N6 – Module 5
Bracket creeping/Fiscal drag & Indexing – this phenomenon takes place both when inflation is higher than approx. 6%, and also when income tax payers are given an increase, and means that they are paying more tax in a higher bracket (see illustration: Tax Brackets). It is sometimes possible for a person to receive an increase, but to receive less net income than before. Not only does this happen when inflation is high, but also when one is placed in a higher tax bracket. Someone earning R165 000 p.a. pays 18% tax. Should they receive an increase, for instance, and their new salary is R166 000 (I use this as an illustration only – of course one would receive more than just R1000 a year increase), and one does the calculations (I hope mine are correct), you will discover that before their net income would have been R135 300 (R165 000 minus 18% tax), with the increase to R166 000, their new tax bill will be R30 058. Tey will take home only R642 more than before. BUT if inflation is 10%, they will be earning only R145 400 because their gross income is now worth 10% less because of inflation. So the “increase” of R642 is meaningless. Tis means that it is oſten possible, as I have said, to receive in “increase” and to earn less than before! Disturbing, don’t you think? Te Minister of Finance oſten tries to compensate for this by using indexing – new tax rebates will be linked to, say the consumer price index (CPI), which oſten is a good measure of inflation – this then is an attempt to offer something back to the income earner, to offset the phenomenon of fiscal drag itself.
Corporate Income Tax Company tax is relatively new. Britain introduced it only in 1947 (Gildenhuys 1993:264), and America in 1909. In South Africa a domestic company is a South African company or close corporation that is registered, managed and controlled in SA. A foreign company is a company registered elsewhere that is managed and controlled from abroad (another country). Tere is also a distinction made between public and private companies which are taxed slightly differently. Another type of company, now being phased out, is the close corporation. A close corporation is seen as a private company and its members are seen as shareholders for tax purposes; it is taxed in the same way as any other company.
Tax base: the taxable income of a company includes all profits, rents, interest, royalties and other income it derives from its operation in SA. Like any individual a company does not pay tax on capital profits, dividend income or foreign income. Much like an individual:
Income = Gross income – exempt income
Tax rate: the rate for all companies except gold mining companies and long-term insurance companies, is 28%.
Payroll taxation: a tax on the total payroll of an organisation. In South Africa, the two main taxes in place are the Unemployment Insurance Fund (UIF) which taxes both workers and employers at 1% of each employee’s salary (up to a maximum of R124.78 per month), and the Skills Development Levy, which requires employers to pay 1% of workers’ pay to the Skills Development Levy. Employers can claim this back by providing education and training to employees.
Turnover taxation: at current, certain qualifying small businesses can choose to be taxed on turnover rather than income. Te idea is to simplify the tax burden for small businesses with a turnover of less than R1 million.
Personal Income Tax Tax on Companies Other taxes 33.6%
19.7% Down from 42% – 2005 Up from 13% – 2005 20% VAT 27.3% Up from 25% – 2005
As you can see from the above SARS is collecting less from the citizen, more from companies and more from daily purchases through value added tax than in 2005.
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