POST GRADUATE DIPLOMA

IN ACCOUNTING SCIENCE
(PGDAS)

TAXATION – 2020

COURT CASES

CONTENTS PAGE

1. SAICA TAX EXAMINABLE PRONOUNCEMENTS 2

2. STUDY METHOD 2

3. STUDY OBJECTIVES 2

4. COMPETENCY FRAMEWORK 3

5. SUMMARY OF PRESCRIBED COURT CASES 3

Responsible lecturer: Mrs Michelle van Heerden

1 SAICA TAX EXAMINABLE PRONOUNCEMENTS

The SAICA tax examinable pronouncements covers numerous court cases which
students are required to know well. Court cases remains to be an extremely
popular topic, tested almost each year in the Initial Test of Competency
examination set by SAICA.

2 STUDY RESOURCES

 Slides;
 Module
 Haupt

3 STUDY METHOD

Learn the tax principle(s) of each court case well. Be comfortable with the facts of
the case as this helps to identify the issue(s) in tests and examinations (as
scenarios presented in papers are usually similar to the original case).

The basic idea of this document is an informal, understandable guide that you can
relate to and become comfortable with the court case principles that you must
know. The general format of discussion of each case is the following:
 Facts of the case
 Core issue
 Held (the judges ‘ decision)
 Tax principle – the crux!

3 STUDY OBJECTIVES

After studying the summary of the court cases, you must be able to:
 identify what the issue at hand is based on the scenario stated in a question
(e.g. whether expenditure is incurred in the production of income),
 argue what your opinion is in relation to the issue raised i.e. what is the
court case that can solve the issue and the tax principle (e.g. whether you
believe the expenditure was incurred in the production of income or not),
and
 express your opinion i.e. apply the tax principles to the facts.

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 In other words, marks will be allocated in the exam for identifying the issue(s),
stating the case name and principle, arguing the correct tax treatment by applying
the correct principles to the facts and then expressing your opinion on the issue.

4 COMPETENCY FRAMEWORK

VII-2.8 Applies and interprets tax legislation by applying relevant decisions of

the courts
Level I
Identify the tax issue requiring interpretation
Identify and describe the relevant tax case law principle that is applicable to support the
interpretation
Apply the case law principles in advising and calculating taxes of taxpayer

5 SUMMARY OF PRESCRIBED COURT CASES

The two fundamental issues with court case theory involves: Is an amount gross
income as defined or does an amount qualify for the general deduction formula.
Ensure that you first identify this before answering!

Gross income issue deals with the basic definition-

 Total amount,
 In cash or otherwise,
 Received by or accrued to
 Not of a capital nature
 Worldwide income if the taxpayer is a resident and SA source income with
a non-resident

A deduction issue revolves around section 11(a) (positive test) and 23(g)
(negative test). Section 11(a) and 23(g) being:
 Expenditure and losses,
 Actually incurred,
 During the year of assessment,
 In the production of income
 Not of a capital nature
 Whether it is for trade purposes.

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 GROSS INCOME CASES
CASE HAUPT FACTS OF CASE PRINCIPLE
Residency
1 Cohen Par 2.5.1 Facts of case A person is ordinarily resident in the country to which
A taxpayer owned a flat in Johannesburg, he intends to return from all his wanderings. The
moved overseas for work for two years and country he regards as his real home.
leased his flat.
Issue
Is the taxpayer ordinarily resident in SA while
working overseas for two years?
Judges Decision
Physical absence is not decisive in determining
if one is ordinarily resident. The taxpayer’s
actions for the two years are not the sole test.
“If, though a man may be resident in more than
one country at a time, he can only be
'ordinarily resident' in one, it would be natural
to interpret 'ordinary resident' by reference to
the country of his most fixed or settled
residence. His ordinary residence would be the
country to which he would naturally and as a
matter of course return from all his wanderings,
as contrasted with other lands it might be
called his usual or principal residence and it
would be described more aptly than other
countries as his real home.”

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2 Kuttle Par 2.5.1 Facts of case A person is ordinarily resident where the person’s
A taxpayer emigrated to America and started principle residence is – where the person is
his life there. He returned to SA regularly to habitually and normally resident.
pursue business interest and take part in
yachting activities. During these periods he
stayed in his home in Cape Town, where he
maintained and renovated his house.
Issue
Is the taxpayer ordinarily resident in SA?
Judges Decision
Ordinarily resident is a narrower concept than
resident. The place of ordinary residence was
the place where the person was habitually and
normally resident, apart from temporary or
occasional absences of long or short duration.
The taxpayer’s real home was seen to be in
America.

Source
1 Lever Brothers Par 2.6.14 Facts of case In order to determine the source of an amount one
A foreign creditor lent money to a South must consider Lever Brother:
African company and earned interest income. What is the originating cause?
Where is the cause situated?
Issue
Is the interest income from a South African
source?
Judges decision
The money lent was utilised in SA. Therefore
the interest income is SA source.

Total amount in cash or otherwise

1 Lategan Par 2.4.3 Facts of case The word “amount” includes any form of property
The taxpayer, a wine farmer, entered into an with an ascertainable monetary value, including
agreement in terms of which he disposed of debt and rights.
wine he had made during the year of
assessment. A portion of the selling price was
paid prior to the end of his year of assessment
and the balance was to be paid in instalments
after the end of the year of assessment.

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 Issue:
Is “amount” per the gross income definition
confined to receipts of “money”?
Judges decision
Amount includes every other form of property,
including debts and rights of action

2 Butcher Bros Par 2.2 Facts of case The onus is on SARS to determine the amount.
The taxpayer owned land, leased it to a If there is no amount can be determined there will be
company for 50 years with a renewal option of no gross income.
49 years. In terms of the lease agreement the
lessee was obliged to effect improvements. This court case lead to the par (h) gross income special
The ownership of the improvements would inclusion. The principle however still remains.
pass to the lessor upon termination or renewal.
Issue
The benefit will pass in the future; can an
amount be determined now (upon completion
of the improvements) in order to tax the
lessor?
Judges Decision
The benefit will only pass in 50 years; therefore
the lessor can’t be taxed now as there is no
ascertainable monetary value. I.e. they can’t
determine the value now for the benefit that
accrues in 50 yrs.

3 Brummeria Par 2.7.11 Facts of case General principle: Applicable to Barter

(under the The taxpayer companies developed retirement
heading villages and sold life rights in the dwelling units
Loans) to old age people (i.e. the old person can stay
in the unit until death). In return for the life
right, the pensioner had to make an interest
free loan to the developer.
Issue
Does the fact of having monies available (i.e.
the interest-free loans) mean that there is an
‘amount’ accruing to the developer?
transactions
The judges made it clear in the Brummeria case that
the question whether a receipt or accrual in a form
other than money has a money value is the primary
question. The ability to turn such a receipt or accrual
into money is but one of the ways in which it can be
determined whether it has a money value. It does not
follow that a receipt or accrual which cannot be turned
into money has no value.
The test is objective and not subjective

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 Judges Decision
If a taxpayer had a right to an interest-free
loan, such a right had value. In other words,
the benefit of having monies available on loan,
interest free, has an ascertainable monetary
value.
Accrual
1 People’s Stores Par 2.2, 2.4.3 Facts of case
A clothing retailer sold on credit.
Issue
Has the amount accrued to the taxpayer
despite money still being owed?
If accrued, should it be included at face value
or present discounted value?
Judges Decision
Accrual means the taxpayer has become
entitled to the amount on the date of sale.
Always include an amount at face value.
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Arm’s length principles of valuation must be
applied in each case, having regard to the facts and
circumstances and the intention of the parties.
Specific principles applicable to interest-free
loans with quid pro quo
If a taxpayer has a right to an interest-free loan,
such a right has value.
If a taxpayer receives an interest-free loan, and the
lender receives a quid pro quo (i.e. the lender
receives something in return for lending the money –
in this case life rights), there will be an “amount” for
the taxpayer having the benefit of interest-free
loans.
Interpretation Note 58 was issued after the Brummeria
case. It, inter alia, deals with interest-free loans with
life rights as quid pro quo. See the last 3 pages of this
module for the formula on how to calculate the
‘amount’.
Accrued to = entitled to
Included in gross income when entitled to not when
you receive the money.
Accrual = face value not discounted value
Taxed on the earlier of receipt or accrual
2 Witwatersrand Par 2.4.1 Facts of case If an amount has accrued to a taxpayer and no legal
Association of (under heading A race event was held and resulted in obligation exists to pay it over (only moral
racing clubs Disposal of proceeds that the taxpayer divided between obligation) to another individual, it has in fact accrued
income after two charities. The taxpayer argued that the and is gross income.
accrual) proceeds did not accrue to them, but to the
charities.
Issue
Did the proceeds from the race accrue to the
taxpayer or the charities?
Judges Decision
The proceeds were received as a result of a
scheme of profit making and were distributed
in terms of a moral obligation. Therefore the
association was still the principle, not acting as
the agent of the charities. It was the racing
club’s gross income.

If the contract between the company and

charities stated that the proceeds would accrue
to the charity, then the company would have
been acting as an agent and it would not have
accrued to them.

