TAX2601: Principles of Taxation Exam Notes (UNISA BCompt Financial Accounting)

These study notes provide an integrated, exam-focused guide for TAX2601 – Principles of Taxation as offered in the UNISA BCompt in Financial Accounting and related programmes (e.g. UNISA BCom Accounting Sciences, CUT Diploma in Accounting, UJ BCom Taxation). The focus is on South African income tax principles relevant to introductory tax modules such as TAX2601 (UNISA), TAX201 (CUT) and ACCT2034 Taxation at other South African universities.
Use these notes to consolidate conceptual understanding, apply principles to typical exam-style questions, and build a checklist for last‑minute revision.

1. South African Tax System Overview (TAX2601 / UNISA Principles of Taxation)

1.1 The Legal Framework and Key Role-Players

South African tax law is primarily derived from statutes (Acts of Parliament), interpreted and applied by the courts and administered by the tax authority.

Core legislation for TAX2601 (UNISA):

• Income Tax Act 58 of 1962
  Governs:
  • normal tax on income (including individuals, companies, trusts)
  • capital gains tax (CGT) via the Eighth Schedule
  • certain withholding taxes
• Tax Administration Act 28 of 2011 (TAA)
  Governs (at a principles level for TAX2601):
  • registration, returns, assessments, audits
  • objections and appeals
  • penalties and interest
• Selected other statutes, at awareness level:
  • VAT Act 89 of 1991
  • Customs and Excise Act 91 of 1964
  • Transfer Duty Act 40 of 1949

Key role-players:

• Parliament – enacts and amends tax legislation through annual Taxation Laws Amendment Acts.
• South African Revenue Service (SARS) – administers and enforces tax Acts.
• Minister of Finance & National Treasury – sets policy direction, presents the annual Budget Speech and Rates and Monetary Amounts Acts.
• Courts – interpret tax legislation; important for principles such as “substance over form”.

In TAX2601 UNISA exam questions, you are typically expected to:

• identify the relevant section or Schedule of the Income Tax Act (for instance, s 1 definitions, s 5 tax payable, s 6 rebates, Eighth Schedule for CGT),
• apply principles to short case studies,
  rather than memorise the exact legal wording.

1.2 Types of Taxes in South Africa

A high‑level understanding of the main national taxes is essential, particularly to distinguish direct vs indirect taxes in MCQ and short-form questions.

1. Direct Taxes (on income/wealth of the taxpayer):

• Normal income tax
  • Individuals, companies, close corporations, trusts.
• Capital gains tax (CGT)
  • A component of normal tax; only the taxable capital gain is included in taxable income.
• Dividends tax
  • Final withholding tax on shareholders (main rate 20%).
• Donations tax
  • On certain gratuitous disposals between living persons (rate 20% / 25% above threshold).

2. Indirect Taxes (on consumption/transactions):

• Value-Added Tax (VAT) – on supply of goods and services.
• Transfer duty – on acquisition of immovable property by a non‑vendor.
• Customs and excise duties – on imports and specific locally manufactured goods (e.g. alcohol, tobacco, fuel).
• Stamp duties / securities transfer tax – on certain instruments or transfers of securities.

For UNISA TAX2601 Principles of Taxation, the main focus is on normal income tax and CGT for individuals and basic companies, but exam questions often test awareness of other taxes through classification questions.

1.3 Sources of Tax Law and Hierarchy

Understanding sources is crucial in theoretical questions (especially in essay-type questions in modules like TAX3701, but also tested conceptually in TAX2601).

Primary sources:

1. Legislation
   • Income Tax Act 58 of 1962
   • Subsequent amendment Acts
2. Case law
   • Courts interpret unclear/ambiguous provisions.
   • Leading cases (not always examinable by name in TAX2601, but principles are important).

Secondary (interpretative) sources:

• SARS Interpretation Notes
• Binding General Rulings (BGRs) and Binding Private Rulings (BPRs)
• Practice Notes, Guides, FAQs
• Academic commentary and textbooks (e.g. standard UNISA‑prescribed tax texts).

Hierarchy in conflict situations (for exam reasoning):

• Constitution of the Republic of South Africa
• Income Tax Act & other primary Acts
• Case law interpreting Acts
• SARS rulings and guidance

SARS guidance cannot override the law; if conflict arises, the Act and case law prevail.

1.4 Canons (Principles) of a Good Tax System

Classic principles (often tested in short-theory questions in TAX2601, CUT TAX201, NWU TAXN121) are derived from Adam Smith’s canons and subsequent refinements:

1. Equity / Fairness

   • Horizontal equity: taxpayers with equal ability to pay should bear similar tax burdens.
   • Vertical equity: those with greater ability to pay should bear higher taxes (progressive rate structure).
   • In SA, individuals are taxed on progressive tax brackets.

2. Certainty

   • Tax rules should be clear and unambiguous.
   • Taxpayers should know:
     • what tax to pay,
     • when to pay,
     • how to calculate it.

