What is income tax?
Income tax is a tax levied on all income and profit received by a taxpayer (which includes individuals, companies and trusts). It is the national government’s main source of income and is imposed by the Income Tax Act No. 58 of 1962.
The form of tax that people generally associate with the concept of income tax is “normal” income tax. But the Income Tax Act is also the source of a number of other taxes that, although they have their own particular names, still form part of the income tax system. A few examples of taxes which may affect taxpayers are capital gains tax and donations tax. The Act also establishes a few methods of paying income tax – namely SITE, PAYE and provisional tax.
How is income tax collected?
The year of assessment
The year of assessment for taxpayers covers a period of 12 months. For individuals and trusts, the commencement date of the year of assessment starts on 1 March and ends on the 28/29 February each year. For Companies and Close Corporations the year of assessment is the applicable financial year.
Income tax returns are available annually after the end of each year of assessment to registered taxpayers, and must be completed and submitted to SARS each year.
The “Tax Season” commences 1 July each year, and the deadlines for the submission of returns are:
Individual (ITR12) and Trust (IT12TR) returns (non-provisional taxpayers): Last working day of September for postal submission (the paper version) that can be posted or submitted at your local SARS branch in the designated drop box; or
The last working day in November for eFiling via your PC or laptop or done electronically by a SARS consultant at a SARS branch. Please note that for the 2009/2010 year of assessment, SARS has announced the 26th November 2010 as the deadline for electronic submissions of Income Tax Returns.
Individual (ITR12) and Trust (IT12TR) returns (provisional taxpayers): Provisional taxpayers have until the 31 January 2011 to submit their completed ITR12 income return to SARS.
Company/CC (IT14) returns: Must be completed and submitted within 12 months after the financial year end of the company/close corporation.
The assessment by SARS
From the information furnished in the income tax return, SARS will issue an assessment showing either tax due or refundable, if applicable.
Who needs to register for income tax?
The Minister announced “as from September this year SARS will require all those receiving any form of employment income – including those below the tax threshold – to be registered with SARS to help reduce the scope for non-compliance.
Who needs to submit a completed and signed income tax return to SARS?
Where taxpayers receive remuneration less than R120 000, taxpayers may elect not to submit an income tax return, provided the following criteria are met:
Remuneration is from a single employer;
Remuneration is for a full year of assessment (1 March – 28/29 February); and
No allowance was paid, from which PAYE was not deducted in full with regards to travel allowance.
The final income tax payable by a taxpayer can only be calculated once the total taxable income earned by the individual for the full year of assessment has been determined. This is normally only done after the end of the year of assessment, once a taxpayer’s income tax return has been processed and an assessment is issued.
However, it would be impractical to expect taxpayers to pay tax as a large lump sum once a year. As a result, the Income Tax Act has created three mechanisms to solve this problem: SITE, PAYE, and provisional tax. In this way, income tax is collected as soon as the taxpayer has earned the income and is offset against the final income tax that is due on assessment.
SITE and PAYE are the two elements of employee’s tax. Employees’ tax is the tax that employers must deduct from the employment income of employees – such as salaries, wages and bonuses – and pay over to SARS monthly. It is withheld daily, weekly, or monthly, when these amounts are paid or become payable to the employees.
An employer must issue an employee with a receipt known as an employees’ tax certificate (an IRP5/IT3(a)) if SITE or PAYE have been deducted. This discloses the total employment income earned for the year of assessment and the total SITE and/or PAYE deducted and paid to SARS.
Standard Income Tax on Employees
Standard Income Tax on Employees, or SITE, is not a separate tax. It is merely a method that means employees who earn less than a certain amount pay income tax as a full and finial liability on the information to the specific employer. SITE generally applies to individuals:
whose net remuneration does not exceed R120 000 annually;
who do not receive a traveling allowance; and
who do not receive any other income.
Pay-As-You-Earn, or PAYE, ensure that an employee’s income tax liability is settled in a continuing fashion, at the same time that the income is earned. The advantage of this is that the tax liability for the year is settled over the course of the whole year of assessment. Refer to the PAYE page for more information.
Provisional tax allows taxpayers to provide for their final tax liability by paying two amounts in the course of the year of assessment. But the final liability is determined upon assessment.
Provisional tax payments – which are made six months after the beginning of a year of assessment, as well as at the end of it – represent tax on anticipated income. Provisional tax estimates and payments are made on IRP6 forms.What are the steps in calculating the income tax owed?
The Income Tax Act No. 58 of 1962 sets out a series of steps to be followed in calculating a taxpayer’s “taxable income”. This then forms the foundation on which tax liability is calculated. These steps are briefly set out below and are tackled in greater detail in the explanations that follow.
First determine your total receipts and accruals, or total income. These concepts are not contained in the Act, but they are implied by the wording of the definition of “gross income” in Section 1 of the Income Tax Act.
Deduct from “total income” those amounts that are excluded from the ambit of the definition of “gross income”. In other words, exclude accruals or receipts:
that are from a source outside South Africa for non-residents; or
that is of a capital nature.
Gross income of residents For any person who is a resident, gross income is the total amount of worldwide income, in cash or otherwise, received by or accrued to or in favour of that person.
Gross income of non-residents For any person who is not a resident, gross income is the total amount of income, in cash or otherwise, received by or accrued to or in favour of that person from a source within or deemed to be within South Africa during the year of assessment.
Capital receipts and accruals Receipts or accruals of a capital nature are generally excluded from gross income as the Eighth Schedule covers these as capital gains and losses.
However, certain other receipts and accruals are specifically included in gross income, regardless of their nature. A taxpayer needs to include in gross income:
the general inclusions in terms of the general definition of “gross income” as contained in Section 1;
the specific inclusions in terms of paragraphs (a) to (n) of the definition of “gross income” in Section 1; and
deemed accruals (contained in Section 7), deemed interest (in Section 8E) and the accruals or receipts deemed to be from a source in South Africa (in Sections 9 and 9D).
2. Deduct exempt income
“Gross income” minus the exemptions set out in Section 10 is equal to “income”. A taxpayer’s “income” is therefore calculated by deducting from the taxpayer’s gross income all amounts that are exempt from tax.
3. Deduct allowable deductions
The next step is to subtract certain allowable deductions from “income”, then add taxable gains and then subtract the other deductions, which leaves “taxable income”.
general deductions that qualify in terms of the general deductions formula contained in Sections 11(a ) and 23(f) and (g);
specific deductions contained in Sections 11(c) to (x);
allowances and other special deductions and rulings contained in Sections 11bis to 24L.
4. Multiply ‘taxable income’ by tax rate
Once taxable income has been determined, the applicable tax rate is applied to determine tax liability. Individuals are considered “persons other than companies” and are taxed on a sliding scale.
The taxable income multiplied by the tax rate will leave a certain amount, from which must be subtracted:
rebates for natural persons set out in Section 6; and
any applicable rebates for foreign taxes allowed by double-taxation agreements.