What is Income tax?

When it comes to the world of taxes, you may be surprised to know that you are not the only member of the public that may be confused about taxes. You may be wondering why Henry pays PAYE, Jane pays SITE and you are paying provisional tax. Have no fear, its all a lot simpler than you think and in this article we will demystify income tax and other associated methods of paying income tax such as PAYE, SITE and Provisional tax.

First and foremost, lets answer the question “What is income tax?”. Income tax, simply put, is a tax charged on the income and profit that is made by a taxpayer. This includes individuals as well as companies and trusts. Many people associate the concept of Income tax with what is actually “normal” income tax that forms part of the Income Tax Act No.58 of 1962. There are a number of different taxes that fall under the Income Tax Act such as capital gains tax and donations tax but we will be focusing solely on “normal” income tax which is the government’s main source of income.

Do I need to register for income tax?

Now that you know what income tax is, the questions arises do you need to register for income tax. The answers is a definite “Yes”. From September, SARS requires that you must register for income tax if you receive any form of employment income, even if it is below the tax threshold.

Once you are registered, you must submit an annual income tax return unless the following criteria are met:

Your remuneration was less than R120 000 for the year.
Your remuneration was from a single employer
You were not paid an allowance ( and no PAYE was deducted from this in regards to a travel allowance )

What is the period of assessment?

You should now have a clear idea of whether you need to submit income tax returns or not. The next point we need to look at is what your specific period of assessment will be. For taxpayers, the year of assessment covers a 12 month period. The starting date of the assessment year depends on whether you are an individual, a trust, a company or cc. For individuals and trusts, the commencement date starts on the 1st of March and ends on the 28/29th of February each year. Whereas for companies and cc’s, the year of assessment is the applicable financial year.

Income tax returns must be completed and submitted to SARS each year, after the year of assessment.

How do I pay income tax?

Only once your income tax return has been submitted to SARS, can they determine your total taxable income for the year of assessment. As this is at the end of the assessment period, it would be highly impractical to expect tax payers to pay a large lump sum payment for the tax they owe. Therefore to ensure taxpayers can meet their tax obligations, three methods of paying tax were defined in the Income Tax Act. These are SITE, PAYE and provisional tax.

SITE and PAYE – The Employees Tax

PAYE and SITE are both part of Employees tax which is tax that employers must deduct from the income of employees. These deductions from wages, salaries and bonuses, which are withheld daily, weekly or monthly, are then paid over to SARS on a monthly basis by the employer.

What is SITE and when would I pay it?

SITE is short for Standard Income Tax on Employees. It is important not to confuse this with a separate tax but know that it is merely a method for employees who earn less than a certain amount to pay income tax via their employer. SITE applies to individuals who meet the following criteria:

Your net remuneration does not exceed R120 000 per annum.
You do not receive a traveling allowance
You do not receive any other income

What is PAYE and when would I pay it?

PAYE stands for Pay As You Earn and ensures that as an employee earns income, their tax obligations are settled at the same time. The benefit of this payment structure is that an individuals tax liability is settled over the course of the assessment year.

What is Provisional tax and when would I pay it?

Provisional tax allows taxpayers to make two payments during the year of assessment to make up for their final tax liability. These tax payments represent estimations on the amount of tax payable on anticipated income. If there is any difference when the income tax return is assessed, then either a refund is issued or an additional payment is required. For full details of Provisional tax, please see our blog on “what is provisional tax?”.

Where do I go from here?

After reading all of the information above, you should now know whether you need to register for Income tax, how you should pay your income tax and how often. While you may already be submitting your tax returns yourself, it is always valuable to consult with a tax advisor to make sure that your submissions are accurate and that you know what can legally be claimed for and what cannot. If you have neglected to register and submit tax returns and fear you may be in arrears, it is important that you contact an accountant so that you can be brought up to date as soon as possible and maintain the best possible relationship with SARS through your accountant. For advice and consultations, contact Brett at Dirmeik Consulting on 021 421 4444.