TAX311: Taxation 3A Exam Notes (WSU BCom Accounting)

Comprehensive, exam-focused guide for TAX311 / Taxation 3A as offered in South African universities, with a particular focus on Walter Sisulu University (WSU) BCom in Accounting students. Aligned to typical South African undergraduate tax syllabi, these notes emphasise SARS, the Income Tax Act 58 of 1962, the Tax Administration Act 28 of 2011, VAT Act 89 of 1991, and South African context, while remaining useful for students at UNISA (e.g. TAX3701, TAX3702), CUT, NMU, UJ and similar modules.

1. South African Tax Framework and Core Principles

1.1 South African Tax System Overview

South Africa uses a residence-based tax system:

• Residents are taxed on worldwide income (subject to specific exemptions).
• Non-residents are taxed only on South African–sourced income and certain deemed South African income.

Key legislation relevant to TAX311 / Taxation 3A (WSU) includes:

• Income Tax Act 58 of 1962 (ITA) – primary statute governing normal income tax.
• Tax Administration Act 28 of 2011 (TAA) – administration, assessments, penalties, interest, objections and appeals.
• Value-Added Tax Act 89 of 1991 (VAT Act) – VAT registration, output and input tax.
• SARS Practice Notes, Interpretation Notes and Binding Rulings – not law but persuasive guidance.

Important authorities:

• South African Revenue Service (SARS) – administers and enforces tax laws.
• Tax Court and higher courts – interpret tax law, creating binding case law precedents.
• Minister of Finance / National Treasury – sets tax policy and introduces amendments via annual Taxation Laws Amendment Acts.

For WSU BCom Accounting TAX311 exams, you must be able to:

• Identify the appropriate Act and section.
• Correctly apply tax rates and thresholds for the relevant year of assessment.
• Distinguish clearly between:
  • Normal tax
  • Provisional tax
  • Employees’ tax (PAYE)
  • Capital gains tax (CGT)
  • VAT
  • Dividends tax, donations tax, estate duty (often covered briefly).

1.2 Key Concepts: Gross Income, Exempt Income, Deductions

The starting point in almost all income tax calculations is:

Taxable income = Gross income – Exempt income – Deductions + Taxable capital gain (if any)

Where:

• Gross income: defined in s1 ITA as:
  

  “the total amount, in cash or otherwise, received by or accrued to or in favour of a resident, excluding receipts or accruals of a capital nature” (adapted for non-residents to South African–sourced amounts only).

Core elements:

1. Amount

   • Includes money and money’s worth (e.g. fringe benefits, barter transactions).
   • Must be quantifiable in money.

2. Received by or accrued to

   • Received: taxpayer becomes entitled to it and has physical or constructive possession (even if not yet banked).
   • Accrued: unconditional right to an amount, even if not yet received (e.g. sales on credit).

3. Capital vs. revenue

   • Only revenue receipts fall into gross income.
   • Capital receipts are generally excluded from gross income, but may be subject to CGT if they constitute disposal of an asset.

4. Exempt income

   • Certain amounts are specifically exempt in ss10 and related sections, e.g.:
     • Certain foreign employment income (subject to conditions, s10(1)(o)(ii)).
     • Certain scholarships and bursaries (s10(1)(q)).
     • Dividends from South African companies (subject to dividends tax).

5. Deductions

   • Governed by general deduction formula (s11(a) read with s23(g)) and various specific deduction provisions (e.g. wear-and-tear s11(e), retirement contributions s11F).

1.3 Residents vs Non-residents

For TAX311 you must understand the resident definition in s1 ITA:

• Ordinarily resident test (common law):

  • A person is ordinarily resident where their true, fixed, permanent home is, where they intend to return, or where their centre of vital interests lies.
  • Focus on intention, permanence, and habitual residence.
  • Cases: e.g. Cohen v CIR – strong emphasis on taxpayer’s settled intention.

• Physical presence test (statutory):
  A natural person becomes a resident if all of the following are met:

  • Present in SA for >91 days in the current year, and

  • 91 days in each of the preceding 5 years, and

  • 915 days in total over those 5 preceding years.

  • If the person ceases to be physically present for a continuous period of >330 full days, they cease to be resident from the day they left South Africa.

Non-residents:

• Taxed only on:
  • South African–sourced income, and
  • Certain deemed SA-sourced amounts (e.g. certain royalties, immovable property situated in SA).

Implications for exams:

• Always classify the taxpayer (resident or non-resident).
• The classification determines whether foreign income is taxable in SA.
• Use clear timelines and day counts in physical presence test questions.

1.4 Source of Income and Case Law

Source is not explicitly defined in the ITA and is largely determined by case law. In exams for WSU TAX311 and UNISA TAX3701-type modules, you must:

• Know key principles:

  • Income from services: source where the services are rendered.
  • Interest: usually where the creditor’s capital is employed.
  • Dividends: where the company is resident.
  • Rentals from immovable property: where the property is situated.
  • Business profits: where operations are conducted or where the contract is concluded, depending on the nature of income.

