Final Case Law Pack - Updated - FY 2023 v1

Taxation II:
Case Law
Revenue and capital
1
CONTENTS
1.1. Of a capital nature – intention ....................................................................................................................... 3
1.1.1. CIR v RICHMOND ESTATES (PTY) LTD 20 SATC 355T .............................................................. 3
1.1.2. COMMISSIONER OF TAXES SOUTHERN RHODESIA v LEVY 18 SATC 127 ......................... 4
1.2. Of a capital nature – scheme of profit-making ........................................................................................... 4
1.2.1. CIR v PICK ’N PAY EMPLOYEE SHARE PURCHASE TRUST 54 SATC 271(A) ...................... 4
1.3. Of a capital nature – mixed or dual intention .............................................................................................. 5
1.3.1. CIR v STOTT 3 SATC 253 ................................................................................................................... 5
1.3.2. CIR v NEL 59 SATC 349 ...................................................................................................................... 6
1.4. Of a capital nature – change in intention .................................................................................................... 7
1.4.1. CIR v NUSSBAUM 58 SATC 283 ....................................................................................................... 7
1.4.2. NATAL ESTATES LTD v SIR 37 SATC 193 ..................................................................................... 8
1.4.3. CSARS v FOUNDER’S HILL (PTY) LTD 73 SATC 183 ................................................................ 10
1.4.4. JOHN BELL & CO (PTY) LTD V SIR 38 SATC 87 ......................................................................... 11
1.5.1 Of a capital nature – change in intention .................................................................................................. 11
1.5.1 CIR v VISSER 22 SATC 228 .................................................................................................................. 11
1.5.2 CIR v GEORGE FOREST TIMBER COMPANY LIMITED 1 SATC 20 ............................................ 12
1.6 Damages and compensation ...................................................................................................................... 12
1.6.1 WJ FOURIE BELEGGINGS v CSARS 71 SATC 125 ........................................................................ 12
1.6.2 STELLENBOSCH FARMERS’ WINERY LTD v CSARS 74 SATC 235 ........................................... 13
1.7 Of a capital nature – intention of a company ............................................................................................ 14
1.7.1 CSARS v CAPSTONE 556 (PTY) LTD ..................................................................................................... 14
pg. 2
1.1. OF A CAPITAL NATURE – INTENTION
1.1.1. CIR V RICHMOND ESTATES (PTY) LTD 20 SATC 355T
The taxpayer (a company) was incorporated to manage its sole shareholder’s investments and savings. The
memorandum of association of the taxpayer enabled it to trade and invest in land (to derive a rental
income from it).1
For a period of time, the taxpayer traded as well as invested in land. The taxpayer, however, experienced
difficulties in acquiring land for trade purposes (that is, to trade in land), in a specific region, due to
legislative amendments. The taxpayer therefore made the decision to cease trading in land and rather
use the land to earn rental income by developing the land. This decision was not documented formally
in a company resolution. 2
The shareholder became cognisant of further legislative amendments two years later. The shareholder
indicated that as such legislative changes may negatively affect the company’s property values, the
company disposed of the properties and realised substantial profits. 3
In determining whether the amount earned from the disposal of the properties constituted a receipt or accrual
of revenue or capital nature4 12, the court concluded the following:
• A change in the taxpayer’s intention, regarding the land, had taken place; a change from trading
stock to capital assets upon deciding to develop the properties to derive rental income.
• Although the change in intention (from held as trading stock to held as capital assets) was not
documented as a formal company directorate resolution (and was only validated by the statement
of the sole shareholder), there was no reason to conclude that the intention of the taxpayer did
not change.
• The sale of the capital assets was necessitated by the pending legislative amendments that
would adversely have affect the property values (not a change in intention). Furthermore, the
capital assets were sold at a profit. The mere decision to dispose of a capital asset at a profit
does not per se indicate that the profit is of a revenue nature.
• The nature of the proceeds from the disposal of the properties were, thus, capital in nature.12
Principle
A taxpayer’s intention may also change from revenue (trading stock) to capital (asset held to derive
rental income).5
The mere decision to dispose of a capital asset at a profit does not per se mean that the profit is
revenue in nature.6
1 Silke: First Touch to Tax 2019 M. Stiglingh - page 50

