assessment Questions 58 TOPIC 6 TAX AVOIDANCE VERSUS TAX EVASION – ASSESSED LOSSES AND THE TAX ADMINISTRATION ACT, 2011 60 6.1 Introduction 60 6.2 Tax avoidance versus tax evasion 61 6.3 Illustration of main section affecting Section 80A of the Income Tax Act, 1962 61 6.4 Assessed losses 62 6.5 Tax Administration Act, 2011 63 Summary 64 Self-Assessment Questions 65 GLOSSARY OF TERMS 67 REFERENCE LIST 68 ANSWERS TO SELF-ASSESSMENT QUESTIONS 69 Topic 1 Self-Assessment Answers 69 Topic 2 Self-Assessment Answers 72 Topic 3 Self-Assessment Answers 74 Topic 4 Self-Assessment Answers 78 Topic 5 Self-Assessment Answers 80 Topic 6 Self-Assessment Answers 82 © Milpark Education (Pty) Ltd Taxation TAXN01-6 24a vii  Module introduction AIM OF THE STUDY GUIDE The aim of this study guide is to provide students with an introduction to taxation in the South African context. It covers fundamental taxation principles. The study guide applies relevant tax principles to different situations that may arise in taxation, and is organised into six topics. The first topic introduces gross income, including employment benefits, as well as exempt income and general and specific deductions. The second topic deals with capital allowances, recoupments and capital gains tax. The third topic addresses the calculation of the tax liability of an individual, including lump-sum benefits. The fourth discusses the taxation of business entities. The fifth covers donations and turnover tax, as well as VAT. The sixth topic focuses on tax administration, assessed losses and tax avoidance. Within each topic, there are various focused activities. The activities are included with the aim of progressively building your understanding of related concepts within the topic. At the end of each topic, you are provided with Self-Assessment Questions (SAQs). The SAQs aim to reflect the standard expected in the summative assessment and may test concepts across various sub-topics, or include issues discussed in prior topics. Although model answers are provided for the SAQs, you are advised to first attempt to answer the questions before consulting the suggested solutions to check your own work. Finally, please note that this study guide is based mainly on the prescribed material for this course and cannot be used on its own for full study purposes. SCENARIO A brief description of the circumstances of a person facing certain events in their life has been constructed to give you an overview of some of the scenarios that you will encounter as you study Taxation. An understanding of tax rules and their application in such scenarios will be required in order to adequately address the relevant tax implications arising in these situations. © Milpark Education (Pty) Ltd Taxation TAXN01-6 24a viii John, a South African resident, was at the PwC annual budget speech breakfast that takes place every year in February. At the table where he was sitting, he met Max, a partner of PwC who was interested in his business activities. John explained that he works for a company that sells clothing and accessories for various types of sporting activities, including motor bikes. The company has many branches across South Africa. The deadline for submission of John’s provisional tax return was imminent, and he was stressed because he had a number of items to disclose on his tax return. He had also considered selling a number of his assets, and wanted to get Max’s input on these proposed sales. He and set up an appointment with Max for the following week. The events John explained the following earnings to Max: He earned a salary from his employer in Cape Town and received a number of fringe benefits, including the use of a company-owned vehicle. He earned other income from paintings that he sold online, and has investments in both South African and offshore companies that earned interest. John is considering moving from Cape Town to Johannesburg, where he would run the Johannesburg branch. John wants to sell his primary residence and purchase a flat. He was under the assumption that, because it is a primary residence, no Capital Gains Tax will apply. Max advised him that tax is applicable on a primary residence, but there are certain exemptions he may qualify for. He made a number of donations during the year to his family, and Max advised him that a donations tax of 20% is levied on certain donations made. Max advised him that each of his operations/incomes has different tax consequences, as there are different tax laws that apply to each operation. He further explained that, as a tax resident in South Africa, John was liable to be taxed on his worldwide income, which includes the income from the paintings sold online and interest from offshore investments. John considered transferring assets to his wife in order to avoid paying tax, and Max advised that SARS has implemented the General Anti-Avoidance Rule (GAAR) on transactions in order to ensure that taxpayers do not defer their tax obligation to a connected person. © Milpark Education (Pty) Ltd Taxation TAXN01-6 24a ix The scenario above shows that an individual can have multiple income streams and that different laws apply to each income stream. As a tax expert, you need to be aware of these and be able to give the appropriate advice on each of them. This module aims to provide you with knowledge of the tax laws in order to compute the tax liability of an individual, as well as business entities. This module also covers donations tax, tax avoidance, retirement benefits and VAT. Prescribed textbook Carpenter, R., Parson, S. and West, C. 2024. Fundamentals of South African income tax. 14th ed. Cape Town: H & H Publications. Note: this textbook is updated on a yearly basis. The details of the chapters to be studied will therefore be available on myCourses. Required reading: in each topic, you will be directed to read certain chapters of your prescribed textbook, which will link to the material covered in the topic. © Milpark Education (Pty) Ltd Taxation TAXN01-6 24a x  Module purpose The purpose of this module is to provide students with an introduction to taxation in the South African context. It covers fundamental taxation principles such as gross income, exempt income, deductions, fringe benefits, capital allowances, and recoupments. The calculation of the tax liability of companies, close corporations, partnerships and sole proprietors is also covered, as are taxation of retirement benefits, provisional tax, donations tax, value‐added tax, standard income tax on employees (SITE) and pay-as-you-earn (PAYE). Students are also introduced to the fundamental principles relating to tax avoidance and tax evasion. © Milpark Education (Pty) Ltd Taxation TAXN01-6 24a xi  Module outcomes Upon successful completion of this module, the student will be able to: 1. Determine the gross income, exempt income, and allowable deductions in line with the provisions of the Income Tax Act, 1962 (Act No. 58 of 1962) (hereinafter referred to as ‘ITA’). 2. Calculate the capital allowances, recoupments and capital gains tax (CGT) in line with the provisions of the ITA. 3. Calculate the tax liability (including CGT and tax on retirement provisions) for individuals. 4. Calculate the tax liability of business entities. 5. Calculate VAT, turnover tax and donations tax. 6. Distinguish between tax avoidance and tax evasion, discussing the carrying forward of assessed losses and tax administration, as carried out in accordance with the TAA. © Milpark Education (Pty) Ltd Taxation TAXN01-6 24a xii  Topic 1 Gross income, exempt income and allowable deductions 1.1 INTRODUCTION This topic relates to the following module outcome: 1. Determine the gross income, exempt income, and allowable deductions in line with the provisions of the Income Tax Act, 1962. For a taxpayer to determine their final tax liability, the process is as follows: Add taxable portion of Determine gain or less assessed the gross loss brought forward income Add: Determine Any recoup- the exempt ments income Less: allowable deductions Figure 1.1 Flow of determining tax liability In this topic, you will gain knowledge in the following areas: 1. Determining gross income. 2. Determining exempt income. 3. Determining allowable deductions. © Milpark Education (Pty) Ltd Taxation TAXN01-6 24a 13  Prescribed reading Ensure that you study the chapters ‘Employed Individuals’, ‘Passive Income, Exemptions and Deductions’ and ‘Trading Deductions and Trading Stock’ in your prescribed textbook. 