• Cite supporting cases:

  • CIR v Lever Bros & Unilever Ltd – source where operations are conducted.
  • CIR v Epstein – source of broker’s commission.
  • Kerguelen Sealing & Whaling Co Ltd v CIR – importance of originating cause of income.
  • CIR v Genn & Co (Pty) Ltd – interest source location.

In a standard exam scenario:

A WSU TAX311 case-study might ask: “Sipho, a non-resident consultant, works remotely in London for a South African client and is paid into a South African bank account.”

Key points:

• Source of service income is where services are rendered (London), not where the payer resides or bank is located.
• Result: For a non-resident, that income is not South African–sourced, and is not taxable in SA (unless another deeming rule applies).

1.5 Horizontal and Vertical Equity, Ability-to-Pay, and Efficiency

TAX311 at WSU, UNISA, CUT and similar institutions often tests theoretical tax principles:

• Horizontal equity: taxpayers with similar ability to pay should pay similar amounts of tax.
• Vertical equity: those with greater ability to pay should pay more tax (often via progressive rates).
• Ability-to-pay principle:
  • Income tax is levied based on taxable income as a measurement of economic capacity.
  • Justifies progressive tax brackets and rebates.
• Efficiency and neutrality:
  • Taxes should distort economic behaviour as little as possible.
  • Examples of distortions:
    • High CGT inclusion rates may discourage asset disposals.
    • VAT exemptions on basic food items can alter consumption patterns.

Exam tip:

• When analysing a tax policy question (e.g. the fairness of CGT, VAT on food, or medical tax credits), refer back to:
  • Equity (horizontal/vertical),
  • Efficiency,
  • Administrative simplicity,
  • Revenue adequacy.

2. Normal Tax: Individuals (TAX311 Core Calculations)

2.1 Framework for Individual Taxable Income

For WSU Taxation 3A (TAX311), individual tax computations are central. The structure typically follows:

1. Gross income (resident: worldwide; non-resident: SA source).
2. Less: Exempt income (s10 and related).
3. Equals: Income.
4. Less: Allowable deductions (general and specific, including retirement contributions).
5. Plus: Taxable capital gain (where applicable).
6. Equals: Taxable income.
7. Apply tax tables (progressive standard individual rates).
8. Less: Rebates (primary, secondary, tertiary).
9. Less: Medical tax credits and other credits.
10. Equals: Normal tax payable (then compare to PAYE/provisional tax to get refund or tax liability).

2.2 Gross Income Inclusions (Employment, Business, Investment)

1. Employment income:

Included in gross income:

• Basic salary, wages, bonuses, commissions.
• Overtime, leave pay, performance incentives.
• Allowances:
  • Travel allowances (subject to specific deduction regime).
  • Subsistence allowances (per-diem type).
  • Other taxable allowances (e.g. tool, entertainment).
• Fringe benefits in terms of seventh schedule, e.g.:
  • Company car.
  • Use of employer-owned accommodation.
  • Low- or no-interest loans.
  • Payment of employee’s personal expenses.

You must be able to:

• Convert cash and non-cash benefits into taxable amounts per SARS tables and prescribed values.
• Distinguish between taxable allowances and reimbursements (e.g. reimbursements for actual business kilometres).

2. Business income (sole proprietor):

• Income from a trading activity.
• Sales or fees for goods and services.
• Recoveries (insurance, bad debt recoveries).
• Specific inclusions:
  • Recoupment of allowances (s8(4)(a)): when an asset previously allowed as a deduction (e.g. wear-and-tear) is disposed at more than its tax value, the excess is included in income up to the original cost.

3. Investment income:

• Interest (from banks, loan accounts, etc.).
• Dividends:
  • Local dividends often exempt (s10(1)(k)), but subject to dividends tax at corporate level.
  • Foreign dividends partially taxable based on formula.
• Rental income from properties.
• Annuities.

Exam scenario structure:

In a WSU TAX311 question, you might be asked to compute taxable income for Nomsa, who:

• Has a salary,
• Receives a travel allowance,
• Earns interest from a bank,
• Runs a small side-business (with expenses and asset disposals).

You must:

• Aggregate all amounts received or accrued,
• Exclude capital receipts (unless subject to CGT),
• Apply gross income vs exempt income vs deductions systematically.

2.3 Exempt Income (s10 and Selected Provisions)

Common exam-tested exempt income items:

• Dividends from South African resident companies – s10(1)(k).
• Certain foreign employment income – s10(1)(o)(ii) (subject to days-out-of-SA test and employment conditions).
• Scholarships, bursaries, certain study loans – s10(1)(q).
• Certain government grants (where specifically listed).
• Interest received by non-resident individuals on certain listed debt instruments (subject to conditions).

For TAX311 at WSU and similar modules:

• You must:
  • Identify which amounts are exempt, referencing the appropriate section.
  • Correctly exclude exempt income from taxable income.
  • Still consider exempt income where it affects means tests (e.g. certain credits or deductions).