3 Silke: First Touch to Tax 2019 M. Stiglingh - page 50 and page 51
4 Income Tax – Cases and Materials – Third Edition – Emslie, Davis, Hutton and Olivier – page 245
pg. 3
1.1.2. COMMISSIONER OF TAXES SOUTHERN RHODESIA V LEVY 18 SATC 127
The taxpayer held a 25% shareholding in the company and was also a director of the company. The
company had 4 directors. The company purchased and developed land. 7
The taxpayer’s intention at acquisition of the shares was to hold them to generate dividend income 8.
At that stage, the taxpayer did not exclude the possibility to also hold the shares for purposes of
resale9. Moreover, at acquisition the taxpayer was really interested in generating a decent revenue
stream from the property (via dividends), even though the taxpayer hoped the property and accordingly the
value of the shares would increase10. The taxpayer sold the share 2 years later. 11
The taxpayer was of the view that the amount received from the sale of shares on disposal was of a capital
nature. The court had to rule whether it agreed with this view.12
The court held that the dominant intention of the taxpayer in purchasing the shares was to hold such
shares as an income earning investment. Further, no attempt was made by the taxpayer, at any time,
to dispose of the share and the taxpayer only disposed of the shares when the taxpayer was made an
offer for it. The offer was accepted with the objective of merely realising the investment.13
Principle
Determine the main or dominant intention of the taxpayer at acquisition, should the taxpayer have mixed
intentions in respect of an asset (dominant test).14 15
Kindly note: In the Lydenburg Platinum case it was held that the taxpayer’s dominant intention at acquisition
may also be deduced from the taxpayer’s subsequent actions with the asset. 16
1.2. OF A CAPITAL NATURE – SCHEME OF PROFIT -MAKING

1.2.1. CIR V PICK ’N PAY EMPLOYEE SHARE PURCHASE TRUST 54 SATC 271(A)
The Pick ‘n Pay group of companies formed a trust (the taxpayer) to administer a share purchase
scheme for the group’s employees; that is, to assist Pick ‘n Pay employees in obtaining shares in their
employer.17
The trust bought and sold shares18. Moreover, in order to sell shares to eligible employees, the trust
had to purchase these shares19. In addition, the trust was also required to repurchase, from employees,
shares that the employees forfeited20. The trust, thus, had no control over when to buy and when to sell
the shares21.
7 Silke: First Touch to Tax 2019 – page 52

8 Income Tax in South Africa – Cases and Materials – Fourth Edition – RC Williams – page 279
10
Silke: First Touch to Tax 2019 – page 52
12 Silke: First Touch to Tax 2019 – M. Stiglingh page 52
15 Notes on South African Income Tax 2019 – P Haupt page 45
21
A Student’s Approach to Income Tax 2021 – K Coetzee et. al page 64
pg. 4
The court had to determine the nature of the receipt or accrual from the sale of the shares. 22
The court held that for receipts or accruals to be revenue in nature, the receipts or accruals need to be made
‘by an operation of business in carrying on a scheme for profit-making.’ 23
Thus, for the receipts to be revenue in nature, it was not enough for the taxpayer merely to be carrying
on a business. Such business should also be performed with a profit-making purpose. 24
The share purchase scheme’s purpose was not scheme of profit making, as the trust was not trading with
shares based on the common-sense approach25. The receipts or accruals made by the trust were,
thus, purely fortuitous (incidental by-product), as such receipts or accruals were not intended or worked
for26. The receipts or accruals made by the trust were thus capital in nature27.
Principle
Receipts or accruals are of a revenue nature if the receipts or accruals are generated ‘by an operation of
business in carrying out a scheme of profit-making’.28
1.3. OF A CAPITAL NATURE – MIXED OR DUAL INTENTION