3. Convenience

   • Tax should be collected in a way and at a time convenient for taxpayers.
   • Examples:
     • PAYE system – tax withheld monthly by employer.
     • Provisional tax for non-salary income.

4. Economy / Efficiency

   • Cost of collection should be low compared to revenue raised.
   • Minimise distortions in economic behaviour.

In exam answers, link these principles to practical South African examples:

• Progressive tax tables (vertical equity).
• Automatic SARS assessments via eFiling (convenience, efficiency).
• PAYE collection rather than year-end lump‑sum (convenience, increased compliance).

1.5 Residence-Based vs Source-Based Taxation

South Africa operates a residence-based system for residents and source-based for non-residents.

• Residents (as defined in s 1 of the Income Tax Act) are taxed on:
  • worldwide income, subject to certain foreign tax credits and exemptions.
• Non-residents are taxed only on South African‑source income.

For purposes of TAX2601 (UNISA), understanding the consequences of residence vs non-residence is more important than memorising every technical detail of the definition (physical presence and ordinarily resident tests).

Exam-style question structure:

• Step 1: Determine if the taxpayer is a resident (ordinarily resident or meets physical presence test and not excluded by double tax agreement).
• Step 2: Determine which income items are South African source (e.g. employment exercised in SA, rental from SA property).
• Step 3: Apply residence rules to decide which amounts are included in gross income.

Example:
A UNISA BCompt student, Sipho, works in Johannesburg (resident in SA). He has:

• Salary from SA employer.
• Interest from a UK bank account.
• Rental income from a flat in Durban.

Because Sipho is resident, all three income items (SA salary, foreign interest, SA rental) are potentially taxable in SA, subject to exemptions and foreign tax credits.

2. Core Definitions: Gross Income, Exempt Income, Deductions (Unisa TAX2601)

2.1 Gross Income (Section 1)

Definition of “gross income” (in simplified exam form):

The total amount, in cash or otherwise, received by or accrued to a resident (or from a South African source for a non‑resident), during the year of assessment, excluding amounts of a capital nature, but including specified amounts in paragraphs (a) to (n) of the definition.

Key elements to analyse in questions:

1. “Amount”

   • Measured in money or money’s worth.
   • Can include:
     • cash
     • property
     • services
     • fringe benefits (e.g. company car, free accommodation)
   • Must be capable of being expressed in rand value.

2. “Received by or accrued to”

   • Received: when the taxpayer actually receives the amount (physically or constructively).
   • Accrued: when the taxpayer becomes entitled to it, even if not yet received.
   • Exam tip:
     • Salary due in February but paid in March:
       • If entitlement arises in February, then accrual in February year of assessment.
     • SARS and courts often emphasise unconditional entitlement rather than payment date.

3. “In cash or otherwise”

   • Includes non-cash benefits such as:
     • Company-provided holiday accommodation.
     • Employer-provided company car.
   • Value must be quantified (often via Seventh Schedule fringe benefit valuation rules; more detailed in higher-level modules but conceptually important in TAX2601).

4. “Capital or revenue nature”

   • Only revenue amounts are included in gross income, unless they fall into specific inclusions (like certain capital amounts deemed to be revenue).
   • Distinguish between:
     • regular, recurring receipts (usually revenue),
     • once-off sale of capital assets (often capital, thus excluded from gross income and dealt with under CGT).

5. Specific inclusions (paras (a)–(n), e.g.):

   • Annuities, certain lump sums from employment, use or occupation of residential property by employees, etc.
   • For TAX2601, you typically need a basic awareness of:
     • salary/wage,
     • allowances,
     • fringe benefits,
     • investment income (interest, dividends),
     • business income,
     • and certain lump sums.

2.2 Exempt Income

Exempt income is not included in gross income (or, if included, is excluded from taxable income by specific exemption provisions). Key sections for TAX2601 level:

• Section 10(1)(i) – Local interest exemption (up to certain threshold, mainly for individuals).
• Section 10(1)(k) – Exemption of dividends received from South African companies (for resident individuals, subject to dividends tax at company/shareholder level).
• Section 10(1)(o)(ii) – Remuneration for services rendered outside SA by residents (under certain conditions – 183 days/60 continuous days; more relevant in advanced modules but may be referred to in integrated case studies).
• Section 10(1)(gG) – Certain amounts in respect of tax‑free investments.

In exam answers, identify the exemption and clearly show:

Gross income
Less: exempt income (with section reference)
= Income

Example (simplified TAX2601-style):

• Thandi (resident individual) earns:
  • Salary: R300 000
  • Local interest: R35 000
  • Foreign dividends: R10 000 (no DTA considered here)
  • Local dividends from JSE-listed company: R15 000

Assume 2024/2025 interest exemption: R23 800 for individuals under 65 (figures vary by year – check your prescribed textbook/exam guidance).