2.4 General Deduction Formula and Specific Deductions

General deduction formula (s11(a) read with s23(g)):

A deduction is allowed for:
“expenditure and losses actually incurred in the production of the income, provided such expenditure and losses are not of a capital nature…”

Main requirements:

1. Actually incurred:
   • The liability must have arisen; not merely anticipated.
2. In production of income:
   • There must be a sufficient close connection between expense and income-earning operations.
3. Not of a capital nature:
   • Distinguish capital vs revenue expenditure.
4. Not prohibited elsewhere:
   • E.g. s23(g) disallows expenditure not laid out for purposes of trade.

Capital vs revenue tests:

• Enduring benefit test.
• Once-off vs recurrent expenditure.
• Creation vs maintenance of income-producing structure.

Key cases:

• New State Areas Ltd v CIR – important capital vs revenue principles.
• Joffe & Co (Pty) Ltd v CIR – deductibility of damages; tests for “in production of income”.
• Port Elizabeth Electric Tramway Co Ltd v CIR – commuting vs business travel.

Specific deductions (examples):

• s11(e) – wear-and-tear / depreciation on movable assets used for trade.
• s11F – contributions to pension, provident and retirement annuity funds (subject to deduction limits as a percentage of taxable income and rand cap).
• s11(i) – bad debts.
• s11(j) – doubtful debts allowance.
• s11(aA), s11(c) etc. – more advanced, often partly in Taxation 3B.

Exam approach:

1. List all expenses given.
2. Classify:
   • Direct business/trade expenses (generally deductible).
   • Private/domestic (disallowed, e.g. personal groceries, private cell phone).
   • Capital expenditure (not deductible under s11(a) but may qualify for capital allowances or CGT base cost).
3. Link each allowed deduction to:
   • s11(a) or specific section (e.g. s11(e), s11F).
4. Clearly show calculation steps, especially for wear-and-tear and retirement contributions.

2.5 Fringe Benefits and Allowances (Seventh Schedule)

Fringe benefits are included in gross income in terms of paragraph (i) of ‘gross income’ and valued under the Seventh Schedule of the ITA.

Common exam-tested fringe benefits:

1. Right of use of motor vehicle:

   • Employer-owned car provided for private use.
   • Taxable value often a percentage of determined value (e.g. cost) per month.
   • Reduction if employee bears full fuel/maintenance costs (follow SARS tables).
   • WSU TAX311 exams typically require use of SARS rates for the relevant year of assessment.

2. Low- or interest-free loans:

   • Taxable benefit = difference between actual interest and SARS official rate × loan balance.
   • E.g. employer loans R200 000 at 0%; official rate 8%; monthly fringe benefit = (8% × 200 000)/12.

3. Employer-provided accommodation:

   • Valued using prescribed formulas based on employee’s remuneration and rental value.
   • Special rules for domestic workers, farm workers, remote areas.

4. Payment/reimbursement of private expenses:

   • If the employer pays an employee’s private expense (e.g. school fees), that amount is typically a fully taxable fringe benefit.

Allowances:

• Travel allowance:
  • Portion of the allowance is subject to PAYE (e.g. 80% or 20% rule).
  • Taxpayer may claim deduction for business kilometres using SARS travel logbook and tables.
• Subsistence allowance:
  • Certain deemed daily amounts may be exempt if used for meals/incidental costs while travelling for business.

Exam tips for WSU, UNISA (TAX3701) and CUT modules:

• Always state:
  • Allowance or fringe benefit?
  • Relevant Seventh Schedule paragraph or section.
• Show:
  • Step-by-step valuation of the fringe benefit.
  • How it is added to gross income.
  • Any corresponding allowable deduction (e.g. travel costs).

2.6 Retirement Contributions, Medical Scheme Fees and Tax Credits

Retirement fund contributions (s11F):

• Deductible up to a limit:
  • Typically 27.5% of the higher of remuneration or taxable income (before s11F deduction), capped by a monetary ceiling per year.
• Excess contributions:
  • Carried forward and can be used as a deduction in future years or increase tax-free lump sums at retirement.

Medical scheme fees and medical expenses:

South Africa uses a medical tax credit system:

1. Medical scheme fees tax credit (MTC):

   • Fixed rand amount per month for:
     • Taxpayer (principal member),
     • First dependant,
     • Additional dependants.
   • Credit is a rebate from tax payable, not a deduction from taxable income.

2. Additional medical tax credits:

   • For qualifying out-of-pocket medical expenses and contributions above a threshold.
   • Different rules for:
     • Persons <65 years, no disability.
     • Persons ≥65 years or with a disability (looser thresholds).
   • Exam questions often provide:
     • Total medical scheme contributions,
     • Qualifying expenses,
     • Whether the taxpayer or dependant has a disability or is over 65.

Exam technique:

• Carefully separate:
  • Medical contributions (scheme fees),
  • Out-of-pocket qualifying medical expenses.
• Correctly apply:
  • Relevant percentage threshold,
  • Then compute additional tax credit.