1.3.1. CIR V STOTT 3 SATC 253
Stott (the taxpayer) was a qualified surveyor and architect by trade.29
Stott purchased 2 properties and then subdivided these 2 properties, as set out below. He then sold the
subdivided land (properties) during a specific year of assessment. 30
• Property 1 – Seaside property
The taxpayer purchased the entire property as it was only for sale in its entirety (even though, its size
exceeded what he required for building his seaside cottage). Half the land was then later subdivided by the
taxpayer into smaller plots of land and sold. 31
The Commissioner was of the view that land was acquired for mixed intentions; that is, half the land for
personal use as a seaside cottage and the other half to be sub-divided (cutting up) for resale32.
• Property 2 – Small fruit farm
When the taxpayer purchased the small fruit farm, it was subject to a long-term lease. The taxpayer, however,
subdivided the land into smaller plots of land and sold it, after the tenant defaulted on the rent.33
22
Silke: First Touch to Tax 2019 – M. Stiglingh page49
32
Income Tax in South Africa (Cases and materials) RC Williams Fourth Edition pages 295
pg. 5
SARS was of the view that when the taxpayer subdivided the properties into smaller plots of land and sold it,
the taxpayer embarked on a scheme of profit-making.34
The court had to rule whether the amounts received from the sale of the subdivided land were revenue or
capital in nature.35
The court held the following36:
▪ The taxpayer’s intention at acquisition of the article (e.g., investment) is important and
conclusive, unless any other factor intervenes that indicates that it was disposed of in undertaking
a scheme of profit-making.37
▪ The taxpayer was required to buy the property in its entirety. This, in itself, does not suggest
that the taxpayer’s intention was to deal in land (scheme of profit-making).38
▪ The mere subdivision of land into smaller plots rather than to sale it as a whole, did not in
itself, constitute a change in the taxpayer’s intention from capital to revenue.39 A taxpayer is
entitled to sell an asset at best advantage. 40 The taxpayer is also entitled to accommodate the
asset to meet the demands of the market in which it is sold (e.g., sub-dividing of a property
rather than to sale it as a whole).41
▪ The receipts and accruals from the sales of the subdivided land were, thus, capital in nature.42
▪ Even though the taxpayer knew more about the subdivision and the valuation of land compared to the
general public as he was surveyor, this made no difference.43
Principle
The taxpayer’s intention at acquisition is important and conclusive, unless a change in the taxpayer’s
intention occurred thereafter; that is, if the taxpayer’s intention at acquisition is capital in nature and no
change in intention from capital to revenue in nature (scheme of profit-making) has taken place since
acquisition, the receipt or accrual will be of a capital nature.44
A taxpayer is entitled to sell an asset at best advantage. A taxpayer is also entitled to accommodate the
asset to meet the demands of the market in which it is sold.45
1.3.2. CIR V NEL 59 SATC 349

The taxpayer’s intention at acquisition of the Krugerrands was to hold them for long term investment
purposes; that is, to hedge against inflation46. The Krugerrands were, thus, obtained to hold for ‘keeps’.47

36
Silke: First Touch to Tax 2019 – M. Stiglingh page 50
38
Income Tax in South Africa (Cases and materials) RC Williams Fourth Edition pages 297
pg. 6
The taxpayer, however, decided to sell some of the Krugerrands to fund the urgent purchase of a motor
vehicle for his spouse.48
The court had to rule whether the receipt or accrual from the sale of the Krugerrands was of a revenue of
capital nature. 49
The court held that the taxpayer was merely realising a capital asset and that the taxpayer’s purpose with
disposing of the Krugerrands was clearly not to derive a profit thereof50. Thus, a capital asset (Krugerrands
held for ‘keeps’) was thus realised to purchase another capital asset (motor vehicle) 51.
Furthermore, the sale did not result in a change of intention, as the Krugerrands were bought for ‘keeps’
and was sold due to unusual or special circumstances that occurred. The amount received from the sale
of the Krugerrands was capital in nature.52
Principle
A capital asset (Krugerrands held for ‘keeps’) was realised to purchase another capital asset (motor
vehicle)53.
Krugerrands were bought for ‘keeps’ and was sold due to unusual or special circumstances that
occurred. The receipt or accrual from the sale of the Krugerrands was thus capital in nature.54
Thus, when the taxpayer disposed of the Krugerrands, there was no change intention and no scheme of profit-
making.55
1.4. OF A CAPITAL NATURE – CHANGE IN INTENTION

1.4.1. CIR V NUSSBAUM 58 SATC 283
The taxpayer inherited shares and also purchased shares with surplus income, over the years, to grow his
portfolio56. The taxpayer’s intention when he acquired the shares was to derive dividend income 57. The
taxpayer testified that he only disposed of shares when the dividend yield dropped58.
SARS was of the view that for the 3 years of assessment under review, the receipts and accruals from the
sale of the shares were revenue in nature. 59
The court had to rule on the nature of the receipts or accruals derived from the sale of the shares by the
taxpayer.60

