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Individuals. EXPECTED OUTCOMES Calculate Normal tax Liability – using the framework Apply provisions of the Act iro Married persons and minor children Apply act –calculation of backdated salaries
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Individuals • EXPECTED OUTCOMES • Calculate Normal tax Liability – using the framework • Apply provisions of the Act iro Married persons and minor children • Apply act –calculation of backdated salaries • Calculate deductions of a private nature which can be claimed by individuals in respect of contributions to pension and RAF as well as medical cost. • Do integrated case study.
Individuals • Some Relevant Issues • Tax calculation • - Tax tables & Rebates • Interest & Dividend exemption • Special deductions • - Pension fund contributions : s11(k) • - RAF contributions : s11(n) • - Medical expenses : s18 • - Donations : s18A • Antedated salary & pension • Tax collection • Rating formula – s5(10) • Anti-avoidance • - Diversion of income
Normal Tax Framework • Gross Income (s1) • Minus : Exemptions (Ch II, pt I, s10) • Equals : Income • Minus : Deductions (Ch II, pt I • s11 - s23 mainly) • Plus : Taxable Capital Gains (s26A) • Equals : Taxable income/Assessed Loss • Individuals • Taxable Income x Tax rates s5 • Minus : Rebates (s6) • = Normal Tax liability
Tax Rates • s5 – Different rates for : • - individuals, • - companies, • - trusts, • - gold mines, • - foreign companies, • - small business corporations, • - s5(10) • - etc. • Individuals • - Tables published in Govt. Gazette • - Sliding scale • - See Appendix A, p921 & • Appendix F [Quick Reference Table], p924
IndividualsNormal Tax Rebates • Available to individuals only & certain trusts (special trusts) • Apportioned for partial years of assessment • - Year in which born (if liable) • - Year in which taxpayer dies • - Year in which taxpayer goes insolvent • Two Normal Tax Rebates (s6) • - Primary rebate – all natural persons R8,280 (2009) [R7,740 (2008)] • - Secondary rebate – 65 years or older R5,040 (2009) [R4,680 (2008)] • * i.e. R13,320 in total [R12,240 (2008)] • * age taken on last day of tax year • To be distinguished from the ‘Foreign Tax Rebate’ (s6quat) • - Not covered this year
IndividualsDividend Exemption • S10(1)(k) Exemption • - Available to all taxpayers • Most local (SA) dividends exempt under s10(1)(k)(i) – Chap 4, Pg 78 • - Certain unit trust (CIS) dividends not exempt • - Share buy-back dividends not exempt for share-dealers • Certain foreign dividends exempt under s10(1)(k)(ii) - Chap 4, Pg 78 • - s9D • - Not covered in detail this year • - See Chapter 16
IndividualsGeneral Exemption for Interest & Dividends • S10(1)(i)(xv) Exemption • - Under 65 : R19,000 • - 65 & older : R27,500 • (aa) First R3,200 for foreign dividends and foreign interest • - Foreign dividends first • (if not already exempt under s9D or s10(1)(k)(ii)) • - Bal. (of R3,200) for foreign interest • (bb) Balance after (aa) for local interest • Balance for local dividends • - if not already exempt under s10(1)(k)(i)
Pension Fund Contribution-Chp 6.12 • S11(k) : Deduction available to : • - employee, • - holder of office, or • - partner (who was an employee before becoming a partner) • Deduction for ‘current’ contributions made • - limited to the greater of • * R1, 750 or • * 7.5% of remuneration from ‘retirement-funding employment’ • - Excess not carried forward • Arrear contributions • - limited to R1,800 p.a. • - Excess carried forward to next year (subject to same limit)
Pension Fund ContributionsRFE Income • Retirement-funding employment Income (RFE Income) • Separate definitions in respect of : • - Employees, Holders of office (e.g. directors), & Partners in partnership • Employees & Office-bearers • That portion of remuneration taken into account in determining pension or provident fund contributions • - Does the employee / office-bearer receive remuneration? • - Is he/she a member of a pension fund or provident fund? • - How much does the fund take into account to determine contributions? • Partners in partnerships • Partnership income, but limited to salary from last year of employment • (before becoming a partner) • Example 131
RAF Contributions • S11(n) : Contributions to RAFs (Retirement Annuity Funds) • Current contributions – Limited to the greater of : • - 15% of “Net” Non-RFE Income • - R3,500 minus Pension Fund deduction • - R1,750 • Disallowed excess c/f to following year • “Net” Non-RFE Income • - Non-RFE Income (not pensionable) • - then deduct all admissible expenses, including assessed losses but before deducting • * medical expenses (s18) • * donations (s18A) • * lessor’s soil erosion exp. (s17A) • * certain farming expenditure
RAF ContributionsOther limits • Overall limit (current contrib.) • - Cannot create an assessed loss • - Capital gains not taken into account as non-RFE Income • (TCG included in Taxable Income) • - Excess carried forward to next year (subject to same limit) • Arrear contrib. (reinstatement) • - limited to R1,800 p.a. • - Excess carried forward to next year (subject to same limit) • Example pg 133
Exercise • Mr. S, aged 27 was employed • throughout the year of • assessment and received a • salary of R 48,400 for the year • and a bonus of R5000 on his • birthday. He also received dividends • from SA companies of R 2,200 • and interest from a source • within SA of 20,300. He must • belong to the pension fund • and a contribution of 8% of his • monthly salary must be made.. • Mr. S paid arrear pension • Contributions of R 2000 during the • year. He also contributed R 3,600 to a • RAF during the year. • Calculate the taxable income of • Mr. S for the year of • assessment.
