BLR 310 Cram Notes (Theme 1-10)

CRAM BLR310 Wednesday 04 May 2022
Please Note: These notes have been compiled from various academic sources and they
do not represent the ideas of the maker but rather those of the academic authors. All credit
is due to the authors of such academic material and no CRAM note maker will take credit
for such material. These materials should also not be used as a single source of study
material for tests and exams but rather to make the prescribed academic work more
understandable and reasonable.
These notes were compiled from the following sources: M Stiglingh et al SILKE: South
African Income Tax (LexisNexis, 2022), and Prof van Zyl’s lecture recordings.
1 CRAM Quality Information, Quickly

BLR310 (TAX LAW)

THEME 1 – THE CONTEXT OF TAXATION
Why do people pay taxes?
- There is a relationship (social contract / compact) between the government
(gov) and citizens:
o The citizen has the responsibility to pay taxes
o The gov has the responsibility to deliver certain goods and services
- Is there a direct quid pro quo?
o Aka is taxation reciprocal? If I pay R600 000 in taxes in a year, am I entitled
to R600 000 worth of service delivery by the state? -> NO!
o Why? -> distribution of wealth is an element of tax
o E.g.) Wealthy people pay more taxes annually, but this does not mean that
they are entitled to more or better service delivery than poorer people
- Theories why people pay taxes:
o Fear of punishment/shame -> coercion theory
o Influenced by social structure -> social influence theory
§ E.g.) if you come from a family where law abidance is primary, you will
be likely to follow the footsteps of your elders and also be a law-
abiding citizen -> the opposite is also true if you grow up in a criminal
family
o They value the good that the gov does -> public good theory
§ E.g.) if people see the gov doing good things for the citizens, then the
people will be more likely to pay taxes so the gov can do more good
things
§ E.g.) if people see the gov using taxes to buy nice cars for themselves
or building unnecessary luxuries, they will be less likely to pay taxes
o Paying taxes in equivalent to charitable donations -> tax affinity
hypothesis
§ E.g.) the affluent person knows that there is duty on the state to
distribute the wealth. These rich people might not know where else to
give their money, so they give it to the gov
o In exchange for service delivery by the state -> social contact theory
§ Majority of South Africans who do not pay taxes fall into this theory ->
gov service delivery is bad in our country
DEFINE TAXATION:
- Tax = compulsory payments that are imposed on citizens to raise revenue in order
to fund general expenditure, such as: education, health, and housing for the benefit
of society as a whole
PROVIDE AN OVERVIEW OF THE SA TAX SYSTEM:

- SA has an income tax system (aka we pay taxes based on our income)
o The current tax threshold is R91 250. If you earn less than this, then you
don’t have to pay taxes
- The gov formulates a “tax policy” in order to decide on the appropriate level of
taxation to be imposed
- The tax policy ensures that the gov’s objectives are achieved
- In order to formulate the tax policy, the gov has to make decisions about the
following fundamental considerations:
o (1) The tax base
§ Income (this one applies to SA)
§ Wealth
§ consumption
o (2) The tax rate structure
§ Rate
• Marginal tax rate
• Statutory tax rate
• Average tax rate
• Effective tax rate
§ Structure
• Progressive
• Proportional
• Regressive
o (3) The incidence of tax liability
§ Who bears the burden of tax?
§ Also consider the indirect burden
- These components ^ need to be guided by the general principles of taxation
(1) Tax base:

- = the amount on which tax is imposed
- This amount (the specific tax base) is usually determined by legislative provisions
- Economic income will NOT always be equal to the amount subjected to tax
o E.g.) You earn R30 000 per year (this is your economic income). If tax
legislation says that R20 000 of your annual income is tax free, then you will
only have to pay tax on R10 000 (R10 000 is the tax base).
- Although we always look at the legislation to define the specific tax base, there
are 3 types of tax base we usually encounter:
o (a) Income tax base -> includes income earned or profits generated by
taxpayers during a year
o (b) Wealth tax base -> consists of the value of assets or the property of a
taxpayer
o (c) Consumption tax base -> encompasses the amount spent by taxpayers
on goods and services
- After determining the tax base, a percentage/unit is applied to this amount to
determine the tax liability
(2) Tax rate structure