3 Mooi Par 2.4.3 Accrued to = unconditionally entitled to the amount.

Receipt
1 Geldenhuys Par 2.4.1 Facts of case The amount is only include in gross income by a
A widow inherited the right of use of a farm taxpayer only if it is received by him on his own
(usufruct) while her children received the right behalf, for his own benefit
of ownership (bare dominium). She later
decided to give up farming and sold the sheep
on the property with her children’s consent.
Issue
Are the proceeds from the sale of the sheep
received by the widow?
Judges Decision
The original number of sheep (or cash
equivalent) had to be returned to the owners
(children) at the end of the period of use. The
number of sheep at the end of the period was
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 less than the original amount. She did not
increase the number of sheep during the
period. The children were entitled to the full
amount.
2 MP Finance Par 2.4.1 Facts of case A bilateral receipt (the other party willingly gives you
Group CC (in A company had an illegal pyramid scheme the money) that is used for your own intention means
liquidation) where they promised investors fantastic it has been received by you. You intended to use it
returns with no intention of doing just that. for your own benefit.
They classified the money received as
deposits (loans) and used it for their own
purposes. It is submitted that theft will usually not be gross
income as it is a unilateral receipt.
Issue
Unilateral receipt (taking money) doesn’t mean it
Is the money (deposit) actually received by the
has been received by you as it was never given to
company?
you in the first place.
Judges Decision
Even though the amounts received were
immediately repayable (per the contract), they
were not loans but receipts as the taxpayer
intended retaining the receipts for their own
benefit.

3 Pyott Ltd Par 2.4.2, Facts of case
2.7.1 A biscuit manufacturer sold tinned biscuits.
The customers could return the tins and
receive money for the tin. The company
treated the proceeds relating to the tin as a
deposit and not gross income.
Generally deposits are still received and form part
of gross income.
A deposit is only treated as not being received if
the money is kept separately in a trust account,
for the benefit of the customer.

Issue Section 24C, future expenditure allowance, can

Is the proceeds relating to the tin still received potentially be available against the deposits.
by the taxpayer?

Judges Decision
The amount paid for the tin was received by
the company and is part of the normal trading
income. The customers could choose to return
the tins or not.

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 FRINGE BENEFIT
1 BMW SA Facts of case The primary questions are:
BMW group’s international business policy
requires employees to work for short or medium  whether an advantage or benefit was granted by an
term periods in locations where the Group has employer to an employee; and
a presence, other than in their home countries.
When the employee works in a foreign  whether it was for the latter’s private or domestic
jurisdiction, they are known as expatriates. purposes.
Such employees retain their connection with
their home countries and continue to submit tax NB! Prior to this Supreme Court of Appeal, there was
returns there. The employment relationship a believe that the use must be wholly private or
between the expatriate employees and the domestic i.e. if used partially for the business or affairs
BMW Group operates on an agreed ‘tax of the employer, it is not a fringe benefit.
equalisation’ basis, which is standard in the
Group. In simple terms, this means that the The learned judge busted that principle in stating that
Group, wherever it has a presence, will ensure there will be instances in which benefits or advantages
that the net income of their employees, in for the employee will have some residual or marginal
countries where they are placed, is no less than advantage for an employer.
in their home countries. So, for example, if the
marginal tax rate is higher in another
jurisdiction, the Group will ensure that the
impact is nullified by structuring remuneration in
such a way that the employee is not worse off
in terms of net remuneration.

As a result, BMW SA paid for tax consultants to

provide various tax services to assist its
expatriate employees with their domestic tax
obligations to ensure the individuals’ tax
compliance. This was part of the employees’
secondment conditions and the tax services
provided was not solely for the employee’s
benefit, as they had no choice in the matter.

The tax consulting services was also partly for

BMW SA benefit to protect their interest in terms
of the Group tax equalisation policy, which
requires the Group to incur any additional taxes
that may be incurred by that employee while
employed in the foreign country.

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 Issue
Should the payments made by BMW SA to the
tax consultants constitute a taxable fringe
benefit in the hands of the expatriate employees
in accordance with the Seventh Schedule
paragraph 2(e) or (h) to the Income Tax Act?

The primary enquiry was whether an employer

granted a benefit to an employee and whether it
was for the employee’s private or domestic use
or consumption.

Judges Decision
.
The tax consulting services were rendered to
the expatriate employees in terms of the
contract of employment. The employees would
have been required to personally make these
payments should BMW SA not have paid them.
The payments to the tax consultants, therefore,
is a taxable fringe benefit in the hands of these
employees in terms of section 2(e) of the
Seventh Schedule of the Income Tax Act.

CAPITAL VS. REVENUE

Introduction

Capital versus revenue is still extremely relevant, as capital gains are taxed at a lower rate than income.
The inclusion rate of capital gains for individuals is 40% and for companies and CC’s 80%.
As the word capital is not defined in the Act, one has to consider relevant court cases to determine whether an amount is of capital or revenue nature.

Onus

Onus rests on the taxpayer to prove the nature of a receipt - Section 102 of the Tax Administration Act (Chapter 2.7.10 Haupt).

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Nature of the asset

“Income” is what is produced by “capital” – fruit of a tree principle (Visser). Proceeds from disposing of the “fruit” will be revenue in nature and proceeds
from disposing the “tree” will be capital in nature. Thus, income is produced by an income-producing asset and will be classified as proceeds of a revenue
nature, whereas the sale of an income-producing asset will be classified as receipt of a capital nature.

An amount will either be capital in nature or revenue in nature. There is no half-way house.

The nature of the asset

1 Visser Par 2.7.2 Facts of case:
The taxpayer (an influential businessman in
the area) acquired mining options for a period
of two years over certain properties which
were not renewed and subsequently expired.
Later, a third party negotiated with and offered
the taxpayer an interest in a company to be
formed if he would refrain from taking up
options in competition with him and assist him
to acquire the previously lapsed options.
Tree vs. fruit:
The tree is seen as the capital structure of the
business and the fruit the result of the income
earning activities. Thus, receipts for selling the tree is
capital in nature and receipts for selling fruit is
revenue in nature.

The taxpayer agreed to the proposal. The

arrangement was confirmed in a letter, which
stated that the taxpayer had been promised
shares “in consideration of the services you
have already rendered and will be rendering
to me and my associates in the venture that
we are undertaking”.

Issue:
Was the value of the shares that the taxpayer
received capital or revenue in nature?

Judges decision:
The amount in dispute had accrued to the
taxpayer as a result of his wits, energy and
influence and as such was not a receipt of
capital in nature, but revenue in nature.

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2 George Forest Par 2.7.3 Facts of case All assets are either classified as fixed or floating
Timber The taxpayer company carried on a business capital.
as timber merchants and sawyers. It acquired
about 6oo morgen of natural forest for the Floating is consumed in the very process of
purpose of its business. The nature of the production, while fixed capital is not. Fixed capital is
trees in the forest was such that they did not the structure that enables income to be generated.
renew themselves, and for practical purposes
the value of the land without the timber was The sale of fixed capital gives rise to capital proceeds,
negligible. In the course of its business the while the sale of floating capital gives rise to revenue.
company felled a quantity of timber each year
which was sawn up in the mill and sold as part
of its trading stock.

Issue:
Was the income received from the sale of the
natural forest capital or revenue in nature?
Judges decision:
The total amount received for the sale can be
read into the definition of gross income and
that no part of the proceeds constitute
proceeds of capital in nature.
3 Nel Par 2.7.11 Facts of case: Kruger Rands are a unique asset where the only
(under The taxpayer had bought a number of income earned is through sale. Therefore it will
heading Krugerrands between 1976 and 1978. His normally be seen as capital unless it is your trade to
Krugerrands) avowed intention was to hold them as an buy and sell them.
inflation hedge and as an inheritance for his
children. From 1978 to 1989 he had neither
bought nor sold any coins, despite there
having been many opportunities to do so. He
stated in evidence that the thought of selling
them had never entered his mind.

In 1989 he was obliged to buy a car for his

wife. The need was urgent and he did not
have the necessary funds available. His
auditor advised him to exchange some
Krugerrands for the car, and in fact assisted in
the transaction.

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 Issue:
Did the sale of the Krugerrands represent
capital or revenue profits?

Judges decision:
The evidence showed clearly that the
taxpayer’s purpose in selling the Krugerrands
was not to make a profit but to realise a
capital asset in order to acquire another
capital asset.

Intention of taxpayer
Determination of nature of receipt
The most important tests used by the courts to determine the nature of a receipt, is the determination of the taxpayer’s intention and considering the
facts of the case.

The intention of the taxpayer can either be to:

 purchase an asset for resale at a profit (a scheme of profit making); or
 purchase an asset as investment to earn a return on the investment.
The courts will consider the taxpayer’s:
 intention at the time of purchase; and
 whether the original intention changed during possession and sale of the asset.

The actual intention will be deduced from the surrounding facts.

Intention at the time of purchase of the asset

Based on the facts, decide whether the taxpayer has entered into a scheme of profit making or not (Pick ‘n Pay Employee Share Purchase Trust).

If the facts indicate that the taxpayer had mixed intentions (both investment and speculation), identify the principal, dominant motive (Levy, Stott, Nel).

The principal motive is decisive in whether the income is of a capital nature, even if the secondary motives are of an income nature.

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Change of intention during possession and sale of the asset
Change of intention can take place during possession or sale. The decision is made based on the facts and circumstances applicable to the taxpayer,
whether the intention of the taxpayer possibly changed from an investment holding to a scheme of profit-making.

Decision to sell ≠ change of intention (John Bell)

To sell at a profit – to realise to its best advantage ≠ change of intention (Stott)

The fact that a taxpayer sells an asset at a profit does not per se imply that the receipt is taxable as a revenue nature receipt.

