WHAT IS TAXABLE INCOME & HOW DOES IT WORK – Part 1 of 2.

Is it correct for individuals to say they will claim tax?

Maybe the first question to answer should be what is taxation or tax as is popularly known. Income tax is a direct tax that government levies on the income of its citizens.The Income Tax Act, 1961, mandates that the central government collect this tax. For the purpose of this article, our main focus will be on individual tax and organizational taxation.

What is Individual or personal tax?

Is normal tax paid on an individual’s taxable income? Example of individual tax is remuneration (income from employment), such as, salaries, wages, bonuses, overtime pay, taxable (fringe) benefits, allowances and certain lump sum benefits, profits or losses from a business or trade. Income or profits arising from an individual being a beneficiary of a trust, director’s fees, investment income, such as interest and foreign dividends, rental profit or losses, income from royalties, annuities, pension income, certain capital gains (these can be found on SARS’s website).

The Income tax Act of 1961 instructs the employer to deduct such tax and pay it over to the government’s agency which in the South African Revenue Services (SARS). The employer is also obligated to submit names of individuals whom the tax was deducted monthly (EMP201). The employer is also obligated to reconcile such calculations and submit to SARS twice a year. The reconciliation of tax (EMP501) is done in August and February of each year. It is during this period when employees are furnished with tax documents (IT3 or IRP5). Employers are normally given up to 31 May to submit their tax reconciliation to taxman (SARS). In July, individuals/employees are then expected to submit their tax documents to taxman/SARS.

It is during this period when the taxman assesses if the employer deducted the correct tax on behalf of the employee. It can happen that the employer might have over/under paid the taxman on behalf of the employee. If overpaid, the taxman will then reimburse the employee. If underpaid, the taxman will then demand that you (the employee) pay the underpayment. Now to answer the above question, is it correct to say I am going to claim the tax? Maybe yes, but also remember the taxman can also claim tax from you during the assessment. I choose to use the word assessment instead of a claim because sometimes neither of you claims from each other during assessment.

Every employed person should have a tax number but not everyone is obligated to pay tax. You are only obligated to pay tax once you meet the minimum threshold. What is the threshold you may ask yourself? It is an amount determined by SARS as an entrance or start for an employed person to pay tax. Currently, if the person earns less than R7 604.17 per month/R91 250 per annum is not obligated to pay tax.

​Taxable income (R)	​Rates of tax (R)
1 – 226 000	18% of taxable income
226 001 – 353 100	40 680 + 26% of taxable income above 226 000
353 101 – 488 700	73 726 + 31% of taxable income above 353 100
488 701– 641 400	115 762 + 36% of taxable income above 488 700
641 401 – 817 600	170 734 + 39% of taxable income above 641 400
817 601 – 1 731 600	239 452  + 41% of taxable income above 817 600
1 731 601 and above	614 192 + 45% of taxable income above 1 731 600

As stated above, not every employed person is obligated to submit annual tax documents (IT3/IRP5 etc.). Only those earning above threshold must submit tax documents annually. Those who fail to submit returns may be fined or imprisoned. Individuals are allowed to voluntarily submit tax returns even if they earn less than the threshold. It is important to note there are other incomes that must be declared annual such as capital gains, foreign interest etc.

It is a criminal offense to intentionally submit incorrect information to the taxman. Individuals may be fined or imprisoned for intentionally submitting incorrect information to the tax man.

Part 2 of 2 to focus on organizational or corporate tax and what it means.

Mr. Tebogo Moselakgomo, a Tax Consultant and a member of South African Institute of Tax Practitioners clarifies the language used by most taxpayers. Tebogo is the founder and Managing Director of KCP Consulting.