Tax rate can be expressed in 2 ways:
- (i) As a percentage
o E.g.) tax is imposed at 15% on the value of a transaction
- (ii) As an amount per unit
o E.g.) taxes are imposed on each pack of cigarettes consumed in a country
There are 4 types of tax rates:
- (a) Marginal tax rate
o This is the tax rate that will apply if the tax base increases by R1
- (b) Statutory tax rate
o This is the tax rate that is imposed on the tax based according to legislative
provisions
- (c) Average tax rate
o This is the rate at which tax is paid with reference to the total tax base of a
taxpayer
§ Average tax rate = total tax liability
Total tax base
- (d) Effective tax rate
o This is often used as a measure to compare the effective tax liabilities of
different taxpayers
§ Effective tax rate = tax liability
Total profit or income
Tax rates are usually determined with reference to the following structures:
- (i) Progressive tax rate structure
o The tax rate increases as the tax base increases
o This structure is favoured by govs that aim to achieve wealth redistribution
(the type of tax structure is elected by policymakers depending on what
policy objectives they want to achieve)
o E.g.) an income tax system is an example of a progressive tax system
- (ii) Proportional tax rate structure
o The tax rate does not change even when the tax base changes (flat rate is
charged)
- (iii) Regressive tax rate structure
o The tax rate increases as the tax base decreases
o E.g.) the VAT system is an example of a regressive tax system (no matter
how little you consume, you will always have to pay VAT)
(3) The incidence of tax liability

Who bears the true burden of tax?
- The person liable for tax is NOT necessarily the person required to pay the tax
- E.g.) sometimes employers pay tax to revenue authorities on behalf on their
employees even though it is the employee who is liable to pay taxes -> in this
example, the tax burden is borne by the employee even though it is paid by the
employer
- E.g.) every time you buy coco-cola, you don’t run to SARS to pay VAT. The owner
of the vending machine adds the tax amount onto the coke price. So you bear the
burden of tax when buying the coke, but the retailer will pay the VAT to SARS
When designing tax policy, it is important for policymakers to consider the
following:
- On whom the tax burden will fall
o E.g.) increasing fuel levies -> petrol more expensive -> transporters have to
increase the prices of their food to cover high fuel prices -> this will
negatively impact all consumers, especially lower-income households
o One objective of tax policy is to contribute to the redistribution of income and
opportunities in order to increase job creation and make SA an attractive
destination for investment
- The principles of taxation
THE REQUIREMENTS FOR A GOOD TAX SYSTEM:

Canons/pillars/principles of taxation -> determined by Adam Smith in 1778
(1) The Equity Principle

o = tax should be imposed according to one’s taxable ability or capacity
o This principle is based on the concept of fairness -> if tax is perceived to be unfair, it
could negatively impact taxpayer’s willingness to comply
o Equity is underpinned by:
§ The ‘ability-to-pay’ principle
• = The tax imposed on a taxpayer should take into account the economic
capacity of the taxpayer (how much can the taxpayer afford to pay?)
§ The ‘benefit’ principle
• = equity is established where a taxpayer pays tax in proportion to the
benefit received from a government (via tax revenue spending)
o This means that equity takes into account economic capacity AND benefits received
from the state
o Equity can be further subdivided into:
§ ‘Vertical equity’
• = Vertical equity is achieved where a taxpayer with a greater economic
capacity (ability to pay) bears a greater burden of tax than a taxpayer with
a lesser ability
• Person with higher economic capacity pays more
§ ‘Horizontal equity’
• = Horizontal equity is achieved where taxpayers with equal economic
capacity bear an equal tax burden
• Persons of same economic capacity pay the same
(2) The Certainty Principle

- = the timing, amount, and manner of tax payments should be certain
- How is certainty facilitated? -> tax policy must be:
o Finalised long before its implementation
o Managed in a transparent manner
o Applied in a consistent manner
- Uncertainty about how to apply the relevant legislative provisions or when new
legislation will be introduced etc. will have a negative impact on the economy
(3) The Convenience Principle

- = taxes should be imposed in a manner or at a time that is convenient for taxpayers
- It needs to be easy for taxpayers to comply with tax legislation and to pay their tax
liabilities
- E.g.) allowing people to pay their taxes via the internet rather than physically
queuing at an office + automatically including value-added tax in the retail selling
prices of goods and services supports the Convenience Principle
(4) The Economic Efficiency Principle

- = tax should be designed in a manner not unduly influencing economic decision-
making
- Tax is regarded as economically efficient if it does not unduly influence a person’s
economic decision-making
- This principle plays an important role in preserving the tax base

