TAXATION 2 – 2023

COURT CASES: SUMMARIES

 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 Kuttel 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 Butcher Bros Par 2.2 Facts of case
The taxpayer owned land, leased it to a
company for 50 years with a renewal option of
49 years. In terms of the lease agreement the
lessee was obliged to effect improvements.
The ownership of the improvements would
pass to the lessor upon termination or renewal.
The onus is on SARS to determine the amount.
If there is no amount can be determined there will be
no gross income.
This court case lead to the par (h) gross income special
inclusion. The principle however still remains.

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 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.

Accrual
1 People’s Stores Par 2.2, 2.4.3 Facts of case Accrued to = entitled to
A clothing retailer sold on credit. Included in gross income when entitled to not when
you receive the money.
Issue
Accrual = face value not discounted value
Has the amount accrued to the taxpayer
despite money still being owed?
Taxed on the earlier of receipt or accrual
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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2 Witwatersrand Par 2.4.1 Facts of case An amount accrues to a taxpayer if the taxpayer has
Association of (under heading A race event was held and resulted in no legal obligation to pay it over (only moral
Racing clubs Disposal of proceeds that the taxpayer divided between obligation) to another person.
income after two charities. The taxpayer argued that the
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 contract between company and charity stated 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 Lategan Par 2.4.3 Facts of case Even if an amount is payable in the future, the amount
The taxpayer, a wine farmer, entered into an accrues to the taxpayer when the taxpayer becomes
agreement in terms of which he disposed of entitled to the amount. Once delivery has taken place,
wine he had made during the year of the seller becomes entitled to the full sale price.
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.

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

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

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 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
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 Generally deposits are still received and form part
2.7.1 A biscuit manufacturer sold tinned biscuits. of gross income.
The customers could return the tins and
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 receive money for the tin. The company
treated the proceeds relating to the tin as a
deposit and not gross income.
Issue
Is the proceeds relating to the tin still received
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.
4 ITC 24510 Facts of case
The Company is a retailer of clothing,
cosmetics and general merchandise. A part of
facilities offered to customers is the sale of gift
cards. These gift cards can be redeemed at
any of the Companies stores.
Initially the taxpayer had declared all the
revenue from the sale of the gift cards as being
received by the taxpayer and included in gross
income in the year the cards were issued and
paid for.
However, the Consumers Protection Act (CPA)
has made things more confusing with provision
S63 and S65, which simply states the supplier
of gift cards should take hold of consideration
paid for the bearer of the cards and refrain
from using the consideration as its own
because it is the property of the card bearer.
The CPA forbides the supplier from receiving
the money for itself until the cards have been
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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.
Section 24C, future expenditure allowance, can
potentially be available against the deposits.
The gift card receipts were ‘received’ by the taxpayer
upon the sale, but not for the taxpayers own
benefit, but rather that of the card bearers. The gift
card monies must in terms of a legal requirement of
the CPA be held in a separate account i.e. in a
fiduciary capacity on behalf of the card holders.
Therefore, the taxpayer will only include the monies
in gross income when the gift cards are redeemed or
expires, because this is when the taxpayer receives it
for its own benefit.
NB!
Note 1:
The court found that the mere segregation of receipts
of gift cards in a separate bank account for that
purpose does not mean the Company did not hold the
money for itself and for its own benefit.
This view impacts the Pyott case, i.e. if deposits are
kept in a separate bank account, it will still be
“received” from a gross income perspective. For
 redeemed or expired. Therefore the gift cards
receipts were received by the supplier, not for
itself, but to be held for the card bearer.
After the introduction of the above CPA
provisions the taxpayer changed the way they
dealt with the amount paid for gift cards. The
taxpayers began to transfer the consideration
paid for the gift cards into a separate bank
account, until the card was redeemed or
expired. Therefore, the amount was treated as
not received and not included in gross income.
deposits NOT to be gross income, it must not only be
kept in a separate bank account, but it must legally
be held in a fiduciary capacity for the benefit of the
client.
Note 2: (Just for awareness)
If there is a conflict between the Income Tax Act and
the CPA, there is no president set on there being
hierarchical claim of either one.

