How Does Tax Work In South Africa? (2022)

A tax is a mandatory contribution to state revenue imposed by the government on their citizens. 

The purpose of tax is to get revenue to fund projects that increase the economic performance of the nation and standard of life of their citizens. 

Is it important to pay TAX?

It is mandatory and very important for those who earn a salary that is taxable (which includes a salary that is higher than the limit of exemption for basic income) to file taxes on income. 

Even if the income you earn is lower than the exemption level for basic income there are many advantages when it comes to paying taxes. 

Who are eligible to pay tax in South Africa?

People earning more than R1. 25 million are those eligible to be taxed in South Africa.

Advantages of Paying Taxes

Below are a few advantages of paying your taxes:

• Loan approvals: If you are applying to borrow money, specifically auto loans, home loans, or others. The major banks may require a copy of your tax returns. This could include ITR for the past two to three years. The event of having ITR could even allow you to obtain a larger loan amount or have your loan application reconsidered if it was initially rejected. The reason for this is that banks determine the ability of you to pay back the loan based on your earnings. Tax returns on income give an exact picture of the amount of income earned and the tax that was paid during the preceding years.
• Visa applications: A lot of foreign consulates will require that you submit your income tax returns from prior years at the time of the interview process for visas. While for certain countries, the most recent tax return is sufficient, some will require up to two years’ worth of tax returns to be provided. It is mandatory for the UK, US, Europe as well as Canada However, it is not required as in the case of Southeast Asian countries and the Middle East. 

The reason is that income tax returns serve as a document that proves that you’re not seeking to flee the country to escape taxes. When you travel overseas for business or pleasure it is recommended to bring along your ITR receipts since they will help in case of emergency, when you must get help from a consulate.

• Government tenders: It is contingent on the particular department in the government and there are no strict guidelines however ITR receipts are often required when applying for government tenders. This is to verify that you earn enough and be able to pay the obligations.

Penalty for not Paying Taxes

The government can impose penalties that vary in severity for any person or legal entity that evades tax. The penalty is contingent on the type of tax not paid. The amount due in taxes has to be paid. In addition, the fine and the interest on it must be paid in the form of a penalty.

Types of Taxes In South Africa 

1. Personal Income Tax

All of your earnings and profits are subject to income tax.

Whether you’re an individual, a corporation, or a trust, you’ll surely pay this tax. Local enterprises are taxed at a rate of 28 percent, individuals at 18 percent and 45 percent, and trusts (except special trusts) at 45 percent.

2. Value Added Tax

All goods and services are subject to VAT, which is charged at a normal rate of 15%.

Certain commodities, such as exports, gasoline, diesel, and essential food items, are zero-rated (such as brown bread, milk and fruit).

Some services, including as educational services, public transportation, and residential rental lodging, are also VAT-free.

3.  Capital Gain Tax

When you sell an asset, you’ll have to pay capital gains tax (in other words it changes ownership). When a property is sold or company shares are purchased, for example.

4. Provisional Tax

Companies are automatically classified as temporary taxpayers, but anyone who gets income other than remuneration (for example, rental income from real estate or interest income from investments) is also a provisional taxpayer.

During each fiscal year, three provisional tax payments are made based on an estimate of annual revenue. The first payment is made after six months, while the second payment is made at the end of the fiscal year. The third payment is due six months after the conclusion of the fiscal year.

5. Pay As You Earn

When a corporation hires people, taxes are withheld from their salary. The benefit is that the tax liability for a year is spread out over 12 months rather than being taxed all at once.

6. Transfer Duty

Individuals must pay transfer duty when they purchase property at progressive marginal rates ranging from 0% to 13%.

This sort of tax must be paid within six months after the date of purchase.

7. Excise and Customs Taxes

Imported goods are subject to customs duties in order to generate money and safeguard the local market. The following consumable products are subject to excise charges and levies; petroleum, alcohol, items containing tobacco, luxuries and non-essentials (such as electronic equipment and cosmetics).

8. Donation Tax

The complete value of the property disposed of by a resident through a donation, whether directly or indirectly, is subject to contribution tax.

9. Turnover Tax

Turnover Tax is a simplified tax system available only to sole proprietors, partnerships (definition here), firms, and close corporations with a “qualified turnover” of less than R1 million per year. Micro businesses are the term for these types of companies.

Turnover tax is a sort of tax that is computed based on a company’s turnover rather than a proportion of profit (i.e. income minus business expenses) as is the case with traditional business taxes.

This difference relieves business owners of the administrative burden of keeping thorough records of expenses and determining which are deductible for tax purposes.

10. Dividends

When dividends are distributed to beneficial owners, such as shareholders for firms and members for close corporations, a tax is levied.

A dividend is a payment made by a firm to a shareholder or a close corporation to a member in exchange for a share or interest in that company or close corporation.

Related:

• How Does VAT Work In South Africa?
• Where Can I Exchange Foreign Currency In South Africa?

Closing

South Africa uses a residence-based taxation system in which residents are taxed on their worldwide income, while non-residents pay taxes on South African-derived income. In addition, with 23.9 million of the 59 million inhabitants paying taxes, the majority of the income of the state is derived from corporate and personal taxes.