Paragraph __ Of the gross income definition

 
A= Annuity
C= Services
G= Lease Premium
K= Dividends
S1(1)= general gross income definition
 
 
Exemptions
s10 (A)= annuity amount exemption
s10 (1)(k)(i)= local dividends exemption
s10(1)(i)= Interest exemption
s10 (1)(g)= pension exemption
s10 (1)(q)= bursary exemption
 
 
 
 
Residence Based Tax
 
1. Resident Definition: A natural person is a resident for income tax purposes if he/she
is either ordinarily resident in the Republic or not ordinarily resident in the republic, but
meets all the requirements of the physical presence test.
 
1. Ordinarily Resident not defined: The term 'ordinarily resident' is not defined in the
Income Tax Act (ITA) therefore case law is referred to for guidance.
 
1. State the cases Cohen and Kuttle
 
Cohen Case - A person is ordinarily resident in the country which he/she would naturally
return to from their wanderings.
 
Kuttel Case - A person is ordinarily resident where he has his usual or principal residence, that
is, what may be described as his real home.
Know and mention both!
 
1. Application: Consider and apply the facts from the scenario for each case.
 
1. State if they are an Ordinarily resident or not.
 
1. State is the physical presence does or does not apply.
 
Conclusion: Decide if the person is ordinarily resident or not, and decide if the person is a resident
or not in terms of the ordinarily resident test.
 
From what day is the person resident: From the date when the person becomes ordinarily resident
 
 
 Physical Presence Test

 
1. Introduction on weather the person will be taxed on money and where her
residency status is.
 
1. Residents are taxed on world-wide receipts and accruals while non-residents are
taxed on accruals of a south African source.
 
1. Resident Definition: A natural person is a resident for income tax purposes if he/she
is either ordinarily resident in the Republic or not ordinarily resident in the republic, but
meets all the requirements of the physical presence test.
 
1. If the person was an ordinarily resident in another country then we have to state so
and say "We therefor have to apply the requirements of the physical presence test.
 
1. There are three tests we need to check.
 More then 91 days in total during the year of assessment.
 More then 91 days in total during each of the previous 5 years.
 More then 915 days in total during the previous 5 years.
 
 State how many days she has been in the country during the year of assessment.
 
1. State how many days she has been in the country during the previous 5 years of
assessment.
 
1. State if the Physical Presence test have been met.
 
1. State if she will be taxed or not
 
1. State where the money they earned is of a South African source.
 
1. Conclusion on the amount and if it should be included in her South African year of
assessment with the date.
 
 
330 day rule
 
A natural person, who is a resident per the Physical Presence Test ceases to be a resident when the
person is physically outside the republic for a continuous period of at least 330 days (i.e.. 331 days).
Residence will cease from the day that the person left the republic.
 
 
 
GROSS INCOME
 
Gross income definition: state the definition,
o the total amount in cash or otherwise
o Received by or accrued to or in favor of such resident
o During such year or period of assessment
o Excluding receipts and accruals of a capital nature
 
Issue is: 'All the requirements of the gross income definition are met except for… (link to the gross income
requirements). The issue will involve a requirement of the gross income definition. State if it is 'Received By' or
'Accrued to'.
 
Case Law: If the issue is a requirement of the gross income definition that is not defined in the Income Tax Act
then state the following - 'received by'/ 'Accrued to' is not defined in the Income Tax Act, thus we refer to
case law to seek guidance as to what constitutes 'received by'.
 
Discuss the issues: Discuss each issue separately (supported by the relevant case law) and apply to the given
scenario for marks.
 
Accrued To
 
CIR v Peoples Stores- when a taxpayer 'entitled to' an amount, the amount accrues to a taxpayer.
 
Wits association with racing clubs- any amount received by / accrued to a taxpayer for their own benefit will
be included in Gross Income.
 
Mooi- when a taxpayer entitlement is unconditional, an amount "accrues' to the taxpayer.
 
Received By
 
Geldenhuys- for an amount to be 'received by' the taxpayer, the amount should be received by the taxpayer
for their own benefit.
 
MP finance group- an amount is received by the taxpayer if the taxpayer intended to receive the amount for
his own benefit.
 
Pyott Ltd- If deposits are not deposited into a separate trust account, these deposits will not be included in
gross income IF the taxpayer has received these deposits for its own benefit (beneficially received by the
taxpayer).
 