1. Gross income:

   • Salary R300 000
   • Local interest R35 000
   • Foreign dividends R10 000
   • Local dividends R15 000
     → Gross income = R360 000

2. Exempt income:

   • Local dividends R15 000 – usually fully exempt in Thandi’s hands (s 10(1)(k)).
   • Local interest exemption: R23 800 (assuming Thandi under 65).
     → Exempt income = R15 000 + R23 800 = R38 800

3. Taxable portion of interest:

   • R35 000 – R23 800 = R11 200

4. Income (before deductions):

   • R360 000 – R38 800 = R321 200
     (exam answers then proceed to allowable deductions)

2.3 General Deduction Formula (s 11(a) & s 23(g))

The general deduction formula is central to most TAX2601 calculation questions:

Section 11(a): Allows a deduction of expenditure and losses actually incurred in the production of income, provided such expenditure is not of a capital nature.

Section 23(g): Disallows expenditure not laid out or expended for the purposes of trade.

From these, examiners expect you to apply four main requirements:

1. Expenditure and losses

   • Must be real and not merely contingent.
   • Examples:
     • Salaries, wages, rent, consumables.
     • Bad debts (if trade debts and properly written off).

2. Actually incurred

   • A legal obligation to pay must exist.
   • Even if not yet paid in cash.
   • Accrual basis, not cash basis, for most taxpayers (unless specified otherwise).

3. In the production of income

   • There must be a direct connection between the expenditure and income‑earning activities.
   • Expenditure incurred to:
     • create, maintain or protect income‑earning capacity.
   • Personal expenses fail this test.

4. Not of a capital nature

   • Capital vs revenue distinction:
     • Capital: brings enduring benefit, acquisition of fixed asset (e.g. building, machinery, goodwill).
     • Revenue: recurring operational expenses (e.g. repairs, rent, wages).
   • Capital expenditure is usually not deductible under s 11(a), but may be deductible under specific sections (e.g. s 13 wear‑and‑tear, s 12C, etc. – more advanced but conceptually relevant).

Practical analysis structure (for exam answers):

For any candidate deduction item, comment briefly on:

• Is it actually incurred?
• Is it in the production of income (directly connected to trade)?
• Is it capital or revenue?
• Any specific limitation or disallowance (s 23(b): private expenses, s 23(m): certain salaried employees, etc.)?

Example:
A UNISA BCompt student, Zanele, runs a part‑time online tutoring trade while working full‑time for an employer.

Trade income: R60 000.
Expenses:

• Internet and data: R12 000
• Laptop purchase: R15 000
• Advertising: R8 000
• Domestic holiday: R10 000

Deductibility:

1. Internet and data:

   • Actually incurred: yes (bills in her name).
   • Production of income: yes, used to conduct online lessons.
   • Revenue nature: yes.
     → Deductible under s 11(a) (if related to trade portion; apportion if partly private).

2. Laptop:

   • Capital asset, used >1 year, enduring benefit.
   • Not deductible under s 11(a).
   • May qualify for wear‑and‑tear allowance under a specific section (e.g. s 11(e) in more advanced modules).

3. Advertising:

   • Revenue nature, incurred to gain clients.
   • Deductible under s 11(a).

4. Domestic holiday:

   • Personal/private expense, not in production of income.
   • Disallowed under s 23(b) and fails s 11(a).

2.4 Specific Deductions & Limitations (TAX2601 Level)

While the general deduction formula applies broadly, several specific provisions are examinable at an introductory level.

1. Contributions to retirement funds (for individuals):

• Allowable deduction for contributions to:
  • Pension funds, provident funds, retirement annuity funds.
• Currently limited to the greater of:
  • 27,5% of the greater of remuneration or taxable income, and
  • subject to an overall annual monetary cap (e.g. R350 000 – confirm for exam year).
• In TAX2601, you typically:
  • Are given a contribution amount.
  • Apply the percentage and cap tests.
  • Deduct the allowable portion in arriving at taxable income.

2. Medical expenses (simplified)

• System is complex, but at principles level:
  • Medical scheme fees tax credit (s 6A) – a fixed monthly tax rebate.
  • Additional medical expenses tax credit (s 6B) – on qualifying excess expenses.
• For TAX2601, you may simply need to:
  • Recognise that medical costs do not operate as a deduction from income,
  • But rather as a rebate from normal tax payable.

3. Prohibited deductions:

• Section 23(b) – Private or domestic expenses (e.g. personal groceries, domestic rent not related to business, personal travel).
• Section 23(g) – Non‑trade expenses.
• Section 23(m) – Limits on certain salary‑earner deductions (e.g. for employees earning mainly remuneration and not carrying on a trade, only specific deductions allowed such as pension fund contributions, medical, certain business travel with valid logbook, etc.).
• Fines and penalties for unlawful activities often not deductible as they fail public policy and trade link tests.

Exam approach:
If the question states “The taxpayer is a salaried employee not carrying on any trade”, you must recall that s 23(m) significantly restricts which deductions are allowed; do not automatically allow full s 11(a) deductions unless circumstances indicate a genuine trade.