2.7 Comprehensive Individual Tax Example (Exam Style)

A typical WSU TAX311 or UNISA TAX3701 style question might span 2–3 pages. To practise, consider this simplified illustrative example (numbers are generic, not tied to a specific year of assessment – in exams use the SARS rates supplied in your exam booklet):

Facts:

• Thabo is a resident individual, aged 35.
• Earns:
  • Salary: R300 000.
  • 13th cheque: R25 000.
  • Travel allowance: R60 000 for the year.
• Employer provides a company car (cost R250 000, used partly for private).
• Thabo belongs to a medical scheme (with spouse and one child) at R6 000 per month; employer pays 50% and deducts 50% from salary.
• Thabo also:
  • Contributes R36 000 to a retirement annuity.
  • Earns interest of R8 000 from a local bank.
  • Runs a side business with profit before tax adjustments of R40 000, including depreciation of R10 000 (book) while tax wear-and-tear is R15 000.

Exam tasks typically:

1. Compute taxable income.
2. Calculate normal tax payable after rebates and medical tax credits.
3. Show impact of retirement contributions and medical credits.

The calculation would:

• Include all cash and fringe benefits in gross income.
• Deduct:
  • Appropriate retirement contributions per s11F limit.
  • Business expenses and adjust depreciation to wear-and-tear (adding back book depreciation, deducting tax W&T).
• Apply travel allowance deduction using SARS tables if business kilometres given.
• Add taxable capital gains if there were asset disposals.
• Apply the progressive tax table and rebates.

Developing fluency with such integrated examples is critical for Taxation 3A success at WSU and other South African universities such as UNISA (TAX3702), CUT, UJ and NMU.

3. Capital Gains Tax (CGT) for Individuals and Entities

3.1 CGT Framework in South Africa

Capital gains tax is not a separate tax but part of normal income tax under Eighth Schedule to the ITA.

Key concept:

Taxable capital gain is added to taxable income, then normal tax is levied at the person’s marginal rate.

CGT applies when a disposal of an asset occurs:

• Asset – broadly defined: property of any nature, including movable and immovable, tangible and intangible (shares, cryptocurrency, goodwill, etc.).
• Disposal – includes sale, donation, exchange, vesting, scrapping, and certain deemed disposals (e.g. emigration, death).

Applies to:

• Residents – on worldwide assets (subject to certain exclusions).
• Non-residents – only on:
  • Immovable property in SA,
  • Certain interests in immovable property,
  • Assets of a permanent establishment in SA.

3.2 Steps in CGT Calculation (Individuals)

For an individual resident in a TAX311 exam:

1. Identify disposals in the year of assessment.

2. For each asset:

   • Determine proceeds (usually selling price, adjusted for transaction costs borne by seller, amounts received or accrued).
   • Determine base cost (acquisition cost + directly attributable costs such as transfer duties, improvements, valuation fees).
   • Calculate capital gain or loss = proceeds – base cost.

3. Aggregate:

   • Sum all capital gains and losses to obtain aggregate capital gain or loss.

4. Reduce by exclusions:

   • Annual exclusion for individuals and special trusts (e.g. R40 000 for the year; R300 000 in the year of death – verify exact amounts for exam year).
   • Primary residence exclusion (first R2 million of capital gain or loss on disposal of primary residence, subject to conditions).
   • Personal-use asset rule (certain personal assets where losses are disregarded).

5. Apply inclusion rate:

   • Multiply net capital gain (after exclusions) by the individual inclusion rate (e.g. 40%) to get taxable capital gain.

6. Add taxable capital gain to taxable income:

   • Then apply standard income tax tables.

3.3 CGT for Companies and Trusts (Comparative Notes)

For WSU TAX311, some exposure to entity CGT is typical, though detailed corporate restructurings are often in Taxation 3B.

Basic contrasts:

• Companies:

  • No annual exclusion.
  • Higher inclusion rate (e.g. 80%).
  • Effective CGT rate ≈ company tax rate × 80%.

• Trusts:

  • Inclusion rate often equal to company inclusion rate (e.g. 80%).
  • No annual exclusion (except for special trusts Type A – persons with disabilities – treated like individuals).

Implications:

• Individuals usually have lower effective CGT due to annual exclusion and lower inclusion rate.
• Exam questions sometimes require:
  • Calculation of CGT if asset is held by a company vs held personally.
  • Demonstration of the tax planning implications of holding investment property in a company vs individual name.

3.4 CGT: Special Rules, Exemptions and Exclusions

1. Primary residence exclusion:

• Applies if:
  • The property is used mainly for domestic purposes by the owner or spouse.
  • Land area generally ≤2 hectares.
• Maximum exclusion:
  • First R2 million of capital gain (or loss) disregarded.
• Time apportionment if:
  • Property used partially for business or rental.
  • Periods of absence (e.g. relocating but property unsold) have special rules.

Exam scenario:

A WSU TAX311 question: “Lerato sells her primary residence for R3 000 000. Base cost is R500 000. She used one room as a hair salon (20% of floor area) for the last 2 years of ownership.”

Steps:

• Gain before exclusions = 3 000 000 – 500 000 = R2 500 000.
• Primary residence exclusion of R2 000 000 applies only to portion used as primary residence (80%).
• Allocate gain between personal (80%) and business (20%) use; apply exclusion only to personal portion.
• Compute residual taxable capital gain.