49
55
Comment per Prof Piet Nel.
56 From: Silke: First Touch to Tax 2018 – page 52
58 From: Silke: First Touch to Tax 2018 – page 48 and Note on South African Income Tax 2019 – P Haupt page 56
59 From: Silke: First Touch to Tax 2018
60 From: Silke: First Touch to Tax 2018
pg. 7
The court held that:
• A drop-in dividend yield could only be caused by a drop-in dividend income or an increase in the
market value of the shares.61
• ‘In none of the instances with which the respondent dealt with in his evidence concerning the sale
of low yielding shares did he allege that the fall in yield had been due to a decrease in the
quantum of the dividends as such… on the evidence, therefore, once must conclude that the
reason for the decreases in dividend yield to which the respondent referred was the fact that
the market value of shares had increased. It was essentially this factor, irrespective of the length
of time for which the shares had been held, which occasioned profit’.62
‘Not only was profit inherent in the sale of shares whose dividend yield had dropped but the respondent
manifestly worked for it. He ‘farmed’ his portfolio assiduously. The number, frequency and profitability of
sales, especially of short-term shares, bears clear enough testimony to that’.63
• The taxpayer was carrying on a secondary business of dealing in shares due to the following
and therefore the shares were classified as trading stock (revenue in nature) 64:
• Each time the dividend yield dropped, shares were disposed; nearly always profitable; and
• The substantial number and the frequency of share transactions. 65
• The profit earned from the sale of shares was not merely incidental, even though the shares were
purchased by the taxpayer for investment purposes, as the taxpayer intended to deal in shares for
the purposes of making a profit as demonstrated above. The taxpayer’s intention thus changed
to holding the shares with a dual purpose. The receipts or accruals from the sale of the shares were
thus revenue in nature, as there was no clear dominant purpose.66 67
Principle
If the taxpayer has a primary purpose that is capital in nature (held for investment) and a secondary
purpose that is revenue in nature, the secondary purpose may cause the receipt or accrual to be
revenue in nature as the taxpayer pursue the 2 purposes simultaneously.68 (that is, the taxpayer has no
dominate purpose)69.
1.4.2. NATAL ESTATES LTD V SIR 37 SATC 193

A large piece of land, located north of Durban, was owned by the taxpayer 70. The taxpayer’s intention at
acquisition of the land was to use it for farming sugar cane; that is, capital in nature 71.
61 Income Tax in South Africa: Cases and Materials – RC Williams – Fourth Edition – page 343
62 Income Tax in South Africa: Cases and Materials – RC Williams – Fourth Edition – page 343
63
Nussbaum Judgment (Supreme court of South Africa) – page 25
64 Notes on South African Income Tax 2019 – P Haupt page 56 & Silke: First Touch to Tax 207 – M. Stiglingh page 53
65 Notes on South African Income Tax 2019 – P Haupt page 56 & Silke: First Touch to Tax 207 – M. Stiglingh page 53
68 From: A Student’s Approach to Income Tax – Natural persons - 2019 – K Coetzee page 61
69
Silke: First Touch to Tax 2020– M. Stiglingh page 50
pg. 8
Aware of the expropriation of the land possibility that existed at the time, the taxpayer investigated the
possibility of residential development of the land.72
As the directors then decided to proceed with the residential development of the land, the following
persons were appointed: consulting engineers, architects, financial advisors, marketers 73 . The
developed land was then sold to the public and investors 74.
The taxpayer engaged in township development and the marketing thereof, on a grand scale, to sale the
farmland75.
The court had to determine the nature of the receipts or accruals from sale of the land. 76
The court held that:
▪ ‘Something more’ than the mere decision to dispose of an asset at a profit, is required, to change the
taxpayer’s intention from capital to revenue77.
▪ The taxpayer commenced township development, on a large scale, to sell the land78.
▪ The way in which the land was sold was similar to the activities performed by a land dealer; it
had all that characteristics of a business transaction79.
▪ The taxpayer’s actions and the way of disposal of the land indicated a change in intention from
capital to revenue in nature (trading stock) 80 and thus ‘crossed the Rubicon’81.
▪ Accordingly, the receipts or accruals from the sale of the land were revenue in nature and included in
gross income.82
Principle
‘Something more’ than the mere decision to dispose of an asset at a profit, is required, to change the
taxpayer’s intention from capital to revenue83.
The taxpayer needs to determine whether it has ‘crossed the Rubicon’ and has gone over to the business
of selling the asset at a profit, using the asset as trading stock84
The taxpayer needs to determine whether it has ‘crossed the Rubicon’ by embarking on a scheme of profit-
making, using the asset as trading stock85.
72
73
74
76 Income Tax – Cases and Materials – Third Edition – Emslie, Davis, Hutton and Olivier – page 231 & 221 & 222
pg. 9
1.4.3. CSARS V FOUNDER’S HILL (PTY) LTD 73 SATC 183
The AECI Ltd held land as a capital asset.86 Founders Hill (the taxpayer) was formed to obtain and to sell
the land owned by AECI Ltd87. AECI Ltd owned all the shares of Founders Hill 88.
Founders Hill memorandum of association indicated that it was to realise the land at best advantage.
The court had to rule whether the receipts derived from the sale of the land were capital in nature.
‘The court distinguished this case from the Berea West case where it said that there was real justification for
the formation of the realisation company (in addition to the purpose of realising the assets) without which the
realisation of the asset would have been difficult, if not impossible. Where a company was formed solely
for the purpose of facilitating the realisation of property that could not otherwise be dealt with satisfactory, the
profit achieved on sale would be of a capital nature and would not be taxable.’ 89
Moreover, the court held that only in special circumstances may a ‘realisation company’ be formed to
facilitate the realisation of property, for example90:
• where the property is held by several owners and could more easily be disposed of by a single owner;
OR
• a need to protect the assets from the original owner.91
AECI Ltd could have sold the property itself; Founders Hill did not have to be formed.92
For the realisation company to be formed, there has to be real justification (special circumstances).93
Naming a company, a ‘realisation company’ does not in itself cause the profits from the sale of the
assets of a capital nature. 94
Thus, if special circumstances exist (real justification) for forming a realisation company, the realisation
company will stand in the shoes of the entity transferring the capital assets to it and in turn hold them
as capital assets.95
Principle
If special circumstances (real justification) exist for forming a realisation company, the realisation
company will stand in the shoes of the entity transferring the assets to it and in turn hold them as capital
assets96;
86
87
88
89 Notes on South African Income Tax: 2019 – P Haupt 2019 – page 54
94
Silke: First Touch 2019 – M. Stiglingh page 54
95 Silke: First Touch 2017 – M. Stiglingh page 37 & Income Tax in SA (Cases and materials) RC Williams Fourth Edition
page 255 - 256.