Even to sell at best advantage using a realisation company ≠ change of intention (Berea West Estates)

Something more is needed for a change of intention

A distinction has to be made between ‘realising a capital asset’ and ‘selling an asset in the course of carrying on a business or embarking on a profit-
making scheme’. A change of intention implies “something more” i.e. whether a business is carried out in the execution of a scheme to generate profits
– crossing the Rubicon (Natal Estates)

Intention of a natural person

The taxpayer’s ipse dixit will be taken into consideration i.e. what the taxpayer says his real intention was. But as this is subjective, the courts will deduce
the intention from the surrounding facts (i.e. from the objective factors). The following objective factors are considered by the courts:
 Conduct of taxpayer leading up to the sale transaction;
 Reason for sale of an asset;
 Frequency of similar transactions;
 Continuity of activities;
 Period that an asset was held;
 Manner in which the transaction is financed;
 Nature of taxpayer’s occupation or business;
 The carrying on of business in the execution of a scheme to make profit; and
 Documentary evidence, for example minutes of meetings, correspondence, etc.

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Intention of companies

The intention of a company must be deduced from the objective factors – (Richmond Estates):
 The name of the company;
 Objectives as stated in the memorandum of association;
 Occupation and general activities of shareholders or directors;
 Circumstances and events preceding the incorporation of the company;
 Formal proceedings as recorded in minutes; and
 Change in shareholders.

The intention of a company can also be deduced from those who determine the direction of the company (Elandsheuwel Farming), namely –:
 the directors;
 the shareholders; or
 those persons who effectively control the company.

1 Richmond Estates
(Pty) Ltd
Par 2.7.7 Facts of case A company’s initial intention is indicated by the
The Memorandum of Incorporation (MOI) of a actions of directors, type of business and the MOI.
company indicated that the company could
purchase, develop, layout and prepare land
for building purposes. The company bought
specific plots with this intention but due to
certain restrictions, held it for rental purposes.

Issue
What is the initial intention of the company?

Judges Decision
A company is not an individual. Its initial
intention is demonstrated through director’s
resolutions and formal documentation such as
the MOI.

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2 Levy Par 2.7.4 Facts of the case If there are mixed intention, one needs to determine
The taxpayer disposed of his shares in a the dominant intention.
property-holding company at a profit. He had
two purposes for originally purchasing the
shares, namely to acquire the shares as an
income- earning investment while at the same
time not excluding the possibility of a
profitable resale of the shares.

Issue
If there are two motives with one motive being
more dominant than the other, can the
dominant motive prevail if such motive is
capital in nature?

Judges Decision
The fact that the taxpayer at the time of
purchasing the shares had in mind possible
alternative methods of dealing with the
property should not affect the issue, if the
dominant purpose of the acquisition is clearly
established.
3 Elandsheuwel Par 2.7.9 Facts of the case The intention of the shareholders should be taken
Farming The taxpayer, a company, owned a farm near into consideration when assessing whether the use of
Klerksdorp. For many years the farm was the asset is capital in nature. Thus, a change in
rented out to a farmer whose family owned all shareholding could represent a change in intention.
the shares in the company. Shortly after the (This is especially applicable in the case of a private
farmer sold all of his shares and the new company)
shareholders took over the farm, after being
briefly rented out for farming purposes, was
sold at a profit to the Klerksdorp Municipality.
The shareholders had a history of speculation
with properties.
Issue:
What was the intended use of the farm?
Judges decision:
The judges held that, although the farm was
originally acquired as a capital asset, the
change in shareholding brought about a
change in intention in respect of the use of the
farm. The decision was therefore that the
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 proceeds of the farm were to be included in
the taxpayer’s gross income. The court was
influenced in its decision by the prior history of
the shareholders.

Scheme of profit-making
1 Pick n Pay Par 2.7.4 Facts of case The scheme of profit making is essential to classify
Employee Share The company established a trust to purchase proceeds as revenue in nature.
Purchase Trust shares and administer them for the benefit of
the employees. This trust was also compelled
to repurchase shares from employees who
were required to forfeit their holdings.

Issue
Were the profits made by the share trust on
the share dealings capital or revenue in
nature?

Judges Decision
The fact that the shares were sold at a profit is
an important factor to consider. However no
scheme of profit making existed. Any receipts
were accidental due to the fact that
employees had to sell their shares. This was
to prevent unwanted resignations.
Mixed/ dual intention
1 Stott Par 2.7.4 Facts of case Consider the taxpayer’s dominant intention. The
The taxpayer, Stott, was an architect and fact that the asset is sold at a profit, does not
surveyor. He purchased a few properties as necessarily indicate a change of intention.
an investment over a period of 20 years. One
of the properties, a piece of coastal land of
nearly 54 acres, was acquired by the taxpayer
with the intention of building a seaside
residence thereon, which he did. Because the
property was enormous, the taxpayer
subdivided it into two parts and retained only
the part on which the residence stood. He
subdivided the other part into lots and sold it
piecemeal.

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 Issue
Did the taxpayer have a dual intention? i.e. an
intention to hold one piece of land as a capital
asset and to enter into a scheme of profit
making in respect of the other part of the
land? Did the taxpayer embark on a scheme
of profit-making because he subdivided the
land?

Judges Decision
The court considered the facts that the land
was acquired with surplus funds and that the
piece of coastal land was hopelessly too large
for purposes of a seaside residence. The
court remarked that the mere fact that the
taxpayer subdivided the property and that the
taxpayer was a surveyor, did not instantly
convert the nature of the proceeds to income.
The court relied on the fact that each taxpayer
has the right to realise his assets to his best
advantage and consequently held that the
proceeds were capital in nature. There was no
change of intention.

2 Nel Par 2.7.11 Facts of case
The taxpayer bought Kruger Rands over the
long term as an investment. Eleven years later
he sold some to purchase a car for his wife.
Kruger Rands are a unique asset where the only
income earned is through sale. Therefore it will
normally be seen as capital unless it is your trade to
buy and sell them. Consider the taxpayer’s reason
for selling the Kruger Rands.

Issue
Is the profit realised capital or revenue in
nature? Kruger Rands can only be realised
through sale, does this indicate that it is a
scheme of profit making?

Judges Decision
The only reason that the taxpayer sold the
Kruger Rands was to acquire another asset
and not to make a profit.

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 Change of intention
1 John Bell Par 2.7.9 Facts of the case The mere decision to sell an asset does not change
The taxpayer operated a textile business from an intention. A capital asset may be realised at its
premises that it owned. After the business best advantage. Waiting for market conditions to
relocated to other premises, the directors of change was not an indication of a change in intention.
the company decided to sell the original
premises. In view of the fact that the property
market was not performing well at that point in
time, the directors decided to wait until the
market had improved. In the meantime, the
property was rented out (for a period of 11
yeas) and thereafter, once the market had
improved, the property was realised at a profit.
Issue:
Was there a change in the intended use of the
asset? did the property become trading stock?
Judges decision:
The court emphasised the principle that a
taxpayer is entitled to realise his property to
his best advantage. Therefore, it was decided
that there was no factual evidence that
indicated that the taxpayer had had a change
in intention to use the property as trading
stock.

2 Natal Estates Par 2.7.9 Facts of case A person may realise his capital asset to his best
Ltd The taxpayer held a piece of land for many advantage yet must be careful to not “cross the
years as a capital asset. Before selling the Rubicon” and embark on a scheme of profit making.
land, town planners, consulting engineers and This indicate a change of intention and the proceeds
professional advisors were approached to being revenue in nature.
develop and sub-divide the land.
Issue
Was the sub division a change of intention
from capital to revenue?
Judges Decision
The original intention of the taxpayer to hold
the capital asset as an investment is an
important, yet not deciding factor. A change of
intention was evidenced as the field of
20
 development and marketing on a grand scale
was entered into (Scheme of profit making).

3 Nussbaum Par 2.7.11 Facts of case The secondary purpose could taint the primary
(under A taxpayer held shares during his lifetime for purpose of a taxpayer, considering the frequency.
heading investment purposes. After retirement he sold
Share the shares over a three year period; some This may result in profits that are initially seen as
transactions) shares were held for a long period and others capital, to be revenue. An investor with a dual
for a shorter period. The taxpayer sold shares intention should keep two separate accounts, one
each time the dividend yield dropped. capital and one revenue.
Issue
Note that section 9C is now available.
Does the large number of purchase and sale
of shares during the three year period
constitute a scheme of profit making? Is there
a dual/secondary intention?
Judges Decision
The frequency of transactions indicates
continuity (element in carrying on a business).
Almost all the sales were profitable; the
taxpayer studied his portfolio and was aware
of the profit implications in selling. He was
primarily an investor yet had a secondary
purpose of profit making. Both are almost
equally important.

4 Berea West Par 2.7.11 Facts of case Using a realisation company to realise a capital asset
Estates (under A company was formed to facilitate the merely means the taxpayer is disposing of the asset
(Opposite to heading realisation of land which formed part of the to its best advantage. The receipts of the realisation
Founders Hill) Realisation assets of a deceased estate. The company company are capital in nature.
Companies) acquired the land, and, after subdividing it,
sold the subdivided plots at a profit.

