For the past few weeks we`ve been talking about income from employment. This
week, we will establish a tax framework that we will use consistently. The
focus will be on individuals and the businesses you conduct in your own
name.
Key to an understanding of taxation is the term "gross income". This is the
total income that you receive from all sources (worldwide) including your
employment income (salary).
You will use this concept every year, when you fill in your tax return at
the end of the tax year, in February.
If you follow the steps below, you can work out how much your tax liability
is, or how much tax refund you will obtain. When you complete your tax
return, you do not really perform the tax calculation itself, but simply
fill in the information, so following the steps below will help you check if
the Receiver of Revenue is taxing you as you expect to be taxed.
During the year the Receiver will have been focusing only on your employment
income and on employees` tax, but when it comes to filling in the tax
return, he will want to know what has been happening in other areas of your
life (businesses, investments and so on) and that`s why the steps below are
important.
Total income
Add Deemed income
Gross income - discussed this week
Subtract (Exempt Income) - we`ll
discuss this next week
Equal Income
Subtract (Deductions and Allowances)
we`ll discuss this the week
after next
Equal Taxable income
Tax on taxable income
using tax tables
Less (Rebates from the tax
calculated)
Less (SITE & PAYE & provisional
tax paid previously)
Tax liability or refund
from Receiver
Gross income
This is the sum of income from:
* Employment;
* Investment;
* Business or partnership (not a company or close corporation); and
* Trusts.
You must work out each sub-total and add them to make up gross income.
Employment income
This includes the salary, wages, overtime pay, bonuses, commission, travel
allowance and all other allowances. Note that all pension income and
annuities will be included here as well, as will lump sum pay-outs from
pension and retirement annuity funds, and any fringe benefits you get from
your employer, such as a car or the use of other company assets for free.
If you have worked for your employer outside South Africa, you will have to
add what is called "deemed employment income", which is calculated
separately, according to tax law rules.
Investment income
This is the total interest that you earn from all investments, the dividends
you received from all the shares you hold, the rent you receive from the
flat or house you let out. You may also have to add "deemed investment
income" - the rent, dividends, interest or other investment income earned by
companies which you control in countries other than South Africa.
Business or partnership income
(Remember this does not apply to a company or close corporation.)
This includes all income - before deducting expenses - that you received
from the business that you conduct in your own name. If you have a shop, all
the cash and credit income is included.
Don`t forget to keep records of each business separately. A partnership will
normally prepare annual financial statements, combining all partners income.
In this case, you must take out your share of the profit or loss for the
table.
Income from trusts
Here you must include any income that you get, as a beneficiary, from any
trust.
If you donate property to a trust, so that income is to be given to your
minor children by the trustees, that income will be deemed to be yours.
Add all these up to get gross income.
If you have a company from which you earn a salary and dividends, the salary
goes under employment income and the dividend to investment income. The
profits are not yours, so they are kept in the company, because the company
is a person in its name.
If you conduct your business as a partner and you receive a salary and also
share in profits, the salary goes to employment income and the profits or
losses to business income.
A fundamental difference between these two examples is that the profits or
losses you make as a partner, are added or deducted from your total income,
but the profits of the company are not included, because a company is a
separate "person" from you.
All this is extremely important to your understanding of what taxation for
individuals is all about.
* Next week, we explain exempt income.