Gavin Howe
South Africa's tax system is determined by laws that the Commissioner must administer. The country's tax system was changed in January 2001 from a “source-based” system to a “residence-based” system, where taxpayers residing in South Africa are taxed on their income irrespective of its source. The most important tax laws in South Africa include the Income Tax Act 58 of 1962, the VAT Act 89 of 1991, and the Customs and Excise Act 91 of 1964. In recent years, there has been a focus on closing tax loopholes and addressing issues of financial and human capital flight, as well as concerns about the concentration of economic power and calls for reform.
| Characteristics | Values |
|---|---|
| Type of tax system | Residence-based |
| Who it applies to | Taxpayers residing in South Africa |
| Taxing body | SARS (South African Revenue Service) |
| Tax laws | Income Tax Act 58 of 1962, VAT Act 89 of 1991, Customs and Excise Act 91 of 1964, Tax Administration Act 2011 |
| Tax rates | Vary depending on income level and type of tax (e.g. income tax, capital gains tax, company tax, VAT) |
| Tax period | Year of assessment for individuals: 1 March - 28/29 February |
| Tax registration | Anyone with an income in South Africa must register for tax purposes |
| Tax returns | Income tax returns must be requested annually; companies must submit returns within 12 months of financial year-end |
| Tax offences | Failing to register, make returns, or pay taxes on time can result in fines or imprisonment |
| Tax revenue | SARS collected R 1 287.7 billion in the 2018/19 fiscal year |
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What You'll Learn
Personal income tax
In South Africa, any person who receives an income must register for tax purposes. Income tax returns must be requested by registered taxpayers every year. The year of assessment for individuals covers 12 months, starting on 1 March and ending on the last day of February of the following year. Self-employed individuals must submit two provisional tax returns and make two provisional tax payments during the tax year, with the option of a third "topping-up" payment six months after the tax year ends.
South African residents are taxed on their worldwide income, irrespective of its source. Non-residents are taxed on their South African-sourced income only. Foreign taxes are offset against South African tax payable on foreign income. South African residents earning income from a foreign country are exempt from tax on the first ZAR 1.25 million of employment income, provided they have spent more than 183 full days outside South Africa during any 12-month period, including a continuous period of at least 60 full days.
Rental income from property, interest income, and dividends are all subject to taxation in South Africa, with certain exemptions. For example, the first ZAR 23,800 of local interest income is exempt from tax (ZAR 34,500 for those 65 or older). Additionally, most foreign dividends are exempt from tax if the resident holds at least 10% of the equity shares and voting rights in the company.
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Capital gains tax
South Africa has a residence-based tax system, which means residents are taxed on their worldwide income, irrespective of where their income was earned. Non-residents are taxed on their income from South African sources.
There are some exclusions to CGT. Capital gains on a primary residence are excluded up to a rate of R2 000 000. There is an annual exclusion of R40 000 capital gain or loss granted to individuals and special trusts. There is also a small business exclusion of R1.8 million for individuals aged 55 or above, when a small business with a market value not exceeding R10 million is disposed of. In the year of death, individuals are granted an exclusion of R300 000.
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Residence-based tax system
South Africa has a residence-based tax system, which means residents are taxed on their worldwide income, regardless of where it was earned. Non-residents, on the other hand, are only taxed on their income from South African sources. This system was introduced in 2001, replacing the previous source-based system, where income was taxed in the country of origin.
The residence-based system has significant implications for taxpayers with international income. For example, a South African resident earning over R1 million from offshore sources may face a 45% tax rate, and the only way to legally avoid this is to change their tax status by emigrating. This, however, triggers capital gains tax liability on all assets held in South Africa.
Determining tax residency in South Africa can be complex. An individual is considered a tax resident if they are 'ordinarily resident' or have a physical presence in the country. The term 'ordinarily resident' is not clearly defined in the Income Tax Act, but courts have interpreted it as referring to the country an individual would naturally return to after their travels. This determination is made on a case-by-case basis, considering factors such as visa type, proof of permanent residence elsewhere, and tax residency certificates from foreign authorities.
It is important for individuals with ties to South Africa to know their tax residency status, as their global income may be subject to South African taxation. Taxpayers must inform the South African Revenue Service (SARS) if they cease to be tax residents, and they may also need to declare any change in their circumstances that could affect their tax residency status.
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SARS tax offences
In South Africa, the South African Revenue Service (SARS) is responsible for tax collection and enforcement. SARS has the power to initiate criminal investigations for tax-related offences and can lay complaints with the South African Police Service (SAPS) or the National Prosecuting Authority (NPA). The Tax Administration Act, 2011 outlines various tax offences and their penalties.
SARS considers several actions or omissions as tax offences. These include failing to submit tax returns, not truthfully responding to SARS inquiries, and submitting fraudulent invoices to reduce tax liability or obtain undue refunds. Employers may also commit tax offences by deducting tax from employees but not remitting it to SARS or withholding employee taxes (PAYE). Vendors may charge VAT but not pay it to SARS. Individuals who are required to register for tax purposes but fail to do so are also committing a tax offence.
The TA Act distinguishes between minor and serious tax offences. Minor offences carry a penalty of a fine and/or imprisonment not exceeding two years. Serious offences are subject to a fine and/or imprisonment not exceeding five years. Fraudulent misrepresentations to SARS, whether negligent or intentional, constitute a tax offence. The intention to evade tax is a key factor in determining whether fraud is treated as a minor or serious offence. Understatement penalties for taxpayers increase with the level of culpability, with intentional tax evasion carrying a 200% penalty.
To promote compliance, SARS offers a Voluntary Disclosure Program (VDP) that allows taxpayers to make full disclosures and receive amnesty from criminal prosecution for their tax offences. Additionally, SARS has implemented measures to combat email scams and phishing attacks that abuse the SARS brand to obtain confidential information from taxpayers. SARS will never request personal, tax, banking, or eFiling details via email, phone, or websites.
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Company income tax
South Africa's tax system is determined by the laws that the Commissioner must administer. The Income Tax Act 58 of 1962, the VAT Act 89 of 1991, and the Customs and Excise Act 91 of 1964 are the most important of these. The Income Tax Act 1962 defines a company under South African law.
CIT is applicable to companies liable under the Income Tax Act, 1962 for the payment of tax on all income received by or accrued to them within a financial year. Companies are required to submit an income tax return within 12 months from the date on which its financial year ends. If a company's income comes from sources other than a wage, they must submit two provisional tax returns and make two provisional tax payments during the tax year, with the option for a third "topping-up" payment six months after the tax year ends.
Dividends tax is imposed at 20% on dividends declared and paid by all resident companies, as well as by non-resident companies regarding shares listed on a South African exchange. Dividends are tax-exempt if the beneficial owner is an SA-resident company, SA-retirement fund, or other prescribed exempt persons. Exemptions from dividends tax and treaty-imposed reduced rates apply if the beneficial owner has made a prescribed declaration and undertaking to the paying company or regulated intermediary.
South Africa has a residence-based system, meaning residents are taxed on their worldwide income, regardless of its source. Non-residents are taxed on their income from South African sources. Foreign taxes are offset against South African tax payable on foreign income.
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Frequently asked questions
South Africa has a residence-based system, which means residents are taxed on their worldwide income, regardless of where it was earned. Non-residents are taxed on their income from South African sources.
The most important laws that determine South Africa's tax system are the Income Tax Act 58 of 1962, the VAT Act 89 of 1991, and the Customs and Excise Act 91 of 1964.
The majority of tax revenue in South Africa comes from personal income tax, company tax, and indirect taxes such as VAT.