Issue
Are the receipts of selling the subdivided plots
capital or revenue in nature in the realisation
company?
Judges Decision
The court found that the manner in which the
property was sold, suggested a mere
realisation of a capital asset to best

21
 advantage. In subdividing the land and selling
off the plots the company had not ‘crossed the
Rubicon’.
5 Founders Hill Par 2.7.11 Facts of case There has to be a real justification for the
(Pty) Ltd (under AECI Ltd set up Founders Hill (Pty) Ltd as its realisation company to be formed
(Opposite to heading wholly-owned subsidiary to sell off land
Berea West) Realisation surplus to AECI’s needs. AECI therefore Naming of “Realisation” does not constitute a
Companies) transferred this land to Founders Hill, which realisation company
proceeded to realise the property to best
advantage.
Issue
Are the receipts of selling the land capital or
revenue in nature in the realisation company,
Founders Hill?
Judges Decision
Founders Hill was not a proper realisation
company, with the result that the profit it made
on the sale of the land was subject to normal
income tax. A realisation company was one
which was formed to facilitate the realisation
of property ‘which could not otherwise be dealt
with satisfactorily. None of the realisations
company cases was there a single owner who
interposed a ‘realisation company’ where it
could satisfactorily have realised the capital
asset itself. A company could only be
realisation company in special circumstances,
for example where property is held by a
number of owners and it is easier for a single
owner to sell it, or where there is a need to
protect the assets from the original holder. In
other words, there has to be a real justification
for the realisation company to be formed.
Founders Hill did not have to be formed. AECI
could have sold the property itself.

22
 Damages and Compensation
1 Fourie Par 2.7.11 Facts of case
Beleggings A CC leased premises from which it operated
as a hotel. It had been paid compensation for
the loss of a contract it had with another entity
to provide meals and accommodation to
students.
Issue
The question was whether the compensation
was revenue or capital in nature? If the
compensation was for the loss of part of the
taxpayer’s income-earning structure, it would
be capital in nature. If it was for a loss of
income, it would be revenue in nature.
Judges Decision
The compensation was as a result of not
receiving income; the company was still able
to use the hotel to earn income and this had
no effect on the income earning structure. The
actual contract was the result of using the
income earning structure. The contract was
not part of the income earning structure.
2 Stellenbosch Par 2.7.11. Facts of case
Farmers’ Par 7.6 The taxpayer was a wholesaler that imported
Winery and distributed Bells whiskey in South Africa.
It concluded a 10 year agreement relating to
this distribution which was prematurely
cancelled more than three years before the
earliest date on which the distribution
agreement could be terminated. As a result,
the taxpayer received the sum of R67 million
from United Distillers, a UK based company
with which the taxpayer had concluded the
23
Compensation for damages of capital assets =
capital
Compensation for loss of profit/ income = income
If proceeds relate to “filling a hole” in the income
earning structure, it is capital in nature.
If the proceeds relates to “filling a hole” in the
income pocket, it is revenue in nature.
In the ITC, similar facts to that of Fourie Beleggings
were presented to the candidates. However, in that
set of facts, the compensation received by the hotelier
was separated into 3 different elements i.e. meals and
accommodation, repairs and loss of goodwill. Due to
this fact, each element had to be evaluated on its own
to determine whether it was damages of capital asset
or for loss of income.
Meals and accommodation:
The part of the receipt relating to meals and
accommodation is compensation for loss of profits and of
a revenue nature.
Repairs
The amount was received for the taxpayer’s own benefit
and is therefore gross income – Geldenhyus.
Goodwill
Goodwill (the asset) is part of the income earnings
structure (or the “tree”.), it is therefore of a capital nature –
Visser.
Compensation for cancellation of a contract to an
income-earning right will be considered capital in
nature.
 distribution agreement. SARS included the
receipt of this payment as part of the
taxpayer’s gross income in the assessment for
tax.
Issue
The issue before the court was the taxpayer’s
contention that the payment was of a capital
nature which attracted no tax liability.
Judges Decision
Evaluating the evidence in the case, the court
found that the taxpayer did not carry on the
business of the purchase and sale of rights to
purchase and sell liquor products, did not
embark on a scheme of profit making, and
discharged the onus of establishing the
payment was of a capital nature.

Cryptocurrencies
No specific court Par 2.7.11 NB! Cryptocurrencies are now included in the
case definition of financial instruments. This
triggers a number of implications:
1) From a VAT perspective it’s a financial
service, thus exempt from VAT
2) For a natural person, and from a
capital gains tax perspective,
cryptocurrencies cannot be seen as
personal use assets.
3) Any losses suffered by a natural
person on cryptocurrencies are ring-
fenced in terms of section 20A of the
Income Tax Act.
4) If a taxpayer holds cryptocurrencies as
trading stock, the closing stock value
can only be carried at cost, not market
value.
The following tax treatment is submitted for
cryptocurrencies:
 If a taxpayer is mining cryptocurrencies, any
gain or loss will be of a revenue nature
 If a taxpayer acquired cryptocurrencies, normal
tax principles apply. The normal question of
whether or not it was purchased in a scheme
of profit making is asked.
If the cryptocurrency is acquired in a scheme
of profit making, the gain or loss will be
revenue in nature.
If the cryptocurrency is acquired as a medium
of exchange (i.e. for payments), then the gains
or losses are probably capital in nature. The
NEL court case dealing with Kruger Rands
may be applicable.
The normal questions relating to the taxpayer’s
intention should be asked.

24
 Legality or otherwise of the business production of income
1 Delagoa Bay Par 2.7.11 Facts of case The legality of the income is irrelevant. The
Cigarette Co Ltd (under The company ran an illegal lottery. It set aside amounts will still be gross income.
heading a certain portion of its income from the sale of
Illegal cigarettes in order to pay prizes to people who
business) held winning numbers, obtained from coupons
in the cigarette packets.
Issue
Whether the portion of its sales that were set
aside to pay prizes were in fact gross income
as the lottery was illegal?
Judges Decision
The legality of the income is irrelevant.

2 MP Finance Par 2.4.1 Facts of case Even though the receipts are illegal, they are still
Group CC (in A company had an illegal pyramid scheme received, and therefore gross income.
liquidation) where they promised investors fantastic
returns with no intention of doing just that.
They classified the money received as
deposits (loans) and used it for their own
purpose.
Issue
Is an illegal receipt by a taxpayer taxable
since it was received by him, even though he
wasn’t meant to receive it for his benefit?

Judges Decision
The actual business scheme was illegal in
nature, carrying on this illegal activity was in
the production of income. Therefore the
amounts received were taxable.

25
 Special Inclusions
Annuity
1 Hogan Par 3.2.1 Facts of case An annuity constitutes gross income. Characteristics of
The taxpayer received monthly an annuity:
instalments for loss of future earnings 1) A contractual obligation for the person to pay
from the Motor Vehicle Assurance 2) A fixed or determinable amount
Funds as a result of a car accident. 3) Annually or more frequently
4) For a specific period
Issue
But, these payments must not be reducing a principle amount
Are the payments classified as an
annuity and therefore taxable?
Judges decision
The payments meet the definition of
an annuity as it is a periodic payment
and is payable to the taxpayer.
Therefore it is included per paragraph
(a) irrespective of its capital nature.

In Respect of services rendered

1 Stevens Par 3.4.2 Facts of case Receipts directly related to or as a result of services rendered
A company made an ex gratia will fall within the ambit of a paragraph (c) inclusion in gross
payment to an employee to income.
compensate for the loss of a share If there is a causal relationship between the payment and
option when the company went into the employment, it will be gross income.
voluntary liquidation.
Issue
Is this payment in respect of services
rendered and as a result of
employment?
Judges decision
The payment was directly linked to the
employee’s services with the
company, and therefore was within
the scope of paragraph (c).

26
 DEDUCTIONS CASES
CASE HAUPT PRINCIPLE FACTS OF CASE
During the year of assessment
1 Sub-Nigel Ltd Par 5.4.6, Facts of case An expense must be deducted in the year of assessment that
5.4.10 A taxpayer company paid insurance premiums on it is incurred, even if it will only produce income in future years.
a loss of profits insurance policy. The insurance I.e. the matching principle is irrelevant.
policy will only pay out in future, if certain events
took place. An expense has to be claimed in the year that it is incurred. It
cannot be claimed in later years.
Issue
Are the insurance premiums deductible even
though income from those claims was not
received in the same year?
Judges decision
The premiums were incurred to ensure income
was earned in the case certain events happened.
The fact that no income had actually been
produced was irrelevant. The expense was laid
out for the purpose of providing income and
should be deducted in the year incurred.

Carrying on a Trade
1 Burgess Par 5.2.1 Facts of case A wide interpretation should be given to trade
The taxpayer borrowed money from the bank and
invested in a short term investment company as
part of a scheme. He wanted to deduct the losses
from the scheme.
Issue
Is the scheme regarded as the carrying on of a
trade?
Judges decision
The main purpose of the scheme was to make a
profit. Trade has a wider interpretation including
where a person takes risks with the object of
making a profit.

27
 Actually Incurred
1 Nasionale Pers Par 5.4.2 Facts of case If a payment is contingent upon the happening of an uncertain
Bpk The taxpayer claimed a provision for bonuses as future event, the expense and corresponding liability can only
a deduction. The amount was only payable at a be actually incurred once the conditions are met.
future date. The provision was raised for the
liability as a result of the employees working for a Just note that in relation to bonuses specifically, section 7B was
full year and becoming entitled to their bonus. inserted in the Act to deal with the timing of variable
remuneration such as bonuses.
Issue
Was the provision expense actually incurred
during the year of assessment?
Judges decision
The bonus was payable on a future date (in
another year of assessment) provided the
employee were still in the employ of the
company. This is an uncertain future event, and
the expense can only be actually incurred on this
future date.

