SUGGESTED SOLUTION TO EXERCISE 1.1 Page 1 of 2 pages Amongst others, the following taxes are imposed by the South African Income Tax Act: Normal tax (including capital gains tax) Normal tax is a tax on the receipts and accruals of both non-corporate and corporate taxpayers. It represents the major source of state revenue. For the purposes of this tax the income of the taxpayer who is a natural person is imposed on a progressive basis (see below) and is then rebated (that is, reduced) so as to give relief to those persons in the lower-income brackets. For persons other than companies, the tax is levied on a progressive basis. It embodies the principle of an 'ability to pay' - persons having higher taxable incomes than others, pay normal tax at a higher rate. Corporate taxpayers pay normal tax at a flat rate of tax. The advantage of normal tax is that it represents a fair basis of extracting taxes from South Africans, since it levied is in proportion to their income. The disadvantage of normal tax is that it is a cumbersome method of raising funds for the fiscus - requiring detailed legislation and a large administration. Capital gains tax Capital gains tax is a tax on gains made that are mostly of a capital nature (and not of a revenue nature). Its objective is to raise more funds for the fiscus. It is structured on the basis that it is included in a person's taxable income so that it is in effect also levied on a progressive basis for a natural person. It embodies the principle of an 'ability to pay' - persons having higher taxable incomes than others, pay normal tax at a higher rate. Corporate taxpayers pay normal tax at a flat rate of tax. As an advantage it may be argued that with a capital gains tax in operation, the amounts raised from other taxes could be kept at a lower level. The disadvantage of a capital gains tax is that it creates a hardship when the gain is simply the result of inflation or as a result of the death of the taxpayer. Donations tax Donations tax is a tax levied upon the disposition of an asset by a taxpayer while he is still alive. It could be considered to be an advance payment of estate duty. It was also introduced to discourage a person from donating an income-producing asset, and thereby paying less normal tax during his lifetime, and having less estate duty to pay on death. The purpose of donations tax is to ensure that estate duty is not avoided by the taxpayer by him giving away most of his estate before his death. It is often argued that the administration of donations tax is cumbersome. It often results in litigation. Dividends tax When a dividend is distributed by a company to a beneficial shareholder, the distributing company is required to withhold 20% of it, in the form of dividends tax. In