UNIVERSITY OF LIMPOPO

TURFLOOP CAMPUS

PGDA

MODULE 1 – 2020

COURT CASES

CONTENTS PAGE

1. SAICA TAXATION EXAMINABLE PRONOUNCEMENTS 2

2. STUDY METHOD 2

3. STUDY OBJECTIVES 2

4. COMPETENCY FRAMEWORK 3

5. SUMMARY OF PRESCRIBED COURT CASES 3

(Adapdet: UJ)
1 SAICA TAXATION EXAMINABLE PRONOUNCEMENTS

The SAICA taxation examinable pronouncements covers numerous court cases

which students are required to know well. Court cases remains to be an
extremely popular topic, tested almost each year in the Initial Test of Competency
examination set by SAICA.

2 STUDY METHOD

Learn the tax principle(s) of each court case well. Be comfortable with the facts
of the case as this helps to identify the issue(s) in tests and examinations (as
scenarios presented in papers are usually similar to the original case).

The basic idea of this document is an informal, understandable guide that you
can relate to and become comfortable with the court case principles that you
must know. The general format of discussion of each case is the following:
 Facts of the case
 Core issue
 Held (the judges ‘ decision)
 Tax principle – the crux!

For further explanation on the cases, consult Silke: Table of Cases (page 1207)

3 STUDY OBJECTIVES

After studying the summary of the court cases, you must be able to:
 identify what the issue at hand is based on the scenario stated in a
question (e.g. whether expenditure is incurred in the production of
income),
 argue what your opinion is in relation to the issue raised i.e. what is the
tax principle (e.g. whether you believe the expenditure was incurred in the
production of income or not), and
 express your opinion i.e. apply the tax principles to the facts.

In other words, marks will be allocated in the exam for identifying the issue(s),
arguing the correct tax treatment by applying the correct principles to the facts
and then expressing your opinion on the issue. Please note that marks will no
longer be awarded for court case names.

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(Adapted:UJ)
4 COMPETENCY FRAMEWORK

VII-2.8 Applies and interprets tax legislation by applying relevant decisions of the courts

Identify the tax issue requiring interpretation

Identify and describe the relevant tax case law principle that is applicable to support the interpretation
Apply the case law principles in advising and calculating taxes of taxpayers

5 SUMMARY OF PRESCRIBED COURT CASES

The two fundamental issues with court case theory involves: Is an amount gross
income as defined or does an amount qualify for the general deduction formula.
Ensure that you first identify this before answering!

Gross income issue deals with the basic definition-

 Total amount,
 In cash or otherwise,
 Received by or accrued to
 Not of a capital nature
 Worldwide income if the taxpayer is a resident and SA source income with
a non-resident.

A deduction issue revolves around section 11(a) (positive test) and 23(g)
(negative test). Section 11(a) and 23(g) being:
 Expenditure and losses,
 Actually incurred,
 During the year of assessment,
 In the production of income
 Not of a capital nature
 Whether it is for trade purposes.

Other court case issues:

 Trusts
 Trading stock
 Assessed losses
 Seventh Schedule
 VAT

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(Adapted:UJ)
 GROSS INCOME CASES
CASE SILKE FACTS OF CASE PRINCIPLE
Residency
1 Cohen 3.2.1 Facts of case A person is ordinarily resident in the country to which he
A taxpayer owned a flat in Johannesburg, moved intends to return from all his wanderings. The country
overseas for work for two years and leased his flat. he regards as his real home.
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.”
2 Kuttle 3.2.1 Facts of case A person is ordinarily resident where the person’s
A taxpayer emigrated to America and started his life principle residence is – where the person is habitually
there. He returned to SA regularly to pursue and normally resident.
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.
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 CASE SILKE FACTS OF CASE PRINCIPLE
Source
1 Lever Brothers 21.3 In order to determine the source of an amount one must
consider Lever Brother:
What is the originating cause?
Where is the cause situated?

Total amount in cash or otherwise

1 Lategan 3.3 The word “amount” must be given a wider meaning and
must include not only money but the value of every form of
property earned by the tax payer, whether corporeal or
incorporeal which has a ascertainable monetary value.

2 Butcher Bros 3.3 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.

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.

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(Adapted:UJ)
 CASE SILKE FACTS OF CASE
3 Brummeria 3.3 Facts of case
The taxpayer companies developed retirement
villages and sold life rights in the dwelling units to old
age people (i.e. the old person can stay in the unit
until death). In return for the life right, the pensioner
had to make an interest free loan to the developer.
Issue
Does the fact of having monies available (i.e. the
interest-free loans) mean that there is an
‘amount’ accruing to the developer?
PRINCIPLE
If a taxpayer receives an interest-free loan, and the
lender receives a quid pro quo (i.e. the lender receives
something in return for lending the money – in this case
life rights), there will be an “amount” for the taxpayer
having the benefit of interest-free loans.
Interpretation Note 58 was issued for interest-free loans
with life rights as quid pro quo. See IN 58 for the formula
on how to calculate the ‘amount’. You do not have to study
IN 58, just study the formula and accompanying examples
1-3 on page 495-499.

Judges Decision
If a taxpayer had a right to an interest-free loan,
such a right had value. In other words, the benefit of
having monies available on loan, interest free, has
an ascertainable monetary value.

Accrual
1 People’s Stores 3.4.2 / Facts of case Accrued to = entitled to
3.4.3 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 (important
If accrued, should it be included at face value or tax principle)
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.

CASE SILKE FACTS OF CASE PRINCIPLE

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(Adapted:UJ)
2 Witwatersrand 3.4.2 / Facts of case If an amount has accrued to a taxpayer and no legal
Association of 3.4.7 A race event was held and resulted in proceeds that obligation exists to pay it over (only moral obligation) to
racing clubs the taxpayer divided between two charities. The another individual, it has in fact accrued and is gross
taxpayer argued that the proceeds did not accrue to income.
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 the contract between the company and charities

stated that 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 Mooi 3.4.2 Accrued to = unconditionally entitled to the amount.