1.2 GROSS INCOME Figure 1.1 above illustrates that the starting point of determining a tax liability is to commence with what is known as gross income. Gross income is either in relation to the general definition, or linked to some specific inclusions (Carpenter et al., 2023:43). See Figure 1.2 below. any resident excluding receipts/ the total accruals of amount a capital nature Gross income in year of in cash or assess- otherwise ment received by or accrued to Figure 1.2 Definition of ‘gross income’ © Milpark Education (Pty) Ltd Taxation TAXN01-6 24a 14  Table 1.1 Case law relating to gross income Any natural person who is ordinarily resident in South Africa or is Resident not physically present in SA. Lategan v CIR 1926 CPD 203 2 SATC 16: the wider meaning not Amount only includes money per se, but the value of any form of property, whether corporeal or incorporeal, that has a monetary value. This is generally receipts or accruals of money; however, if there Cash or is a receipt other than money, it must be valued at an earlier date otherwise of receipt of accrual. Geldenhuys v CIR 1947 (3) SA 256 (C), 14 SATC 419: the taxpayer had the right to the use of a flock of sheep but did not Received or own them. The case concluded that the amount received was not accrued for the taxpayer’s own benefit, and it was not included in the gross income. Receipts of a capital nature are excluded in general; however, there are some inclusions, irrespective of their nature, when they are included. Various case laws determine the nature, but Capital generally the analogy of a tree and its fruit illustrates this nature principle. The tree is the capital portion of the asset, as it is held for investment purposes, and the fruit is gross income, which is the revenue generated from the investment. Note Capital is usually determined by what is known as the dominant factor. The question is: what was the intention of the taxpayer regarding the purchasing of the asset at the time? Activity If a person is not ordinarily resident in South Africa at any point during a year of assessment, the physical presence test will be considered. List the number of days a resident would need to be in South Africa, in terms of the physical presence test, to be considered a resident for tax purposes. © Milpark Education (Pty) Ltd Taxation TAXN01-6 24a 15 1.3 PASSIVE INCOME EXEMPTIONS (EXEMPT INCOME) After determining the gross income, the next step is to determine the passive income exemptions, or exempt income. This means that, once the exempt income has been determined, it is then deducted from the gross income. Exempted income, if exempt, cannot be subjected to CGT (Carpenter et al., 2023:54). There are two main categories of exemptions: Category 1 Income exempt from Certain entities that are normal tax, for completely exempt from Catergory 2 example, full tax, such as charities – exemptions or partial their income earned is exemptions. completely tax-exempt. Figure 1.3 Two categories of exempt income Royalties paid to non- Dividends and residents and interest paid foreign as an annuity/ dividends SA dividends purchased (partial) annuities Natural person's interest exemption Non- resident's interest exemption Figure 1.4 List of exempt income © Milpark Education (Pty) Ltd Taxation TAXN01-6 24a 16 1.4 ALLOWABLE DEDUCTIONS After determining the gross income and deducting the exempt income, the next step is to determine the allowable deductions. The following is a template of what a tax liability calculation would look like: Gross income: section 1 Salary, commission, leave pay, etc. Xxxx Fringe benefits: Xxx Use of motor vehicle Right or use of asset Acquisition of an asset Meals, vouchers, refreshments Free or cheap services Low-interest loans Subsidies Payment of employee’s debt Medical aid contributions Medical costs incurred Less: exempt income Non-resident interest exemption (xxx) Natural person interest exemption Dividend exemption Royalty exemption Special uniform exemption (These are only a few, but there are many more in the ITA.) Income Xxxx Less: Deductions Mainly sections 11−20 and 23 Pension fund deduction Sub-total (This figure is required for RAF Xxxx contributions.) Less: RAF deductions (xxx) Add: Taxable portion of Travel allowance Xxx allowances Subsistence allowance Other allowances (entertainment) Add: taxable portion of Xxx CGT Sub-total (This figure is required for donations (xx) deduction 10% excess.) © Milpark Education (Pty) Ltd Taxation TAXN01-6 24a 17 TAXABLE INCOME Xxxx Tax as per the tax table (Based on taxable income) Xxx Less: Annual rebates (xxx) Tax payable Xxx Activity Do you think that if your passive income was allowed to be exempt, that you would be able to deduct any expenses incurred by that passive income against your taxable income? Summary This topic described what constitutes gross income, exempt income, and allowable deductions. In order to arrive at a final tax liability, the starting point is to first determine the gross income, deduct the exempt income, and then deduct all allowable deductions. Once this has been done, the tax liability can be determined. There is a typical tax liability template that can be used to determine the final tax liability. ‘Gross income’ is defined as the total amount in cash, or otherwise, received by, or accrued to, any resident in the year of assessment, excluding receipts/accruals that are of a capital nature. Case law is used to determine if an amount constitutes gross income, or if it is capital in nature. After gross income has been determined, taxpayers are permitted to make certain deductions against gross income. The general principle governing the deduction is that it has to be incurred in the production of income in terms of section 11 of the ITA. There are other components for determining the deductibility of an expense, the principles of which need to be adhered to in order to secure a deduction successfully. © Milpark Education (Pty) Ltd Taxation TAXN01-6 24a 18  Self-Assessment Questions Note These examples are based on the 2023/2024 year of assessment. Please ensure that you use the appropriate rates/exemptions for the relevant year of assessment. Refer to myCourses for more information. Question 1 Read the scenario below and answer the question that follows: Mpho, a 23-year-old, earned interest income during the tax year. His interest income was twofold: 1. Interest received locally on his personal bank account from ABC Bank: R34 546, and 2. Interest earned offshore based on his unit trusts with a foreign bank: R12 341. Required: From these two streams of income, explain what will be included in gross income and if any exemptions or deductions apply. Question 2 Read the scenario below and answer the questions that follow: Mr Petrie Aucamp, a 26-year-old recently qualified engineer, took up employment after graduation. Petrie has been working on a permanent basis for Expert Engineering for the past three years; this included two work projects out of the country, which meant he was working abroad. The periods he was out of South Africa were between 20 September 2023 and 27 September 2023 (when he was in Malaysia), and from 10 October 2023 to 29 February 2024 (when he was in Namibia). © Milpark Education (Pty) Ltd Taxation TAXN01-6 24a 19  Details relating to his income and retirement provision can be seen below: Petrie earns an annual cash salary of R650 000 per annum. Expert Engineering deducts 7.5% of Petrie’s salary to pay to a pension fund. Petrie contributes an additional R850 per month towards a retirement annuity fund. A summary of the income earned by Petrie for the year can be seen below: Description Amount Interest earned from a South African bank account R54 231 Interest earned from Jersey foreign bank account R23 320 An annuity from a family trust; 40% relates to South African R11 000 dividends and the balance is South African interest. To supplement his income for the year, Petrie purchased an annuity for R75 000 on 1 September 2023. The annuity pays out R1 850 per month for five years, starting on 1 October 2023. Required: 2.1 Determine Petrie’s gross income, as defined for the year of assessment ended 29 February 2024. 2.2 Calculate the total section 10A purchased annuity exemption. 2.3 Calculate Petrie’s income as defined for the year ended 29 February 2024. 