page 255.
pg. 10
If no special circumstances (no real justification) exist for forming a ‘realisation company’, the
‘realisation company’ will not stand in the shoes of the entity transferring the assets to it (not merely alter ego);
that is, the asset is acquired for purposes of resale by the ‘realisation campany’.97
1.4.4. JOHN BELL & CO (PTY) LTD V SIR 38 SATC 87

The taxpayer (company) owned premises. It carried on a textile business from this premises. The taxpayer,
however, relocated to a new premise. As the original premises was, thus, no longer required, the directors
of the company decided to dispose thereof. At that time, the property market was not performing well.
The directors postponed the sale of the premises until such time that the market value increased. A profit
was then realised on disposal of the original premises. The sale of the original premises was postponed
for 11 years. During this period the premises was let others. 98
The court had to determine the nature of the receipt or accrual.
Principle
The courts noted that ‘something more’ than a mere decision to dispose of the asset was required to
change the asset’s character and change the nature of its proceeds to gross income; thus, the receipt or
accrual is still capital in nature.99
Kindly note: Once a decision is made to dispose of a capital asset, waiting a period of time for the value
of the asset to increase prior to disposal, does not constitute a change in intention, unless the taxpayer
embarks on a scheme of profit-making in the interim.100
1.5.1 OF A CAPITAL NATURE – CHANGE IN INTENTION

1.5.1 CIR V VISSER 22 SATC 228
Mining options, to mine for mineral deposits on specific farms, were obtained by the taxpayer. The taxpayer
did not perform any mining activities, as these options had lapsed, by the time the taxpayer intended to do
so.101
The taxpayer was of the view that, if needed, he would be able to obtain such options from the farmers
again, as he had persuasive influence over these farmers. Due to the aforementioned, a company
contacted the taxpayer to assist it in acquiring mining options in the area. In exchange for rendering
these services, the company would provide the taxpayer with shares in the company. 102
The court had to determine that nature of the shares acquired.103
page 255.
100 A Student’s Approach to Income Tax – Natural Persons 2019 – K Coetzee page 59
pg. 11
The product received by a person for using its wits and energy (tree), is income. Therefore, the shares
obtained by the taxpayer is of a revenue nature, as the shares obtained was the product received by the
taxpayer for using its wits and energy.104
Principle
The fruit constitutes the income produced by the income-producing asset (capital asset). The tree
constitutes the income-producing asset (capital asset). Fruit is revenue in nature, while the sale of the tree
is capital in nature.105
1.5.2 CIR V GEORGE FOREST TIMBER COMPANY LIMITED 1 SATC 20

