GROSS INCOME

GROSS INCOME

• Introduction
• Gross income
• Resident
• General definition
• Court cases
• “Capital in nature”
 INTRODUCTION
Definition

Gross income
Special
Income inclusions
Less
exempt income
less
General
deductions
Deductions
Specific
deductions
gives
Capital
allowances
Taxable income before
capital gain,
retirement fund contribution
deduction and
donations deduction
 GROSS INCOME

• Taxable income is calculated as follows: Gross

income, less exempt income, less allowable
deductions, plus the taxable capital gain gives
you the taxable income.
• An amount must be included in gross income
before it can be subject to tax. It can be
included either by the general definition in the
Act or the special inclusions rules.
 RESIDENT
• The definition is applicable to residents and non-
residents.
• Residents are taxed on their worldwide income
• Non-residents are taxed only on income received
from a South African source. (Refer to non-
residents)
• Ordinarily resident (Kuttel and Cohen)
• Physically presence test – days test
– Exceeding 91 days (current and 5 preceding years)
– Exceeding 915 days (5 preceding years)
 GENERAL DEFINITION

• Gross income means:

– In the case of any resident;
– the total amount, in cash or otherwise;
– received by or accrued to or in favour of such
resident;
– during such year or period of assessment;
– excluding receipts or accruals of a capital nature.
 COURT CASES
• Break the gross income definition up in the different compo-
nents and apply the information given in the question to
each component.
• Each component of the gross income definition is suppor-
ted by various court cases:
– “Received by or accrued to”
• MP Finance Group CC (unilateral taking (stealing) is regarded as a receipt for
income tax purposes);
• Geldenhuys (received for own benefit and own behalf);
• People’s Stores (Walvis Bay) (Pty) Ltd (“become entitled to”);
• Mooi (“unconditionally entitled to”);
• Witwatersrand Association of Racing Clubs (“in favour of”).
– “Receipts of a capital nature”
• Visser (Tree vs Fruit)
 “CAPITAL IN NATURE”
• For the “capital in nature” component the courts have established subjective and objective factors to determine the
difference between capital and revenue.
• Subjective factors:
– intention of the taxpayer – Trust Bank of Africa Ltd
– change of intention – Richmond Estates (Pty) Ltd / Stott / Natal Estates Ltd / Berea West Estates (Pty) Ltd
– mixed intentions – Levy / Glass
– intention in the case of a company = Booysens Estates Ltd / Natal Estates Ltd / Lace Proprietary Mines Ltd
– establishing a person’s true intention - Malan
• Objective factors:
– manner of acquisition;
– manner of disposal;
– period for which asset is held;
– continuity;
– taxpayer’s occupation and activities;
– no change in ownership of the asset;
– nature of the asset disposed of;
– reason for receipt;
– legal nature of the transaction;
– operation of business in carrying out a scheme of profit-making;
– age of the taxpayer;
– activities of the taxpayer;
– accounting treatment of the transaction;
– purpose of a legal person.
 EXAMPLE
• Sample (Pty) Ltd is a South African company that sells contempo-
rary art. Sample (Pty) Ltd’s financial year ends on 28 February. On
25 February 20x8 they sold an artwork worth R10 000 to an adver-
tising company. The advertising company purchased the artwork to
hang in their reception area. Instead of paying cash for the artwork,
the advertising company offered Sample (Pty) Ltd an advertising
campaign also worth R10 000. On 26 February 20x8, Sample (Pty)
Ltd accepted the advertising campaign instead of cash. The cam-
paign would consist of 10 monthly advertisements in a local news-
paper, commencing during March 20x8.

Discuss whether the receipt of the advertising campaign would consti-

tute gross income of Sample (Pty) Ltd as defined in the Income Tax
Act 58 of 1962 for the year ending 28 February 20x8.
 SOLUTION
Definition Application

In the case of a resident, Sample (Pty) Ltd is a resident (South African) company that received an advertising campaign (satisfies the “otherwise”
amounts in cash or otherwise of gross income definition) in return for their artwork, since a value can be placed on it.

Received by or accrued to such a Sample (Pty) Ltd is unconditionally entitled to an advertising campaign therefore it has accrued to Sample (Pty) Ltd / or
resident for own benefit.

During year of assessment The artwork was sold on 25 February 20x8 and Sample (Pty) Ltd accepted the advertising instead of the cash on
26 February 20x8 therefore falling in the period of assessment ending 28 February 20x8.

Excluding receipts or accruals of Sample (Pty) Ltd is in the business of selling contemporary art (its trading stock) thus the accrual of an advertising
a capital nature campaign is not capital in nature / fruit vs tree.

Conclusion The requirements of the gross income definition have all been met therefore the receipt of the advertising constitutes
gross income of Sample (Pty) Ltd for the period ending 28 February 20x8.