GROSS INCOME:

PART 3
SILKE: SOUTH AFRICAN INCOME TAX 2023: CHAPTER 3

LECTURER: MR A LATIEF
EMAIL: azlatief@uwc.ac.za
OFFICE NUMBER: 4.03
 LEARNING OBJECTIVES
• Demonstrate an in-depth knowledge of the criteria to
be applied in order to distinguish income (revenue) or
capital.
 GROSS INCOME DEFINITION
Gross income definition:
• Total amount
• Cash or otherwise
• Receive by or accrued to or in favour of
• Resident – world wide
• Non-resident – RSA source
• During a year or period of assessment
• Excluding receipts or accruals of a capital nature

Special inclusions regardless of its nature (next lecture)

 GROSS INCOME DEFINITION
in any year or period of assessment, means -
i. In the case of any resident, the total amount, in cash or
otherwise, received by or accrued to or in favour of such
resident; or
ii. in the case of any person other than a resident, the total
amount, in cash or otherwise, received by or accrued to
or in favour of such person from a source within the
Republic,
during such year or period of assessment, excluding receipts
or accruals of a capital nature, but including...
 COMPONENTS OF GROSS
INCOME
1. Total amount
2. In cash or otherwise
3. Received by or accrued to
- From anywhere, in the case of a person who is a resident
- From a source in South Africa in the case of a non-resident person
4. Other than receipts or accruals of a capital nature
6

NOT OF A CAPITAL NATURE

• Assume a taxpayer who earns above the highest marginal rate
of tax who sells his holiday house and makes a gain of
R1 500 000
- If taxed under income = R675 000 in extra tax payable
- If taxed under capital = R270 000 in extra tax payable
 NOT OF A CAPITAL NATURE
• Largest body of case law
• Must be one or the other
• Subjective, determined by intention of taxpayer
• SARS treats capital receipts differently from revenue receipts.
- If an amount is capital in nature it might be subject to Capital Gains Tax.
 GROSS INCOME:
DISCUSSION POINTS

• Need to distinguish between ‘capital’ and ‘revenue

- Eg’s pg.47
• Revenue: Gross Income
- 100% inclusion in Gross Income

• Capital: Taxable Capital Gain

- 40% & 80% inclusion via s26A into taxable income

• Capital not defined in ITA – numerous case law

 GROSS INCOME:
DISCUSSION POINTS

• Need to distinguish between ‘capital’ and ‘revenue

• One or the other (must be either Capital or Revenue)

- Not neither capital nor revenue
- Not both capital and revenue
- But might sometimes be split into separate capital
and revenue portions.
 EXCLUDING RECEIPTS OR
ACCRUALS OF A CAPITAL NATURE
• There are two kinds of assets for Income Tax purposes
- Trading stock (Revenue/Gross Income)
- Capital Asset (Capital)

• If you can identify the asset being sold or used you will
be able to identify whether it goes into gross income
or not
 INCOME OR CAPITAL

• HOW DO THE COURTS ASCERTAIN WHETHER INCOME

OR CAPITAL

1) Burden of proof rests on the taxpayer s102.

2) Consider the facts of circumstances.

 DEFINING CHARACTERISTICS
• There is no ‘half-way house’ between capital and revenue
(Pyott Ltd v CIR) (but apportionment is not precluded)

• CAPITAL produces REVENUE/BENEFITS

- CIR v VISSER
• Tree v Fruit
- CIR v GEORGE FOREST TIMBER CO. LTD
• Fixed v Floating capital
• WJ Fourie Beleggings CC v CSARS
• Income earning structure v Result of its use
13
EXAMPLE 1
• If a motor dealership sells a
motor car it is trading stock
(income in nature).
A baker, sets up a business of
making and selling bread. To
enable him to achieve this
objective he acquires various
assets including a motor car which
he uses to make deliveries of his
bread and uses the motor car to
generate income (such as the sales
of the breads). If the baker sells his
bread then the amount received is
of an income nature (fruit). If he
sells the motor car, it is of a capital
nature (tree).
 THE SALE OF ASSETS
CONTINUED

• The GOLDEN RULE:

- The most important test used by courts in deciding is
the intention of the taxpayer.
- The intention must be investigated:
• At the time asset was acquired;
• Period the asset was held
• At the time of disposal

• Subjective and objective tests

 THE SALE OF ASSETS
CONTINUED
• Subjective Test
- The intention of the taxpayer is the primary test to determine the nature of
the receipt or accrual;
- Scheme of profit making (revenue in nature); or
- Held for investment purposes (capital in nature)

• The following is not considered to be a change in intention:

- The decision to sell is not change of intention
- The decision to sell at a profit is not change of intention
- The decision to sell at best advantage is not a change of intention
- Using a realisation company to realise capital assets at its best advantage, is
not change in intention, provided real justification for using a realisation
company is available.