3. Individuals: Taxable Income and Tax Liability (UNISA TAX2601, CUT TAX201)

3.1 Structure of the Individual Tax Computation

Most TAX2601 exam questions require performing or interpreting a tax calculation for an individual. A standard template helps:

1. Gross income

   • Employment income (salary, bonus, allowances, fringe benefits).
   • Business/trade income.
   • Investment income (interest, dividends, rental income).
   • Other lump sums (if revenue in nature or specific inclusions).

2. Less: Exempt income
   = Income

3. Less: Deductions / Allowances (s 11(a), retirement contributions, allowable business expenses)
   = Taxable income before CGT

4. Add: Taxable capital gain (from CGT calculation)
   = Taxable income

5. Calculate normal tax using individual tax tables (progressive rates).

6. Less: Rebates (primary, secondary, tertiary; plus medical tax credits where applicable)
   = Normal tax payable

7. Less: Employees’ tax (PAYE), provisional tax paid, foreign tax credits
   = Tax payable / refundable

In exams for UNISA TAX2601 and similar modules at CUT (e.g. TAX201) and NWU TAXN121, marks are allocated for:

• Correct layout
• Accurate classification
• Applying exemptions and deductions with section references
• Completing the CGT and medical credit portions correctly where required.

3.2 Employment Income: Salaries, Allowances, Fringe Benefits

1. Cash remuneration

Typical items:

• Salary, wages, commission, overtime.
• Bonuses (e.g. 13th cheque).
• Leave pay.

All these are gross income, fully taxable unless a specific exemption applies (rare for normal cash remuneration).

2. Allowances

• Travel allowance:
  • Tax consequences depend on:
    • whether a logbook is provided,
    • business vs private kilometres.
  • At fundamental level, for a salaried employee (TAX2601):
    • Travel allowance is fully included in gross income.
    • SARS allows a deduction (either deemed cost per km or actual costs apportioned) for proven business travel.
• Subsistence allowance:
  • An allowance for meals and incidental costs when travelling for business.
  • Only amounts exceeding SARS‑prescribed limits may be taxable.
• Other allowances:
  • e.g. cell phone, entertaining clients – included in gross income; related actual business expenses may be deductible in certain circumstances.

3. Fringe benefits (Seventh Schedule)

Examples:

• Use of company car.
• Employer-provided accommodation.
• Low-interest or interest‑free loans.
• Payment of employee’s debts.

TAX2601 focuses on recognising that these benefits:

• have monetary value,
• are part of gross income,
• are often computed according to SARS tables (detailed rates often provided in exam annexures).

Example:
A BCompt UNISA student, Musa, works at a firm that gives him:

• Salary: R250 000
• 13th cheque: R20 000
• Travel allowance: R60 000
• Company car fringe benefit of R48 000 (calculated per SARS table).

Gross income from employment = R250 000 + R20 000 + R60 000 + R48 000 = R378 000
Then, allowable travel deduction (if any) would be considered under deductions.

3.3 Investment and Rental Income

1. Interest

• Local interest:
  • Included in gross income.
  • Individual exemption (s 10(1)(i)) up to specified threshold, depending on age.
• Foreign interest:
  • Fully taxable (no local exemption), but foreign tax credits may apply.

2. Dividends

• Resident individuals:
  • Local dividends generally exempt from normal tax, but subject to dividends tax (withheld at 20%).
  • Foreign dividends partially taxable, with certain exemptions/participation reliefs (details expanded in advanced modules).

3. Rental income

• Gross rental (e.g. from letting out a flat, student accomodation).
• Allowable deductions:
  • Rates and taxes.
  • Repairs and maintenance (not improvements).
  • Interest on mortgage bond (if property is income-producing).
  • Agents’ commission, insurance.
• Net rental profit is part of taxable income.

Typical exam mistake:
Students confuse repairs (revenue, deductible) and improvements (capital, not deductible under s 11(a)). Example exam phrasing: “Repairs to leaking roof” (repairs) versus “Adding a new bathroom” (improvement).

3.4 Retirement Contributions and Lump Sums

1. Contributions

• As discussed, deductible within statutory limits.
• Contributions may relate to:
  • Employer pension fund
  • Provident fund
  • Retirement annuity (RA)

2. Lump sums

• Retirement fund lump sums are taxed according to special tables, separate from normal income tax tables.
• For TAX2601, you typically:
  • Distinguish between pre‑retirement (withdrawal) and retirement/death/lump sums.
  • Apply tax tables (provided in exam) to calculate tax on taxable lump sum.
  • Do not mix these with normal taxable income.

3.5 Rebates and Medical Credits

1. Personal rebates (s 6)

• Primary rebate: available to all resident individuals.
• Secondary rebate: additional rebate for those aged 65 or older.
• Tertiary rebate: further rebate for those aged 75 or older.