2. Small business asset relief:

• On disposal of active business assets by small business owners above a certain age (often studied in more detail in Taxation 3B, but basic awareness may be required).
• Lifetime exclusion (e.g. up to R1.8 million for small business CGT relief; verify current figures for exam).

3. Personal-use assets:

• Losses on personal-use assets (e.g. private car, furniture) disregarded.
• Gains may be taxable (subject to annual exclusion).

4. Exempt assets:

Certain assets/disposals are CGT-exempt, such as:

• Personal-use movable property below specified thresholds (e.g. clothing, household furniture, private motor car used solely for personal transport).
• Certain long-term assurance policies (endowment policies) under specific conditions.
• Compensation for personal injury/illness.

3.5 CGT Planning Considerations (Exam Discussion)

Tax planning aspects often examined theoretically:

• Timing of disposals:
  • Selling late in the tax year vs early in the next can defer CGT.
• Use of annual exclusion:
  • Spreading disposals across years to fully utilise annual exclusion.
• Holding structure:
  • Holding investment properties individually vs through a company or trust affects:
    • Effective CGT rate,
    • Access to primary residence exclusion,
    • Administrative complexity.

In discussion-type questions:

• Refer to:
  • Horizontal and vertical equity – CGT ensures capital and labour income are taxed more evenly.
  • Administrative feasibility – tracking base costs can be complex; SARS guidance and record-keeping requirements.
  • Economic impact – CGT may discourage short-term speculation, but could also inhibit investment and asset mobility.

3.6 Integrated CGT Example

An example aligned to typical WSU Taxation 3A / UNISA TAX3702 level:

Facts:

• Sibusiso (resident, age 45) in year of assessment:
  • Sells listed shares:
    • Proceeds: R150 000
    • Base cost: R80 000
  • Donates antique furniture to his sister:
    • Market value: R50 000
    • Base cost: R10 000
  • Sells his primary residence:
    • Proceeds: R2 800 000
    • Base cost: R500 000
    • Entirely used as his home (no business use).

Exam tasks:

1. Identify which disposals are subject to CGT.
2. Calculate aggregate capital gain.
3. Apply primary residence exclusion and annual exclusion.
4. Determine taxable capital gain (assuming individual inclusion rate of 40% and annual exclusion R40 000).

Outline answer:

• Shares:
  • Capital gain: 150 000 – 80 000 = 70 000.
• Donation of antique furniture:
  • Disposal deemed at market value (R50 000).
  • Capital gain: 50 000 – 10 000 = 40 000.
• Primary residence:
  • Gain: 2 800 000 – 500 000 = 2 300 000.
  • Apply R2 000 000 primary residence exclusion ⇒ taxable gain on residence: 2 300 000 – 2 000 000 = 300 000.
• Aggregate capital gain:
  • 70 000 + 40 000 + 300 000 = 410 000.
• Less annual exclusion (R40 000) ⇒ net capital gain: 370 000.
• Taxable capital gain (40% inclusion): 370 000 × 40% = R148 000, which is added to Sibusiso’s taxable income.

You then use the individual tax tables to calculate normal tax on taxable income plus R148 000.

4. Corporate Taxation, Dividends Tax and VAT (TAX311 Entity Focus)

4.1 Overview of Company Tax in South Africa

Core features:

• Companies and close corporations are separate taxpayers.
• Taxed at a flat corporate tax rate on taxable income.
• Structure similar to individuals:
  1. Gross income
  2. Exempt income
  3. Deductions
  4. Taxable capital gain (at company inclusion rate)
  5. Taxable income × corporate rate = normal tax.

Main distinctions vs individuals:

• No rebates (like primary, secondary rebates).
• No medical credits directly (though medical contributions for employees are deductible as expenses).
• Different deduction and allowance regimes for:
  • Machinery, factories, buildings (e.g. s12C, s13, s13quin).
  • Research and development (s11D).
  • Learnerships and training allowances.

In WSU TAX311, you are usually not required to know all complex incentives in detail, but you must:

• Understand the basic corporate tax calculation.
• Apply common allowances such as wear-and-tear, capital allowances for plant and machinery.
• Integrate CGT into company tax where assets are disposed.

4.2 Tax Computation for a Company (Exam Pattern)

Typical exam steps (WSU, UNISA, CUT):

1. Start with accounting profit before tax from the income statement.
2. Adjust for:
   • Non-taxable income (e.g. exempt dividends) – subtract.
   • Non-deductible expenses (e.g. fines, penalties, donations above s18A limit) – add back.
   • Differences between accounting depreciation and tax allowances (add back accounting depreciation, deduct tax allowances).
   • Capital gains/losses (separate from operating profit, then apply CGT rules).
3. Arrive at taxable income.
4. Apply company tax rate.
5. Add dividends tax consideration if company distributes profits (though dividends tax is generally paid by the company as withholding, not from company’s own tax liability).

