Chapter 3
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Personal taxation
Company taxation
Capital gains tax
Other taxes
Double taxation
South African taxation
• What is tax?
• Who pays tax?
• Who is SARS?
• Personal tax will be levied on all financial resources of
individuals!
• Principle sources:
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Income (earned – wages/salaries or unearned – investment income/rent)
Profit from operating as a sole trader or partner
Inherited wealth
Investment gains
Value of assets held
• Income tax is often main source of tax revenue for governments
• Employed and self-employed pay income tax
• Governments may also introduce:
• Capital gains tax (section 3)
• Wealth tax
• Inheritance tax
• 1.1 Considerations
• Taxing cashflows:
o Easier to tax income than wealth because income is an accessible
cashflow
• Taxing in arrears:
o To ensure citizens have sufficient retained income and wealth to meet
their essential needs
o Also PAYE (pay as you earn) scheme – pay tax when salary is
received weekly/monthly
o Self employed pay income tax twice a year – estimate made on
current year’s earnings and amendment is made when actual earnings
are known
• 1.1 Considerations (continue….)
• Taxing once
• In general revenue flows are taxed only once
• However, double taxation will be likely if taxed on wealth
• 1.2 Calculating taxable income
• Tax-free income
o Most profits from gambling
o Most forms of social security benefit
o Income from certain types of investments (example Individual Savings
Account)
• Tax-free expenditure
o Contributions to an approved pension fund scheme
o Charitable gifts
• 1.2 Calculating taxable income
• Income in kind (“fringe” benefits / byvoordeel)
o Company cars available for private use
o Medical insurance premiums
o Free housing
o Subsidised mortgages (reduced interest rate payable on mortgage
finance)
• Investment income deducted at source
o Examples: Interest from a building society account is received net of tax –
when personal tax calculated will offset the tax already paid
o Also company dividends are paid net of tax (but attaching tax credit for
recipient – called franked investment income)
• 1.2 Calculating taxable income
• Allowances
o Personal allowance may be deducted from income before determining
liability to tax
o Also age allowances (pensioners)
o Some countries allowance for married couples 
• 1.3 Tax rates (UK)
o Consideration must be given to whether marginal tax rates should
increase, remain constant or decrease as the individual’s taxable base
varies.
o UK tax year 2013/2014 – Marginal tax rates are:
 20% (basic rate)
 40% (higher rate)
 45% (additional rate)
o Tax rates are applied to bands of taxable income
o Income increases and taken to higher band, the higher marginal rate
applies to additional income earned
• Question 3.2
Personal allowance is R5 000
Marginal rates 20% for first R40 000
And 40% for taxable income above this.
Assuming no adjustments to total income, how much tax will a
single person earning R50 000 pay?
What proportion of total income is paid in tax?
Companies are liable to corporate income tax on their taxable
profits!
2.1 Calculating taxable profit
• Taxable profits usually include both income (less expenses) and
capital gains
• Accounting profit:
o Starting point
Profit on ordinary activities before taxation
Sales revenue
Less: Expenses
Operating profit
Plus: Non-trading income (interest, dividends, capital gains)
Profit before tax and interest
Less: Interest paid
Profit before tax
• Taxable profit
o Accounting profit before tax needs to be adjusted why??
o Since the rules for taxation is not the same as for accounting purposes!!!
• The main adjustments are:
o Add back any business expenses or potential expenditure which are not
allowed for tax (i.e. entertainment of customers, fines for illegal acts)
o Add back any charge for depreciation, and instead subtract the
allowable “capital allowance” (tax authorities for consistency purposes use
their own capital allowances)
o Deduct any special reliefs, i.e. research and development costs
• The rates of tax
o UK tax rate for year 2013/2014 – standard rate for corporation tax is
23% and due to fall to 21% for the tax year 2014/2015
o Small companies pay a lower rate of 20%
o Corporation tax rates around the world vary considerably
o For simplicity the 30% rate may be used as a proxy for the true rate of
corporation tax (both Core Reading and ActEd notes often use tax rate of
30%)
• Uses of the corporation tax system
o Some countries give relief to shareholders on dividends received – since
dividends are paid from post-tax income, tax has already been paid on
dividends, therefore dividend income is known as “franked income” meaning
income that has already been taxed
o Such an “imputed” tax system ensures that there is no disadvantage
experienced by the shareholder when company distribute profits (otherwise
company and shareholder would pay tax on dividend)
o Government incentivise to retain and reinvest earnings with tax system…
o How?? Levying higher taxes on dividends than on retained profits or allowing
tax relief for new investments
o Also pension provision – offering tax relief to encourage to save for retirement