Issue
When was the monies “received” from a Gross
Income perspective.

Judges Decision
The Company might have seen itself as a
trustee but there is no evidence that it was
legally bound to hold the receipts in a fiduciary
capacity. It did not matter where the Company
kept it or how it was accounted for in their
books. It could have spent it or saved it as it
wished for its own benefit.

However, when the CPA was introduced, it

legally required the Company to keep the
monies separate and in a fiduciary capacity i.e.
the Company cannot apply the monies for their
own benefit. Thus, it is only received from a GI
perspective, when redeemed or expired.

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.

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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).

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 farm properties. The
options, however, lapsed – at which time he
still did not start with any search for mineral
deposits. Later, a third party negotiated with
and offered the taxpayer an interest in a
company to be formed if he would assist him
to acquire the previously lapsed options from
the farmers again.
Income may be described as the product of a
person’s wits and energy.
Tree vs. fruit:
The economic meaning of ‘income’ and ‘capital’
excludes one another. ‘Income’ is what ‘capital’
produces.
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”.
It is important to note that what may be a capital asset
(tree) in on taxpayer’s hands may be a trading asset
(fruit) in another taxpayer’s hand. For example law
books for a lawyer is a capital asset, whereas law
books for a bookstore is trading stock.

Issue:

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 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.

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

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 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.

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

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• 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 (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.

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:

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• 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.

Intention of companies

The intention of a company must be deduced from the objective factors – :

• 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 (Capstone), namely –:
• the directors;
• the shareholders; or
• those persons who effectively control the company.

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1 Capstone Facts of case A company’s intention is indicated by the persons who
The facts of the Capstone court case are are in effective control of the company, such as
extremely complex. The facts and the directors and executive management.
principles coming from those facts is not the
reason why its included in the Court cases list
of SAICA.

Issue
From whom can you determine the intention
of the company?

Judges Decision

Intention of a company must be determined by

ascertaining what its directors acting as such
intended.

“I can see no reason in principle why the persons

who are in effective control of a company cannot
give evidence as to what was the intention or
purpose of a company in relation to any matter at
any given time. That the management committee
was for practical purposes in effective control of
the affairs of the respondent bank is clear from the
evidence.”

Embark on 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.

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 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.

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
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 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.

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

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 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. 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
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, if a taxpayer’s actions
heading investment purposes. After retirement he sold become too frequency.
Share the shares over a three year period; some
transactions) shares were held for a long period and others This may result in profits that are initially seen as
for a shorter period. The taxpayer sold shares capital, to be revenue. An investor with a dual
each time the dividend yield dropped. intention should keep two separate accounts, one
capital and one revenue.
Issue

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 Does the large number of purchase and sale Note that section 9C is now available.
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.

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.
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

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Crypto assets
No specific court Par 2.7.11 NB! Crypto assets are 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, crypto
assets cannot be seen as personal
use assets.
3) Any losses suffered by a natural
person on crypto assets are ring-
fenced in terms of section 20A of the
Income Tax Act.
4) If a taxpayer holds crypto assets as
trading stock, the closing stock value
can only be carried at cost, not market
value.
Legality or otherwise of the business production of income
1 Delagoa Bay Par 2.7.11 Facts of case
Cigarette Co Ltd (under The company ran an illegal lottery. It set aside
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
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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.
The following tax treatment is submitted for crypto
assets:
• If a taxpayer is mining crypto assets, any gain
or loss will be of a revenue nature
• If a taxpayer acquired crypto assets, normal
tax principles apply. The normal question of
whether or not it was purchased in a scheme
of profit making is asked.
If the crypto asset is acquired in a scheme of
profit making, the gain or loss will be revenue
in nature.
If the crypto asset 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.
The legality of the income is irrelevant. The
amounts will still be gross income.
 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.

