CH 18 - Taxes, Interest Rates, Inflation

Question 1

What does the government (state) need tax revenue for?

Answer 1

To fund social and economic programmes.

To provide public services

• schools
• hospitals
• universities
• roads
• security

Question 2

Where are taxes paid too?

Answer 2

South African Revenue Service (SARS).

And then handed over to the National Treasury to distribute to government departments
-local and provincial governments

Question 3

What does the Minister of Finance do?

Answer 3

Presents the budget, which outlines the total government expenditure for following financial year.

And how taxes will pay for this expenditure.

Question 4

Threshold

Answer 4

The level above which income is taxable.

Question 5

SARS

Answer 5

South African Revenue Service

Acts as a collection agency for taxes on behalf of the government.

Question 6

Direct taxes

Answer 6

Income tax and property tax.

Based on the principal that people should contribute to the wealth of the state to the same extent as they are able to contribute toward their own wealth.

Question 7

Income tax

Answer 7

Tax levied on all income and profit that a taxpayer receives.

Governments main source of income.

Question 8

Taxpayers

Answer 8

Individuals, companies and trusts.

Question 9

Income tax years and dates

Answer 9

• Tax year begins 1 March, ends 28/29 February.
• Tax is calculated in tax tables that are revised annually.
• As of 1 March 2012, individuals earning below the tax threshold don’t pay income tax

Question 10

PAYE

Answer 10

Pay As You Earn

It’s is the employee tax that employers deduct from the balance of an employees full-time income, in excess of the tax threshold for a year

Amount deducted from employees monthly remuneration is calculated in tax tables and payed to RECEIVER OF REVENUE.

Question 11

Provisional tax

Answer 11

System that applies to taxpayers with irregular incomes

Eg. Farmers, business owners or people earning money other than their salary.

Question 12

What is the aim of Provisional Tax?

Answer 12

Aim is to help taxpayers pay their tax in two payments. Instead of a single large sum of money at the end of the tax year.

Final liability is determined soon assessment.

Question 13

What happens at the end of a tax year?

Answer 13

SARS sends you an income tax return. You must fill in and send back.

Or you can register with eFiling, free online process for submitting tax returns.

All tax returns and declarations must have deducted certain standard tax rebates.

SARS then determines if you have payed them what you owe.
If paid too little, they will send a bill with outstanding amount.
If paid too much, they will refund you.

Question 14

Rebates

Answer 14

Refunds

You get rebates for expenses such as medical expenses and the cost of running a business from home.

Question 15

Tax must be paid on all forms of income:

Answer 15

You must pay tax on:

Investment income (money received)
Property income (rentals) 

And any other forms of income

Question 16

Property taxes

Answer 16

Owners of real property, commercial, industrial, residential and agricultural property all pay property taxes.

• taxes on ownership of property (land and buildings)
• set by municipalities based on market value of property (charges differ from area to area, usually 1% of market value)
• paid monthly or annually to local government (municipalities) that use money for local community services.

Question 17

Indirect taxes

Answer 17

Taxes hidden in the price of goods and services.

We aren’t always aware of how much tax we pay.
We all pay tax on a daily basis.

Nearly 1/3 of governments total revenue comes from indirect taxes (VAT).

Question 18

VAT

Answer 18

VAT - Value Added Tax

14% added to the price of specified goods and services.

• Money collected is paid to government.
• All consumers pay VAT regardless of income or purchase price.

Question 19

VAT Exempted Items

Answer 19

Goods or services on which VAT is not charged.

Eg. Residential rental, financial services, public road and rail transport and state-owned educational services.

Question 20

Zero-rated Items

Answer 20

Goods and services that’s a taxes at 0% rate.

Eg. Brown bread, maize products and rice, milk products, eggs and fruit&veg.

Question 21

Excise duty - sin tax

Answer 21

Tax placed on the manufacture and sale of products such as alcohol and tobacco.

Question 22

Import duty

Answer 22

Levied on all goods and services entering the country from abroad.

Importer pays the tax directly to government and recovers it from consumers by adding it onto price of goods.

Question 23

Licenses

Answer 23

For which you have to pay fees, are also a form of tax.

Eg. Drivers licenses, fishing and hunting.

Question 24

A fuel levy

Answer 24

A levy paid in every litre of petrol and diesel sold in SA.

Includes a levy payable to the Road Accident Fund.

The levies on fuel make up about 30% of the price of petrol and diesel.