2 Edgars Stores Par 5.4.2 Facts of case An expense can only be deducted once there is an
The taxpayer leased premises to conduct its unconditional legal obligation to pay the expense.
business. There was a basic monthly rental and
an annual rental based on turnover. The taxpayer
estimated the annual amount and claimed it as
deduction.
Issue
Are the estimates of the annual turnover liability
actually incurred?
Judges decision
The obligation to pay turnover rental is contingent
until the turnover is determined and cannot be
deducted until it is determined.
3 Golden Dumps Par 5.4.6 Facts of case Where an obligation to pay an amount is in dispute, the
(Pty) Ltd The taxpayer and a former employee were expense can only be actually incurred when the dispute is
involved in a 4 year dispute over the delivery of settled with regards to the obligation and the amount thereof.
shares promised by the taxpayer. The taxpayer
claimed the cost of the shares as a deduction.

28
 Issue
When was the expenditure actually incurred?
Judges decision
Only when the claim is upheld by the court will a
liability arise. If the outcome of a dispute is
undetermined, it cannot be said that a liability has
been actually incurred.

4 Labat Par 5.7 Facts of case
The company, Labat, issued shares as
consideration for the acquisition of a trademark.
Issue
The issue was whether the issuing of the shares
as consideration for the acquisition of a
trademark amounted to “expenditure actually
incurred” by the issuing company. Because the
term “expenditure” is not defined in the Income
Tax Act, the Court observed that the term’s
ordinary meaning had to be attributed. In this
regard, the ordinary meaning of the term
“expenditure” encompasses the action of
spending funds, disbursement or consumption
and hence, requires a diminution of the assets by
the person who expends.
After the Labat case, section 40CA was introduced into the
Income Tax Act in 2008, which deems an expense to be
incurred by a company where it issues shares as
consideration for acquiring an asset to be the market of the
shares issued immediately after acquisition.
SARS is however of the opinion that the principle derived in the
Labat case (i.e. that the issuing of shares does amount to
expenditure incurred) will still apply in all other contexts. For
example, if shares are issued in exchange for services, the
issue of shares will not be deductible by the issuing company.
To summarise:
Shares issued for acquiring an asset = Section 40CA
determines the deemed expenditure incurred amount

Judges decision Shares issued for services rendered = No expenditure incurred

The Court held that the issue of shares does not
give rise to any diminution in the assets of the
issuing company and that the shares issued as
consideration for the acquisition of the trademark
accordingly do not amount to “expenditure”

In the production of income

1 Port Elizabeth Par 5.4.7 Facts of case 1. What is the purpose of the expense?
Tramway A driver employed by the taxpayer died as a 2. How closely connected is that expense to the
result of injuries sustained from an accident that production of income?
occurred while working. The taxpayer had to pay
damages to the widow of the employee. The
taxpayer also incurred legal costs resisting the

29
 claim. The commissioner disallowed both
deductions
Issue
Are the following amounts incurred in the
production of income?
1) Compensation paid to the widow 2) Legal
costs to resist the claim
Judges decision
Taxpayer’s business to employ drivers.
Therefore, it is expected that liabilities will be
incurred to compensate employees. Thus the
compensation paid is deductible and naturally in
the production of income. Legal costs were not
part of the income-earning operations and that
deduction was disallowed.

2 Joffe and Co Par 5.2.2 Facts of case If something is not an inevitable concomitant of the business
A company carried on a concrete engineering operations it is not deductible.
business. A concrete hood, which the company Negligence resulted in the roof collapsing and is thus not an
was supervising, collapsed; killing a workman. It inevitable part of trade.
was determined in the court case that the
company was negligent and had to pay damages
to the workman’s deceased widow. The
Commissioner disallowed the company’s claim
for compensation and the legal costs incurred.
Issue
Is the compensation to the widow and the legal
costs deductible
Judges decision
Negligent actions were not deemed a necessary
part of an engineering trade and were not
incurred for the purpose of earning profits/
carrying on of trade.

30
3 BP South Par 5.6.17 Facts of case Recurring payments for maintaining income earning
Africa BP SA paid royalties to BP worldwide in terms of operations are deductible.
a trade mark licence agreement in order to
display the BP licensed trademarks. The payment This will naturally mean it is incurred in the production of
was expressed as a rate per litre of product sold. income.
SARS disallowed this as a deduction.
Royalty payments are of a revenue nature and deductible if
the intellectual property is used in the production of income.
Issue
Therefore, use of rights of patents, copyright and inventions are
Are the royalty payments incurred in the
deductible.
production of income?
Judges decision
The royalty payments were done to procure the
taxpayer’s use of the parent company’s
intellectual property for the term of the
agreement. The payments were revenue in
nature.

4 Provider Par 5.6.8 Facts of the case: Expenditure incurred to induce the employees to enter and
and The taxpayer had introduced two schemes for the remain in the service of the taxpayer may qualify as a deduction
Par 14.2.4 benefit of its employees: a life assurance scheme since the purpose is to produce current or future income.
and a service bonus. The amount of the bonus Amounts paid in terms of a service package are deductible.
or benefit varied in line with the length of the
employee’s service. The taxpayer sought to
deduct both amounts.
Issue:
The Commissioner allowed the bonus as a
deduction but would not allow the life assurance
benefit paid to the dependants as a deduction.
Thus, the question is whether both amounts were
expended in the production income.
Judges decision:
Both schemes were clearly designed by the
taxpayer to induce its employees to enter and
remain in its service and to secure contented
staff. Thus, both amounts could validly be
deducted as constituting expenditure actually
incurred in the production of income.

31
5 Mobile Par 5.4.9 Facts of the case: Audit Fees:
Telephone Mobile Telephone Networks Holdings (Pty) Ltd
Incurring audit fees is necessarily attached to the performance
Networks incurred expenditure in respect of an audit
of the taxpayer’s income earning operations i.e. audit fees
Holdings (Pty) performed. The auditors spent 94% of its time on
are incurred in the production of income.
Ltd the audit of interest income and 6% of its time of
auditing the exempt dividend income
Where a there is a split between producing income versus
Furthermore, expenditure was incurred in respect
exempt income (thus where audit fees are incurred for a dual
of training fees to train staff on learning the new
purpose), apportionment has to take place.
computerised accounting system. The system
was only used in respect of interest income.
Apportioning audit fees based on time spent on areas
Issue: generating exempt versus non-exempt income is not
In respect of the audit fees, the issue was necessarily correct. Apportionment will depend on the facts of
whether the full audit fee will be deductible, even each case; a reasonable apportionment approach will thus be
though a portion was attributable to exempt followed.
dividend income?
In respect of the training fees, are the full training Training Fees:
fees a necessary concomitant of the income
If an expense is necessary in order to trade effectively (i.e. there
earning operations or are the training fees capital
is a direct link between the training fees and the taxpayer’s
in nature?
trading activities), it will not be capital in nature and will be
Judges decision: allowed as a deduction.
For the audit fees, it was ruled that only 94% of
the audit fees was incurred in the production of
income
For the training fees, all the expenditure was
deemed to be a necessary concomitant of the
taxpayers trade as a whole, due to it allowing him
to trade more effectively.

Dual purpose
1 Nemojin Par 5.4.9 Facts of case
A share dealing company carried on dividend
stripping operations. Investors would incur
expenditure in buying shares in dormant
companies with excess cash and reserves
(claiming the expenditures as s11(a) deductions)
The company would declare dividends to
eliminate all reserves, leaving only the shell of the
company. The dividend income would be exempt
in the hands of the share owners. Subsequently
they would sell their shares at a loss.
Assess the closeness of the connection of expenditure incurred
and exempt income received or accrued. Apportion taxable
income between taxable and exempt.
If a dividend stripping scheme is evident, then the portion of
the cost of the shares will be disallowed as a deduction that so
relates to the earning of exempt dividend income. The
remaining part is deductible in terms of S11(a) that so relates to
the proceeds on the sale that is included in gross income.
The apportionment is as follows:
(Taxable amount ÷ Total distribution amount) × Cost price

32
 Issue
Is the expenditure on the shares deductible in
terms of S11(a) or a portion disallowed as a
result of S23(f)?
Judges decision
The taxpayer (a share dealer) had a dual
purpose: to receive exempt dividend income and
proceeds from the sale of the shares being gross
income. Therefore a portion of the cost relates to
the earning of exempt dividend income and
S23(f) disallows this portion from being deducted.
(A similar apportionment to Rand Selection)

Take note: This case dealt with a share dealer,

therefore the shares bought would classify as trading
stock and the cost thereof would have been allowed a
S11(a) deduction. If a taxpayer bought shares for
investment purposes, the cost would form part of base
cost and this apportionment would not apply as no
S11(a) deduction could be claimed in the first place

Not of a capital nature

1 New State Par 5.4.12 Facts of case Fixed (capital) vs. Floating capital (revenue)
Areas Ltd A taxpayer was required to install a new Cost of establishing/ improving/adding income earning plant
sewerage system on its premises as well as on (fixed capital) is capital in nature and therefore not deductible
land outside its property. The system was vs.
installed at the cost of the local authority but the
taxpayer had to repay the cost in monthly Cost of performing income-earning operations (floating capital)
instalments (relating to the system on the which is revenue in nature and therefore deductible
premises and the system outside). The
Commissioner disallowed the deduction of both
amounts.
Issue: Are any of these monthly instalments
capital in nature?

Judges decision
The instalments relating to the system on the
premises were capital as they related to the
acquisition of an asset which remained the
property of the company. The instalments relating
33
 to the system outside the premises were not a
permanent asset of the company. They were
incurred due to the right of use of the system
belonging to the local authority. Therefore these
costs were deductible.