Receipt
1 Geldenhuys 3.4.1 Facts of case The amount is only include in gross income by a taxpayer
A widow inherited the right of use of a farm (usufruct) only if it is received by him on his own behalf, for his own
while her children received the right of ownership benefit
(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.

CASE SILKE FACTS OF CASE PRINCIPLE

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(Adapted:UJ)
2 MP Finance Group 3.4.1
CC (in liquidation)
Facts of case A bilateral receipt (the other party willingly gives you the
A company had an illegal pyramid scheme where money) that is used for your own intention means it has
they promised investors fantastic returns with no been received by you. You intended to use it for your
intention of doing just that. They classified the money own benefit.
received as deposits (loans) and used it for their own
purposes.
It is submitted that theft will usually not be gross income
Issue as it is a unilateral receipt.
Is the money (deposit) actually received by the Unilateral receipt (taking money) doesn’t mean it has
company? been received by you as it was never given to 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 3.4.1 Facts of case
A biscuit manufacturer sold tinned biscuits. The
customers could return the tins and receive money
for the tin. The company treated the proceeds
relating to the tin as a deposit and not gross income.
Generally deposits are still received and form part of
gross income.
An exception to this principle is where the money is kept in
a separate bank account and not used by the company for
their own benefit.

Issue No half-way house between capital and

Is the proceeds relating to the tin still received by the revenue( important for gross income contrast with
taxpayer? deductions)

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.

CASE SILKE FACTS OF CASE PRINCIPLE

CAPITAL VS. REVENUE
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(Adapted:UJ)
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.

Onus

Onus rests on the taxpayer to prove the nature of a receipt - Section 102 of the Tax Administration Act. (Always state this when answering a court
case question).

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 3.6 Tree vs. fruit:
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.

2 George Forest 3.6.1 All assets are either classified as fixed or floating
Timber capital.

Floating is consumed in the very process of production,

while fixed capital is not. Fixed capital is the structure that
CASE SILKE FACTS OF CASE PRINCIPLE

6
(Adapted:UJ)
 enables income to be generated.

The sale of fixed capital gives rise to capital proceeds,

while the sale of floating capital gives rise to revenue.
3 Nel 3.6.5 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.

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
 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 (Levy, 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)

CASE SILKE FACTS OF CASE PRINCIPLE

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(Adapted:UJ)
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:
 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 – (Richmond Estates):
 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;

CASE SILKE FACTS OF CASE PRINCIPLE

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(Adapted:UJ)
 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 (Elandsheuwel Farming), namely –:
 the directors;
 the shareholders; or
 those persons who effectively control the company.

1 Richmond Estates Fact of case A company’s initial intention is indicated by the actions of
(Pty) Ltd 3.6 / The Memorandum of Incorporation (MOI) of a directors, type of business and the MOI.
3.6.5 company indicated that the company could
purchase, develop, layout and prepare land for
building purposes. The company bought specific
plots with this intention but due to certain
restrictions, held it for rental purposes.
Issue
What is the initial intention of the company?

Judges Decision
A company is not an individual. Its initial intention is
demonstrated through director’s resolutions and
formal documentation such as the MOI.
2 Levy 3.6 / If there are mixed intention, one needs to determine the
3.6.7 dominant intention.

3 Elandsheuwel 3.6 / Facts of the case
Farming 3.6.2 The taxpayer, a company, owned a farm near
Klerksdorp. For many years the farm was rented out
to a farmer whose family owned all the shares in the
company. Shortly after the farmer sold all of his
shares and the new shareholders took over the farm,
after being briefly rented out for farming purposes,
was sold at a profit to the Klerksdorp Municipality.
The shareholders had a history of speculation with
properties.
The intention of the shareholders should be taken into
consideration when assessing whether the use of the
asset is capital in nature. Thus, a change in shareholding
could represent a change in intention.
(This is especially applicable in the case of a private
company)

CASE SILKE FACTS OF CASE PRINCIPLE

9
(Adapted:UJ)
 Issue:
What was the intended use of the farm?

Judge’s decision:
The judges held that, although the farm was
originally acquired as a capital asset, the change in
shareholding brought about a change in intention in
respect of the use of the farm. The decision was
therefore that the proceeds of the farm were to be
included in the taxpayer’s gross income. The court
was influenced in its decision by the prior history of
the shareholders.

Scheme of profit-making
1 Pick n Pay 3.6 / Facts of case The scheme of profit making is essential to classify
Employee 3.6.3 / The company established a trust to purchase shares proceeds as revenue in nature.
Share 3.6.21 and administer them for the benefit of the
Purchase Trust employees. This trust was also compelled to
repurchase shares from employees who were
required to forfeit their holdings.
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 3.6 / Facts of case Consider the taxpayer’s dominant intention. The fact
3.6.4 The taxpayer, Stott, was an architect and surveyor. that the asset is sold at a profit, does not necessarily
He purchased a few properties as an investment indicate a change of intention.
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
CASE SILKE FACTS OF CASE PRINCIPLE
10
(Adapted:UJ)
 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 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 3.6 / Facts of case Kruger Rands are a unique asset where the only income
3.6.5 / The taxpayer bought Kruger Rands over the long earned is through sale. Therefore it will normally be seen
3.6.19 term as an investment. Eleven years later he as capital unless it is your trade to buy and sell them.
sold some to purchase a car for his wife. 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.
CASE SILKE FACTS OF CASE PRINCIPLE
Change of intention
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1 John Bell 3.6 / Facts of the case The mere decision to sell an asset does not change an
3.6.6 The taxpayer operated a textile business from intention. A capital asset may be realised at its best
premises that it owned. After the business relocated advantage. Waiting for market conditions to change was
to other premises, the directors of the company not an indication of a change in intention.
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 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?
Judge’s decision:
The court emphasised the principle that a taxpayer is
entitled to realise his property to his best advantage.
Therefore, it was decided that 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 3.6 / Facts of case A person may realise his capital asset to his best
Estates Ltd 3.6.6 / The taxpayer held a piece of land for many years as advantage yet must be careful to not “cross the
3.6.9 a capital asset. Before selling the land, town Rubicon” and embark on a scheme of profit making. This
planners, consulting engineers and professional indicates a change of intention and the proceeds being
advisors were approached to develop and sub-divide revenue in nature.
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).
CASE SILKE FACTS OF CASE PRINCIPLE