Question 25

Interest

Answer 25

Cost of borrowing money.

Question 26

Revenue

Answer 26

The total amount of income available to the government.

Question 27

Two aspects of interest rates

Answer 27

We receive interest on our savings or when we lend money to someone.

We pay interest when we use some form a credit facility, such as a personal loan.

Question 28

How interest rates change

Answer 28

Interest rates go up and down as supply and demand for money changes.

Rise - become more expensive to borrow money.
Fall - less expensive to borrow money.

Expressed as a total sum loaned for a certain period of time.
Eg. 10% pa means for every R100 you borrow for 1 year, you pay a charge of R10.

Question 29

Repo rate (repurchase rate) - RR :

Answer 29

The interest rate at which commercial banks can borrow money from the reserve bank.

Interest rates on credit agreements, rise and fall with the repo rate (RR) charged by the Reserve Bank.

Question 30

Simple interest

Answer 30

Calculated on the principal amount of loan.

No interest is paid in interest received during the time of the loan.

Simple interest is normally used for short-term loans.

Question 31

Interest rate

Answer 31

The rate at which borrowers pay interest for the money they borrow from lenders.

Expressed as a percentage of the total sum borrowed (principal amount) for a specific period.

Question 32

Compound interest

Answer 32

Interest is added to original principal amount, and front that moment, interest earns interest on interest.

Addition of interest to principal is called compounding.

• calculated monthly, quarterly, semi annually or yearly.
• series of back to back simple interest contracts.

Question 33

Prime interest rate

Answer 33

The interest rate the banks use to determine the interest rate charged on loans to their customers.

Question 34

Borrowing money from a bank:

Answer 34

Interest rate that the bank charges you is specified in terms of the Prime interest rate.

• banks determine the PIR based in the repo rate (RR).
• PIR is always higher than RR because that’s how banks make their money.

Question 35

High risk loans

Answer 35

Granting money to people with a lot of debt.

Bank will charge higher interest rate (prime plus three)

Question 36

Lower risk loans

Answer 36

Bank will charge a lower interest rate (prime minus two)

Question 37

Reserve bank

Answer 37

Central bank of South Africa

Holds the reserves of other banks.

Question 38

Interest rates applicable to different types of credit

Answer 38

Interest rate on credit agreements can be fixed or variable.

Question 39

Fixed interest rates

Answer 39

The lender can only charge the same amount of interest per month throughout the duration of the loan.

Question 40

Variable interest rate

Answer 40

Will fluctuate with changes in the RR.

The NCA specifies that any changes in the variable interest rate of a credit agreement is only valid if it is in reference to changes in the RR.

Question 41

Credit agreements and interest rates

Answer 41

Mortgage bond
= (repo rate x 2.2) + 5% pa

Credit facilities
= (repo rate x 2.2) + 10% pa

Unsecured (personal loans)
= (repo rate x 2.2) + 20% pa

Short-term loans (less than R8000)
= 5% pm

Incidental credit (dr bills)
= 2% pm

Question 42

Inflation

Answer 42

The rise in prices of goods and services, measured over a specific period, and subsequently a drop in the purchasing power of money.

Process of continual increase in prices in a country.

Question 43

Buying power

Answer 43

The purchasing power of money, is the value of money as measured by the quantity of products and services it can buy.

Question 44

Value of money

Answer 44

Measured in terms of how prices have increased over the years.

Inflation is the decrease in the purchasing power of money.

Question 45

CPI

Answer 45

Consumer Price Index

The CPI measure changes in the cost of goods and services over a specific time period.

Helps determine the increase in prices.

Question 46

How his the CPI measured?

Answer 46

By defining a basket of goods and services used by a typical household and then keeping track of the change in the cost of the basket over a specific time period.

When the change in 12 months is expressed in % form, the measurement serves as a yardstick for the inflation rate.

Question 47

Inflation rate

Answer 47

The annual percentage change in the consumer price index (CPI).

Question 48

Effect of inflation (5)

Answer 48

• You can buy less with the same amount of money.
• Reduces purchasing power of savings. Retired people have less money to spend each month.
• Lenders or depositors who are paid fixed rate of interest on loans or deposits will loose purchasing power from interest they earn.
• People borrowing money for long term loan benefit from inflation. Because money they repaying in loan becomes less than the money they originally owed.
• People with fixed incomes, if their salaries don’t keep up with inflation, their purchasing power of income covers less expenses.