Example (illustrative, check current amounts in your exam year):

• Primary rebate: R17 235
• Secondary rebate: R9 444
• Tertiary rebate: R3 145

If a 77‑year‑old pays R80 000 normal tax:

• Total rebates:
  • Primary R17 235
  • Secondary R9 444
  • Tertiary R3 145
    = R29 824
• Tax payable:
  • R80 000 – R29 824 = R50 176

2. Medical tax credits (s 6A & 6B)

• Medical scheme fees tax credit:
  • Fixed monthly amount per main member and dependants.
• Additional medical expenses tax credit:
  • Percentage of qualifying medical expenses, subject to formulas.

In introductory modules like TAX2601, CUT TAX201, UNISA TAX2603, an exam may provide:

• Monthly credit amounts,

• Simplified steps,
  and require you to:

• Determine total annual medical scheme fees,

• Calculate the total basic medical tax credit,

• Calculate any additional medical expenses credit (if details provided),

• Deduct total credits from normal tax.

3.6 Cape Town Case Study: Integrated Individual Tax Calculation

Consider a scenario similar to what appears in UNISA TAX2601 past exam papers or CUT Taxation 2:

Lebo, age 30, is a resident individual employed in Johannesburg for the 2024/2025 year of assessment. Information:

• Salary: R380 000
• Bonus: R20 000
• Travel allowance: R60 000
• Local interest: R18 000
• Local dividends: R9 000
• Rental income from flat in Bloemfontein:
  • Rental received: R72 000
  • Interest on bond: R30 000
  • Rates & taxes: R8 000
  • Repairs: R5 000
• Retirement annuity contributions: R36 000
• Lebo belongs to a medical scheme:
  • Contributions: R3 000 per month (no dependants)
  • No other qualifying medical expenses
• PAYE deducted by employer: R105 000

Required: Determine Lebo’s taxable income and tax payable/refundable for the year.

Step 1: Gross income

• Salary R380 000
• Bonus R20 000
• Travel allowance R60 000
• Local interest R18 000
• Local dividends R9 000
• Rental income:
  Rental received R72 000 (gross income)

Gross income total = 380 000 + 20 000 + 60 000 + 18 000 + 9 000 + 72 000
= R559 000

Step 2: Exempt income

• Local dividends: R9 000 exempt (s 10(1)(k)).
• Interest exemption: assume under 65, threshold = R23 800 (check exam year; interest is R18 000, so fully exempt).

Total exempt income = 9 000 + 18 000 = R27 000

Step 3: Income

Income = Gross income – Exempt income
= R559 000 – R27 000
= R532 000

Step 4: Deductions

1. Rental expenses (against rental income):
   • Interest on bond: R30 000
   • Rates & taxes: R8 000
   • Repairs: R5 000
     → Total rental deductions = R43 000
     Net rental profit = R72 000 – R43 000 = R29 000

But in our income figure of R532 000, we already included full R72 000 rental. To avoid confusion, better to handle as:

Income before rental expenses:
All items except rental expenses:
Salary R380 000 + Bonus R20 000 + Travel allowance R60 000 + 0 (interest after exemption) + 0 (dividends exempt) + Rental R72 000 = R532 000 (as above).

Now subtract deductible rental expenses (R43 000):

Income after rental expenses =
R532 000 – R43 000
= R489 000

2. Retirement annuity contributions: R36 000
   Assume 27,5% limit not exceeded (27,5% of R489 000 ≈ R134 475; RA = R36 000 < limit).
   → Deduct full R36 000.

Taxable income before CGT = 489 000 – 36 000
= R453 000

Assume no capital gains; thus taxable income = R453 000.

Step 5: Calculate normal tax (using illustrative tax tables)

Assume 2024/2025 SA individual tax table (illustrative, verify for exam):

• First R237 100 @ 18% = R42 678
• Next R370 500 – R237 101 = R133 399 @ 26% = R34 683.74 (rounding; textbook will provide precise table)
• Next R512 800 – R370 501 = R142 299 @ 31% = R44 112.69

Lebo’s taxable income: R453 000.
Falls into the R370 501 – R512 800 bracket.

Many textbooks summarise this as:

Tax = base amount for bracket + (taxable income – lower limit) × marginal rate.

Using a simplified example table (check your official rates):

• Tax on R370 500 = R70 532 (illustrative)
• Plus 31% of amount above R370 500.

Amount above:
R453 000 – R370 500 = R82 500

31% of R82 500 = R25 575

Normal tax before rebates = R70 532 + R25 575
= R96 107

Step 6: Less rebates

Lebo is under 65 → only primary rebate applies.
Assume primary rebate = R17 235.

Normal tax after rebate:
R96 107 – R17 235 = R78 872

Step 7: Medical tax credit

Monthly medical scheme fees tax credit (main member only). Suppose R364 per month (example).
Annual credit: 12 × 364 = R4 368

Normal tax after medical credit:
R78 872 – R4 368
= R74 504

Step 8: Final tax payable / refund

PAYE withheld: R105 000

Tax payable according to calc: R74 504

Because PAYE > tax payable, Lebo is due a refund:

Refund = R105 000 – R74 504 = R30 496

In the TAX2601 exam, marks would be awarded for:

• Correct classification and exemption of interest and dividends.
• Proper handling of rental income and expenses.
• Correct treatment of RA contributions.
• Application of tax tables and rebates.
• Separate, labelled workings with clear headings.