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3 Nussbaum 3.6 / Facts of case The secondary purpose could taint the primary
3.6.8 / A taxpayer held shares during his lifetime for purpose of a taxpayer, considering the frequency.
3.6.21 investment purposes. After retirement he sold the
shares over a three year period; some shares were This may result in profits that are initially seen as capital,
held for a long period and others for a shorter period. to be revenue. An investor with a dual intention should
The taxpayer sold shares each time the dividend keep two separate accounts, one capital and one revenue
yield dropped. account.
Issue
Note that section 9C is now available.
Does the large number of purchase and sale 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.

4 Berea West 3.6.9 Facts of case Using a realisation company to realise a capital asset
Estates A company was formed to facilitate the realisation of merely means the taxpayer is disposing of the asset to its
(Opposite to land which formed part of the assets of a deceased best advantage. The receipts of the realisation
Founders Hill) estate. The company acquired the land, and, after company are capital in nature.
subdividing it, sold the subdivided plots at a profit.
Issue
Are the receipts of selling the subdivided plots capital
or revenue in nature in the realisation company?
Judges Decision
The court found that the manner in which the
property was sold, suggested a mere realisation of a
capital asset to best advantage. In subdividing the
land and selling off the plots the company had not
‘crossed the Rubicon’.

CASE SILKE FACTS OF CASE PRINCIPLE

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5 Founders Hill 3.6.6 / Facts of case There has to be a real justification for the realisation
(Pty) Ltd 3.6.9 AECI Ltd set up Founders Hill (Pty) Ltd as its wholly- company to be formed
(Opposite to owned subsidiary to sell off land surplus to AECI’s
Berea West) needs. AECI therefore transferred this land to Naming of “Realisation” does not constitute a realisation
Founders Hill, which proceeded to realise the company.
property to best advantage.
Issue
Are the receipts of selling the land capital or revenue
in nature in the realisation company, Founders Hill?
Judges Decision
The court held that Founders Hill was not a proper
realisation company, with the result that the profit it
made on the sale of the land was subject to normal
income tax. It said that a realisation company was
one which was formed to facilitate the realisation of
property ‘which could not otherwise be dealt with
satisfactorily. It said that in none of the realisations
company cases was there but a single owner who
interposed a ‘realisation company’ where it could
satisfactorily have realised the capital asset itself.
The court said that a company could only be
realisation company in special circumstances, for
example where property is held by a number of
owners and it is easier for a single owner to sell it, or
where there is a need to protect the assets from the
original holder. In other words, there has to be a real
justification for the realisation company to be formed.
Founders Hill did not have to be formed. AECI could
have sold the property itself.

Damages and Compensation

1 WJ Fourie 3.6.10 Facts of case Compensation for damages of capital assets = capital
Beleggings A CC leased premises from which it operated as a Compensation for loss of profit/ income = income
hotel. It had been paid compensation for the loss of a
contract it had with another entity to provide meals If proceeds relate to “filling a hole” in the income
and accommodation to students. earning structure, it is capital in nature.
If the proceeds relates to “filling a hole” in the income
Issue pocket, it is revenue in nature.
CASE SILKE FACTS OF CASE PRINCIPLE

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 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.
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
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.

2 Stellenbosch 3.6.10 Facts of case Compensation for cancellation of a contract to an

Farmers’ The taxpayer was a wholesaler that imported and income-earning right will be considered capital in nature.
Winery distributed Bells whiskey in South Africa. It
concluded a 10 year agreement relating to this
distribution which was prematurely cancelled more
than three years before the earliest date on which
the distribution agreement could be terminated. As a
result, the taxpayer received the sum of R67 million
from United Distillers, a United Kingdom (UK) based
company with which the taxpayer had concluded the
distribution agreement. The Commissioner of the
Revenue Service included the receipt of this
payment as part of the taxpayer’s gross income in
the assessment for tax. This was upheld by the tax
court.
Issue
The issue before the court was the taxpayer’s
contention that the payment was of a capital nature
which attracted no tax liability.

CASE SILKE FACTS OF CASE PRINCIPLE

15
(Adapted:UJ)
 Judges Decision
Evaluating the evidence in the case, the court found
that the taxpayer did not carry on the business of the
purchase and sale of rights to purchase and sell
liquor products, did not embark on a scheme of profit
making, and discharged the onus of establishing the
payment was of a capital nature.

Legality or otherwise of the business production of income

1 Delagoa Bay 3.4.1 Facts of case The legality of the income is irrelevant. The amounts
Cigarette Co The company ran an illegal lottery. It set aside a will still be gross income.
Ltd certain portion of its income from the sale of
cigarettes in order to pay prizes to people who held
winning numbers, obtained from coupons in the
cigarette packets.
Issue
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 3.4.1 Facts of case Even though the receipts are illegal, they are still
Group CC (in A company had an illegal pyramid scheme where received, and therefore gross income.
liquidation) 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.
CASE SILKE FACTS OF CASE PRINCIPLE
16
(Adapted:UJ)
 Special Inclusions
Annuity
1 Hogan 4.2 Facts of case An annuity constitutes gross income. Characteristics
The taxpayer received monthly instalments for loss of an annuity:
of future earnings from the Motor Vehicle Assurance A contractual obligation for the person to pay
Funds as a result of a car accident. A fixed or determinable amount
Annually or more frequently
Issue
For a specific period
Are the payments classified as an annuity and
therefore taxable?
But, these payments must not be reducing a principle
Judge’s decision amount.
The payments meet the definition of an annuity as it
is a periodic payment and is payable to the
taxpayer. Therefore it is included per paragraph (a)
irrespective of its capital nature.
In Respect of services rendered
1 Stevens 4.4 Facts of case Receipts directly related to or as a result of services
A company made an ex gratia payment to an rendered will fall within the ambit of a paragraph (c)
employee to compensate for the loss of a share inclusion in gross income.
option when the company went into voluntary If there is a causal relationship between the payment
liquidation. and the employment, it will be gross income.
Issue
Is this payment in respect of services rendered and
as a result of employment?
Judge’s decision
The payment was directly linked to the employee’s
services with the company, and therefore was within
the scope of paragraph (c).