Source of an amount
 
CIR v Lever Brothers and Unilever Ltd- Source means 'originating cause'
 
Legality of amounts receipts
 
CIR v Delagoa Bay Cigarette - Source of the income, legal or illegal is immaterial/irrelevant in determining if an
amount constitutes income.
 
MP Finance Group v CSARS - An amount is 'received by' a taxpayer if the taxpayer intended to receive the
amount for his own benefit (irrespective of the fact that such amounts are illegal in nature).
 
Conclusion: it must answer/ address the issue and state whether the amount is included in gross income or
not and state the year of assesment.
 
 
 
Revenue vs Capital

o Gross income definition: state the definition,

o the total amount in cash or otherwise
o Received by or accrued to or in favor of such resident
o During such year or period of assessment
o Excluding receipts and accruals of a capital nature
 
o Issue- Is it Revenue or capital
 
1. S102 of TAA - Onus to provide proof that the amount is of capital nature rests on the
taxpayer (s102 of the Tax Administration Act (TAA)). Capital not defined ‘of a capital nature’ is
not defined in the Income Tax Act (ITA) – refer to case law
 
1. Subjective test
 
Primary test - The taxpayer’s intention is the primary test to determine whether a receipt or
accrual is of a capital or revenue in nature.
 
Determine the intention of the taxpayer at acquisition:
 
 Asset held for investment = capital in nature (house let to tenant)
 Asset held for scheme of profit making = revenue in nature (trading stock/asset held
for speculation)
 
 
Not a natural person
 
Elandsheuwel Farming - If the taxpayer is not a natural person ‘The acts and omissions of a
juristic person are controlled by living beings and they are the brain and the ten fingers of that
juristic person’.
 
Scheme of profit making
 
Pick ‘n Pay Employee Share Purchase Trust - The taxpayer’s intention can either be, scheme
of profit making (revenue in nature); or held for investment purposes (i.e. capital in nature)
 
Mixed Intentions
 
COT v Levy - Determine the main or dominant intention of the taxpayer at acquisition, where
the taxpayer have mixed intentions in respect of an asset (dominant test). If none of the
intentions are dominant, the asset will be considered revenue in nature.
  
Change in intention
 
Stott - The taxpayer's intention at acquisition is important and conclusive, unless a change in
the taxpayer's intention occurred thereafter; that is, if the taxpayer's intention at acquisition
is
 
 Capital in nature and no change in intention from capital to revenue in nature
(scheme of profit-making) has taken place since acquisition, the receipt or accrual will
be of a capital nature.
 
 Revenue in nature and no change in intention from revenue to capital in nature
(investment) has taken place since acquisition, the receipt or accrual will be of a
revenue nature.
 
John Bell - The mere decision by a taxpayer to sell a capital asset does not per se make the
resulting profit subject to tax (i.e. does not change the nature of the amount from capital to
revenue nature). It does not constitute a change in intention ,‘something more is required’
 
Natal Estates - ‘Something more’ than the mere decision to dispose of an asset at a profit, is
required, to change the taxpayer’s intention from capital to revenue.
 
The taxpayer needs to determine whether it has ‘crossed the Rubicon’ and has gone over to
the business of selling the asset at a profit, using the asset as trading stock.
 
The taxpayer needs to determine whether it has ‘crossed the Rubicon’ by embarking on a
scheme of profitmaking, using the asset as trading stock.
 
Berea West - The use of a realisation company to realise a capital asset at best advantage (and
not embarking on a scheme of profitmaking) does not constitute a change the intention.
 
Founders Hill - If special circumstances (real justification) exists for forming a realisation
company, the realisation company will stand in the shoes of the entity transferring the assets
to it and in turn hold them as capital assets.
 
If no special circumstances (no real justification) exists for forming a ‘realisation company’, the
‘realisation company’ will not stand in the shoes of the entity transferring the assets to it (not
merely alter ego); that is, should the ‘realisation company’ thus have obtained the asset for
purposes of resale (trading stock), the proceeds will thus be of a revenue nature.
 
Nussbaum - If the taxpayer has a primary purpose that is capital in nature (held for
investment) as well as a secondary purpose that is revenue in nature, the secondary purpose
may cause the receipt or accrual to be revenue in nature as the taxpayer pursued the 2
purposes simultaneously.

 
 Nel - A capital asset (Krugerrands held for ‘keeps’) was realised to purchase another capital
asset (motor vehicle).
 
Krugerrands were bought for ‘keeps’ and was sold due to unusual or special circumstances
that occurred. The receipt or accrual from the sale of the Krugerrands was thus capital in
nature.
 
