Taxation 2

Taxation in South Africa

1. Outcomes of this chapter

  • After studying this chapter, you should be able to:
      - Explain the legislative process in South Africa.
      - Identify the national taxes levied in South Africa.
      - Describe how the tax Acts are administered.
      - Explain how tax law is interpreted.
      - Illustrate how tax legislation is interpreted by performing a normal tax calculation.

2. Overview

  • This chapter provides an overview of the national taxes levied in South Africa. Focus is predominantly on the Income Tax Act 58 of 1962.

  • Different types of taxes are levied based on income, wealth, and consumption. A background to taxation in South Africa is provided with discussions on:
      - How tax law is administered (2.3).
      - How it is interpreted (2.4).
      - Analysis of normal tax components and interpretation of tax law (2.5).

3. Brief history of taxation in South Africa (2.2.1)

  • Taxation has existed in South Africa since the 1600s with early forms including:
      - Transfer duty on property and customs taxes on goods imported into the Cape Colony.
      - History of taxes reflects colonial influences from the Netherlands and Britain, leading to a complex tax system.

  • Major historical amendments include:
      - The Franzsen Commission's reports (1968, 1970) on fiscal policy.
      - The Margo Commission (1986) on tax structure.
      - The Katz Commission (1994-1999) with nine interim reports.
      - The Davis Tax Committee (2013-2018) focusing on inclusive growth and employment.

  • Significant changes to the tax system have been enacted following these reviews.

4. The legislative process (2.2.2)

  • Governed by the Constitution of South Africa, 1996, ensuring transparency and public participation.

  • General process involves:
      - Issuing a Green Paper (public discussion document).
      - Following with a White Paper (refined policy document based on input).
      - Draft Money Bill, prepared by the National Treasury and reviewed for compliance before parliamentary introduction.
      - Public comment period follows the introduction in Parliament.

  • Normal legislature passing involves:
      - Approval by National Assembly and National Council of Provinces.
      - Assent by the President leading to binding legislation.

4.1 Types of Tax Legislation

  • Four main legislative pieces are typically introduced annually to amend tax laws:
      - Taxation Laws Amendment Act.
      - Rates and Monetary Amounts Amendment Act.
      - Revenue Laws Amendment Act.
      - Tax Administration Laws Amendment Act.

5. Current tax legislation (2.2.3)

  • An overview of national taxes categorized by tax base:
      - Income Tax (Act 58 of 1962):
        - Normal tax (2.2.3.1): taxable income.
        - Withholding tax (2.2.3.2): various income sources.
        - Turnover tax (2.2.3.3): micro-business turnover.
        - Dividends tax (2.2.3.4): tax on dividends.
        - Donations tax (2.2.3.5): tax on property donations.
        - Value-added tax (2.2.3.6): consumption tax.
        - Transfer duty (2.2.3.7): tax on property acquisition.
        - Estate duty (2.2.3.8): tax on the estate of deceased.
        - Securities transfer tax (2.2.3.9): tax on share transfers.
        - Customs and excise duties (2.2.3.10): taxes on imported goods and certain local goods.
        - Unemployment insurance contributions (2.2.3.11): contributions by employers and employees.
        - Skills development levies (2.2.3.12): employer-paid levies.

5.1 Normal tax (2.2.3.1)

  • Normal tax reflects income tax based on gross income during the assessment year, with net taxable income derived after allowable deductions and exemptions.

  • Details on how disposal of assets relates to the calculation of gross income and capital gains can be found in Chapter 17.

5.2 Withholding tax (2.2.3.2)

  • Tax withheld at the source from payments made to individuals or entities and paid to SARS. Key types include:
      - Employees' tax: deducted from employee remuneration, not final but a prepayment of normal tax.
      - Dividends tax: applied to dividends, treated as final tax on income for the beneficial owner.
      - Taxes for non-residents: like taxes on immovable property sales, royalties, and interest.