2.4 Calculate the tax liability owing to the South African Revenue Services (SARS) at the end of February 2024, with the assumption that no employee’s tax was withheld at all by Expert Engineering. © Milpark Education (Pty) Ltd Taxation TAXN01-6 24a 20 Question 3 Read the scenario below and answer the question that follows: The following information relates to John for the 2023/2024 year of assessment: He worked for Great (Pty) Ltd (‘Great’), where he was required to wear a uniform that is clearly distinguishable from ordinary clothing. He retired on 29 February 2024 at the age of 65. His receipts and payments for 2023/2024 year of assessment were as follows: Salary R600 000 Uniform allowance R25 000 Pension fund contribution – own contributions R36 000 Interest earned on South African investments R20 000 Foreign dividends received R45 000 South African dividends received R90 000 Provident fund contribution – own contributions R15 000 Donation to a tax-exempt organisation (certificate R75 000 received) Speeding fine R1 200 A company car with a maintenance plan and a value of R300 000 (including VAT) was given to him to use on 1 July 2023. He was responsible for all fuel costs. He did not keep any record of distance travelled or cost incurred. Great acquired the car on 1 April 2023. Great took out a lease agreement of a boat, whereby ownership will transfer to Great at the end of the lease agreement at a cost of R1 250 (excluding VAT) per month. The use of the boat was given to John from 1 June 2023 to 31 December 2023. On 31 December 2023, Great took ownership of the boat at no cost and donated it to John on the same day. The market value of the boat was R10 700 (excluding VAT) on 31 December 2023. The boat is not part of the trading stock of Great. John earned a salary of R50 000 per month for the 2023/2024 year of assessment. His employer granted a bursary on 1 March 2023 of R100 000 to his daughter to compete her degree. He borrowed R2 800 on 1 March 2023 from his employer to buy his daughter’s textbooks. He repaid it in full on 30 June 2023. © Milpark Education (Pty) Ltd Taxation TAXN01-6 24a 21 Required: For the purposes of this question, assume John’s remuneration is R813 450*. Calculate his taxable income for 2023/2024 year of assessment. *This remuneration will be used to determine the pension fund deduction in line with the limitations as specified in the ITA. © Milpark Education (Pty) Ltd Taxation TAXN01-6 24a 22  Topic 2 Capital allowances, recoupments and CGT 2.1 INTRODUCTION This topic relates to the following module outcome: 2. Calculate the capital allowances, recoupments and CGT in line with the provisions of the ITA. As discussed in Topic 1, the next step in arriving at the tax liability calculation is assessing the availability of capital allowance deductions or recoupments to be added back as income. Once this has been determined, any disposal of assets triggers either a capital gain or loss, and this is the final step in determining the tax liability calculation. Add taxable portion of Determine gain or less assessed the gross loss brought forward income Add: Determine any recoup- the exempt ments income Less: allowable deductions Figure 2.1 Flow of determining a tax liability In this topic, you will gain knowledge in the following areas: 1. Calculating capital allowances and recoupments. 2. Calculating CGT or loss for the final tax liability. © Milpark Education (Pty) Ltd Taxation TAXN01-6 24a 23  Prescribed reading Ensure that you study the chapters ‘Capital Allowances and Recoupments’ and ‘Capital Gains Tax’ in your prescribed textbook. 2.2 CAPITAL ALLOWANCES The premise for capital allowances is that a taxpayer is able to write off an asset over a period of time, thus reducing its original cost. This is known as a wear- and-tear allowance. For accounting purposes, this is known as depreciation. Accounting and taxation have different write-off periods for assets. According to section 11(a) of the ITA, any expenses of a capital nature are not permissible as a tax deduction. However, the Act permits certain assets to have capital allowances (deductions), as prescribed in the provisions of the ITA. Note An asset bought some time ago does not have the same value now as it did when it was purchased. For example, a DELL laptop purchased three years ago would have a lesser value today than it did three years ago. This is because the asset devalues and, as a result, if this asset is disposed of, it would not yield the same value. Therefore, a taxpayer is granted an allowance against such an asset. When expenses are incurred for capital assets and are claimed as a deduction, SARS scrutinises these types of expenses. Why? Surely it is an expense and it is deductible, as it was incurred in the production of income and meets the requirements for a deduction? The answer to this question is that the cost of repairing business assets does not qualify as a deduction in terms of section 11(a) of the ITA; however, section 11(d) of the ITA allows a deduction if: Expenditure actually incurred During the year of assessment Used for trade (or in the production of income) Not of a capital nature, i.e., not considered an improvement. © Milpark Education (Pty) Ltd Taxation TAXN01-6 24a 24  Activity MCN (Pty) Ltd, a company that makes ironing boards, owns automated manufacturing equipment at its plant to produce its product for sale and distribution. The main machine stopped working. After assessing what repair would be required, it was determined that a certain part of the machine would need to be replaced with a completely new part. The replacement would enhance the machine considerably, making it faster and more capable of producing more ironing boards than before. Is this an improvement to the machine, or a simple repair, and will it qualify for a deduction in terms of section 11(d)? It is important to understand the difference between an outright repair versus an enhancement to an asset. A quick and easy rule is to ask yourself: 1. If the repair is done on the asset, and it renders the asset in the same state/condition it was in before = REPAIR. 2. If the repair is done to the asset and it renders the asset an enhanced asset, capable of doing more than it did before the repair = CAPITAL in nature and is not deductible. It should be noted that there is no definition for ‘repairs’ in the ITA; however, there are guidelines given in case law. © Milpark Education (Pty) Ltd Taxation TAXN01-6 24a 25 2.3 VARIOUS ALLOWANCES The table below lists all the types of allowances that are available to assets: Table 2.1 Capital allowances Act reference Allowance name Which assets, write-off periods? (section): 11(e) Wear-and-tear All assets not claimed under section allowance 11(d), or any other allowances listed in the table Various write-off periods refer to Interpretation Note No. 47 (issue 5). 12C Special depreciation Certain assets (plant and machinery) allowance brought into use for the first time Manufacturing equipment Four-year write-off (new and unused) – 40% in the first year Five-year write-off (second-hand). 12E Small business Non-manufacturing assets over three corporation (SBC) years at certain percentages Manufacturing assets – 100%. 13(1) Building allowances Manufacturing buildings (newly 13quin Manufacturing: erected) 13quat Ranges from 2% to 5% allowances, 13sex Commercial depending on provisions met UDZ Any new and used building owned Residential units A 5% allowance annually Sale of low-cost Refurbishment of existing building – residential units. 20% over five years (straight-line) Construction of new building written off – 11 years (first year @ 20%, remaining years @ 8%) A 5% allowance A 10% deduction of any amount owed to seller. © Milpark Education (Pty) Ltd Taxation TAXN01-6 24a 26 2.4 RECOUPMENT It stands to reason that when a taxpayer utilises allowances to diminish the value of the asset, this diminished value is known as the ‘tax value’ (Carpenter et al., 2023:132). This tax value is what the estimated value of the asset would be if the asset was disposed of. However, this is not the case in reality, as the tax value and the final selling price of the asset at the time render a difference. Example Asset A, purchased at a value of R650 000: its capital allowances amounted to R560 000 for the past few years. The owner of the business decided to sell the asset. This means that the tax value of the asset is R90 000. The owner received an offer of R120 000, which means that there is a recoupment of R30 000 that needs to be factored in when the tax return is done, and it is treated as a taxable recoupment for income tax purposes. There are instances when these recoupments are not included in a taxpayer’s income; this will take place if the provision of section 8(4)(e) of the ITA is applied. Section 11(o) of the ITA is applied when the cost of the asset exceeds the proceeds on the sale of the asset. This is known as a scrapping allowance. Activity A jackhammer (an asset) was purchased for R280 000 and was brought into use immediately. The jackhammer was recently sold for R5 000. The total wear and tear claimed on the jackhammer was R260 000. Determine the scrapping allowance. 