4. Capital Gains Tax (CGT) Fundamentals (UNISA TAX2601 / TAX3701 Bridge)

4.1 CGT Framework and Applicability

Capital Gains Tax (CGT) is not a separate tax, but part of normal income tax imposed under the Income Tax Act. The Eighth Schedule (read with s 26A) governs CGT.

Basic principles for TAX2601 (Principles of Taxation):

• CGT is triggered when a capital asset is disposed of and a capital gain arises.
• Only a proportion of the capital gain (the inclusion rate) is included in taxable income.
• Different inclusion rates apply to:
  • Individuals and special trusts.
  • Companies and other trusts.

Inclusion rates (illustrative, check for exam year):

• Individuals and special trusts: 40%
• Companies and other trusts: 80%

Thus, for an individual:

Taxable capital gain = Aggregate capital gain × 40%

and then this amount is added to taxable income.

4.2 Key CGT Terminology

1. Asset

   • Property of any kind, including:
     • immovable property (land and buildings),
     • shares and securities,
     • intangible assets (goodwill, trademarks),
     • personal-use assets (furniture, private car).

2. Disposal

   • Any event that causes an asset to cease to be owned by the taxpayer.
   • Includes:
     • sale,
     • donation,
     • exchange,
     • loss or destruction (sometimes a deemed disposal),
     • death.

3. Proceeds (para 35)

   • Amount received or accrued from the disposal.
   • Excludes:
     • certain excluded amounts (e.g. VAT component in some cases).
   • For non‑cash disposals, fair market value is used.

4. Base cost (para 20–25)

   • Original cost of asset plus allowable expenditures, such as:
     • acquisition cost,
     • improvements,
     • transfer duty, legal fees,
     • valuation costs in certain circumstances.
   • Excludes:
     • amounts already deducted as revenue expenditure for income tax purposes.

5. Capital gain / loss

   • Capital gain: Proceeds – Base cost (if positive).
   • Capital loss: Base cost – Proceeds (if positive).
   • Netting process:
     • Sum all capital gains and losses during the year.
     • Offset losses against gains.
     • Apply annual exclusion (where applicable).
     • Apply inclusion rate.

6. Annual exclusion

• For individuals: an annual exclusion of a specified amount (e.g. R40 000).
• In the year of death of an individual: higher exclusion (e.g. R300 000).
• For companies: no annual exclusion.

Exam tip for UNISA TAX2601 and CUT TAX201:
Always apply annual exclusion after aggregating all capital gains and losses for the year; do not apply per asset.

4.3 Personal-Use Assets and Primary Residence Exclusion

1. Personal-use assets

• Assets held mainly for personal use or enjoyment by the taxpayer or relatives (e.g. personal motor car, furniture, clothing).
• Capital losses on personal-use assets are disregarded for CGT.
• Capital gains on personal-use assets are subject to CGT (though often relatively small or covered by annual exclusion).

2. Primary residence exclusion

• Applies to a natural person (or special trust) in respect of their primary residence.

• Requirements (simplified):

  • Taxpayer or spouse must ordinary reside in the property.
  • Used mainly for domestic purposes.

• Exclusion:

  • First R2 million of capital gain or loss on disposal of primary residence is disregarded.
  • However, if property is used partly for business (e.g. home office, B&B), apportionment may apply.

Example:
A UNISA BCompt student, Ayanda, sells her primary residence:

• Proceeds: R2 800 000
• Base cost: R1 200 000
• Capital gain: R1 600 000

Primary residence exclusion: R2 000 000 available, but gain is only R1 600 000, so full gain is excluded. No CGT arises.

4.4 CGT Calculation Process for Individuals

Standard exam layout:

1. Identify each disposal and determine proceeds and base cost.
2. Calculate capital gain/loss per asset.
3. Sum all gains and losses to obtain aggregate capital gain/loss.
4. Apply annual exclusion (for individuals).
5. If positive, multiply by inclusion rate to get taxable capital gain.
6. Include taxable capital gain in taxable income (s 26A).

Example (UNISA TAX2601‑type):

Thabo (resident individual) disposes of two assets during the 2024/2025 year:

1. Vacant land (investment property):
   • Proceeds: R900 000
   • Base cost: R500 000
2. Listed shares:
   • Proceeds: R120 000
   • Base cost: R150 000

Assume annual exclusion: R40 000. Inclusion rate: 40%.

