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Income Tax

Content developed by SARS

What is income tax? 

Income tax is a tax levied on all income and profit received by a taxpayer (which includes individuals, companies and trusts). It is the national government’s main source of income and is imposed by the Income Tax Act No. 58 of 1962. 

The form of tax that people generally associate with the concept of income tax is "normal" income tax. But the Income Tax Act is also the source of a number of other taxes that, although they have their own particular names, still form part of the income tax system. A few examples of taxes which may affect taxpayers are capital gains tax and donations tax. The Act also establishes a few methods of paying income tax - namely SITE, PAYE and provisional tax.

Who needs to register for income tax? 

The Minister announced “as from September this year SARS will require all those receiving any form of employment income – including those below the tax threshold – to be registered with SARS to help reduce the scope for non-compliance. 

Who needs to submit a completed and signed income tax return to SARS? 

  • Where taxpayers receive income less than R120 000, taxpayers may elect not to submit an income tax return, provided the following criteria are met:
  •      Remuneration is from a single employer; 
  •      Remuneration is for a full year of assessment (1 March – 28/29 February); and
  •      No allowance was paid, from which PAYE was not deducted in full with regards to 
  •      travel allowance.

What are SITE, PAYE and provisional tax?

Your income tax can only be calculated once your total earnings for that year has been determined. This is normally only done after the end of the year of assessment, once a taxpayer’s income tax return has been processed and an assessment is issued. 

However, it would be impractical to expect taxpayers to pay a once off tax at the end of the year as it will be a large amount. As a result, the Income Tax Act has created three mechanisms to solve this problem: SITE, PAYE, and provisional tax. 

In this way, income tax is collected as soon as the taxpayer has earned the income by deducting the amount from their paycheck at the end of each month or week. At the end of the year the total amount of tax owed is calculated and then you will either have to pay in extra money or SARS will reimburse you for money owed. 

Employees' tax 

SITE and PAYE are the two elements of employee’s tax. Employees’ tax is the tax that employers must deduct from the employment income of employees – such as salaries, wages and bonuses - and pay over to SARS monthly. It is withheld daily, weekly, or monthly, when these amounts are paid or become payable to the employees. 

An employer must issue an employee with a receipt known as an employees’ tax certificate (an IRP5/IT3(a)) if SITE or PAYE have been deducted. This discloses the total employment income earned for the year of assessment and the total SITE and/or PAYE deducted and paid to SARS.

If you work for more than one employee, you will then receive more than one IRP5 form. 

Standard Income Tax on Employees

Standard Income Tax on Employees, or SITE, is not a separate tax. It is merely a method that means employees who earn less than a certain amount pay income tax.

  • SITE generally applies to individuals: 
  •      whose net remuneration does not exceed R120 000 annually; 
  •      who do not receive a traveling allowance; and 
  •      who do not receive any other income.  

Pay-As-You-Earn 

Pay-As-You-Earn, or PAYE, ensure that if you work as an employee, your tax is settled with each paycheck, ie at the same time that the income is earned. The advantage of this is that the tax owed for the year is settled over the course of the whole year of assessment.  This means you dont have to pay a huge amount of money at the end of the year as it is automatically deducted. 

Provisional tax 

Provisional tax allows taxpayers to pay their tax in two amounts of the course of the year.

But the final amount owed is determined at the end of the year based on how much you really earnt. Provisional tax payments - which are made six months after the beginning of a year of assessment, as well as at the end of it - represent tax on anticipated income. Provisional tax estimates and payments are made on IRP6 forms.

Provisional tax is usually paid by self employed contractors or people that have multiple jobs. 

What are the steps in calculating the income tax owed? 

The Income Tax Act No. 58 of 1962 sets out a series of steps to be followed in calculating a taxpayer’s "taxable income". 

This then forms the on how to calculate the amount of tax you will owe.  These steps are briefly set out below and are tackled in greater detail in the explanations that follow.

The below formula can look very daunting, but if you use eFiling, all you have to do is fill in the numbers and SARS will calculate the figures for you. 

Otherwise register for Turnover Tax, if you qualify, as it is a very simple tax system that anyone can understand. 

1. Determine gross income 

First determine your total income. 

Deduct from "total income" those amounts that are excluded the definition of “gross income”. 

  • In other words, income that are: 
  •      that are from a source outside South Africa for non-residents; or 
  •      that is of a capital nature. 

Gross income of residents 

For any person who is a resident of SA, gross income is the total amount of worldwide income, in cash or otherwise, received by or accrued to or in favour of that person. 

Gross income of non-residents 

For any person who is not a resident of SA, gross income is the total amount of income earned in SA. 

Capital receipts and accruals 

Income of a capital nature are generally excluded from gross income as the Eighth Schedule covers these as capital gains and losses. 

2. Deduct exempt income 

Once your “Gross income” has been calculated, minus the income that is expemt from tax. 

3. Deduct allowable deductions

  • Then deduct your allowable deductions. 

4. Multiply 'taxable income' by tax rate 

Once taxable income has been determined, the applicable tax rate is applied to determine tax owed. Individuals are considered "persons other than companies" and are taxed on a sliding scale. 

5. Subtract rebates 

  • The taxable income multiplied by the tax rate will leave a certain amount, from which must be subtracted: 
  •      rebates for natural persons set out in Section 6; and
  •      any applicable rebates for foreign taxes allowed by double-taxation agreements.

The above formula can look very daunting, but if you use eFiling, all you have to do is fill in the numbers and SARS will calculate the figures for you. 

Otherwise register for Turnover Tax, if you qualify, as it is a very simple tax system that anyone can understand.