Cap vs Rev BEL200 Test 5 2020

Question 3

An amount is included in a person’s gross income if it meets the requirements of thegross income definition in terms of section 1 of the
Income Tax Act.
GROSS INCOME DEFINITION:
In the case of any resident:
Not required in question
-There must be an amount , in cash or otherwise
- Received by or accrued to
-During such year or period of assessment; and
-Excluding receipts or accruals of a capital nature

Therefore, it is important to determine if the receipts and accruals are of a capital or revenue nature. If an amount received or accrued is
capital in nature, it will not be gross income provided it does not fall within the provisions of one of the ‘special inclusions’ in the definition Not required in question
of ‘gross income’
Under section 102 of the Tax Administration Act 28 of 2011, the onus is on the taxpayer to show that the proceeds on sale are of a capital
1 bonus mark
nature. The proceeds will then be excluded from JuJu (Pty) Ltd’s gross income.
The term ‘capital nature’ is not defined within the Act, but the courts have laid down certain tests, the most important being the intention
2
of the taxpayer at the date of acquisition of the asset (‘ipse dixit’)
If the building was acquired with the intention of renting it out to students, the building may be considered anasset from which income will
be received. (CIR v Visser).The building can be described as the ‘tree’ and the rental income, the ‘fruit’ of the tree. This is therefore an 2
indication of the proceeds possibly being capital in nature.
As the intention of a taxpayer is often a subjective factor and a difficult one to prove, the receiver also considers other objective factors. None
of these factors is decisive but one or more may assist in establishing the intention of the taxpayer. These factors include, but are not limited
to:
1. The nature of the taxpayer’s business or occupation: JuJu owns several properties which it leases out to its tenants. There is no
indication that it deals in property. Leasing out of property and generating revenue from it is in line with theVisser court case and is 1
therefore indicative of capital nature.
2. The frequency of similar transactions: In the past, JuJu has sold 3 of its buildings, however each sale was done at least 4 years
between each other. The frequency of the sales cannot be regarded as dealing in property and is thus an indicator that the proceeds 1
may be capital in nature.
3. The length of time for which an asset is held: the building was held for a little over two (2) years, which is considered an insufficien
1
amount of time for the asset to be considered capital in nature. Therefore indicative of revenue nature.
Note to marker: Application to theory attains the mark in points above.
There can be a change of intention that could alter the original intention to hold the property as an investment. 1
Yet the mere decision to sell the building does not in itself constitute a change of intention.Something more is needed to metamorphose the
1
asset and change its nature from a capital asset to trading stock.
(In this regard refer to John Bell & Co (Pty) Ltd v SIR (1976 (4) SA 415 (A), 38 SATC 87).) 1
The decision to sell the building was as a result of the high costs of maintaining the building. It can be argued that had they not had to contend
with the high maintenance costs, that they wouldn’t have otherwise decided to put the building up for sale.
After the building was listed for sale, JuJu decided to effect renovations to the building to encourage the public to purchase the building by
making it more attractive. This is common in the sale of residential units and does not necessarily indicate entering into ascheme of profit- 2
making. ( Pick n Pay Employee Share Purchase Trust)
The renovations increase the value of the property, and could be an indicator of JuJucrossing
‘ the rubicon’ (Natal Estates v SIR) 1
Will accept Berea West Estates v SIR, provided it’s substantiated.
Bonus mark for both
An extensive marketing campaign was undertaken and could be indicative that they crossed
‘ the rubicon’ (Natal Estates v SIR) applications of Natal
estates
Although the sale occurred within a short period of acquisition they are entitled to sell the capital asset at the highest profit to itsbest
advantage (CIR v Stott (1928 AD 252, 3 SATC 253) without becoming revenue in nature. Several offers were received and they declined
1
those offers in the hope that they would receive better offers in the near future. Again this is common practice for the sale of residences and
the courts have maintained that every taxpayer is entitled to realise their best gain.
In conclusion, the sale of the building is one which is capital in nature and will not be included in gross income. 1
Total 17
Max 15