• The following is considered to be a change in intention:

• “Something more ” = “Cross the Rubicon” and therefore change in intention
16
THE SALE OF ASSETS
INTENTION
• CIR v RICHMOND ESTATES (PTY) LTD
-The nature of an amount is determined by the intention of the
taxpayer in relation to the asset disposed of.
• CIR v STOTT
- The taxpayers intention on acquisition of the asset is decisive
unless some other factor intervenes which indicates a change of
intention.
• COT v LEVY
- The main or dominant intention with which the property was
acquired must be determined.

• The courts will consider :

- Intention at the acquisition; and
- Whether there was a change of intention
 THE SALE OF ASSETS
ACQUISITION
• The intention of the taxpayer can either be to:
- Speculative (a scheme of profit making)
• CIR v PICK 'n PAY EMPLOYEE SHARE PURCHASE TRUST
• Receipts or accruals will only be of a revenue nature if
the business was conducted with a profit making
purpose i.e. as a profit making scheme

- Investment (to earn a return on the investment).

 THE SALE OF ASSETS
CHANGE OF INTENTION
• CIR v STOTT
- Realize at best advantage
• To sell at the best advantage ≠ change of intention

• JOHN BELL & CO (PTY) LTD v SIR

- Something more than mere decision to sell
• To sell at a profit ≠ change of intention
 THE SALE OF ASSETS
CHANGE OF INTENTION
• NATAL ESTATES LTD v SIR
- ‘Crossed the Rubicon’

• BEREA WEST ESTATES (PTY) LTD v SIR

- Using a realisation company does not change the intention from
capital to revenue.
- The receipt was deemed to be of a capital nature
 THE SALE OF ASSETS
CHANGE OF INTENTION
• CSARS v FOUNDERS HILL
- The company was not a proper realisation company.
- A realisation company was one in which was formed to facilitate the
realisation of property which could not otherwise has be dealt with
satisfactorily.

• CIR v NUSSBAUM
- The court held that profits on the sale of the shares were not
incidental to the primary objective of increasing dividend income
but that the taxpayer had a secondary profit making purpose.
- The profits were therefore revenue in nature and were taxable.
 THE SALE OF ASSETS
CONTINUED
• Objective Test
- In assessing the taxpayer’s intention, the courts do
take into consideration of the taxpayer ipse dixit, but
as the taxpayer’s intention is subjective, the courts will
thus determine the intention from the surrounding
facts (objective factors).
- Example:
• Conduct of the taxpayer i.r.o transaction;
• Frequency of similar transactions;
• Continuity of activities;
• The length of time asset was held;
Eg’s pg.32
 DETERMINING INTENTION
• Onus of Proof – TAA s102

• Subjective Test:
- The intention of the taxpayer is an important factor to determine whether an
amount is capital or income in nature.
- Ipse dixit

• Objective Test:
- Actions of directors - CIR v Richmond Estates
- Length of time held
- Frequency, BUT Stephan v CIR
- Nature of Taxpayers business
- Income stream
- Reason for sale – CIR v Nel – CIR v Nussbaum
- Finance
- Nature of asset
Specific Situations

Mr Azmatullah Latief
Room 4.03 4th Floor EMS Building
azlatief@uwc.ac.za
 THE SALE OF ASSETS
CONTINUED
• Mixed Intentions:
- Main and dominant intention (COT case)

• Intention of a company:
- The intention of the directors represents the intention of the
company.

• Realisation companies?

• Damages and compensation?

• Share transactions?
 DAMAGES & COMPENSATION
• If amount received for the loss of a capital asset = capital
nature
• If amount received to compensate a taxpayer for loss of
profits = income nature
- Burmah Steamship Co Ltd v IRC
 DAMAGES AND COMPENSATION
• WJ Fourie Beleggings v CSARS

- Taxpayer operated a hotel. A contract providing accommodation to

a particular client was cancelled.
- The client paid the taxpayer compensation for the cancellation of
the contract.
- Was the contract directed towards making a profit or was it a means
of producing income?
- The cancelled contract was a trading contract and the compensation
received formed part of 'gross income'. The cancelled contract was
a product of the taxpayer’s income earning activities (profits), not
the means by which it earned income (capital asset).
 FORTUITOUS GAINS
• Fortuitous Gains includes gifts, inherited amounts, prizes and
donations
- Such amounts are generally regarded as capital in nature
 GAMBLING
• Sporadic successes from gambling activities are considered to be
of a capital nature
- Professional Gambling = Revenue in Nature
 ILLEGAL BUSINESS
• MP FINANCE GROUP CC (IN LIQUIDATION) v CSARS
- The taxpayer had taken in income with the intention of retaining it
for its own benefit. The amounts were therefore received.
- Illegal contracts can have tax consequences.
 GROSS INCOME:
DISCUSSION POINTS

• Exam technique for discussion questions:

- Apply scenario to all elements of the definition (briefly)
- Focus the discussion on the main issue(s)
• Revenue vs. Capital
• Received by or Accrued to
• Resident vs. Non-resident
- Refer to case law
• Describe principle in the case law
• Apply to scenario
- Conclude