The Basic Tax Calculation
01 June 2007
Posted by: TaxFind™
The Basic Tax Calculation
Remember that the formula for calculating income tax payable is the same,no matter whether you are a JSE listed company, a CC , Trust or Partnership.
It all starts with Accrual.Money accrues to the person that worked for it (exchange of services for fees) or that sold an item for it (exchange of goods or stock for money).So, and this is one of the building blocks to understanding tax, you cannot give money to someone else to be taxed in their hands if you earned it.It accrues to you, then its part of your gross income.
Gross income is every little bit of income that comes your way. (except capital amounts-which might be taxed in terms of section 26A and the Eighth Schedule as CGT).The first thing that happens to gross income when your taxes are being calculated is that exempt income is subtracted from it, because exempt income is not taxed at all.Exempt income is mainly provided for in section 10 of the Income Tax Act. It includes South African dividends, exempt interest amounts, offshore pensions, funds earned offshore if you have been away from SA for a certain amount of time.
Once exempt income is subtracted from your gross income amount, the remainder is called income.'income' means the amount remaining of the gross income of any person for any year or period of assessment after deducting there from any amount s exempt from normal tax under Part I of Chapter II;The result here is a conglomerate amount of income that still contains all the amounts that are legally deductible in terms of the provisions of the income tax act.(Your rentals, interest, wages, salaries, fuel, office supplies, raw materials, spares, maintenance, water and lights, telephone, cell, rates and so on).
Once all the above legitimate deductions (various allowances and limitations are found after section 22,but for our purposes,the main deduct ions are provided for between sections 11 and 22) have been subtracted, the result is: taxable income...Under section 26A Inclusion of taxable capital gain in taxable income.There shall be included in the taxable income of a person for a year of assessment the taxable capital gain of that person for that year of assessment, as determined in terms of the Eighth Schedule.Taxable capital gains, once the applicable formula has been applied, are included at this juncture.
Now this is where your vehicle makes a big difference. If you are in a company here, you are taxed at a flat rate on the taxable income.As a natural person, you are taxed on a sliding scale, if you are in a partnership, the taxable income is split at this point and you are each taxed as natural persons.
If taxable income is earned in trust, it would be a good idea for the trustees to intervene at this point and allocate the taxable income to the beneficiaries.In the absence of section 7 (the anti- avoidance section) each beneficiary will be taxed in his or her own right as a natural person.Right, so this is where the tax tables are applied.
Once the tables are applied and the amount of tax is known, don’t forget your rebate under section 6 of the Act .Subtract the rebate from the result of the application of the tables to taxable income and you are left with tax payable.
Source : By Peter O’Halloran (TaxTALK)