Thus, when the taxpayer disposed of the Krugerrands, there was no change intention and no
scheme of profitmaking.
 
Visser - The fruit constitutes the income produced by the income-producing asset (capital
asset). The tree constitutes the income-producing asset (capital asset) itself. Fruit is revenue
in nature, while the tree is capital in nature.
 
George Forest Timber - Floating capital (trading stock) is considered to be consumed and
disappears in the production process. Fixed capital, however, does not do so; it produces
fresh wealth and remains intact.
 
WJ Fourie Beleggings - A contract directed by its performance towards making a profit in
which case the compensation received for the cancellation of the contract will be income in
nature.
 
A contract which was a means of producing income (that is, a contract that provides an
income producing capital structure/asset) in which case the compensation received for the
cancellation of the contract will be capital in nature.
 
 Objective test - Discuss the relevant objective factors and apply to the given
scenario.
 
 Frequency of similar transactions - There is presumption of a scheme of profit-
making if a taxpayer frequently buys and sells assets – revenue in nature.
 
 Period that an asset was held - An asset held for a long period of time is more likely
to be a.
 
 Nature of taxpayer’s business - If a taxpayer disposes of an asset of the type that the
taxpayer purchases and sells in the ordinary course of business, the taxpayer will have
difficulty in discharging the onus of it being of a capital nature.
 
 Conclude: revenue vs. capital - Always provide a conclusion as to whether the
receipt or accrual is of a revenue or capital nature.
 
 
 Specific Inclusions and Exemptions
 
 
A= Annuity
C= Services
G= Lease Premium
K= Dividends
S1(1)= general gross income definition
 
 
Exemptions
s10 (A)= annuity amount exemption
s10 (1)(k)(i)= local dividends exemption
s10(1)(i)= Interest exemption
s10 (1)(g)= pension exemption
s10 (1)(q)= bursary exemption
s10 (1)(nA)= uniform exemption
s10A (2)=2 purchased annuity exemption

General Deduction Formula

 
Introduction - For an amount to be deductible, it needs to meet the requirements of section 11(a) (the
positive test) and section 23(g) (the negative test) OR the general deduction formula.
 
Onus of proof - State who has the onus of proof in terms of section 102 of the Tax Administration Act.
 
Requirements - Section 11(a) permits a deduction from the income of a person carrying on a trade:
 
- expenditure and losses
- actually incurred
- during the year of assessment
- in the production of income
- not of a capital nature
 
( Positive Test )
 
S23 (g) - any money, claimed as a deduction from income derived from trade, to the extent to which
such moneys were not laid out or expended for the purpose of trade.
 
( Negative Test )
 
 
Identify the issue - “All requirements have been met except for: …… ”
 
 
Requirements not specifically defined - Once the issue has been identified we need to discuss whether
it is met or not.
 
You need to state that the requirement is not defined, therefore, case law is referred to for guidance.
  
 
Case law
 
CARRYING ON A TRADE
 
BURGESS V CIR
 Trade should be given a wide interpretation.
 A taxpayer carrying on what (standing on its own) amounts to the carrying on
of a trade, does not cease to carry on a trade simply because one of his
purposes, or even his main purpose is to enjoy a tax advantage.
 If he carries on a trade, his motive for doing so is irrelevant.
 The definition is not exhaustive and the term 'trade' was intended to
embrace every profitable activity.
 
EXPENDITURE AND LOSSES
 
JOFFE AND CO V CIR
 A "loss" in relation to trading operations is sometimes used to signify a
deprivation suffered by the loser, actually an involuntary deprivation.
 'Expenditure' usually means a voluntary payment of money
 
SARS V LABAT 2011 SCA
 The ordinary meaning of expenditure refers to the action of spending funds;
disbursements or consumption; and hence the amount of money spent.
 In the context of the Act, it would also include the disbursements of other
assets with a monetary value.
 Expenditure, accordingly, requires a diminution or at the very least
movement of assets of the person who expands.
 
  
ACTUALLY INCURRED
 
CALTEX OIL (SA) V SIR
 'Expenditure actually incurred' does not mean 'expenditure actually paid during the
YOA', but means all expenditure for which a liability has been incurred during the year,
whether the liability has been discharged during the year or not. It is in the tax year in which
the liability for the expenditure is incurred, and not in the tax year in which it is actually paid
(if paid in a subsequent year), that the expenditure is actually incurred
 
EDGARS STORES V CIR
 There must be an unconditional legal obligation on a taxpayer to pay an expense before
it will actually be incurred for the purposes of s11(a) of the ITA.
 