The taxpayer, to carry on its business, obtained a natural forest. A number of trees were felled, sawn up
in its mill and then sold as trading stock, each year.106
The court had to determine the nature of the timber sales.107
The court held that the taxpayer created and sold a new product, it was not merely realising a capital asset.
The receipts from the timber sales were revenue in nature.108
Principle:
Floating capital (trading stock) is considered to be consumed and disappears in the production
process. Fixed capital, however, does not do so; it produces fresh wealth and remains intact.109
1.6 DAMAGES AND COMPENSATION

1.6.1 WJ FOURIE BELEGGINGS V CSARS 71 SATC 125
The taxpayer leased a hotel to carry on its business as hotelier 110. In terms of the agreement entered
into between the taxpayer and the third party, the taxpayer was required to supply accommodation to
persons for a lengthy period of time 111. For various reasons this contract was terminated early112. The
compensation obtained by the taxpayer in respect of the termination of the contract was to settle all claims
that may have arisen as a result thereof 113; that is, to compensate the taxpayer for the loss of profits
suffered as the persons left early (accommodation not provided to them for entire period).114
The court had to rule whether the amount received as compensation for cancellation of the contract was
revenue or capital in nature115.

107 From: Silke: First Touch to Tax 2019 – M. Stiglingh page 48
108
From: Silke: First Touch to Tax 2019 – M. Stiglingh page 48
109
From: Silke: First Touch to Tax 2019 –– M. Stiglingh page 48
110 Notes on South African Income Tax 2019 – P Haupt – page 51
111 Silke: First Touch to Tax 2019 – M. Stiglingh – page 54
113 Silke: First Touch to Tax 2019 – M. Stiglingh - page 54
114
Income Tax in South Africa – Cases and Materials – Fourth Edition – RC Williams – page 356
pg. 12
The taxpayer’s income earning structure included the lease of the hotel. This was not lost when the
abovementioned contract was terminated, as the taxpayer could still continue to use the hotel to generate
income116.
Contracts entered into by the taxpayer to supply accommodation were income-earning contracts, as the
taxpayer generated income from the use of the income-earning structure (hotel); that is, taxpayer
generated income from using the hotel to supply accommodation to guests. Compensation received
regarding the termination of an income-earning contract was therefore revenue in nature 117.
Thus, this contract was ‘a product of the taxpayer’s income earning activities, not the means by which
it earned income’118.
Principle
A contract directed by its performance towards making a profit in which case the compensation received
for the cancellation of the contract will be income in nature;119 and
A contract which was a means of producing income (that is, a contract that provides an income
producing capital structure/asset) in which case the compensation received for the cancellation of the
contract will be capital in nature.120
1.6.2 STELLENBOSCH FARMERS’ WINERY LTD V CSARS 74 SATC 235

The taxpayer had the sole distribution right of whiskeys in South Africa. Per the contract, the taxpayer
held such right for 10 years. During this period, the sale of such whiskeys contributed substantially to the
profitability of the taxpayer. The company that granted the taxpayer the sole distribution right was subject to a
group restructuring: this, resulted in the early termination of the sole distribution right. The taxpayer, thus,
obtained compensation for the early termination of this agreement 121.
The court had to determine whether the amount received for the early termination of the sole distribution right
was revenue or capital in nature122.
The court held that the sole distribution right was a capital asset (it established an income producing
structure) 123 and that such asset was lost when the sole distribution right was terminated. Furthermore, the
taxpayer was not trading in such rights (not a scheme of profit making) 124.
Compensation received for the impairment of the taxpayer’s business, due to the loss of the sole
distribution right, was of a capital nature125.