Exam tip:

• Clearly reconcile from accounting profit to taxable income in a structured, columnar format:
  • Column 1: Accounting amount.
  • Column 2: Plus/minus tax adjustment.
  • Column 3: Taxable amount.

4.3 Dividends Tax (Shareholders) vs Company Tax (Profits)

Dividends tax:

• Levied under Part VIII of Chapter II of the ITA.
• Rate (commonly 20%, subject to DTI agreements).
• Payable by:
  • The beneficial owner (shareholder) of the dividend, but usually withheld and paid to SARS by the company or regulated intermediary.
• Applies to:
  • Dividends declared by South African resident companies.
  • Certain foreign dividends from dual-listed companies.

In examinations:

• Identify:
  • A dividend distribution = not deductible in computing company taxable income.
  • Shareholder’s receipt of local dividend is often exempt income (s10(1)(k)), but dividends tax may be withheld.

Contrast with company tax:

• Company tax is paid on taxable income at corporate rate.
• Dividends tax is a second layer when profits are distributed as dividends.

Example:

• XYZ (Pty) Ltd:
  • Taxable income: R1 000 000.
  • Company tax (at 27%): R270 000.
  • After-tax profit: R730 000.
  • Declares full amount as dividend.
  • Dividends tax (20%): 20% × 730 000 = R146 000.
• Shareholder receives:
  • Net dividend: 730 000 – 146 000 = R584 000 (usually exempt income for resident individuals, but taxed via dividends tax).

4.4 VAT: Fundamentals for TAX311 Students

The Value-Added Tax Act 89 of 1991 imposes VAT on the supply of goods and services in South Africa.

Key features:

• Standard rate (e.g. 15%).
• Some supplies are:
  • Zero-rated (0% VAT, but still input tax claimable).
  • Exempt (no output VAT, no input tax credit).

VAT registration:

• Compulsory registration if taxable supplies exceed the compulsory registration threshold (e.g. R1 million in any 12-month period).
• Voluntary registration possible if taxable supplies exceed a lower threshold (e.g. R50 000 in 12 months).

VAT vendors:

• Charge VAT on taxable supplies (output tax).
• Claim VAT paid on business expenses (input tax).
• Net VAT = output – input; if positive, payable to SARS; if negative, refundable.

4.5 VAT Categories: Standard-rated, Zero-rated and Exempt

1. Standard-rated supplies:

   • Most goods and services (e.g. clothing, electronics, restaurant meals).
   • VAT charged at standard rate (e.g. 15%).

2. Zero-rated supplies (s11 and Schedule 2):

   • VAT charged at 0%.
   • Vendor may still claim input tax.
   • Examples:
     • Certain basic foodstuffs (brown bread, maize meal, rice, milk).
     • Exports of goods (direct exports).
     • Sale of a going concern under specified conditions.

3. Exempt supplies (s12):

   • No output VAT charged.
   • No input tax credit for expenses relating to such supplies.
   • Examples:
     • Financial services (interest on loans, issue of shares).
     • Residential accommodation.
     • Public road transport for fare-paying passengers in certain vehicles.
     • Educational services by recognized institutions.

Exam tasks:

• Correctly classify supplies.
• Explain consequences for input tax:
  • If business makes both taxable and exempt supplies, must apportion input tax.

4.6 VAT Input and Output Tax: Computation Example

A typical TAX311 / UNISA (e.g. TAX3703) style VAT question:

Facts:

• ABC Traders (Pty) Ltd is a registered VAT vendor making only taxable supplies.
• For a VAT period:
  • Sales (exclusive of VAT): R460 000.
  • Sales returns (exclusive): R10 000.
  • Purchases of trading stock (inclusive of VAT): R230 000 (from VAT vendors).
  • Capital equipment purchased: R115 000 (inclusive of VAT, from VAT vendor, for exclusive business use).
  • Insurance claim received for damaged trading stock: R11 500 (inclusive of VAT).

Tasks:

1. Compute output tax:

   • Output VAT on sales (R460 000 × 15%) = R69 000.
   • Decrease output tax for sales returns (R10 000 × 15%) = R1 500.
   • Insurance claim may include VAT component (if insurer is a vendor and claim relates to trading stock); need to separate VAT fraction.

2. Compute input tax:

   • Purchases: Input VAT portion = 15/115 × 230 000 = R30 000.
   • Capital equipment: Input VAT = 15/115 × 115 000 = R15 000.

3. Net VAT:

   • Total output – total input.
   • Show clearly whether ABC must pay SARS or receives a refund.

Key exam points:

• Always check if supplier is a VAT vendor.
• Expenses must be used for making taxable supplies to qualify for input tax.
• Certain costs (e.g. entertainment) may have denied input tax even if vendor is registered.

4.7 Entity Tax Example: Integrated Income Tax and VAT

An integrated entity taxation question at WSU (TAX311) might combine:

• Corporate tax calculation.
• CGT on disposal of a company asset.
• VAT implications of the disposal.

Example outline:

• XYZ Manufacturing (Pty) Ltd:
  • Sells an old machine (original cost R400 000; tax value R120 000) for R200 000 (exclusive of VAT).
  • Machine used 100% in taxable operations.
  • Accounting depreciation differs from tax wear-and-tear.
  • Company also has other trading income and expenses.