NASIONALE PERS BPK V KBI
 If there is no definite and absolute liability during the YOA to pay an amount,
expenditure has not been actually incurred.
 
CIR V GOLDEN DUMPS
 A liability to pay a claim is not unconditional where the validity of a claim is genuinely
disputed and, if at the end of the relevant tax year the dispute is unresolved. The liability
will be unconditional and any such claim will, therefore, not be actually incurred for the
purposes of s11(a) of ITA in the YOA.
 
CSARS V LABAT 2011 SCA
 An allotment or issuing of shares does not in any way reduce the assets of a company,
and therefore does not qualify as an expenditure.  
 
 
 
IN THE PRODUCTION OF INCOME
 
 
PORT ELIZABETH ELECTRIC TRAMWAY V CIR
 To determine whether the expenditure was in the production of income two
questions must be asked:
 What action gave rise to the expenditure?
 Is this action so closely connected with (or a necessary concomitant of) the
income-earning activities from which the expenditure arose as to form part of the
cost of performing it?
 Expenditure must be closely related to the income-earning activities of an entity (or
a necessary concomitant of the income-earning activities) in order for it to be
considered to be in the production of income. The expenditure must be so closely linked
to the income-earning activities as to be regarded as part of the cost of performing
them.
 
JOFFE AND CO V CIR
 Payment for damages/compensation resulting from negligence will only be
deductible if the negligence constitutes an inevitable concomitant of the taxpayers
income-earning operations
  If an expense is not an inevitable concomitant (or necessary concomitant) of the
taxpayers income earning operations, it is not in the production of income.

SUB-NIGEL CIR
 An expense actually incurred would meet the requirement of 'in the production of
income' if the expense was incurred for the purpose of producing /earning income. It
then is relevant if no income was in actual fact produced, in the year or incurred, or
ever.
 
PROVIDER V COT
 If expenditure is incurred to induce employees to enter and remain in the service of
the taxpayer, the expenditure may qualify as a deduction since the purpose is to
produce current or future income.
 
CSARS V MTN HOLDINGS
 When expenditure is incurred for a mix/dual purpose, only a fair and reasonable
portion of the expenditure will be considered to be in the production of income, and
therefore allowed as a deduction.

 
CSARS V BP SOUTH AFRICA
 Factually, there was no need for the taxpayer to borrow money to pay dividends. As
the loan was obtained for the purpose of carrying on of the taxpayers income-earning
activities, the interest paid was in the production of income. The principle that was
confirmed is that for an expense to be incurred in the production of income, the
purpose of the expense must be to produce income.
 
Dual Purpose: CIR V NEMOJIN
 Where expenditure is incurred for a dual purpose (to produce exempt income and
income), such expenditure must be apportioned to only allow the expenditure that
gives rise to income.
 
 
NOT FOR A CAPITAL NATURE
 
 
NEW STATE AREAS LTD V CIR
 Expenditure incurred to perform the income-earning operations is income in nature
 Expenditure incurred to establish, improve or add to the income-earning structure is
capital in nature.
 
BP SOUTHERN AFRICA V C:SARS 2007 SCA
 Where no new capital asset for the enduring benefit of the taxpayer has been
created (enduring in the way the fixed capital endures), the expenditure naturally tends
to assume more of a revenue character.
 
RAND MINES (MINING AND SERVICES) V CIR
  Expenditure that is more closely related to the cost of adding to or enhancing the
income-earning structure of a business than to the cost of performing its income-
earning operations is capital in nature.
 
SUB-NIGEL V CIR
 Deductible expenditure can only be deducted in the YOA in which it was incurred
 
 
 
PROHIBITED DEDUCTIONS
 
WARNER LAMBERT SA V CSARS
 The social responsibility expenditure was bona fide incurred for the performance of
the taxpayer's income producing operation and formed part of the cost of performing it.
The social responsibility expenditure was therefore incurred for the purposes of trade
and for no other.
 
CSARS V SCRIBANTE CONSTRUCTION
 Interest on loans will be allowed as a deduction i.t.o s11(a) and 23(g), if a company
has sufficient funds to pay the dividends (without borrowing) and the purpose of the
borrowing is to enable the taxpayer to earn income. In such instances, the interest will be
seen as expended for the purposes of the taxpayers trade and will not be prohibited by s23(g).
 
 
Application of the Cases
 
Conclude - After making your argument you need to conclude whether the amount would be
deductible or not.