2.5 CAPITAL GAINS TAX Capital gains tax (CGT) applies to the disposal of assets. It was introduced on 1 October 2001 (Carpenter et al., 2023:138). © Milpark Education (Pty) Ltd Taxation TAXN01-6 24a 27 Persons liable for CGT include residents and non-residents. For non-residents, asset disposal consists mostly of the disposal of immovable assets, any interest on immovable property, and, lastly, any assets connected to a permanent establishment (Carpenter et al., 2023:138). Note SARS revised the inclusion rate for CGT. The inclusion rate differs from an individual to a company. The inclusion rate for an individual is 40% and for a company is 80%. The general formula for CGT is: Procceds Base Capital from LESS cost of gain/ sale of asset (loss) asset Figure 2.2 Illustration of CGT gain/(loss) Figure 2.2 above depicts the first step in calculating CGT: the proceeds less the base cost of the asset, arriving at the CGT gain/(loss). 2.5.1 Determining the valuation date value Should the proceeds received on the disposal of a pre-valuation date asset exceed the expenditure allowable, the person disposing of the asset may use the method that provides the highest base cost. The methods available are: Market value as at 1 October 2001 The time apportionment base cost. A formula is used, namely: − The base tab formula − The adjustment formula. 20% × (proceeds – post valuation date expenditure). Note: where no valuation was obtained, and no records of the actual cost are available, the person disposing of the asset can make use of the 20% method (Carpenter et al., 2023:147). © Milpark Education (Pty) Ltd Taxation TAXN01-6 24a 28 2.5.2 Deemed disposals When assets are disposed of, in many instances taxpayers are not aware that the provisions of the ITA provide for certain deemed disposals. Paragraph 12 of the Eighth Schedule of the ITA deals with events that trigger deemed disposals. These are generally situations in which no actual acquisition or disposal took place, but the event is treated as the trigger. Below is a list of such events: Commencing or ceasing to be a resident Assets sold that relate to a South African permanent establishment Capital asset becomes trading stock Trading stock ceasing to be trading stock Personal use assets. 2.5.3 Portion of disposals excluded from CGT This applies to any capital gain or capital loss made, which is subject to an inclusion. It must be disregarded when calculating the person’s aggregate capital gain or aggregate capital loss for the year (Carpenter et al., 2023:154). These are some of the exclusions (please note that only a few are listed below, but there is an extensive list in the Eighth Schedule to the ITA): Primary residence Personal use assets Disposal of microbusiness assets Gambling, games and competitions Donations or bequests to public benefit organisations and exempt persons. 2.5.4 Rollover relief for spouses This is the deferral of the capital gain for a later date. This is commonly seen between spouses. When as asset is transferred between spouses, the transferor is deemed to have disposed of the asset at its base cost and the transferee is deemed to have acquired the asset for the same expenditure incurred by the transferor. (Carpenter et al., 2023:156). © Milpark Education (Pty) Ltd Taxation TAXN01-6 24a 29  Summary This topic discussed capital allowances of assets and that the allowance allows a taxpayer to claim write-offs against the value of their assets in the form of a deduction. These capital allowances are exclusively for assets only; therefore, if not allowed under the general deductions of section 11(a) of the ITA, then capital allowances are permitted under various other sections. When capital allowances are granted, the taxpayer needs to determine whether or not a recoupment exists on the asset being sold. This results in either a recoupment that is treated as income for the taxpayer, or as a scrapping allowance, which is treated as a further deduction. Assets fall into different classes of capital allowances and the applicable section for each asset is clearly defined in the ITA. The disposal of an asset not only triggers a recoupment or scrapping allowance, but also CGT. Capital gains tax is calculated upon the disposal of assets. The disposal of assets can trigger a capital gain or a capital loss. There are various methods that can be used to determine the value of an asset that was acquired prior to 1 October 2001. Capital gains tax is a tax that is based on the disposal of capital assets and, in certain circumstances, some events give rise to a disposal. There are exclusions applicable to a taxpayer on certain assets being disposed of that are not included in a taxpayer’s income. Self-Assessment Questions Note This example is based on the 2023/2024 year of assessment. Please ensure that you use the appropriate rates/exemptions for the relevant year of assessment. Refer to myCourses for more information. © Milpark Education (Pty) Ltd Taxation TAXN01-6 24a 30 Question 1 Read the scenario below and answer the questions that follow: ABC (Pty) Ltd is preparing their annual tax return and, in doing so, requires your assistance to assess the allowances, recoupments and capital gain tax that some of the transactions may have triggered. The tax year-end and financial year-end are both 29 February 2024. ABC (Pty) Ltd is a chemical-producing company, which produces chemical cleaning products and sells them to large wholesale companies. It also sells cleaning materials to the veterinary sector. Due to the rapid expansion of the business, the company made the following transactions: Mr Newton (owner and director of ABC (Pty) Ltd) owned, in his personal capacity, a delivery vehicle. The business is expanding, so Mr Newton sold the delivery vehicle to the business. It will now be used solely for business purposes, and the necessary allowances and expenses associated with the delivery vehicle can be claimed. Mr Newton bought the vehicle five years ago at a cost of R345 987. He sold the asset to the company for R243 900. ABC (Pty) Ltd purchased a factory on 1 January 2001; the building was not a newly erected building and had already been constructed at the time of purchase. The company has never claimed any building allowances on this building to date. ABC (Pty) Ltd had a fire in the building a few years ago and several documents, as well as backup data, were destroyed. They cannot determine whether or not the asset was valued on 1 October 2001, and they only have the cost of R1 350 000 as recorded in the Annual Financial Statements. The building was sold for R3 456 000 on 31 January 2024. In the factory, there is a label-printing machine, which the company uses to print the labels that go onto its products for branding. The machine was not working at its initial capacity, so the technician assessed the repair work to be done and stated that the machine would need a few new parts. Once these parts were installed, the printer would be fully operational and continue as it did before. The repairs amounted to R345 234. © Milpark Education (Pty) Ltd Taxation TAXN01-6 24a 31  ABC (Pty) Ltd purchased assets during the course of the year (30 April 2023), and they were brought into use. The assets are classified as assets directly used in the process of manufacture and play an active role in the activities of the company, i.e., manufacturing chemicals for the business. The assets were bought new, all at the same time, on 30 April 2023; they cost ABC (Pty) Ltd R2 891 800. Mr Newton, the Director, is aware that there might be a section in the capital allowance provisions of the ITA that ABC (Pty) Ltd can make use of; however, he is unsure. Assumptions: The building was purchased in January 2001. ABC (Pty) Ltd only uses the prescribed wear-and-tear rates or capital allowance rates in accordance with SARS and does not use a separate accounting depreciation rate policy. The profit after all other expenses for the year is R10 345 789, before considering the repairs/improvements or CGT. Provisional taxes paid are as follows: – 01: R1 237 900 – 02: R1 450 000. Required: 1.1 Calculate the CGT for the following assets to be included in the taxable profit as at year-end: 1.1.1 Delivery vehicle 1.1.2 Building. 