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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.

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 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.

22
 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.

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
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 and not incurred in the production of
was determined in the court case that the income
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.
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 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, amongst other things, for the purpose of
producing income

3 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 (employment
or benefit varied in line with the length of the contract) are deductible.
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.

4 Mobile Par 5.4.9 Facts of the case: Audit Fees:

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

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
sewerage system on its premises as well as on
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 land outside its property. The system was Cost of establishing/ improving/adding income earning plant
installed at the cost of the local authority but the (fixed capital) is capital in nature and therefore not deductible
taxpayer had to repay the cost in monthly vs.
instalments (relating to the system on the
premises and the system outside). The Cost of performing income-earning operations (floating capital)
Commissioner disallowed the deduction of both which is revenue in nature and therefore deductible
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 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.

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 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
windmill for the borehole and installed piping to to be classified as a repair. The cost must maintain the
feed water from the borehole to the dam. This income 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. Restoration can either be by
Products The original roof of the factory had to be repaired. replacement or renewal of 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.

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 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
incurred this social responsibility expenditure and success.
claimed it as a deduction under section 11(a). This meant that the expenditure had been “incurred for the
purposes of trade and for no other” and was therefore incurred
Issue
in the production of income
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

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 Gross income - principles from case law
Relevant to Issue to identify Principle(s)
Definition of gross “resident” 1. A person is ordinarily resident in the country to which
income he intends to return from all his wanderings. The
country he regards as his real home.

2. A person is ordinarily resident where the person’s

principle residence is – where the person is
habitually and normally resident

Definition of gross “amount” 1. The onus is on SARS to determine the amount.

income
2. Whether a receipt or accrual in a form other than
money has a money value is the primary question

The test is objective and not subjective and arm’s

length principles of valuation must be applied
in each case.

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.

Definition of “from a source within

gross income the Republic” What is the originating cause?
Where is the cause situated?

Definition of “accrued to” 1. Accrued to = entitled to

gross income Accrual = Face Value not Discounted

2. Accrued to = unconditionally entitled to

3. Amount accrues to the taxpayer if the taxpayer has no

legal obligation to pay it over (only moral)

Definition of gross “received by” 1. Received by him, on his own behalf, for his own
income benefit.

2. Bilateral receipts are received by you – even if it is

from illegal activities.

3. Deposits are still received and form part of gross

income.
Only not received if kept in a separate in trust account
for the benefit of the customer.

4. Gift card receipts are ‘received’ by the taxpayer, but not

for the taxpayers own benefit. The gift card monies
must in terms of a legal CPA requirement be held in a
separate account i.e. in a fiduciary capacity on behalf
of the card holders.
Only include the monies in gross income when the gift
cards are redeemed or expire.

29
Relevant to Issue to identify Principle(s)
Definition of gross “of a capital nature”– 1. Tree vs. Fruit
income nature of the ‘asset’
2. Fixed capital vs Floating capital\

3. Kruger Rand normally seen as capital in nature, unless

in trade to buy and sell.

Definition of gross “of a capital nature” – 1. Company = actions of the directors and executive
income intention of a company management.
(non-natural taxpayer)
Intention of the shareholders must be taken into
account when considering if the use of an asset is
capital in nature.

Definition of “of a capital nature” – 1. Consider the taxpayer’s dominant intention. The
gross income mixed or dual intention fact that the asset is sold at a profit, does not
necessarily indicate a change of intention.

2. Kruger Rand is a unique asset. Consider a

taxpayers reasons for selling Kruger Rands.

Definition of gross “of a capital nature” – 1. The mere decision to sell an asset does not change
income change of intention an intention. A capital asset may be realised at its
best advantage.