Tasks:

1. Income tax:
   • Determine recoupment of allowances (200 000 – 120 000 = R80 000) included in income.
   • If proceeds exceed original cost, the excess would be capital gain; here it does not, so no CGT.
2. VAT:
   • Disposal of trading asset for R200 000 (exclusive), vendor must charge VAT:
     • Output VAT = 200 000 × 15% = R30 000.
   • Buyer claims input VAT if also a vendor and asset used for taxable supplies.

This type of integrated calculation prepares WSU BCom Accounting students for more advanced corporate tax in Taxation 3B and for practical application in SA tax practice.

5. Tax Administration, Provisional Tax, PAYE and Exam Strategy (WSU TAX311)

5.1 Tax Administration Act 28 of 2011 (TAA) Essentials

The Tax Administration Act (TAA) harmonises administrative procedures across different tax Acts.

Key areas for TAX311 exams:

• Registration:
  • Obligation to register for income tax, VAT, PAYE, etc., where thresholds and conditions are met.
• Returns and records:
  • Taxpayers must submit returns by due dates and keep records for a minimum period (often 5 years).
• Assessments:
  • SARS issues estimated, original, additional, reduced and jeopardy assessments.
• Interest and penalties:
  • Administrative non-compliance penalties (e.g. late submission).
  • Understatement penalties (kinds of behaviour: substantial understatement, reasonable care not taken, no reasonable grounds, gross negligence, intentional tax evasion).

Exam tasks may ask:

• Define and differentiate various assessments.
• Explain penalty percentages and circumstances (for a given case).
• Provide steps to remit or reduce a penalty.

5.2 Provisional Tax: Who, When and How

Provisional tax is not a separate tax but a payment system designed to spread income tax liability for certain taxpayers over the year.

Who must register:

• Individuals who earn income not subject to PAYE, e.g. business income, rental income, investment income above certain thresholds.
• Companies and close corporations are usually automatically provisional taxpayers.

Exemptions for individuals (commonly in exam booklets):

• If total taxable income is below the tax threshold, or
• If income (other than remuneration) is below certain limited amounts.

Provisional tax periods:

• For individuals (with February year-end):
  • First period: 1 March – 31 August.
  • Second period: 1 September – last day of February.
  • Third/top-up payment (voluntary): by 30 September (7 months after year-end).

Calculations:

1. First provisional payment:

   • Based on:
     • Basic amount (usually last assessed taxable income), or
     • Taxpayer’s own estimate (must be realistic to avoid penalties).

2. Second provisional payment:

   • More accurate estimate of total taxable income for the year.
   • Use relevant tax tables and rebates to determine total estimated tax, deduct first provisional payment, pay the balance.

3. Third/top-up payment:

   • Paid to prevent or reduce interest for underestimation.

Exam tips for WSU TAX311, UNISA (TAX3701), and CUT:

• Show clearly:
  • “Estimated taxable income” → “Normal tax” → “Less: Rebates” → “Less: PAYE” → “Provisional payment due”.
• Remember:
  • Provisional tax replaces PAYE for non-salary income; final liability is determined on assessment.

5.3 PAYE (Employees’ Tax), UIF and SDL

Pay-As-You-Earn (PAYE):

• System by which employers withhold employees’ tax from remuneration and pay to SARS.
• Calculated using SARS PAYE tables based on:
  • Gross remuneration,
  • Allowances (portion taxable monthly),
  • Medical scheme tax credits (often factored in).

Employers must:

• Register with SARS for PAYE, UIF, and possibly SDL (Skills Development Levy).
• Issue IRP5 certificates annually.

UIF (Unemployment Insurance Fund):

• Contributions:
  • Employer: 1% of employee’s remuneration (up to a ceiling).
  • Employee: 1% (deducted from remuneration).
• Paid to the UIF, not SARS.

SDL (Skills Development Levy):

• 1% of payroll for eligible employers (above certain thresholds).
• Paid to SARS.
• Funds used for training via SETAs (Sector Education and Training Authorities).

Exam tasks:

• Compute monthly PAYE, UIF, SDL for a given employee.
• Distinguish which contributions are:
  • Deductible for income tax (e.g. employer’s contribution deductible as expense),
  • Not deductible (e.g. employee’s portion of UIF).

5.4 Objections, Appeals and Dispute Resolution

Under the TAA:

• A taxpayer who disagrees with an assessment (income tax, VAT, etc.) may:

1. Lodge a request for reasons within the prescribed period (usually within 30 days of assessment).

2. Submit a notice of objection (formally challenging the assessment), usually within 30 business days of:

   • The date of assessment, or
   • Date when reasons were provided.

3. If SARS disallows the objection partially or fully:

   • Taxpayer may appeal to:
     • Tax Board (for smaller amounts), or
     • Tax Court (for larger or complex disputes).