2 Rand Mines Par 5.6.7 Facts of case Expenditure incurred to obtain an income earning right or
A mine management company incurred an structure will be capital in nature
expense to acquire a contract to manage a mine
in the same group of companies. SARS Cost incurred to create a capital structure = capital
disallowed the deduction. Cost incurred to work the capital structure = revenue
Issue
Is the expenditure to acquire the contract revenue
or capital in nature?
Judges decision
The management contract did not generate
income in itself, yet created the opportunity to
generate income. This cost was therefore related
to the income earning structure and capital in
nature. The cost was incurred to create a capital
structure, not to work the capital structure.

3 BPSA Par 5.6.17 Facts of case The legal categorisation of a payment does not determine
BP SA made an upfront payment to lease whether it is capital or revenue, but rather the purpose of the
premises for 20 years. expenditure. The shorter the period of endurance to which the
payment relates, the easier it is to argue that it is revenue in
Issue
nature. Was an enduring benefit created?
Whether the lump sum rental payment is
deductible for the purpose of section 11(a) or
rather deemed to be expenditure of capital
nature?
Judges decision
SARS concluded that the expense was not rental
expense, but rather capital in nature due to the
fact that an enduring benefit was created. The
legal categorisation of a payment does not
determine whether it is capital or revenue

34
 Repair
1 Flemming Par 7.2 Facts of case The expenditure incurred must be as a result of damage or the
A taxpayer drilled a new borehole, erected a need to repair an asset that has been subject to use, in order to
windmill for the borehole and installed piping to be classified as a repair. The cost must maintain the income
feed water from the borehole to the dam. This earning ability of the asset, not improve this.
was done as the old borehole did not pump
adequate water for farming purposes. The
taxpayer regarded the costs as repairs to the old
borehole and repairs of the property according to
Section 11(d).
Issue
Are the costs incurred to drill the borehole, erect
a windmill and install piping repairs per Section
11(d)?
Judges decision
As no evidence was found that anything was
wrong with the old borehole, the expenditure
incurred was not incurred to repair the borehole
or the farming property. The expenditure was
incurred to improve the water supply which is not
classified as a repair.

2 African Par 7.2 Facts of case Repair is restoration by replacement or renewal of

Products The original roof of the factory had to be repaired. subsidiary parts of the whole
Manufacturing However different material (reinforced concrete) Materials need not be the same
Co Ltd was used as a result of the unavailability of the Repair is different from an improvement which is creating a
original material used. better asset
Issue
The test is: Has a new asset been created resulting in an
Should the amount incurred be regarded as a
increase in the income-earning activity or income earning
repair?
potential? If yes, an improvement has taken place which might
Judges decision qualify for capital allowances.
The taxpayer had restored the roof to its original
condition. The use of different material didn’t
constitute an improvement. Therefore the
expenditure qualified as repairs.

35
 Section 23(g)
1 Warner Par 5.6.18 Facts of case Expenditure incurred in ensuring that income is not lost is
Lambert SA An American parent company with operations in incurred in the production of income.
(Pty) Ltd South Africa was obliged to ensure that South If there is a link between the company’s ability to trade and
African subsidiary companies (the taxpayer) the expenditure, it will be incurred for the purposes of
complied with the Sullivan Code i.e. social trade.
responsibility expenses were incurred by the
taxpayer in terms of this code. The taxpayer Social responsibility was seen as crucial for trading success.
incurred this social responsibility expenditure and This meant that the expenditure had been “incurred for the
claimed it as a deduction under section 11(a). purposes of trade and for no other” and was therefore incurred
in the production of income
Issue
1) Are these expenses incurred in the
production of income, and
2) Are they incurred for the purposes of trade?
Judges decision
The taxpayer was instructed by its parent
company to incur these costs to prevent possible
loss of income. Therefore the costs were incurred
in the production of income and deductible in
terms of Section 11(a).

Furthermore, the court found that the link

between the company’s trade and the social
responsibility expenditure was not too remote.
The expense did not have to produce a profit
itself. The court took the view that if the company
did not incur the social responsibility expenditure,
it would have lost its ‘privileged subsidiary status’.
This might have led to the loss of ‘all kinds of
trade advantages’. The expenditure was for
purposes of trade and not prohibited by section
23(g) to any extent

2 Scribante Par 30.16.1 Facts of case 1) If dividends are declared to shareholders on interest-bearing
Constructions loan accounts, the interest are incurred in the production of
The company declared dividends to its
income by the company, if there is a close link between the
shareholders. The company had enough cash to
availability of the funds for the company and the company’s
pay the dividends but for sound business reasons
income earning capabilities.
decided to rather allocate it to the shareholders’
loan accounts. Half of the loans was non-interest
2) Borrowing money and re-lending it at a higher rate of interest,
bearing and the other half was interest-bearing.
thereby making a profit, constitutes the carrying on of a trade.
36
No money was exchanged - it was purely a book
entry. In fact, the cash funds of the company
which were available for the purpose of the
distribution remained in the interest-bearing call
accounts held by the company (i.e. the company
earned interest on these call accounts.)
The sound business reason for keeping the cash
available in the company was that the company’s
business involved the furnishing of contract
guarantees (surety bonds) for construction work
which it was to undertake. The ability of the
company to reflect a substantial cash reserve in
its financial statements was of material
assistance in readily obtaining the issue of
guarantees from financial institutions, thereby
sharpening its competitive edge when tendering
for contracts and increasing its income potential.

Issue
The issues were whether the interest paid by the
company to the shareholders was
1) expenditure incurred in the production of
income and
2) whether the interest was laid out or
expended by the company for the purposes
of trade within the meaning of s 23(g).

Judges decisions
1) To determine the deductibility of interest the
primary or dominant inquiry often relates to the
purpose for which the money was borrowed for
(Shareholders loan account). The interest paid by
the taxpayer enabled it to retain the shareholders'
funds, which could otherwise have been moved
elsewhere. The availability of the funds to the
taxpayer increased its competitive edge (by
assisting it in obtaining guarantees from financial
institutions) and, temporarily, its income in the
form of interest, which it retained. These two
considerations provided the sufficiently close link

37
 between the interest expenditure incurred and the
income-earning operations of the taxpayer thus
the interest payments were incurred in the
production of income.

2) The only purpose of paying interest on the loan

accounts was to secure for the company the
benefit of the continued availability of the funds
for use in its trading activities. In addition,
borrowing money and re-lending it at a higher
rate of interest, thereby making a profit,
constitutes the carrying on of a trade: Burgess

Other Cases
Trusts Sec 25 B
Section 7: Donation, Settlement or Disposition
CSARS v Woulidge Par 24.3.8 Facts of case
(under A taxpayer set up trusts for his minor children. He
heading In then sold shares (at market value) to the trust via
consequen an interest free loan. SARS decided that the sale
ce of) of the shares contained an element of
gratuitousness. Therefore all income received or
accrued from the shares should have been taxed
in the taxpayer’s hands.
Issue
Can the sale be regarded as containing an
element of gratuitousness? Should all the income
be regarded as being part of the income of the
donor for purposes of Section 7(3)?
Judges decision
In order for Section 7(3) to apply there must be a
donation by a parent where the beneficiaries are
his/her minor children. The transaction did consist
of a gratuitousness element as interest was not
charged. The interest not charged was gratuitous
and not the sale itself as the purchase price was
market related.
38
1) The sale of an asset at full market value is a disposition
however it’s not a disposition with a gratuitous element.
2) However, selling that asset on an interest-free loan
account results in another party receiving a benefit – and
that benefit is a form of “other disposition” and indicates
a gratuitous element is present (not the loan itself).
The SAICA Examinable Pronouncements were amended to
exclude low-interest rate loans i.e. only interest free loans will
be asked
3) As long as the loan amount remains unpaid, the failure to
charge interest will result in a continuous disposition.
4) In a subsequent matter before the court by the same
taxpayer on the same facts, the court determined that the
notional interest is not subject to the in duplum rule. This
rule basically states that the interest portion can never
exceed the capital amount. For example, if a loan of R100
000 is granted, interest can only be levied up to R100 000.
The court decided that the in duplum rule can only be applied
in the real world where it serves considerations of public
 policy and the protection of borrowers against exploitation by
lenders. Therefore, in the case of trusts with notional interest,
it will not be limited to the capital amount outstanding. For
example, if a loan of R100 000 is granted interest free,
attribution of income will continue indefinitely and will
not be limited to the original capital amount of R100 000.

NB! Please note that the above principle (i.e. that the in
duplum rule does not apply to section 7 anti-avoidance
provisions) was inacted in the Income Tax Act through the
introduction of section 7D.

Section 7D basically provides that the in duplum rule,

CIR v Berold Par 24.3.6 Facts of case
A taxpayer formed a company and subscribed to
shares in the company. He then sold assets
(shares in other companies) to the newly formed
company, the purchase price remaining
outstanding as an interest free loan. Thereafter,
the taxpayer created a trust for each of his five
minor children, and donated two shares and a
portion of his loan account to each trust.
The dividends declared by the company were to
be received by/ accrued to the minor children.
whether common law or statutory law, does not apply to any
anti-avoidance legislation within the Income Tax Act. For
example, if a loan of R100 000 is granted, interest of more
than R100 000 can be accrue to a taxpayer.
The effective cause of the income being received and
accumulated by the trusts was the donation by the taxpayer.
The income in question had therefore been received or had
accrued ‘by reason of’ his donation, settlement or other
disposition and he was taxable thereon in terms of
section7(3).

Issue
Whether the interest-free loan to the taxpayer
consisted of a donation and in whose hands
dividends were to be taxed in?
Judges decision:
An interest free loan advanced by a taxpayer to a
private company is to be regarded as a
continuous donation. The resulting dividends
accruing to the minor children were to be included
in his (donor’s) income in terms of section 7(3).