2. Must be careful to not “cross the Rubicon” and

embark on a scheme of profit making. This indicate a
change of intention and the proceeds being revenue in
nature.

3. The secondary purpose could taint the primary

purpose of a taxpayer, if a taxpayer’s actions become
too frequency.

4. The receipts of the realisation company are capital

in nature.

There has to be a real justification for the realisation

company to be formed. By merely selling an asset
through a realisation company does not make the
proceeds capital in nature.

Definition of “of a capital nature” – The scheme of profit making is essential to classify
gross income scheme of profit-making proceeds as revenue in nature.

Definition of Damages and 1. Compensation for damages of capital assets = capital

gross income compensation 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.

2. Compensation for cancellation of a contract to an

income-earning right will be considered capital in
nature.

30
Relevant to Issue to identify Principle(s)
Definition of the legality or otherwise 1. The legality of the income is irrelevant.
gross income of the business
productive of Income 2. Even if receipts are illegal, they are still received,
and therefore gross income.

Section 11(a) - Principles from case law

Relevant to Issue to identify Principle(s)

Deductions – “carrying on a trade” 1. A wide interpretation should be given to trade
section 11(a)
2. Borrowing money and re-lending it at a higher rate of
interest, thereby making a profit, constitutes the
carrying on of a trade.

Deductions – “actually incurred” 1. If a payment is contingent upon the happening of an

section 11(a) uncertain future event, the expense and corresponding
liability can only be actually incurred once the
conditions are met.

2. An expense can only be deducted once there is an

unconditional legal obligation to pay the expense.

3. Where an obligation to pay an amount is in dispute,

the expense can only be actually incurred when the
dispute is settled with regards to the obligation and
the amount thereof.

4. Shares issued for services rendered = No expenditure

incurred

Shares issued for acquiring an asset = Section 40CA

determines the deemed expenditure incurred amount

Deductions – “during the year of An expense must be deducted in the year of

section 11(a) assessment” assessment that it is incurred, it cannot be claimed in
later years.

Relevant to Issue to identify Principle(s)

Deductions – “in the production of 1. Link between expense and production of income:
section 11(a) income” • What is the purpose of the expense?
• How closely connected is that expense to
the production of income?

31
 2. If something is not an inevitable concomitant of the
business operations it is not deductible. (negligence in
not an inevitable concomitant)

3. Recurring payments for maintaining income

earning operations are deductible e.g. royalties

4. Amounts paid in terms of a service package

(employment contract) are deductible.

5. Incurring audit fees is necessarily attached to the

performance of the taxpayer’s income earning
operations i.e. Audit fees are incurred in the
production of income.

Where a there is a split between producing income

versus exempt income (thus where audit fees are
incurred for a dual purpose), apportionment has to
take place.

Apportioning audit fees based on time spent on areas

generating exempt versus non-exempt income is not
necessarily correct. Apportionment will depend on the
facts of each case

Deductions – “not of a capital nature”

1. Fixed capital (capital in nature) vs floating capital
section 11(a)
(revenue in nature)
2. Cost incurred to create a capital structure = capital
cost incurred to work the capital structure =
revenue.
3. The legal categorisation of a payment does not
determine whether it is capital or revenue, but rather
the purpose of the expenditure. Was an enduring
benefit created?

Section 23(g) - Principle from case law

Relevant to Issue to identify Principle(s)

Section 23(g) “for purposes of trade” Expenditure incurred in ensuring that income is not lost
is incurred in the production of income.

If there is a link between the company’s ability to trade

and the expenditure, it will be incurred for the
purposes of trade.

Section 11(d) - Principles from case law

32
Relevant to Issue to identify Principle(s)
Deductions – “repair” 1. The expenditure incurred must be as a result of
section 11(d) damage. The cost must maintain the income earning
ability of the asset, not improve this.

2. Repair is restoration. Restoration can either be by

replacement or renewal of parts of the whole.
Repair is different from an improvement which is
creating a better asset

33