Introduction

South African income tax is built on a progressive tax basis, meaning that the more taxpayers earn, the higher the marginal tax rate and the more tax is payable on assessment. A progressive tax system favours low-income earners by imposing lower income tax rates, and adversely affects higher income groups. Progressive tax is typically applied to personal income tax. In addition, South African income tax system is residence-based. South African tax residents are taxed on their worldwide income, and non-residents are taxed on their income from a South African source only.

Taxable income is calculated by taking into consideration all gross income, in cash or otherwise, received by or accrued to a resident taxpayer, after subtracting all allowable deductions, under the South African tax laws.

We shall discuss the technical expressions of gross income, income and taxable income in terms of the Income Tax Act of South Africa. While these words are extensively used in our daily lives, their technical meanings and definitions for taxation purposes, must be made well understood by all taxpayers.

Gross Income

The definition of gross income is detailed in section 1 of the Income Tax Act and essentially means

(i) in the case of any resident, the total amount, in cash or otherwise, received by or accrued to or in favour of such resident; or

(ii) in the case of any person other than a resident, the total amount, in cash or otherwise, received by or accrued to or in favour of such person from a source within the Republic,

during such year or period of assessment, excluding receipts or accruals of a capital nature, but including, without in any way limiting the scope of this definition, such amounts (whether of a capital nature or not) so received or accrued as are described hereunder…”

Furthermore, the legislator defines a vast list of instances, where amounts received by, or accrued to, constitute gross income.

Why it is important for the taxpayers to be cognisant of the gross income meaning and definition? Gross income is the foundation of our tax system. We therefore have income tax, meaning that tax is imposed on income. Our income tax legislation is structured in such a way that the defined gross income is subject to certain exclusions, then allowable for tax expenses are subtracted, in order to ascertain the taxable income of a person. Gross income is not taxable in its nature, this is the total income received by, or accrued to a taxpayer, upon which the determination of their taxable income is achievable. Many taxpayers believe that an amount they have received it’s not “taxable”, this is a mistaken perspective, stemming primarily from their deficient understanding of the definition of gross income. If you are uncertain whether an amount constitutes gross income and it should be included in your income tax return, do not hesitate to contact us for professional tax assistance.

Income

"income” means the amount remaining of the gross income of any person for any year or period of assessment after deducting therefrom any amounts exempt from normal tax under Part I of Chapter II”

After deducting from the taxpayer’s gross income certain exemptions, allowed under the Income Tax Act, the taxpayer’s income is determined, to be further converted to taxable income.

Taxable Income

“taxable income” means the aggregate of—

1. the amount remaining after deducting from the income of any person all the amounts allowed under Part I of Chapter II to be deducted from or set off against such income; and

2. all amounts to be included or deemed to be included in the taxable income of any person in terms of this Act;

Conclusion

Income tax is calculated on “taxable income”, which must be distinguished from gross income and income as defined in the Income Tax Act.