Step 1: Capital gain/loss per asset

1. Land:
   • Gain = 900 000 – 500 000 = R400 000
2. Shares:
   • Loss = 150 000 – 120 000 = R30 000

Step 2: Aggregate capital gain/loss

Aggregate capital gain = R400 000 – R30 000 = R370 000

Step 3: Apply annual exclusion

Annual exclusion: R40 000
Net capital gain after exclusion = 370 000 – 40 000 = R330 000

Step 4: Taxable capital gain

Taxable capital gain = 330 000 × 40% = R132 000

This R132 000 is then added to Thabo’s taxable income from other sources when computing final tax.

In exam answers, include a separate CGT working clearly labelled and then link “Taxable capital gain” into the main tax computation.

4.5 CGT and Small Business Use (Awareness Level)

Even at TAX2601 level, examiners may lightly test your understanding that:

• When a small business owner sells business assets:

  • If held as trading stock, gains are revenue and subject to normal tax (not CGT).
  • If held as capital assets (e.g. an owner‑occupied business building), gains fall under CGT.

• Small business CGT reliefs (e.g. small business asset rollover, R1.8 million exclusion on retirement) are usually covered in advanced modules, but it helps to recognise that:

  • Not all gains are taxed identically.
  • Different regimes exist to encourage entrepreneurial activity and retirement planning.

5. Tax Planning, Compliance and Exam Technique (UNISA TAX2601, CUT TAX201, UJ ACCT2034)

5.1 Tax Planning vs Tax Avoidance vs Tax Evasion

Many UNISA TAX2601 exam questions (and comparable modules like CUT TAX201, UJ ACCT2034 – Taxation) test conceptual understanding of these terms.

1. Tax planning (legitimate)

• Arranging affairs within the law to minimise tax liability.
• Example:
  • Timing of asset disposal to benefit from annual CGT exclusions.
  • Investing in tax-free investments allowed by law.
• Legitimate and encouraged; uses incentives and reliefs provided in the Income Tax Act.

2. Tax avoidance (aggressive but legal behaviour; sometimes targeted by anti-avoidance rules)

• Structuring transactions to reduce tax with little or no commercial substance, but staying within very literal reading of law.
• May be attacked by general anti-avoidance rule (GAAR) in the Income Tax Act if abusive.
• Example:
  • Circular schemes creating artificial losses with no real economic risk.

3. Tax evasion (illegal)

• Deliberately under-reporting or falsifying income or deductions.
• Criminal offence; subject to penalties, interest, and potential imprisonment.
• Examples:
  • Omitting cash income.
  • Inflating expenses using fake invoices.

Exam answering tip:

When asked to distinguish:

• Use short definitions.
• Provide one or two practical South African examples.
• Clearly state which is legal and which is illegal.

5.2 Basic Anti-Avoidance Concepts

Even at Principles level, students should understand:

• Substance over form:
  • Courts and SARS may look at the economic reality of a transaction, not just its legal labels.
• General Anti-Avoidance Rule (GAAR):
  • Allows SARS to disregard or recharacterise impermissible avoidance arrangements that:
    • lack commercial substance,
    • result in tax benefit,
    • and are abnormal in the context of business practice.
• Specific anti‑avoidance provisions:
  • Example: rules preventing artificial loss creation on transactions between connected persons.

Application in exam settings is usually qualitative (explain concept, identify if an arrangement is likely abusive), not detailed legal application.

5.3 Tax Compliance: Returns, Assessments and Deadlines

For TAX2601 (UNISA BCompt), awareness of tax compliance processes under the Tax Administration Act (TAA) is required.

Key aspects:

1. Registration

   • Individuals earning above the tax threshold must register as taxpayers (unless fully covered by PAYE).
   • Companies and trusts must register upon starting to trade.

2. Filing returns

   • Annual income tax return (ITR12 for individuals, ITR14 for companies).
   • Deadlines differ for:
     • provisional vs non-provisional taxpayers,
     • manual vs eFiling submissions (most returns via eFiling).

3. Employees’ tax (PAYE)

   • Employers register and withhold PAYE from employees’ remuneration.
   • Issue IRP5 certificates to employees at year-end.

4. Provisional tax

   • Applies to:
     • persons with significant non-salary income (e.g. business income, rental).
   • Two compulsory provisional payments during tax year (and an optional third top-up).
   • Based on estimated taxable income.

5. Assessments and audits

   • SARS issues:
     • assessment notices (ITA34),
     • may select returns for verification or audit.
   • Taxpayers must retain records for prescribed period (usually 5 years).

6. Objections and appeals

   • If taxpayer disagrees with assessment:
     • Lodge objection within prescribed time.
     • If disallowed, may lodge an appeal to tax board or tax court.

Exam implication: Questions might ask:

• To explain the function of PAYE or provisional tax.
• To distinguish assessment from provisional assessment.
• To outline steps if taxpayer disagrees with SARS assessment.

5.4 Penalties and Interest

Non-compliance leads to:

• Administrative penalties:
  • For late submission of returns (monthly fixed penalties).
• Understatement penalties:
  • For misstatements, omissions, or other behaviour leading to shortfall in tax.
  • Percentage based, depending on taxpayer’s behaviour (e.g. reasonable care not taken, gross negligence, intentional evasion).
• Interest:
  • Charged on:
    • late payment of tax,
    • unpaid provisional tax shortfalls.

