What are the steps in calculating the income tax owed?

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.

1. Determine gross income

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”. Deductions include:

  • 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.

5. Subtract rebates

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.
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