17
(Adapted:UJ)
 DEDUCTIONS CASES
CASE SILKE FACTS OF CASE PRINCIPLE
During the year of assessment
1 Sub-Nigel Ltd 6.3.4 Facts of case An expense must be deducted in the year of assessment that
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?
Judge’s 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 6.2 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?
Judge’s 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.

18
(Adapted:UJ)
 CASE SILKE FACTS OF CASE PRINCIPLE
Actually Incurred
1 Nasionale Pers 6.3.2 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? 16
Judge’s 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.

19
(Adapted:UJ)
2 Edgars Stores 6.3.2 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?
Judge’s decision
The obligation to pay turnover rental is contingent
until the turnover is determined and cannot be
deducted until it is determined.

CASE SILKE FACTS OF CASE PRINCIPLE

3 Golden Dumps 6.3.2 Facts of case
(Pty) Ltd The taxpayer and a former employee were
involved in a 4 year dispute over the delivery of
shares promised by the taxpayer. The taxpayer
claimed the cost of the shares as a deduction.
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.

Issue
When was the expenditure actually incurred?
Judge’s 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

20
(Adapted:UJ)
1 Port Elizabeth 6.3.1 Facts of case What is the purpose of the expense?
Tramway 6.3.2 A driver employed by the taxpayer died as a 2. How closely connected is that expense to the
6.3.4 result of injuries sustained from an accident that production of income?
6.10.8 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
Judge’s 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.

CASE SILKE FACTS OF CASE PRINCIPLE

2 Joffe and Co 6.3.1 Facts of case If something is not an inevitable concomitant of the business
6.3.4 A company carried on a concrete engineering operations it is not deductible.
6.10.3 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.
was determined in the court case that the
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.
Issue
Is the compensation to the widow and the legal
costs deductible

21
(Adapted:UJ)
 Judge’s decision
Negligent actions were not deemed a necessary
part of an engineering trade and were not
incurred for the purpose of earning profits/
carrying on of trade.
3 BP South 6.3.5 Facts of case Recurring payments for maintaining income earning
Africa 6.10.2 BP SA paid royalties to BP worldwide in terms of operations are deductible.
a trade mark licence agreement in order to
display the BP licensed trademarks. The This will naturally mean it is incurred in the production of income.
payment was expressed as a rate per litre of
product sold. SARS disallowed this as a Royalty payments are of a revenue nature and deductible if
deduction. the intellectual property is used in the production of income.
Therefore, use of rights of patents, copyright and inventions are
Issue
deductible.
Are the royalty payments incurred in the
production of income?
Judge’s decision
The royalty payments were done to procure the
taxpayer’s use of the parent company’s
intellectual property for the term of the
agreement. The payments were revenue in
nature.

4 Provider 6.3.4 Facts of the case: Expenditure incurred to induce the employees to enter and
The taxpayer had introduced two schemes for the remain in the service of the taxpayer may qualify as a deduction
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 or Amounts paid in terms of a service package are deductible.
benefit varied in line with the length of the
CASE SILKE FACTS OF CASE PRINCIPLE

22
(Adapted:UJ)
 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.

5 Mobile 6.3.4 Facts of the case: Audit Fees:

Telephone Mobile Telephone Networks Holdings (Pty) Ltd
Incurring audit fees is necessarily attached to the performance
Networks incurred expenditure in respect of an audit
of the taxpayer’s income earning operations i.e. audit fees
Holdings (Pty) performed. The auditors spent 94% of its time on
are incurred in the production of income.
Ltd the audit of interest income and 6% of its time of
auditing the exempt dividend income
Where a there is a split between producing income versus
Furthermore, expenditure was incurred in respect
exempt income (thus where audit fees are incurred for a dual
of training fees to train staff on learning the new
purpose), apportionment has to take place.
computerised accounting system. The system
was only used in respect of interest income.
Apportioning audit fees based on time spent on areas
Issue: generating exempt versus non-exempt income is not necessarily
In respect of the audit fees, the issue was correct. Apportionment will depend on the facts of each case;
whether the full audit fee will be deductible, even a reasonable apportionment approach will thus be followed.
though a portion was attributable to exempt
dividend income? Training Fees:
In respect of the training fees, are the full training
If an expense is necessary in order to trade effectively (i.e. there
fees a necessary concomitant of the income
is a direct link between the training fees and the taxpayer’s
earning operations or are the training fees capital
trading activities), it will not be capital in nature and will be
in nature? allowed as a deduction.
Judges decision:
For the audit fees, it was ruled that only 94% of
the audit fees was incurred in the production of
CASE SILKE FACTS OF CASE PRINCIPLE
23
(Adapted:UJ)
 income
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

Dual purpose
1 Nemojin 6.3.4 Facts of case Assess the closeness of the connection of expenditure incurred
6.5.6 A share dealing company carried on dividend and exempt income received or accrued. Apportion taxable
stripping operations. Investors would incur income between taxable and exempt.
expenditure in buying shares in dormant
companies with excess cash and reserves If a dividend stripping scheme is evident, then the portion of
(claiming the expenditures as s11(a) deductions) the cost of the shares will be disallowed as a deduction that so
The company would declare dividends to relates to the earning of exempt dividend income. The remaining
eliminate all reserves, leaving only the shell of the part is deductible in terms of S11(a) that so relates to the
company. The dividend income would be exempt proceeds on the sale that is included in gross income.
in the hands of the share owners. Subsequently The apportionment is as follows:
they would sell their shares at a loss. (Taxable amount ÷ Total distribution amount) × Cost price
Issue
Is the expenditure on the shares deductible in
terms of S11(a) or a portion disallowed as a result
of S23(f)?
Judge’s decision
The taxpayer (a share dealer) had a dual
purpose: to receive exempt dividend income and
proceeds from the sale of the shares being gross
income. Therefore a portion of the cost relates to
the earning of exempt dividend income and
S23(f) disallows this portion from being deducted.
(A similar apportionment to Rand Selection)