39
 Trading Stock: Definition and Sec 22
Ernst Bester Trust Par 10.1.1 Facts of case Sand only becomes trading stock when removed from
The taxpayer sold sand on his farm (it was the ground. Section 11(a) is the only section that can deduct
removed from the ground by a transport the purchase cost of trading stock, while section 22 is
contractor) to another person for a fixed monthly relevant for opening and closing stock if it is not yet sold. If a
consideration. capital asset subsequently becomes trading stock and is sold
in that same year of assessment, then it will not be within the
Issue
scope of section 22. The proceeds from sale thereof must still
Is the sand trading stock? i.e. section 22 trading
be gross income as the asset is now revenue in nature
stock provisions apply? Furthermore, is the sale
(trading stock). If trading stock is acquired and disposed
of the sand the sale of a right to use a capital
of in the same year of assessment, section 22 is not
asset (employment of capital) or the sale of
applicable.
trading stock?
Judges decision
The sand only became trading stock when taken
from the ground, and as it was taken away in the
same year of assessment, s22 could not apply to
it. The court held, too, that while the sand was in
the ground it was not trading stock of the farmer,
because it formed part of the land.
Furthermore, the court preferred the view that the
consideration was not so much received for the
trading in goods, namely sand but that the
payments were similar to royalties in respect of a
mining lease, and therefore income earned by
virtue of the employment of capital.

Eveready (Pty) Ltd Par 10.7 Facts of case Just due to the fact that a purchase agreement does not yet
The taxpayer bought a business as a going have an amount attributed to trading stock at the time of
concern. No amount was specifically allocated to purchase, does not mean that trading stock was acquired for
the inventory yet in terms of the purchase no consideration.
agreement. The buyer wanted to claim an
opening stock deduction at the market value of If trading stock is aquired for consideration, the section 22
the stock in terms of 22(4) read with 22(3) and deemed opening value deduction will the cost of the trading
22(2). He argued that no consideration was paid stock to the taxpayer.
for the trading stock, thus a deduction was
available at market value.
Issue
Was the trading stock acquired for no
consideration?
40
 Judges decision
It was clear from the agreement read as a whole,
that part of the purchase price was attributable to
the trading stock. It is most unlikely that trading
stock worth R 100 million would be given for free.
Volkswagen (2018) Par 10.2.1 Facts of the case:
Volkswagen’s trading stock constituted a number
of unsold vehicles including trucks, busses and
passenger vehicles. Volkswagen carried its
trading stock at net realisable value (NRV) in
terms of International Accounting Standard 2 (IAS
2). NRV being the expected selling price less any
expected selling expenses. So the effect was that
where trading stock’s NRV was lower than the
original cost, such closing stock was accounted
for at NRV.
Issue:
In terms of section 22(1), the closing stock value
to be included in the income of a taxpayer is the
cost price of the trading stock, less such amount
as the Commissioner may think just and
reasonable as representing the amount by which
the value of such trading stock has been
diminished by reason of damage, deterioration,
change of fashion, decrease in market value or
for any other reason satisfactory to the
Commissioner.
In layman’s term it was always said that the
closing stock value is the lower of cost or market
value….or lower of cost or NRV
Judges decision:
The SCA expressed the following views on
diminishing the value of trading stock:
41
There are the 4 normal circumstances that allows the write
down of closing trading stock, namely damage, deterioration,
change of fashion or decrease in market value. Trading
stock can only be written down in 1 of the following 2
circumstances:
 based on events that are known at the end of the tax
year; or
 based on events that it is known will occur in the
following year.
The SCA views on using NRV are as follows:
NRV cannot be used to determine closing stock value, due to
the fact that the use of NRV is inconsistent with two basic
principles that underpin the Act.
1) Taxable income is determined and taxation levied from
year to year on the basis of events during each tax year.
The Commissioner is not concerned with the taxpayer’s
trading prospects in later years. This principle is
sometimes expressed by saying that taxation is
backward looking. By contrast NRV is explicitly
forward looking. It is concerned with the amount that
the trader is likely to receive when the goods are realised
and for that reason it takes account of the expenses that
will be incurred in making the sale.
2) Using NRV has the effect that expenses that will only
be incurred in a future tax year would become
deductible in an earlier tax year. This is inconsistent
with the basic deduction provision in s 11(a) of the Act.
“Four circumstances namely, damage, deterioration, An interesting comment made by the SCA judges was that,
change of fashion or decrease in market value, are according to them, when considering whether trading stock
specified as causing a diminution in the value of trading can be written down, one must consider trading stock as a
stock. All of those can be illustrated quite simply. Goods whole, and not per stock item. A number of tax experts
may be damaged in transit and as a result can only be disagree with the judges view. It is submitted that the judges’
sold at less than cost. Their condition may deteriorate view (i.e. evaluating stock as a whole) was raised due to the
whilst in transit or in storage, as with a cargo of first specific circumstances i.e. using NRV and how the NRV was
grade rice undergoing heating at sea, so that it has to be calculated.
downgraded to second or third grade and is only saleable
at less than cost. Fashionable clothing tends to be
seasonal and, if not sold before the end of the season,
retailers may need to dispose of unsold surplus stock at
discounted prices below cost. A decrease in the value of
trading stock may arise where stock has been acquired at
a particular price and the supplier subsequently reduces
the price. For example, a retailer might acquire mobile
phones for R400 from the manufacturer. If the
manufacturer cuts its price to retailers to R300, in order
to get rid of stock before introducing a new model phone,
the value of the stock acquired at R400 has diminished.

With regards to the ‘other reason satisfactory to

the Commissioner’, SCA expressed the view that
the Commissioner can only grant a diminution in
value of trading stock in 2 circumstances, namely:
 where some event has occurred in the tax
year in question causing the value of the
trading stock to diminish; or
 where it is known with reasonable certainty
that an event will occur in the following tax
year that will cause the value of the trading
stock to diminish.

The judges denied the use of NRV as NRV differs

fundamentally from tax principles in 2 ways:
1) Tax looks backwards – whereas NRV looks
forward
2) NRV takes into account future expenditure.
Expenditure is only deductible in the year
incurred

42
 Section 20 – Assessed Loss (Trade Requirement)
SA Bazaars (Pty) Par 5.2.1 Facts of case If a company does not carry on trade in a year, it loses
Ltd and The taxpayer closed down its active business the right to carry forward a balance of assessed loss
Par 11.1.3 operations for 5 years, yet remained in existence. beyond that year. Trading involves more than a mere
During this time it kept a bank account and intention to trade.
incurred losses. It later resumed business
operations and wanted to set the prior losses off The balance of assessed loss may only be carried forward for
against the new income generated. a company provided it is carrying on a trade. S20(1)(a) states
that it will be lost if the trade element is not present.
Issue
May an assessed loss be carried forward if a
*An individual may always carry forward an assessed loss,
company doesn’t trade for a year?
even if he has not carried on trade for a year
Judges decision
The company did not trade and had no income;
therefore the assessed loss would be lost for
subsequent years.

Robin Consolidate Par 11.1 Facts of case In order to carry forward an assessed loss the company
Industries Ltd Transactions were concluded by liquidators must be carrying on a trade. Transactions concluded by
during liquidation of taxpayer’s stock. liquidators during the liquidation of a taxpayer does not
constitute the carrying on of a trade by the taxpayer
Issue
himself
Did the taxpayer ‘carry on a trade’ during the
liquidation?
Judges decision
Liquidation does not constitute trade for the
taxpayer himself. Thus, the assessed loss cannot
be carried forward.
VAT
British Par 30.2.13 Facts of case VAT is levied on a service by a vendor, and not merely upon
Airways PLC British Airways recovered a “passenger service receipts.
charge” on behalf of Airport Company Limited (a
South African company). British Airways charged
this passenger service charge as a separate line
item on each passenger’s flight ticket. SARS
contended that although the fare for the flight was
zero-rated (being an international flight), the
passenger service charge had to be standard
rated.

43
 Issue
The issue was whether British Airways had to
account for VAT on that part of its ticket price
which represented the recovery of the passenger
service charge on behalf of Airport Company
Limited.
Judges decision
The court held that British Airways could not be
required to account for VAT on a service it did not
supply. VAT is levied on a service by a vendor,
and not merely upon receipts.

Respublica Par 30.5.10 Facts of the case: When assessing the VAT consequences of a particular
contractual arrangement, one must characterise the
Respublica owned immovable property and relationship by reference to the contracts and then consider
concluded a lease agreement with Tshwane whether that characterisation is destroyed by facts.
University of Technology (TUT) in respect thereof.
The lease agreement provided that the property In other words, one must consider the legal characteristics
were let to TUT for the sole purpose of allowing it of an agreement.’
to offer student accommodation to its students and
no other purpose. TUT was also permitted to use
the property to accommodate holiday groups
during university vacations.

Issue:
Whether Respublica supplies ‘commercial
accommodation, and according only needs to levy
VAT at 60%. In other words, whether Respublica
could be said to have provided lodging to TUT.
Judges decision:

The relevant contractual rights and obligations

were those between Respublica and TUT, not
TUT’s students. TUT had separate contracts with
3rd party students, with which Respublica had no
contractual nexus. Respublica did not provide
lodging/accommodation to TUT.