1.2 Assess whether the repairs and maintenance will be deductible in terms of section 11(d) of the ITA, or disallowed entirely. Provide an explanation as to the deductibility (or lack thereof). 1.3 Calculate the remainder of the capital allowances for the purchased assets. 1.4 Finalise the company’s tax calculation as at 29 February 2024. © Milpark Education (Pty) Ltd Taxation TAXN01-6 24a 32  Topic 3 Calculate the tax liability of an individual 3.1 INTRODUCTION This topic relates to the following module outcome: 3. Calculate the tax liability (including CGT and tax on retirement provisions) for individuals. The determination for a final tax liability of an individual is very similar to the process used for a company. It all starts with determining gross income less any allowable deductions, adding any recoupments and, lastly, the adding of any CGT profit or loss. A simple breakdown is shown below (Carpenter et al., 2023:2): Gross income section 1 Xxxx Less: Exempt income (xxx) Income Xxxx Less: Deductions (sections 11−20 and 23) (xxx) Add: Taxable portion of allowances (section 8(1)) and Xxx taxable portion of gains Less: Deductions for donations (XXX) Taxable income of an individual Xxxx In this topic, you will gain knowledge in the following areas: 1. Calculating the retirement benefits to be included/deducted from gross income. 2. Performing a tax calculation for an individual with allowable deductions to arrive at the final tax liability, after offsetting employee’s tax and/or provisional taxes. © Milpark Education (Pty) Ltd Taxation TAXN01-6 24a 33  Prescribed reading Ensure that you study the chapter ‘Introduction’, as provided on myCourses. The chapter ‘Retirement Benefits and Planning’, as authored by Phillip Haupt, and the document, ‘Spouses married in community of property’, are both also available on myCourses. Ensure that you study the chapter ‘Employed Individuals’ in your prescribed textbook. Note Refer to Topic 2 for an overview of CGT principles that will be applied to individuals. 3.2 TYPES OF TAXES THAT INDIVIDUAL TAXPAYERS COULD BE LIABLE FOR Figure 3.1 depicts the types of taxes for which individual taxpayers could be liable. Taxes Direct taxes Indirect taxes Normal tax Securities Estate duty VAT Transfer Tax Skills Customs and Turnover tax Development Transfer duty Excise Levy Dividends tax /withholding Donations Various levies tax tax Figure 3.1 Types of taxes payable Source: Haupt (2020:3) © Milpark Education (Pty) Ltd Taxation TAXN01-6 24a 34 The process of determining the tax liability for an individual can be broken down as follows: Income from services less any exempt income Less: Add: non- employees tax cash rewards or provisional (fringe taxes benefits) TAX Less: LIABILITY Less: applicable allowances medical (deductions) rebate Less: annual Add: rebates capital gains Figure 3.2 Flow of determining an individual’s tax liability 3.3 INCOME FOR INDIVIDUALS (INCLUDING FRINGE BENEFITS) The table below illustrates the types of income and what constitutes income. Table 3.1 Types of income Income name What constitutes income? Income from Income for individuals starts with any income earned for services rendered services rendered, i.e., your monthly salary. These services rendered imply that the taxpayer performed a certain function in order to receive the remuneration; there is a causal link. Fringe benefits Acquisition of assets (non-cash rewards) Right or use of any asset (other than residential accommodation) Right of use of motor vehicle Meals, refreshments and such vouchers Free or cheap services Low-interest loans © Milpark Education (Pty) Ltd Taxation TAXN01-6 24a 35  Subsidies Payment of employee’s debt Medical aid contributions Incurring of costs related to medical aid Contributions to retirement funds by employers. Allowances Travel allowance Subsistence allowance Other allowances. Different rules apply depending on whether each of these allowances is taxable as a fringe benefit or not. Students should ensure they understand how to apply the principles. Activity Mrs X is given a reimbursive allowance. The allowance amounts to R6 700, and it was used to purchase a new cellphone for work. Mrs X provides her employer with the invoice and receipt of the purchase. Determine what Mrs X’s inclusion will be for her taxable income when she files her tax return. 3.4 EXEMPTIONS Once gross income is determined from your employment, the next step is to determine whether there is any exempt income that must be deducted from the gross income. Gross income xxx Less: exempt income (xxx) Income xxx The key exemptions are as follows: Special uniforms exemption Transfer or relocation costs exemption Ship’s crew exemption Employment outside the Republic exemption. © Milpark Education (Pty) Ltd Taxation TAXN01-6 24a 36 3.5 DEDUCTIONS Most deductions are included in section 11(a) of the ITA, and the main premise of these deductions is that a taxpayer is only permitted these deductions if such expenses were incurred in the production of income from trade (Carpenter et al., 2023:26). SARS introduced section 23(b) and (m) of the ITA, which prohibits employees from claiming deductions (e.g. professional memberships, telephone costs, computer depreciation, etc.), as SARS is of the view that these costs are not incurred in the ‘production of employment income’ (Carpenter et al., 2023:26). The main deductions applicable to employees are as follows: Pension, provident fund and retirement fund contributions Contributions to retirement funds (from 1 March 2016) Donations to public benefit organisation. Activity If you made a donation during the year of assessment ending 29 February 2024, and it amounted to R14 000, what are the requirements you would need to meet and the paperwork you would have to submit in order to claim the donations successfully as a deduction? Is there a maximum limit for donations by an individual? 3.6 TAX LIABILITY AND TAX TABLES Once the taxable income has been determined, the tax liability is determined by taking the taxable income and multiplying it by the tax tables, and then deducting the annual rebates applicable to the individual. After the annual rebates, an additional rebate is available to an individual and this is the medical scheme fees tax credit. © Milpark Education (Pty) Ltd Taxation TAXN01-6 24a 37 3.7 EMPLOYEES’ TAX AND FINAL TAX Normal tax Provisional tax: Employees tax: Advance payment Advance payment of normal tax of normal tax Can be individuals Usually salaried who earn income employees from multiple sources 3.8 TAXATION OF AMOUNTS RECEIVED AS A RESULT OF RETIREMENT Amounts that are received by individuals as a result of retirement give rise to various tax consequences (Haupt, 2023:377). For example, annuities are fully taxable, as deductions are given for retirement annuities under section 11(m) of the ITA in full, but are taxed on their own tax tables. Table 3.2 Retirement benefits Amounts received as a result of retirement Description Annuities Fully taxable in the hands of recipient. Lump sum for termination of service Fully taxable, other than pension, pension preservation, provident, provident preservation fund or retirement annuity fund. Severance benefits: Taxable in terms of retirement Severance benefit fund lump-sum tax table. Insurance proceeds Excluded from definition of (*) insurance received by way of employer ‘severance’. © Milpark Education (Pty) Ltd Taxation TAXN01-6 24a 38 3.9 PENSION, PENSION PRESERVATION, PROVIDENT, PROVIDENT PRESERVATION AND RETIREMENT FUND 3.9.1 Events that give rise to receipts The three events that give rise to the receipts from such funds are: 1. Resignation from the fund 2. Retirement 3. Death of the member. 3.9.2 Taxation of annuities Annuities received form part of gross income, and not more than one-third of the annuity due from the fund can be allowed as a pay-out; the other two-thirds remain in the fund, but the taxpayer will receive the two-thirds in the form of an annuity. 3.9.3 Taxation of lump sums Certain portions of pensions, pension preservation funds, retirement annuity funds, provident funds and provident preservation lump sums are tax free and do not fall into gross income. There are two types of lump sums, namely retirement lump-sum benefits and withdrawal benefits. 3.9.4 Retirement benefit A retirement benefit has the following tax features: A separate tax table A withdrawal benefit A separate tax table. 