Take note: This case dealt with a share dealer,

therefore the shares bought would classify as trading
stock and the cost thereof would have been allowed a
S11(a) deduction. If a taxpayer bought shares for
investment purposes, the cost would form part of base
cost and this apportionment would not apply as no
S11(a) deduction could be claimed in the first place

24
(Adapted:UJ)
 CASE SILKE FACTS OF CASE PRINCIPLE
Not of a capital nature
1 New State 6.3.5 Facts of case Fixed (capital) vs. Floating capital (revenue)
Areas Ltd A taxpayer was required to install a new Cost of establishing/ improving/adding income earning plant
sewerage system on its premises as well as on (fixed capital) is capital in nature and therefore not deductible vs.
land outside its property. The system was
installed at the cost of the local authority but the Cost of performing income-earning operations (floating capital)
taxpayer had to repay the cost in monthly which is revenue in nature and therefore deductible
instalments (relating to the system on the
premises and the system outside). The
Commissioner disallowed the deduction of both
amounts.
Issue: Are any of these monthly instalments
capital in nature?
Judge’s 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.

25
(Adapted:UJ)
2 Rand Mines 6.3.5 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?
Judge’s 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.

CASE SILKE FACTS OF CASE PRINCIPLE

3 BPSA 6.3.5 Facts of case The legal categorisation of a payment does not determine
6.10.2 BP SA made an upfront payment to lease whether it is capital or revenue, but rather the purpose of the
premises for 20 years. expenditure. The shorter the period of endurance to which the
payment relates, the easier it is to argue that it is revenue in
Issue
nature. Was an enduring benefit created?
Whether the lump sum rental payment is
deductible for the purpose of section 11(a) or
rather deemed to be expenditure of capital
nature?
Judge’s decision
SARS concluded that the expense was not rental
expense, but rather capital in nature due to the
fact that an enduring benefit was created. The
legal categorisation of a payment does not
determine whether it is capital or revenue
Repair

26
(Adapted:UJ)
1 Flemming 12.4.1 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 to
windmill for the borehole and installed piping to be classified as a repair. The cost must maintain the income
feed water from the borehole to the dam. This 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)?
Judge’s 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.

CASE SILKE FACTS OF CASE PRINCIPLE

27
(Adapted:UJ)
2 African 12.4.1 Facts of case Repair is restoration by replacement or renewal of
Products The original roof of the factory had to be repaired. subsidiary 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
Judge’s 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.

Section 23(g)
1 Warner 6.5.7 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 trade.
complied with the Sullivan Code i.e. social
responsibility expenses were incurred by the Social responsibility was seen as crucial for trading success.
taxpayer in terms of this code. The taxpayer This meant that the expenditure had been “incurred for the
incurred this social responsibility expenditure and purposes of trade and for no other” and was therefore incurred
claimed it as a deduction under section 11(a). in the production of income
Issue
Are these expenses incurred in the production of
income, and
Are they incurred for the purposes of trade?
Judge’s decision
The taxpayer was instructed by its parent
company to incur these costs to prevent possible
loss of income. Therefore the costs were incurred

28
(Adapted:UJ)
 CASE SILKE FACTS OF CASE PRINCIPLE
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

2 Scribante 6.5.7 Facts of case 1) If dividends are declared to shareholders on interest-bearing

Constructions loan accounts, the interest are incurred in the production of
The company declared dividends to its income by the company, if there is a close link between the
shareholders. The company had enough cash to availability of the funds for the company and the company’s
pay the dividends but for sound business reasons income earning capabilities.
decided to rather allocate it to the shareholders’
loan accounts. Half of the loans was non-interest 2) Borrowing money and re-lending it at a higher rate of interest,
bearing and the other half was interest-bearing. thereby making a profit constitutes the carrying on of a trade.
No money was exchanged - it was purely a book
entry. In fact, the cash funds of the company
which were available for the purpose of the
distribution remained in the interest-bearing call
accounts held by the company (i.e. the company
earned interest on these call accounts.)

The sound business reason for keeping the cash

available in the company was that the company’s
business involved the furnishing of contract
guarantees (surety bonds) for construction work
which it was to undertake. The ability of the
company to reflect a substantial cash reserve in
its financial statements was of material
assistance in readily obtaining the issue of
guarantees from financial institutions, thereby

29
(Adapted:UJ)
 sharpening its
competitive edge when tendering for contracts
CASE SILKE FACTS OF CASE PRINCIPLE

30
(Adapted:UJ)
and increasing its income potential.

Issue
The issues were whether the interest paid by the
company to the shareholders was
1) expenditure incurred in the production
of income and
2) whether the interest was laid out or
expended by the company for the
purposes of trade within the meaning of
s 23(g).

Judges decisions

1) To determine the deductibility of interest the

primary or dominant inquiry often relates to the
purpose for which the money was borrowed for
(Shareholders loan account). The interest paid by
the taxpayer enabled it to retain the shareholders'
funds, which could otherwise have been moved
elsewhere. The availability of the funds to the
taxpayer increased its competitive edge (by
assisting it in obtaining guarantees from financial
institutions) and, temporarily, its income in the
form of interest, which it retained. These two
considerations provided the sufficiently close link
between the interest expenditure incurred and
the income-earning operations of the taxpayer
thus the interest payments were incurred in the
production of income.