In an exam, you might be asked to:

• Explain why penalties are imposed.
• Classify taxpayer behaviour as negligent or intentional based on facts.

5.5 Ethics in Tax Practice (UNISA BCompt, CUT, UJ)

Professional ethics are critical for accountants and tax practitioners in South Africa.

Commonly emphasised in UNISA TAX2601 and UNISA ECS2603 (Ethics & Professionalism), as well as CUT Accounting Ethics, UJ Financial Accounting 3:

1. Integrity

   • Being honest and straightforward in all professional and business relationships.
   • Not participating in tax evasion or knowingly misrepresenting facts to SARS.

2. Objectivity

   • Avoiding bias or conflict of interest.
   • Example: not favouring a client’s desired outcome over the correct application of tax law.

3. Professional competence and due care

   • Maintain knowledge of current tax law.
   • Perform work diligently and carefully.

4. Confidentiality

   • Respect confidentiality of client tax information.
   • Disclose only when legally required (e.g. court order).

5. Professional behaviour

   • Comply with laws and regulations.
   • Avoid any action that discredits the profession.

Exam example: A question may describe a scenario where a client asks you to “leave out” some rental income from their return, promising you a portion of tax saving. You must:

• Identify that this is tax evasion.
• State that professional ethics require you to refuse and, if necessary, withdraw from engagement.

5.6 Exam Technique for TAX2601 (and Similar SA University Tax Modules)

1. Time management

• Section A: usually MCQs – aim to finish these quickly but carefully (20–30% of time).
• Section B/C: longer questions – allocate time according to marks (e.g. 1,8 minutes per mark in a 3-hour, 100‑mark paper).

2. Show workings clearly

• Use a standard layout for individual tax calculations, CGT workings, etc.
• Even if final answer is wrong, method marks may be awarded for correct principles.

3. Read the question carefully

• Identify:
  • Year of assessment (tax tables depend on this).
  • Whether taxpayer is resident or non-resident.
  • Whether they are salaried employee only or also carrying on trade/business.
  • Any instructions like “Ignore VAT” or “Amounts are exclusive of VAT”.

4. Section references

• While not all markers insist on precise section numbers at TAX2601 level, including them for major items (e.g. s 10 exemptions, s 11 general deduction, s 6 rebates) can earn extra marks and demonstrates understanding.

5. Common exam pitfalls

• Forgetting to:
  • Deduct exemptions (interest, dividends).
  • Apply annual CGT exclusion.
  • Distinguish capital vs revenue items.
  • Use correct rebate rather than deduction for medical and personal rebates.
• Mixing gross income with taxable income terminology.

6. Use of past papers and study resources

Students at UNISA, CUT, UJ, NWU, UKZN commonly search for:

• “TAX2601 exam pack”
• “TAX2601 past exam solutions”
• “TAX2601 2023 memo”
• “CUT TAX201 study notes”
• “UJ ACCT2034 Taxation summaries”

Effective strategy:

• Attempt past questions under time pressure.
• After marking your attempt with the official memo, reconstruct a model answer using:
  • correct layout,
  • brief explanations,
  • correct section references.
• Integrate common patterns into your own exam template.

5.7 Linking TAX2601 with Other BCompt and Accounting Modules

Within the UNISA BCompt in Financial Accounting and similar programmes at CUT, UJ, NWU:

• TAX2601 foundations support:
  • TAX3701 / TAX3702 (advanced income tax),
  • FAC2601 / FAC3703 (Financial Accounting),
  • AUE2602 (Auditing) where understanding tax implications supports audit procedures.
• Understanding principles of taxation improves performance in modules like:
  • Financial Accounting 2 (UNISA FAC2601) – where accounting for tax liabilities and deferred tax (in later levels) requires conceptual tax knowledge.
  • Management Accounting (MAC2601) – after-tax cash flows in capital budgeting.
• At Central University of Technology (CUT), TAX2601 concepts align closely with:
  • TAX201 – Taxation 2 in the Diploma in Accounting,
  • bridging to TAX301 – Taxation 3.
• At University of Johannesburg (UJ), similar principles underlie:
  • ACCT2034 – Taxation,
  • building towards ACCT3030 – Advanced Taxation.

Recognising this integration encourages students to:

• Master core definitions and calculation frameworks in TAX2601 early.
• View tax not as an isolated module, but as an integral part of financial decision-making and reporting.

This comprehensive guide on TAX2601: Principles of Taxation Exam Notes is tailored to the South African university context, especially the UNISA BCompt in Financial Accounting curriculum, but also highly relevant for tax modules at CUT, UJ, NWU, and other institutions. Consistent use of the definitions, templates, examples, and exam strategies outlined above will significantly enhance conceptual understanding and exam performance in foundational income tax.