3.10 DIVORCE A non-member spouse can request the member’s fund to pay a portion of the pension benefit to them in cash, or to transfer the benefit to another retirement fund or preservation fund (Haupt, 2023:390). Section 37D of the Pension Funds Act, 1956 (Act No. 24 of 1956) states that the benefit going to the non-spouse © Milpark Education (Pty) Ltd Taxation TAXN01-6 24a 39 member is deemed to accrue to the member spouse on the date of the court order. This is only applicable for the purposes of the Divorce Act, 1979 (Act No. 70 of 1979). For income tax purposes, you look at: Maintenance Lump sum to non-member. 3.11 CAPITAL GAINS TAX Refer to Topic 2 in this study guide. The principles are the same. Summary This topic discussed the flow of determining the final tax liability of an individual. The starting point is to look at the income (less exempt income) of the individual, and then to take into account the allowable deductions. For an individual, you need to take into account the annual and medical rebates available. Employees, tax and provisional tax must be deducted from the tax due, in order to determine the final tax payable by an individual. When it comes to retirement provisions, it should be noted that withdrawal and retirement from a fund have separate tax tables, and the rules governing them are different for each retirement provision. Capital gains for individuals follow the same principles for companies, except that there are specific exclusions when it comes to personal-use assets. This detail was covered in Topic 2. Self-Assessment Questions Note These examples are based on the 2023/2024 year of assessment. Please ensure that you use the appropriate rates/exemptions for the relevant year of assessment. Refer to myCourses for more information. © Milpark Education (Pty) Ltd Taxation TAXN01-6 24a 40 Question 1 Read the scenario below and answer the question that follows: Mrs Nkosi has approached you for some assistance in the preparation of her tax return for the tax year ended 29 February 2024. Mrs Nkosi (40 years old) was employed by BZN Bank for the full tax year. She received the following: An annual salary of R734 000 per annum. BZN Bank provided Mrs Nkosi with a company car on 1 March 2023. The car cost BZN Bank R450 000 (including VAT) when it was purchased on 1 March 2022. Mrs Nkosi kept a logbook and travelled 40 000 km, with 10 000 km being for business. She paid R1 200 for the licence and R27 000 for all private fuel. There was the acquisition of an asset for the year amounting to R13 211 (this was a computer she purchased from the company). The market value of the asset is R15 000. Mrs Nkosi received two long-service awards – she has been employed by BZN Bank for 25 years. She received the following gifts: – An iPad Pro 9.7-inch Retina display, which cost BZN Bank R20 899 – A Montblanc® pen: Meisterstück Gold-Coated 149 Fountain Pen, which cost BZN Bank R12 456. Mrs Nkosi received a reward from the police for providing them with information regarding illegal dealings in child kidnapping that resulted in a well-known criminal being arrested. She received a reward of R250 000. Mrs Nkosi donated R5 000 to an NPO, and she has a section 18A certificate. She earned interest income of R20 747 from a South African bank on her current account, which is reflected on her IT3(b). Mrs Nkosi contributed to a medical aid herself (with no contribution from her employer). She has no dependants and has not incurred any out-of- pocket medical expenses. Her total contributions for the year were R43 211. Mrs Nkosi disposed of her primary residence at the end of September 2023. The residence was purchased in January 2011 at a cost of R3 850 900, and its selling price was R6 789 111. The estate agent’s commission was R678 911. Mrs Nkosi made no improvements to her property during this period. © Milpark Education (Pty) Ltd Taxation TAXN01-6 24a 41  According to the IRP5 received from her employer, her PAYE total was R148 557. Assumptions: The car came with a maintenance plan and Mrs Nkosi made no other payments. Required: Calculate Mrs Nkosi’s tax liability for the tax year ended 29 February 2024. Question 2 Read the scenario below and answer the questions that follow: Mr T was a full-time employee of NewIt (Pty) Ltd and was retrenched during the year of assessment. He received a lump sum of R550 000 from his retirement annuity fund when he turned 60 in June 2023. He then invested this amount, plus his lifetime savings, in a bank fixed deposit. He earned interest income of R83 210 for the year ended 29 February 2024. In addition, he had the following income and expenditure: Salary R450 000 Severance benefit from employer on 31 May 2023 R623 900 Interest income R83 210 Required: Calculate Mr T’s tax liability for the year ended 29 February 2024. © Milpark Education (Pty) Ltd Taxation TAXN01-6 24a 42 Question 3 Read the scenario below and answer the questions that follow: Mr and Mrs Young (both aged 65) were married in community. Mrs Young travelled extensively and Mr Young was lonely at home, as he was a stay-at- home husband. Unfortunately, things did not work out and the marriage ended in divorce. Mrs Young had a corporate retirement fund (provident) with a fund value of R5 000 000 at the date of divorce (1 April 2022), of which Mr Young received 20% through a court order. Mrs Young decided to withdraw the money from this fund and pay over the 20% to her ex-husband. Mrs Young elects to put R4 000 000 of this money in a preservation fund and takes R2 000 000 cash. Of the cash received, R1 000 000 was used to pay out her previous husband so that she could keep the house. Note: the R1 000 000 paid to the husband was in terms of a court order; therefore, Mr Young is taxable on the money received. The company for which Mrs Young works was offering voluntary retrenchment to certain staff members, and Mrs Young was so devastated after the divorce that she took the retrenchment on 31 December 2023. The pay-out was as follows: Accumulated leave pay: R40 000 Severance pay: R300 000. Mrs Young also saved in a retirement annuity. The total fund credit was R1 000 000, as she retired from the fund on 31 December 2023. She took the maximum capital so that she could travel abroad. The balance remained in the fund and pays out an annuity. Required: Calculate the tax payable on the retirement lump sums received on 31 December 2023. Note: round off to the nearest rand. © Milpark Education (Pty) Ltd Taxation TAXN01-6 24a 43  Topic 4 Tax liability of business entities 4.1 INTRODUCTION This topic relates to the following module outcome: 4. Calculate the tax liability of business entities. There are many different business entities that can operate in South Africa. This topic will illustrate the various business entities and outline how each of them is taxed, and whether there is a special taxing regime applicable. Provisional tax is explained in relation to the tax liability of various business entities. In this topic, you will gain knowledge in the following areas: 1. Understanding different business entities and how to determine their tax liability. 2. Calculating provisional tax for various business entities. Prescribed reading Ensure that you study the chapter ‘Business Entities and Provisional Taxes’ in your prescribed textbook. 4.2 TYPES OF BUSINESS ENTITIES There are different forms of business entities with different tax rates that are applicable to each entity. The different types of business entities are depicted in the figure below. © Milpark Education (Pty) Ltd Taxation TAXN01-6 24a 44  Business entities Sole Partnerships Companies trader/independent contractors SBC Provisional tax Close corporations Figure 4.1 Types of business entities Note All business entities mentioned above are liable to register for provisional tax. This is applicable to both companies and individuals, and is a form of advance tax collection of normal tax from taxpayers. However, microbusinesses will only be liable for exemption from paying dividends tax to the extent that any dividends paid during the year do not exceed R200 000 per year. 4.2.1 Natural persons Natural persons can trade as the following three options: 1. Independent contractor 2. Sole trader 3. Partnership. Note Calculating the taxes payable for natural persons under these three options uses the same method as that used for determining individual tax liability, except that income in a partnership that is taxable is split in the proportion of the partnership. All three options listed in Topic 4.2.1 earn income from trading in their personal capacities and not as salaried employees. © Milpark Education (Pty) Ltd Taxation TAXN01-6 24a 45 4.2.2 Companies Classification of companies and tax rates: Private or public taxed at 28% Small business corporations (either a company or a CC) taxed according to the SBC tax table Microbusiness paying turnover tax. Note All of the business entities above are subject to dividends withholding tax if dividends are to be declared through these business entities, subject to a 20% withholding tax (WHT) rate. The rate of dividends tax increased from 15% to 20% for any dividend paid on or after 22 February 2017. Microbusinesses paying turnover tax are exempt from dividends tax to the extent that the aggregate amount in dividends paid during the year does not exceed R200 000. 