2) The only purpose of paying interest on the loan

accounts was to secure for the company the
benefit of the continued availability of the funds
for use in its trading activities. In addition,
borrowing money and re-lending it at a higher
rate of interest, thereby making a profit,
constitutes the carrying on of a trade: Burgess

31
(Adapted:UJ)
 Other Cases
CASE SILKE FACTS OF CASE
Trusts Sec 25 B
Section 7: Donation, Settlement or Disposition
CSARS v Woulidge 24.6.9 Facts of case
(Both the 2000 and A taxpayer set up trusts for his minor children. He
2002 decisions) then sold shares to the trust via an interest free
loan. SARS decided that the sale of the shares
contained an element of gratuitousness.
Therefore all income received or accrued from the
shares should have been taxed in the taxpayer’s
hands.
Issue
Can the sale be regarded as containing an
element of gratuitousness? Should all the income
be regarded as being part of the income of the
donor for purposes of Section 7(3)?
Judge’s decision
In order for Section 7(3) to apply there must be a
donation by a parent where the beneficiaries are
his/her minor children. The transaction did consist
of a gratuitousness element as interest was not
charged. The interest not charged was gratuitous
and not the sale itself as the purchase price was
market related.
32
PRINCIPLE
1) The sale of an asset at full market value is a disposition
however it’s not a disposition with a gratuitous element.
2) However, selling that asset on an interest-free loan account
results in another party receiving a benefit – and that
benefit is a form of “other disposition” and indicates a
gratuitous element is present (not the loan itself).
3) An appropriate apportionment must be made between
gratuitous elements and non-gratuitous elements. Section 7 will
deem all income as a result of the gratuitous part to be income
of the parent donor.
Examples:
An interest free loan results in a 100% gratuitous element. i.e.
% market related interest x loan amount = maximum disposition
attributable to the donor per annum.
4) As long as the loan amount remains unpaid, the failure to
charge interest (or reduced interest) will result in a continuous
disposition.
5) In a subsequent matter before the court by the same taxpayer
on the same facts, the court determined that the notional interest
is not subject to the in duplum rule. This rule basically states
that the interest portion can never exceed the capital amount.
For example, if a loan of R100 000 is granted, interest can only
be levied up to R100 000. The court decided that the in duplum
rule can only be applied in the real world where it serves
considerations of public policy and the protection of borrowers
against exploitation by lenders. Therefore, in the case of trusts
with notional interest, it will not be limited to the capital amount
outstanding. For example, if a loan of R100 000 is granted
interest free, attribution of income will continue indefinitely
and will not be limited to the original capital amount of
R100 000.
(Adapted:UJ)
 CASE SILKE FACTS OF CASE PRINCIPLE
CIR v Berold 16.2.6 Facts of case The effective cause of the income being received and
A taxpayer formed a company and subscribed to accumulated by the trusts was the donation by the taxpayer.
shares in the company. He then sold assets
(shares in other companies) to the newly formed The income in question had therefore been received or had
company, the purchase price remaining accrued ‘by reason of’ his donation, settlement or other
outstanding as an interest free loan. Thereafter, disposition and he was taxable thereon in terms of section7 (3).
the taxpayer created a trust for each of his five
minor children, and donated two shares and a
portion of his loan account to each trust.
The dividends declared by the company were to
be received by/ accrued to the minor children.
Issue
Whether the interest-free loan to the taxpayer
consisted of a donation and in whose hands
dividends were to be taxed in?
Judges decision:
An interest free loan advanced by a taxpayer to a
private company is to be regarded as a
continuous donation. The resulting dividends
accruing to the minor children were to be
included in his (donor’s) income in terms of
section 7(3).

Trading Stock: Definition and Sec 22

Ernst Bester Trust 14.3 Facts of case Sand only becomes trading stock when removed from the
The taxpayer sold sand on his farm (it was ground. Section 11(a) is the only section that can deduct the
removed from the ground by a transport purchase cost of trading stock, while section 22 is relevant for
contractor) to another person for a fixed monthly opening and closing stock if it is not yet sold. If a capital asset
consideration. subsequently becomes trading stock and is sold in that same
year of assessment, then it will not be within the scope of
Issue
section 22. The proceeds from sale thereof must still be gross
Is the sand trading stock? i.e. section 22 trading
income as the asset is now revenue in nature (trading stock). If
stock provisions apply? Furthermore, is the sale
trading stock is acquired and disposed of in the same year
of the sand the sale of a right to use a capital
of assessment, section 22 is not applicable.
asset (employment of capital) or the sale of
trading stock?
CASE SILKE FACTS OF CASE PRINCIPLE
33
(Adapted:UJ)
 Judge’s decision
The sand only became trading stock when taken
from the ground, and as it was taken away in the
same year of assessment, s22 could not apply to
it. The court held, too, that while the sand was in
the ground it was not trading stock of the farmer,
because it formed part of the land.
Furthermore, the court preferred the view that the
consideration was not so much received for the
trading in goods, namely sand but that the
payments were similar to royalties in respect of a
mining lease, and therefore income earned by
virtue of the employment of capital.

Eveready (Pty) Ltd 14.5 Facts of case Just due to the fact that a purchase agreement does not yet
The taxpayer bought a business as a going have an amount attributed to trading stock at the time of
concern. No amount was specifically allocated to purchase, does not mean that trading stock was acquired for no
the inventory yet in terms of the purchase consideration.
agreement. The buyer wanted to claim an
opening stock deduction at the market value of If trading stock is aquired for consideration, the section 22
the stock in terms of 22(4) read with 22(3) and deemed opening value deduction will the cost of the trading
22(2). He argued that no consideration was paid stock to the taxpayer.
for the trading stock, thus a deduction was
available at market value.
Issue
Was the trading stock acquired for no
consideration?
Judge’s decision
It was clear from the agreement read as a whole,
that part of the purchase price was attributable to
the trading stock. It is most unlikely that trading
stock worth R 100 million would be given for free.