119
Silke: First Touch to Tax 2017 – M. Stiglingh – page 38
120
Silke: First Touch to Tax 2017 – M. Stiglingh – page 38
121 Silke: First Touch to Tax 2019- M Stiglingh – page 54
122 Silke: First Touch to Tax 2019 –M Stiglingh page 54
123
Silke: First Touch to Tax 2019 – M. Stiglingh – page 54 & 55 & Silke: First Touch to Tax 2017 – M. Stiglingh – page 38
& 39
124 Silke: First Touch to Tax 2019 – M Stiglingh page 54
125 Silke: First Touch to Tax 2019 – page 54
pg. 13
Principle
The amount received to compensate for the impairment of the taxpayer’s business, due to the loss of the sole
distribution right, was of a capital nature 126.
Thus:
Loss/termination of a capital asset OR the sterilisation/impairment of a substantial part of the income-

producing structure is capital in nature.127
1.7 OF A CAPITAL NATURE – INTENTION OF A COMPANY

1.7.1 CSARS V CAPSTONE 556 (PTY) LTD
The taxpayer disposed of shares in a company that was acquired to rescue a major business in the retail
sector. The court had to consider whether the proceeds of the sale of shares were of a capital or revenue
nature.
The taxpayer’s intention at the time of acquisition of the shares was to make a strategic investment in a leading
company in the furniture industry as part of a large-scale ‘rescue operation’ (and this was overwhelmingly
supported by the objective evidence). It was clear from the evidence that the taxpayer’s decision to sell the
shares was not foreseen (even though the shares were sold less than five months after the acquisition date),
as the circumstances that prevailed at the time of sale were materially different from the circumstances
prevailing when the obligation was incurred.
The court held that it was clear from the evidence that the first and primary purpose of the acquisition of the
shares was to rescue a major business in the retail furniture industry by a long-term investment of capital. The
court held that this involved commitment of capital for an indeterminate period involving considerable risk and
only a very uncertain prospect of a return and that this was consistent with an investment of a capital nature
that was realised sooner than initially expected because of skilled management and favourable economic
circumstances.
It was not a purchase of shares as trading stock for resale at a profit and the proceeds were, therefore, held
to be of a capital nature.
Principle
Profits on share transactions are not only subject to normal tax if the frequency and volume of the number of
transactions are so great as to constitute the carrying on of a business. The intention with regard to which
shares are held will determine whether the proceeds on the sale thereof would be classified as capital or
income in nature. Like any other assets, shares may be trading stock.
Where there is a purchase of shares NOT as trading stock for resale at a profit, the proceeds from the
sale will be held to be of a capital nature. (Subject to section 9C – equity shares that are held by the taxpayer
for at least three years, the receipt on the disposal of the shares is deemed to be capital in nature).
126
Silke: First Touch to Tax 2019 – M. Stiglingh – page 54 & 55
127
Silke: First Touch to Tax 2019 – M. Stiglingh – page 54 & 55 & Silke: First Touch to Tax 2017 – M. Stiglingh – page 38
& 39
pg. 14

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Taxation II:

1 Silke: First Touch to Tax 2019 M. Stiglingh - page 50

1.2. OF A CAPITAL NATURE – SCHEME OF PROFIT -MAKING

7 Silke: First Touch to Tax 2019 – page 52

1.3. OF A CAPITAL NATURE – MIXED OR DUAL INTENTION

• Property 1 – Seaside property

• Property 2 – Small fruit farm

The court held the following36:

1.3.2. CIR V NEL 59 SATC 349

34 Silke: First Touch to Tax 2019 – M. Stiglingh page 50

1.4. OF A CAPITAL NATURE – CHANGE IN INTENTION

48 Silke: First Touch to Tax 2019 – M. Stiglingh page 50

1.4.2. NATAL ESTATES LTD V SIR 37 SATC 193

The court held that:

• a need to protect the assets from the original owner.91

page 255 - 256.

1.4.4. JOHN BELL & CO (PTY) LTD V SIR 38 SATC 87

The court had to determine the nature of the receipt or accrual.

1.5.1 OF A CAPITAL NATURE – CHANGE IN INTENTION

The court had to determine that nature of the shares acquired.103

1.5.2 CIR V GEORGE FOREST TIMBER COMPANY LIMITED 1 SATC 20

The court had to determine the nature of the timber sales.107

1.6 DAMAGES AND COMPENSATION

104 From: Silke: First Touch to Tax 2019 – page 49

1.6.2 STELLENBOSCH FARMERS’ WINERY LTD V CSARS 74 SATC 235

116 Notes on South African Income Tax 2019 – P Haupt – page 51

Loss/termination of a capital asset OR the sterilisation/impairment of a substantial part of the income-

1.7 OF A CAPITAL NATURE – INTENTION OF A COMPANY

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