4.3 PROVISIONAL TAX Provisional taxpayers are defined as all companies, or individuals who are carrying on a trade, or any person identified by the Commissioner to be a provisional taxpayer. (Carpenter et al., 2023:73). Exemptions from paying provisional tax include the following entities and individuals: Approved tax-exempt public benefit organisation (PBO) Anyone who does not derive income from carrying on a trade Anyone who only earns interest, but who does not exceed the annual tax liability threshold. 4.3.1 Payment of provisional taxes Taxpayers are required to make two compulsory provisional tax payments during the year of assessment on their estimated taxable income (Carpenter et al., 2023:75): 1. The first payment is done within the first six months of the year of assessment. © Milpark Education (Pty) Ltd Taxation TAXN01-6 24a 46 2. The second payment must be done no later than the end of the year of assessment. These payments are based on estimated taxable income. Some important guidelines are as follows: For the first provisional tax payment, a taxpayer can use the basic amount. Should an estimated taxable income amount be lower than the basic amount, special consent is required by the Commissioner for a first provisional tax payment. The first provisional tax payment must exclude any capital gain from the basic amount. The second payment is made at the end of the year and is based on a very accurate set of numbers that taxpayers must use when performing the calculation. Third provisional tax payments are voluntary provisional tax payments. Actual taxable income is R1m or less, estimated taxable income can be based on lower of: – taxable income for the year – the basic amount (adjusted by 8% as an escalation). To avoid 20% additional tax, the estimation is required to be within 90% of the actual taxable income for the year. Actual taxable income is R1m or more, estimated on taxable income based on a serious calculation. To avoid 20% additional tax, the estimation is required to be within 80% of the actual taxable income for the year. Figure 4.2 Two-tiered system for provisional estimates by taxpayers Note Penalties are levied on any understatement of provisional tax estimation payment, and interest will accrue. © Milpark Education (Pty) Ltd Taxation TAXN01-6 24a 47  Activity What will the penalty be for a company or an individual, if their taxable income is more than R1m a year? Should their provisional tax estimation be understated, and how accurate should the provisional tax estimation be? Summary This topic presented the various business entities that can operate and trade under the ITA. The concepts of sole traders, independent contractors and partnerships were identified, and the taxation principles of these options were explained. Companies can be registered companies, close corporations or small business corporations, and they are all taxed at the same tax rates (i.e., annual corporate tax rate). Small business corporations (SBCs) are the exception; there is a separate tax table for the various income levels of SBCs, which are taxed differently. Dividends tax is also applicable to all companies at the prescribed dividends withholding tax (DWT) rate. Provisional tax is a method used to enable SARS to collect normal tax in advance, and SARS sets out that there are two compulsory payments that are required to be made by taxpayers registered for provisional tax. Self-Assessment Questions Note These examples are based on the 2023/2024 year of assessment. Please ensure that you use the appropriate rates/exemptions for the relevant year of assessment. Refer to myCourses for more information. © Milpark Education (Pty) Ltd Taxation TAXN01-6 24a 48 Question 1 Read the scenario below and answer the questions that follow: Thobikile Valakazi earns the following income: Monthly salary: R24 000 per month Interest income: R785 per month Rental income: R4 500 per month. Required: Calculate Thobikile’s taxable income. Also advise whether Thobikile is required to be registered for provisional tax, and provide an explanation for your answer. Question 2 Read the scenario below and answer the questions that follow: Company Mortal Expo (Pty) Ltd is preparing their first provisional tax payment, which is due on 31 August 2023 for the 2024 year of assessment. They have not yet been assessed for 2022/2023 (the assessment is pending with SARS, and SARS has not given feedback yet regarding the delay). However, the accountant, Mpho, is feeling anxious as she is faced with the following issues: The estimated basic amount should be based on the prior year’s assessment, with a minimum of 8% escalation to the numbers, excluding any capital gains. When Mpho performs the calculation, she ascertains that the numbers are considerably lower than the basic amount would be if they did indeed receive the 2022/2023 assessment. The estimated taxable income is R3 204 000 for the year, and Mpho tells you that she only needs to base the estimated taxable income on 60% of the actual taxable income for the year to avoid the 20% understatement provisional tax penalty. Mpho decides to do the following: Submit the IRP6 based on her lower estimated taxable amount, even if it is lower than all prior years assessed. Submit the estimation at 60% of prior years’ assessed numbers. © Milpark Education (Pty) Ltd Taxation TAXN01-6 24a 49 Required: Explain what the issues are with the approach that Mpho is using. Explain what the process is for lower estimations and, additionally, whether the 60% principle being applied by Mpho is correct. Make corrective recommendations to Mpho. Question 3 Read the scenario below and answer the questions that follow: Rain (Pty) Ltd (‘Rain’) is a company that sells umbrellas. The company’s financial year-end is 31 December. During the 2023 year of assessment, Rain made total sales amounting to R2 500 000. Rain purchased 10 000 umbrellas, at R20 each, during the 2023 year of assessment. Due to the company’s commitment to the suppliers, they provided Rain with 100 umbrellas free of charge. The market value of the umbrellas at that date was R30 each. Rain had 200 umbrellas on hand from the previous year of assessment and decided to donate these to employees and friends. The market value of the umbrellas was determined as R25 per umbrella. At the 2023 year-end stocktake, it was found that Rain had 400 umbrellas on hand. The market value of these umbrellas is R30 per umbrella. Required: Calculate the tax payable for Rain (Pty) Ltd for the year ending December 2023. © Milpark Education (Pty) Ltd Taxation TAXN01-6 24a 50  Topic 5 VAT, turnover and donations tax 5.1 INTRODUCTION This topic relates to the following module outcome: 5. Calculate VAT, turnover tax and donations tax. Within the landscape of tax, there are other taxes that are triggered by transactions, namely VAT, which is known as transactions tax. Turnover tax is a form of normal income tax, whereas donations tax is similar to VAT in that it is based on a transaction or action, i.e., the act of donating money. In this topic, you will gain knowledge in the following areas: 1. Understanding what VAT is and how it is calculated. 2. Understanding what turnover tax is and how this is calculated. 3. Understanding what donations tax is and how it is calculated. Prescribed reading Ensure that you study the chapters ‘Value-added Tax’ and ‘Turnover Tax’ in your prescribed textbook. A chapter, ‘Donations Tax’, as authored by Phillip Haupt, is available on myCourses. 5.2 OTHER TYPES OF TAXES Other types of tax include the following: Value-added tax (VAT) Turnover tax Donations tax. © Milpark Education (Pty) Ltd Taxation TAXN01-6 24a 51 5.3 VALUE-ADDED TAX (VAT) Valued-added tax is levied on any supply of goods or services (Carpenter et al., 2023:161). Business entities that register for VAT are: Independent contractors Sole traders Partnerships Trusts Companies (close corporations, private and public companies). Note Registration applies to a person who is carrying on an enterprise in the Republic, partly or wholly, and whose taxable supplies (standard and zero-rated) exceed R1 000 000. 