44
Stellenbosch Par 30.6.5 Facts of case VAT is levied at a zero-rate for services to a non-resident if
Farmers’ Winery The taxpayer was a wholesaler that imported and the services do not relate to any immovable property in SA.
distributed Bells whiskey in South Africa. It
concluded a 10 year agreement relating to this Services that relates to an incorporeal right not situated in SA
distribution which was prematurely cancelled will be levied at 0%.
more than three years before the earliest date on
which the distribution agreement could be
terminated. As a result, the taxpayer received the
sum of R67 million from United Distillers, a United
Kingdom (UK) based company with which the
taxpayer had concluded the distribution
agreement. The Commissioner included the
receipt of this payment as part of the taxpayer’s
gross income in the assessment for tax. This was
upheld by the tax court.
Issue
Whether VAT was payable on the payment
received because the payment allegedly related
to services supplied by the taxpayer to a non-
resident of South Africa but directly connected to
movable property situated in South Africa
Judges Decision
The services in question, compositely the
surrender of rights, were not connected to any
movable property, and on the basis that in any
event the exclusive distribution right held by the
taxpayer was an incorporeal right not situated in
South Africa since United Distillers was registered
in the UK, which meant VAT was to be charged at
zero per cent in terms of s 11 (2) (I) (ii) of the
Valued Added Tax Act.
Master Currency Par 30.6.1 Facts of Case: Duty-free areas at international airports in South Africa is part
(p. 932) Master Currency (MC) operated two bureaux de of the Republic. Thus, services rendered in these duty-free
change in the duty free area at O.R. Tambo areas are services rendered in South Africa and should be
International Airport in the Republic. Shops standard rated for VAT purposes.
located in the duty free area are able to supply
goods free of certain taxes and duties to
departing passengers, for example no VAT are Remember: Section 11(2)(l) provides for services supplied by
levied on goods purchased in the duty-free are in a vendor to a person who is not a resident of the Republic
international terminals . (non-resident) to be zero-rated subject to certain conditions.

45
 The supply of services to a non-resident must be tested
MC rendered services to non-resident passengers against all three of these exclusions in order to qualify to be
whereby they presented their South African rand zero-rated. The last exclusion will disqualify the supply from
to MC, who would convert the rand into foreign being a zero rated if the non-resident is in the Republic at the
currency. In doing so, MC would calculate the time the services are rendered.
exchange rate margin, and charge a commission
and transaction fee. The relevant amounts would
all be indicated on an invoice presented to the
passenger when the services were rendered.

The dispute between Master Currency and SARS

related to whether MC was, (on the currency
exchange services rendered), obliged to levy and
pay VAT at the standard rate of 14%, as per
section 7(1)(a), or at the rate of 0% by virtue of
section 11(2)(l).

Issue:
Whether the services rendered to non-residents in
the duty-free areas should be zero rated for VAT
purposes or not?

Judges Decision:
The duty-free area of an international airport is
regarded to be in the Republic. The currency
exchange services are therefore rendered in the
Republic. Thus, even though the services are
rendered to a non-resident, the provisions of
S11(2)(l)(iii) of the VAT Act are not met and it
should therefore be standard and not zero rated.

XO Africa Safaris Par 30.6.5 Facts of case VAT is a destination based consumption tax. The services
are consumed in SA, thus the zero-rating does not apply.
XO Africa Safaris, a local company, assembled
package tours for foreign tour operators and
individuals. XO Africa Safaris booked all the
accommodation, meals etc. XO Africa Safaris
charged the foreign tour operator a lump sum i.e.
no breakdown of costs or mark-up were provided
to the foreign tour operator.
46
 Issue

Whether the invoice raised by XO Africa Safaris

could be zero-rated, based on the argument that
its supplied to foreign tour operators

Judges decision

The services are supplied to non-residents but

supplied directly to other persons who are in the
Republic at the time the services are rendered.

CSARS v De Beers Par 30.2.3 Facts of case You need to determine what activities form part of the
vendors enterprise.
De Beers acquired certain legal and advisory Only costs that relate or contribute to the activities that form
services relating to a takeover bid by a newly part of the vendors enterprise, could be seen as for the
incorporated company. De Beers claimed VAT making of taxable supplies by that enterprise.
input on the invoices issued to it by various
vendors. Advisory services were also acquired
from a London based company. SARS denied the
input vat claim on the basis that it was not
incurred for the making of taxable supplies by the
enterprise. SARS also contended that the
advisory services constitutes imported services,
and thus De Beers is liable for VAT output as the
services were not acquired for the making of
taxable supplies.

Issue
Where any of the advisory services relating to the
takeover in the course or furtherance of the De
Beers enterprise of making taxable supplies?
Side issue: Where the advisory services from the
London Company consumed in SA?
Judges decision

Such services were not acquired to enable De

Beers to enhance its VAT ‘enterprise’ of mining,
marketing and selling diamonds. They could not

47
contribute in any way to the making of De Beers’s
‘taxable supplies’. They were supplied simply to
enable De Beers’s board to comply with its legal
obligations. Thus Input VAT would be denied.
Output VAT on imported services should be paid
to SARS since the services were not for the
making of taxable supplies, and thus constitute
imported services.
Even though some meetings took place overseas,
the initial meeting, approving and implementation
of the takeover bid took place in SA, thus it was
consumed in SA.

48
Brummeria – Relevant extracts from Interpretation Note 58

… it may be accepted that the value of the right to use the interest-free loan should be calculated in the year that the loan is granted with reference to the following factors:

A = The monetary value of the right of use of the interest-free loan which must be included in gross income

B = The amount of the interest-free loan

C = The present value of R1 a year over the life expectancy of the life-right holder*, or in the case of more than one life-right holder, the youngest of them

D = The weighted-average prime overdraft rate for banks in respect of the relevant year of assessment

E = 93,1% (The percentage to be allocated to the monetary value of the life right of a unit, as opposed to the value of the complete ownership of the unit. This average
percentage has been determined actuarially and is acceptable to SARS for all life rights granted.) SARS has accepted this method as a basis for calculating the amount to
be included in gross income. This deduction accommodates the owner of the unit who gives a right to occupy the unit as a quid pro quo for the right to use an interest-free
loan.

Formula: A = (B x C x D) – E x (B x C x D)

* The life expectancy of the life-right holder and the present value of R1 a year for the life of the life-right holder may be determined by using the life-expectancy table
issued under Government Notice No. R1942 of 23 September 1977 under section 29 of the Estate Duty Act No. 45 of 1955.

The monetary value of the right to use the interest-free loan in the year in which it is granted and paid must be determined by multiplying the amount of the loan by the
present value of R1 a year for the lifetime of the life-right holder and the weighted-average prime overdraft rate determined for the relevant year of assessment. The
amount so calculated is then reduced by 93,1%. Note: This is a once-off calculation of the amount to be included in the gross income of the borrower in the year of
assessment in which the borrower becomes entitled to the right to use the loan. The amount is therefore not re-calculated and included in the borrower’s gross income in
each subsequent year until the loan is repaid.

An owner that is obligated to refund only a portion of the loan on death or cancellation of the agreement must include the amount not refundable in gross income in the
year of assessment in which the loan is granted and paid by the person acquiring the life right.8

49
Example 1 – Calculation of the monetary value to be included in gross income

Facts:

A retirement village is held under sectional title by the owner. The scheme is governed by the Housing Development Schemes for Retired Persons Act No. 65 of 1988. On 1
June 2011 the owner enters into an agreement, under which the owner grants a life right of occupation over a sectional title unit in the village to a person aged 75.

Under the agreement, the 75-year-old person and that person’s spouse will be entitled to occupy the unit in exchange for the grant to the owner of the use of an interest-
free loan of R400 000. The life-right holder advanced the loan on 1 July 2011.

The person turned 75 on 16 February 2011.

According to the life-expectancy table the present value of R1 a year for the life of the 75-year-old male is 4,59354 (age next birthday = 76).

The interest-free loan is repayable by the owner of the village to –

● the life-right holder upon cancellation of the agreement under various circumstances, which include the life-right holder falling ill and requiring full-time medical care; or
● his or her estate when he or she dies.

The weighted-average prime overdraft rate for banks during the relevant year of assessment is 13,44%.

The financial year of the owner of the retirement village commences on 1 March 2011 and ends on 29 February 2012.

Result:

The monetary value of the right to the use of the interest-free loan is calculated as follows:

A = (B x C x D) – E x (B x C x D)

= (R400 000 x 4,59354 x 13,44%) – 93,1% x (R400 000 x 4,59354 x 13,44%)

= R246 948,71 – R229 909,24 = R17 039,47

50
Example 2 – Full loan amount not refundable

Facts:

The agreement between the owner and the life-right holder provides that only 80% of the interest-free loan of R900 000 is refundable on death.

Result:

The owner must include R180 000 (20% x R900 000) in gross income in the year of assessment in which the loan is granted and paid by the life-right holder.

In addition, an amount equal to the monetary value, calculated in respect of the right to use the interest-free loan, must be included in the owner’s gross income in the year
of assessment in which the loan is granted and paid.

Note: For purposes of calculating the monetary value, symbol “B” in the formula is 80% x R900 000 = R720 000. In the case of an interest-free loan, the benefit to retain and
use the interest-free loan will accrue to the owner on the date the loan has been granted and paid by the person acquiring the life right.

Example 3 – Date of accrual of an interest-free loan

Facts:

B retired on 30 March 2012 and entered into an agreement with a retirement village owner. Under the agreement, B will be entitled to occupy a particular unit in exchange
for the grant of the use of an interest-free loan of R400 000. The agreement is concluded on 15 February 2012. B undertook to pay the R400 000 on receipt of his lump sum
benefit from his pension fund. He paid over the R400 000 to the retirement village owner on 12 June 2012. The year of assessment of the owner ends on 31 December 2012.

Result:

The date of accrual for purposes of calculating the monetary value of the right to use the interest-free loan is 12 June 2012.

51