CASE SILKE FACTS OF CASE PRINCIPLE

34
(Adapted:UJ)
Volkswagen South 14.2 Facts of case Closing stock should not be valued at market value or NRV for
Africa (Pty) Ltd Volkswagen valued their trading stock at NRV income tax purposes. Cost price should be used as the baseline.
and argued that the NRV represented the It is only when the stock is worth less than it was paid for that
diminished value of trading stock at the end of SARS may adjust the closing stock value.
those years.
Issue
‘Whether the NRV of VWSA’s trading stock,
calculated in accordance with IAS 2 and taking
account of the individual categories of costs, may
and should, where it is lower than the cost price of
such trading stock as determined in accordance
with section 22(3) of the Act, be accepted as
representing the value of closing stock for
purposes of section 22(1)(a) of the Act.’
Judge’s decision
On careful consideration of the items making up
the NRV calculation it appears that the only
possibility in that regard
would have been damage to vehicles justifying
the rework/refurbishment claim. However, that
was a minor item that on its own would not have
had the effect of diminishing the value of the
trading stock to the extent required to warrant the
Commissioner making an allowance in favour of
the taxpayer.

Section 20 – Assessed Loss (Trade Requirement)

SA Bazaars (Pty) 12.12.1 Facts of case If a company does not carry on trade in a year, it loses the
Ltd 12.12.2 The taxpayer closed down its active business right to carry forward a balance of assessed loss beyond
operations for 5 years, yet remained in existence. that year. Trading involves more than a mere intention to trade.
During this time it kept a bank account and
incurred losses. It later resumed business The balance of assessed loss may only be carried forward for a
operations and wanted to set the prior losses off company provided it is carrying on a trade. S20(1)(a) states that
against the new income generated. it will be lost if the trade element is not present.
Issue
*An individual may always carry forward an assessed loss, even
May an assessed loss be carried forward if a
if he has not carried on trade for a year
company doesn’t trade for a year?
CASE SILKE FACTS OF CASE PRINCIPLE

35
(Adapted:UJ)
 Judge’s decision
The company did not trade and had no income;
therefore the assessed loss would be lost for
subsequent years.

Robin Consolidate 12.12.2 Facts of case In order to carry forward an assessed loss the company
Industries Ltd Transactions were concluded by liquidators must be carrying on a trade. Transactions concluded by
during liquidation of taxpayer’s stock. liquidators during the liquidation of a taxpayer does not
constitute the carrying on of a trade by the taxpayer himself
Issue
Did the taxpayer ‘carry on a trade’ during the
liquidation?
Judge’s decision
Liquidation does not constitute trade for the
taxpayer himself. Thus, the assessed loss cannot
be carried forward.

BMW South Africa 8.4.10
(Pty) Ltd v CSARS
SEVENTH SCHEDULE
Par 2(e) or (h)
Facts of case The primary question however, is whether an advantage or
The BMW Group procured the services of the tax benefit was granted by an employer to an employee and
advisors to assist expatriates with their domestic whether it was for the latter’s private or domestic purposes.
tax obligations, specifically to assist with their tax
returns and to deal with queries and objections.

Issue
Whether the payments to the tax advisors
constituted a taxable fringe benefit, as
contemplated by paragraph (i) of the definition of
gross income in the ITA, read with paragraphs
2(e) or (h) of the Seventh Schedule thereto.
Judge’s decision
In the present case, as stated above, the
compelling conclusion is that the services were
correctly valued and utilised for the employees’
private or domestic purposes as contemplated by
s 1 of the Act read with para 2(e) of the Seventh
Schedule.
CASE SILKE FACTS OF CASE PRINCIPLE
VAT
36
(Adapted:UJ)
 1) Recoveries
British 31.12.6 Facts of case VAT is levied on a service by a vendor, and not merely upon
Airways PLC British Airways recovered a “passenger service receipts.
charge” on behalf of Airport Company Limited (a
South African company). British Airways charged
this passenger service charge as a separate line
item on each passenger’s flight ticket. SARS
contended that although the fare for the flight
was zero-rated (being an international flight), the
passenger service charge had to be standard
rated.
Issue
The issue was whether British Airways had to
account for VAT on that part of its ticket price
which represented the recovery of the passenger
service charge on behalf of Airport Company
Limited.
Judge’s decision
The court held that British Airways could not be
required to account for VAT on a service it did not
supply. VAT is levied on a service by a vendor,
and not merely upon receipts.

CASE SILKE FACTS OF CASE PRINCIPLE

2)Zero rated
37
(Adapted:UJ)
Stellenbosch 31.10.2.3 Facts of case VAT is levied at a zero-rate for services to a non-resident if the
Farmers’ Winery The taxpayer was a wholesaler that imported and services do not relate to any immovable property in SA. Thus,
distributed Bells whiskey in South Africa. It services related to an incorporeal right not situated in SA will be
concluded a 10 year agreement relating to this levied at 0%.
distribution which was prematurely cancelled
more than three years before the earliest date on
which the distribution agreement could be
terminated. As a result, the taxpayer received the
sum of R67 million from United Distillers, a
United Kingdom (UK) based company with which
the taxpayer had concluded the distribution
agreement. The Commissioner of the Revenue
Service included the receipt of this payment as
part of the taxpayer’s gross income in the
assessment for tax. This was upheld by the tax
court.
Issue
Whether VAT was payable on the payment
received because the payment allegedly related
to services supplied by the taxpayer to a non-
resident of South Africa but directly connected to
movable property situated in South Africa

Judges Decision
The services in question, compositely the
surrender of rights, were not connected to any
movable property, and on the basis that in any
event the exclusive distribution right held by the
taxpayer was an incorporeal right not situated in
South Africa since United Distillers was registered
in the UK, which meant VAT was to be charged at
zero per cent in terms of s 11 (2) (I) (ii) of the
Valued Added Tax Act.

CASE SILKE FACTS OF CASE PRINCIPLE

38
(Adapted:UJ)
Master Currency 31.10.2.3 Facts of Case: Duty-free areas at international airports in South Africa are part
Master Currency (MC) operated two bureaux de of the Republic. Thus, services rendered in these duty-free
change in the duty free area at O.R. Tambo areas are services rendered in South Africa and should be
International Airport in the Republic. Shops standard rated for VAT purposes.
located in the duty free area are able to supply
goods free of certain taxes and duties to
departing passengers, for example no VAT are
levied on goods purchased in the duty-free area
in international terminals .