5.3.1 VAT concepts Determining whether VAT is payable or refundable is based on two main components: 1. Output tax: this is the VAT that vendors charge to their customers on their goods or services supplied. 2. Input tax: this is the VAT charged by external vendors on the supply of goods or services. 5.3.2 VAT rates Standard-rated supplies are charged at 15%. Zero-rated supplies are charged at 0%. Exempted supplies are exempt from VAT. 5.3.3 Determining output VAT In addition to VAT being charged on any goods or services, there are also certain deemed output VAT supplies, namely: © Milpark Education (Pty) Ltd Taxation TAXN01-6 24a 52  Fringe benefits When a person ceases to be a VAT vendor When a going concern is disposed of Insurance claims The supply of goods used partly for making taxable supplies. 5.3.4 Claiming of input VAT The follow applies to claiming input VAT: Input VAT must have been incurred (Carpenter et al., 2023:164). Input being claimed must have been acquired in the course of making taxable supplies. VAT input should be apportioned in certain circumstances, i.e., if a good or service that is to be used is only partly for the making of taxable supplies. If the portion of taxable supplies being used is more than 95%, the full input VAT can be claimed. Prohibited input VAT, in accordance with the Value-added Tax Act, 1991 (Act No. 89 of 1991) (hereinafter referred to as the ‘VAT Act’), applies to the following: − Motor cars − Entertainment expenses − Fees or subscriptions. 5.3.5 Exempted supplies Exempted supplies generally include the following: The financial service industry (interest, transferring of shares and exchange of currency) Residential accommodation Education services Transport by road or rail Other exempt supplies. 5.3.6 VAT invoices and record-keeping The South African Revenue Services (SARS) has strict criteria in place for the claiming of input VAT. The VAT Act, 1991, provides a comprehensive list in section 20 as to what constitutes a tax invoice. Failure to comply with any one of these criteria will result in the input VAT being disallowed in full by SARS. © Milpark Education (Pty) Ltd Taxation TAXN01-6 24a 53 The VAT Act, 1991, requires that detailed records be kept for a period of five years from the date the last return was received by SARS. 5.3.7 VAT calculation format The table below depicts how the Vat payable or refundable is calculated: Total output VAT xxxxx Less: Total input VAT ( xxxx) Net VAT payable/(refundable) xxxxx Activity Think of an instance in which a VAT vendor would be able to de-register for VAT. 5.4 TURNOVER TAX Turnover tax is applicable to microbusinesses. The premise of this tax is that a microbusiness is taxed on its turnover at a lower rate. Profits derived are not subject to normal tax. The business is taxed on a receipts basis and not on an accrual basis, which is generally the norm for income tax. total receipts excluding amounts from that are carrying exempt on (i.e., business govt. activities grants) excluding any amount of a capital nature Figure 5.1 Qualifying turnover © Milpark Education (Pty) Ltd Taxation TAXN01-6 24a 54 There is a turnover table that is used for turnover thresholds and tax liability percentages. Note Turnover may not exceed R1 000 000 for a year of assessment. Microbusinesses are not required to register for VAT, as their turnover does not exceed R1 000 000 per annum. Dividends tax: a shareholder of the microbusiness is exempt from dividends tax, as long as the dividends being paid do not exceed R200 000. Provisional tax payments: microbusinesses are not subject to provisional taxes; however, two payments must be made annually by the end of August and by the end of the year of assessment/year-end. Certain amounts are excluded from taxable turnover. Investment The general rule is income, such as that an individual rental on who wants to immovable assets, register as a dividends, interest, microbusiness royalties, annuities cannot hold and proceeds from shares in any financial other company. instruments. If more than 20% of total Non-qualified receipts due to persons limit rendering microbusiness personal to register for services turnover tax. disqualify as microbusiness. Figure 5.2 Other points for consideration © Milpark Education (Pty) Ltd Taxation TAXN01-6 24a 55 5.5 DONATIONS TAX Donations tax is not a tax on income but rather on a transfer of assets (Haupt, 2023:844). When considering the aspects of donations, one needs to be mindful of the following: Donations rate is levied at a flat rate of 20%, unless the donation exceeds R30 million; then it is taxed at 25%. Annual exemption is R100 000. It is payable by the donor. Donations are effective when all legal formalities have been complied with. If the taxpayer is not an individual, the exemption is limited to casual gifts that are less than R10 000 per year. 5.5.1 Exemptions to donations tax Donations tax is not payable when: the donation is made to a spouse. the donation is made to or for the benefit of a spouse. it is a donatio mortis causa (by way of death). it is a donation under which the benefit only passes to the donee on the death of a donor. a donation was cancelled within six months of the date on which it took effect. the donation is made by or for the benefit of any traditional council, traditional community, or tribe. a donation of property or a right in a property situated outside the Republic. donations are by or for any person (usually approved tax-exempt organisations such as PBOs, etc.). they are voluntary awards. a property is disposed of under, and in pursuance, of any trust. a donation or right to use of farming property is given to a donor’s child. donations are made by a company to a recognised public company for tax purposes. casual gifts are made that do not exceed R10 000 per annum. © Milpark Education (Pty) Ltd Taxation TAXN01-6 24a 56 5.5.2 Deemed donations Donations tax is payable on the following: A property that has been donated. Fiduciary interests. Usufructuary interest. Bare dominium. 5.5.3 Payment of donations tax Payment is due the month following the one in which the donation takes effect. Activity What happens to the donor if the donations tax is paid late? Summary This topic discussed VAT as an indirect tax, turnover tax that is applied to microbusinesses, and donations tax. Value-added tax (VAT) is levied at a standard rate of 15%, unless the item is exempt from tax or is taxed at 0%. Value-added tax is governed by the VAT Act, 1991, which explains the concept of carrying on an enterprise, as well as input and output tax. Output tax is tax payable to SARS and input tax is claimable from SARS. The net effect will determine whether you have VAT payable or refundable. Turnover tax is for microbusinesses and assists small businesses in lessening the administrative burden for tax compliance in respect of income tax. Qualifying turnover determines the amounts on which the business will pay tax. There are also specific criteria that need to be met in order to qualify as a microbusiness and to apply turnover tax. Donations tax is levied at a flat rate of 20% and is taxed on the transfer of assets; if the amount exceeds R30 million, the tax rate is 25%. This is a separate tax. Certain exemptions apply to donations tax, as highlighted in the topic. © Milpark Education (Pty) Ltd Taxation TAXN01-6 24a 57  Self-Assessment Questions Note These examples are based on the 2023/2024 year of assessment. Please ensure that you use the appropriate rates/exemptions for the relevant year of assessment. Refer to myCourses for more information. Question 1 Read the scenario below and answer the questions that follow: Gail Force (Pty) Ltd is a renewable energy company. Storm (Pty) Ltd is its holding company. Storm (Pty) Ltd purchases trading stock from its subsidiary, Gail Force (Pty) Ltd, for R67 000 (this is the price that the parties agreed upon); however, the open market price of the stock is R123 000, excluding VAT. A summary of Gail Force (Pty) Ltd’s transactions for the VAT period ended June 2023 is given below, which is due on or before 25 July 2023: Taxable supplies billed: R234 000, including VAT Expenses incurred in the furtherance of making taxable supplies: – Entertainment R1 345, including VAT – Rental paid R11 200, including VAT – Bank charges R456, including VAT – Computer expenses R2 456, including VAT. Note: assume that the sale of the trading stock to Storm (Pty) Ltd is not included in the R234 000 taxable supplies. Required: Determine the V