Key elements:

• Objections must:
  • Be in writing, using prescribed form.
  • State grounds of objection clearly and specifically.
• Certain disputes can be resolved via:
  • Alternative Dispute Resolution (ADR).

Exam application:

• You may be asked to outline the steps a taxpayer must take after receiving an unfavourable assessment.
• Emphasise:
  • Time limits,
  • Content requirements,
  • The difference between objection and appeal.

5.5 Penalties and Interest: Types and Calculation Principles

Common penalties under TAA:

1. Administrative non-compliance penalties:

   • For failure to:
     • Register as a taxpayer,
     • Submit returns on time,
     • Retain records.
   • May be fixed amount penalties (e.g. per month until rectified) depending on taxpayer category.

2. Understatement penalties:

   • Apply where:
     • Taxpayer makes a false statement, omits income, or underestimates tax.
   • Penalty percentage depends on:
     • Nature of default (e.g. “substantial understatement”, “gross negligence”, “intentional tax evasion”).
     • Behavior categories have prescribed penalty rates (e.g. 25%, 50%, 75%, 100% etc. of shortfall).

3. Interest:

   • Charged on late payment of tax.
   • Usually at a rate prescribed by SARS, compounded monthly.

In a TAX311 exam question:

• You may be given:
  • Amount of tax shortfall.
  • Description of taxpayer behaviour (e.g. “no reasonable grounds for the tax position taken”).
• You must:
  • Identify appropriate penalty category.
  • Calculate penalty amount (shortfall × penalty percentage).
  • Add interest, if time period and rate are provided.

5.6 Ethical Considerations for Professional Accountants and Tax Practitioners

For WSU BCom in Accounting students, TAX311 often includes ethical dimensions:

• Professional accountants and registered tax practitioners must adhere to:
  • SAICA Code of Professional Conduct (if applicable),
  • SARS Tax Practitioner Code of Conduct,
  • General principles of integrity, objectivity, professional competence, due care, confidentiality and professional behaviour.

Ethical scenarios in exams:

• Client asks practitioner to “inflate deductions” or “understate income”.
• Practitioner discovers prior-year understatements.

Expected response:

• Never assist in illegal tax evasion or misrepresentation.
• Advise client of correct treatment and implications.
• If client refuses to correct or persists in unlawful actions:
  • Consider withdrawing from the engagement.
  • Evaluate legal obligations about reporting or qualifying the work.

Distinguish:

• Tax evasion (illegal, deliberate misrepresentation).
• Tax avoidance (legal arrangement to minimise tax, may be subject to anti-avoidance provisions such as s80A–s80L in the ITA).

5.7 Exam Strategy for WSU TAX311: Structuring Answers and Time Management

For WSU TAX311: Taxation 3A, as well as equivalent modules like UNISA TAX3701/TAX3702, CUT Taxation 3, etc., success depends on technical mastery and exam technique.

Core strategies:

1. Read the question carefully:

   • Identify:
     • The taxpayer type (individual, company, trust, non-resident).
     • The tax year (to use correct rates and thresholds).
     • Which taxes are in scope (income tax, CGT, VAT, PAYE, provisional).

2. Structure your answer:

   • For computation questions:
     • Use clear headings: Gross income, Exempt income, Deductions, Taxable income, Normal tax, Rebates, etc.
   • Show all workings in a logical, step-by-step manner.

3. Reference legislation and cases:

   • In discussion/theory questions, cite:
     • Relevant sections (e.g. s1 [definition of gross income], s11(a), s23(g), Eighth Schedule).
     • Key cases (e.g. New State Areas Ltd v CIR, Joffe & Co v CIR, Lever Bros case, etc.).
   • Use these to support your conclusion, not just list them.

4. Time management:

   • Allocate time according to mark allocation:
     • If question is out of 25 marks in a 100-mark, 3-hour exam, allocate about 45 minutes.
   • Move on if stuck:
     • Put down partial answers and calculations; do not spend too long on one tricky adjustment.

5. Avoid common mistakes:

   • Forgetting to:
     • Subtract exempt income,
     • Apply annual exclusion for CGT,
     • Include taxable fringe benefits,
     • Apply correct rebates and medical tax credits.
   • Misclassifying:
     • Capital vs revenue items,
     • Zero-rated vs exempt supplies for VAT.

6. Practice past papers:

   • For WSU, look specifically for “TAX311: Taxation 3A past exam papers”.
   • For additional practice, use similar modules from UNISA (TAX3701, TAX3702) and CUT BTech/BCom Taxation.
   • Recreate exam conditions:
     • Time yourself,
     • Do not look at memorandum until finished.

7. Link theory and computation:

   • Many exam questions include a computational component plus a short theory question:
     • E.g. “Explain why a specific expense is disallowed as a deduction, referring to s23(g) and relevant case law.”
   • Be prepared to justify calculations with brief written explanations.

By mastering the South African tax framework, key definitions, individual and corporate tax computations, CGT, VAT basics, and administrative aspects under the TAA, WSU BCom in Accounting students taking TAX311: Taxation 3A build a solid foundation for further tax modules (such as Taxation 3B), professional exams, and work in public practice or corporate finance departments.