MC rendered services to non-resident passengers

whereby they presented their South African rand
to MC, who would convert the rand into foreign Remember: Section 11(2)(l) provides for services supplied by a
currency. In doing so, MC would calculate the vendor to a person who is not a resident of the Republic (non-
exchange rate margin, and charge a commission resident) to be zero-rated subject to certain conditions. The
and transaction fee. The relevant amounts would supply of services to a non-resident must be tested against all
all be indicated on an invoice presented to the three of these exclusions in order to qualify to be zero-rated. The
passenger when the services were rendered. last exclusion will disqualify the supply from being a zero rated if
the non-resident is in the Republic at the time the services are
The dispute between Master Currency and SARS rendered.
related to whether MC was, (on the currency
exchange services rendered), obliged to levy and
pay VAT at the standard rate of 14%, as per
section 7(1)(a), or at the rate of 0% by virtue of
section 11(2)(l).

Issue:
Whether the services rendered to non-residents in
the duty-free areas should be zero rated for VAT
purposes or not?

Judges Decision:
The duty-free area of an international airport is
regarded to be in the Republic. The currency
exchange services are therefore rendered in the
Republic. Thus, even though the services are
rendered to a non-resident, the provisions of
S11(2)(l)(iii) of the VAT Act are not met and it
should therefore be standard and not zero rated.

CASE SILKE FACTS OF CASE PRINCIPLE

39
(Adapted:UJ)
XO Africa Safaris 31.10.2.3 Facts of the case The court held that the vendor did not merely organise the tour
XO Africa Safaris CC (XO), assembled tour packages but rather provided services in South Africa to
packages for foreign tour operators (FTO‘s) customers who used the tour packages.
arranging for group and individual foreign tours to
this country. These packages included The services supplied by the taxpayer could therefore not be
accommodation, travel, restaurant bookings and zero-rated as they were rendered to persons present in South
recreational activities, such as golf, safaris, whale Africa at the time the services were rendered (the benefit of the
watching and the like (local services). Some of services rendered was enjoyed in South Africa).
the tour groups were in South Africa partly for
business and partly for social purposes, in which
event the packages included arranging meeting
facilities and the like. XO accepted that this
involved a supply of services to the FTO, but
claimed that it was a supply that was zero rated
in terms of s 11(2)(l) of the Value Added Tax Act
89 of 1991 (the Act).

Issue
(SARS) contended that these services did not fall
within s11(2)(l), but were subject to the standard
rate of VAT of 14% (now 15%) in terms of s 7(1)
of the Act.
(a) what services did XO supply?
(b) to whom did XO supply such services?
(c) were the parties to whom such services
were supplied, residents of, or present in the
Republic when such services were supplied?

Judges decision
The argument of XO is unsustainable because, if
is followed, it would mean that notwithstanding
the fact that the services were consumed in the
Republic and XO would have a claim for input
VAT in relation thereto, the fiscus would forego
the 14% output tax levied on the supply of local
services by XO. This court has already held that
the purpose of this provision is to ensure that
when services are consumed in South Africa VAT
is payable at the standard rate (see Master
Currency v CSARS 2014 (6) SA 66 (SCA)).
CASE SILKE FACTS OF CASE PRINCIPLE
40
(Adapted:UJ)
 3) Imported services enterprises and input tax
CSARS v De Beers 31.9.1 Facts of case You need to determine what activities form part of the vendors
De Beers acquired certain legal and advisory enterprise.
services relating to a takeover bid by a newly Only costs that relate or contribute to the activities that form
incorporated company. De Beers claimed VAT part of the vendors enterprise, could be seen as for the
input on the invoices issued to it by various making of taxable supplies by that enterprise.
vendors. Advisory services were also acquired
from a London based company. SARS denied
the input vat claim on the basis that it was not
incurred for the making of taxable supplies by
the enterprise. SARS also contended that the
advisory services constitutes imported services,
and thus De Beers is liable for VAT output as the
services were not acquired for the making of
taxable supplies.
Issue
Where any of the advisory services relating to
the takeover in the course or furtherance of the
De Beers enterprise of making taxable supplies?
Side issue: Where the advisory services from
the London Company consumed in SA?
Judge’s decision
Such services were not acquired to enable De
Beers to enhance its VAT ‘enterprise’ of mining,
marketing and selling diamonds. They could not
contribute in any way to the making of De
Beers’s ‘taxable supplies’. They were supplied
simply to enable De Beers’s board to comply
with its legal obligations. Thus Input VAT would
be denied. Output VAT on imported services
should be paid to SARS since the services were
not for the making of taxable supplies, and thus
constitute imported services.
Even though some meetings took place
overseas, the initial meeting, approving and
implementation of the takeover bid took place in
SA, thus it was consumed in SA.

CASE SILKE FACTS OF CASE PRINCIPLE

4) Commercial accommodation
41
(Adapted:UJ)
CSARS v 31.11.3.2 Facts of case It is important to note that each supply for VAT constitutes supply
Respublica (Pty) Respublica, supplied a building and related and that the ultimate use of a building by the end user will not
Ltd goods and services to an educational institution, drive the VAT consequences in a chain of transactions. One
TUT. TUT then supplied the building and related cannot look at the end use of the property to determine the
goods and services to its students. nature of the agreement.

Issue
Whether the letting of student accommodation by
Respublica to TUT was subject to VAT. The
question was whether VAT (if applicable) was
based only on 60% of the rental income (for the
reason that the accommodation was for more
than 28 days).
Judge’s decision
The Supreme Court held that one cannot look to
the end use of the property to determine the
nature of the agreement between Respublica
and TUT. The agreement was a normal rental
agreement in respect of fixed property (not a
supply of accommodation). Therefore, VAT was
leviable at 100% of the standard rate.

42
(Adapted:UJ)