5.3 Turnover tax (2.2.3.3)

  • Turnover tax applies to micro-businesses with turnovers up to R1 million, simplifying tax administration without detailed records. It supplants normal tax for these small entities.

5.4 Dividends tax (2.2.3.4)

  • Applied at 20% on dividends from South African resident companies, certain exemptions exist based mainly on double taxation agreements.

5.5 Donations tax (2.2.3.5)

  • Levied at rates of 20% on cumulative donations under R30 million and 25% on donations exceeding that threshold. Includes annual exemption provisions.

5.6 Value-added tax (2.2.3.6)

  • Imposed at 15% on registered transactional suppliers in South Africa, allowing claim of input tax in certain conditions. VAT affects taxpayer’s income as discussed in Chapter 21.

5.7 Transfer duty (2.2.3.7)

  • Taxed at varying rates on the value of property acquired, handled per transaction case.

5.8 Estate duty (2.2.3.8)

  • A 20% or 25% tax on the net value of a deceased person’s estate, with relief provisions based on certain conditions.

5.9 Securities transfer tax (2.2.3.9)

  • A tax of 0.25% on the transfer of shares with certain exemptions for share issuance.

5.10 Customs and excise duties (2.2.3.10)

  • Duties imposed on imports to uphold local market stability and taxing additional consumables within the country.

5.11 Unemployment insurance contributions (2.2.3.11)

  • Contributions equal to 1% by both employer and employee capped at a monthly salary limit, as discussed in more detail in Chapter 10.

5.12 Skills development levies (2.2.3.12)

  • A 1% levy applicable only to employers, further details presented in Chapter 10.

6. Administration of tax legislation (2.3)

  • The South African Revenue Service (SARS), established under the South African Revenue Service Act 34 of 1997, is responsible for the collection and administration of taxes with several mandates.

  • The Tax Administration Act 28 of 2011 outlines compliance processes governing taxpayer interactions with SARS and upholds the taxpayer's rights to fair administrative action as determined by
      - The Promotion of Administrative Justice Act 3 of 2000.

7. Interpretation of tax law (2.4)

  • Tax law must be interpreted in alignment with the Constitution of the Republic of South Africa, ensuring no law contravenes constitutional stipulations. Major sources include:
      - Tax legislation.
      - Judicial decisions.

7.1 Tax legislation (2.4.1)

  • Involves studying the provisions outlined in the Income Tax Act, regulations, and applicable double taxation agreements.

7.2 Judicial decisions (2.4.2)

  • Judicial decisions from court cases serve to clarify ambiguities in tax law, leading to precedential interpretations that influence future tax cases.

7.3 Rules of interpretation (2.4.3)

  • Methods include:
      - Strict literal approach: Focusing solely on the textual meaning of legislation.
      - Purposive approach: Seeking the intention and purpose behind the legislative provision.
      - Objective approach: Balancing text and context during the interpretation process, with a recent trend towards equating both approaches as important.
      - Contra fiscum rule: Favoring interpretations that relieve taxpayers when ambiguities are present.
      - Substance over form: Emphasizing the actual activities over legal formalities in tax matters.

8. Illustrating components of normal tax and law interpretation (2.5)

8.1 Incidence of normal tax (2.5.1)

  • Tax liability is imposed on any 'person' as defined by the Act, incorporating entities like trusts and estates, while excluding foreign partnerships.

8.2 Rate structure of normal tax (2.5.2)

  • Normal tax is progressive for individuals and certain estates, ranging from 18% to 45%, while a fixed rate is levied on companies (27%) and other trusts which are not special. Tax relief mechanisms also exist to support certain sectors.

8.3 Tax base for normal tax (2.5.3)

  • 'Taxable income', defined broadly, serves as the base for imposing normal taxes which includes calculating normal tax for both natural persons and companies. Framework examples for calculating taxable income highlight the necessary deductions and applicable tax laws.