Exercise • Mr. Botha is a partner in a law firm • and was a member of a pension fund • before becoming a partner. • After becoming a partner he • continued his membership of the • pension fund. His salary from the • partnership during the 12 month • period prior to becoming a partner • was R 384,000 • Calculate the maximum deductible • contribution to the pension fund if his • earnings as a partner for the year • ended 28 Feb 2009 are: • R 420,000 • R 360,000
Donations made (s18A) • Donations made by any taxpayer • Deduction for donations made to • - Public Benefit Organisations (s30) • - Other entities (s10(1)(cA)(i) & (j)) • Activities listed in Part II of 9th Sch. • Approved by Minister of Finance • Deduction limited to : • - 10% of taxable income • (TI before s18 & before s18A) • 9th Sch. : Part I Vs Part II • - PI – PBOs exempt from Normal Tax under s10(1)(cN) • - PII – PBO exempt AND donations to such PBO qualify for s18A deduction (for donor) • - All PBO’s in PII also appear in PI, but not all PBO’s in PI are in PII
DonationsValue of Non-cash donations • Trading stock (Financial instruments, i.e. shares, debentures, etc.) • - Lower of : • * Fair Market Value (FMV) ito s22(8); or • * s11(a) cost or opening stock value • Trading stock (Other) • - s11(a) cost or opening stock value • Other trading assets (Not stock) • - Lower of FMW or Tax Value • Other assets (non-trading) • - Lower of FMV or Cost • (For movable assets, ‘cost’ may be depreciated @ 20%p.a. RB) • Assets specifically purchased or manufactured (etc.) for donation • -Lower of FMV or Cost - Ex. Pg 203
Medical Expenses (s18) - 1 • Medical expenses in respect of • - self, spouse and dependents • What kinds of expenses qualify? • - Medical aid contributions in SA ito M/Aid Scheme Act or similar in other countries • - Unrecovered (from med aid) costs • * doctors, dentists, optometrists, etc • * hospitals, nursing homes, etc. • * prescription medicines (pharmacies) • * necessary expenditure related to disability • * where amt included in employee’s income as a fringe benefit such amt.
Medical Expenses (s18) - 2 • Deductible amount • - 65 or over : all expenses (no limit) • - under 65, with handicapped family member :01 March 2006 no limit , I.e. all expenses • - under 65 (no disability) : • subject to a threshold • - Total of all medical expenses • MINUS • 7.5% of TI (TI before s18, after s18A) • - Net medical aid contributions subject to • - R570 per month for taxpayer & R570 for one dependent (R1 140) • - R345 thereafter for each additional dependent • - Balance of medical aid +qualifying medical expenditure exceeding 7.5% of TI before this deduction
Medical expensesWho is a ‘child’?(or step-child) • Under 18; or • 18 to 20 but • - unmarried; • - wholly/partially dependent upon taxpayer for maintenance; and • - not liable for normal tax • 21 to 25 but • - full time student; • - unmarried; • - dependent upon taxpayer; and • - not liable for normal tax • Any age but • - mentally/physically incapacitated; • - dependent upon taxpayer; and • - not liable for normal tax;
Medical expensesAdditional points • Person who pays the expense claims the deduction • No deduction allowed for amounts recoverable from a medical aid or insurance • Handicapped person applies even if no expenditure incurred on handicapped person • NB: Definition of a Handicapped person will be deleted from 1 March 2009 • Only expenses actually paid may be claimed – no deduction if incurred but not paid • Examples page 214 - 216
Medical expenses • Miss G is an employee aged 44. Her only source of income is her salary, which amounted to R 136,000 for the current year of assessment. During the year she paid qualifying medical expenses of R 8,080 and medical aid fund contributions of R 7,200. Her employer contributed • R 9,240 to the medical aid fund on her behalf. Calculate the taxable income of Miss G for the year of assessment.
Medical expenses • Salary 136, 000 • Add Fringe Benefit 2,040 • 138,040 • Less Medical Expenses (1) 0.00 • Less : Medical expenses(2) ( 7,300) • Taxable Income 130,740 • NB: The fringe benefit to any employee is the amount by which the contributions paid by the employer exceeds the limits for the medical contributions