- If tax is inefficient, taxpayers would be motivated to change their behaviour in an
effort to avoid paying taxes
- Tax that is not economically efficient is not always negative from a policy
perspective, especially when it encourages desired behaviour
o e.g.) levying taxes based on alcohol increase could encourage reduced
alcohol consumption, and also generate indirect social benefits (such as less
domestic violence and road accidents). However, some consumers may
continue with the undesired behaviour because of their specific preferences
- What about Pigouvian taxes? –> these are taxes on things that create socially
harmful effects, and such taxes are meant to change human behaviour
o E.g.) sugar tax -> sugar is taxed to reduce diabetes and obesity
(5) The Administrative Efficiency Principle

- = The tax system should be designed in such a manner as to not impose an
unreasonable administrative burden on the taxpayer and the revenue authorities
- The cost to implement/maintain/administer the tax system should NOT exceed the
revenue that the system is able to generate
(6) The Flexibility principle

- = a good tax system should be designed in such a manner that it accounts for
changing economic circumstances
- This principle is also referred to as tax buoyancy -> how responsive the tax revenue
is in the face of the rapidly changing global economy
- If the tax system is not flexible to the dynamic trade/economic environment, it can
become outdated and obsolete
- The tax system must be able to adapt to modern business models (e.g. selling
goods over the internet) and economic outlooks (e.g. COVID special relief)
(7) The Simplicity Principle

- = tax should be designed in a manner that is easy to understand and apply
- Tax legislation and its application should be simple enough so that a
relatively/reasonably knowledgeable taxpayer would be able to understand and
apply it

- The order in which these principles are applied depend on the policy objective to be
achieved
o E.g.) if the policy objective is the redistribution of wealth, the Equity principle
will be applied first
- These principles function like a tax-ecosystem -> they cannot be isolated from each
other as this may result in policy failure

THEME 2 – TAXATION IN SOUTH AFRICA

The legislative process:
1. Green Paper
o Policy doc open to public discussion
o Sets out a gov departments (aka the National Treasury)’s general view of the
matter under consideration (aka tax laws)
2. White Paper
o Represents a more refined version of the Green paper where all the public
comments have been taken into consideration
3. Draft Money Bill

o Draft set of legislation
o Prepared by the National treasury and submitted to the Minister of Finance
o Cabinet approval must be obtained
o Reviewed by state law advisors to ensure that it does not conflict with the
consti and other existing laws
4. Act of Parliament
o After approval, the Minister of Finance introduces the Bill into Parliament (NA
and NCoP)
o Bill is then published in Gov Gazette for public comment -> amendments are
made where required
o Only once the Bill passes through parliament successfully, will it be
submitted for assent by the President
o Once assented, the Bill becomes an Act of Parliament and becomes binding
on either:
§ The date the Act was published in the gov gazette
§ A date determined in the Act itself
§ The date indicated in the gov gazette

Current tax legislation / tax types that are levied at a

national level in SA:
- In SA, different types of taxes are levied based on income, wealth, and consumption
(these are tax base categories)
Current national taxes levied in SA:

LEGISLATION TAX TYPE TAX BASE TAX BASE
CATEGORY
Income Tax Act Normal tax Taxable income Income
58 of 1962 (ITA)
ITA Withholding tax Gross amount Income

payable to non-
resident/beneficial
owner
ITA Turnover tax Taxable turnover Income
ITA Dividend’s tax Gross amount of Income

dividend
ITA Donations tax Value of property Wealth

disposed of under a
donation
Value-Added Value-added tax Taxable supplies of Consumption
Tax Act 89 of goods and services
1991 (VATA)
Value of property
Transfer Duty Transfer duty acquired or property Wealth
Act 40 of 1949 value enhancement

via annunciation of
rights

Estate Duty Act Estate duty Dutiable amount of Wealth
45 of 1955 estate
Securities Securities Taxable amount of Wealth

Transfer Act 25 transfer tax transferred security
of 2007
Customs and
Excise Act 91 of Customs duties Imported goods Consumption
1964 (CEA)
CEA Excise duties and Specified goods Consumption

levies manufactured
and/or consumed in
SA
Unemployment Unemployment Remuneration Income
Insurance insurance
Contributions contributions
Act 4 of 2002
Skills Remuneration Income

Skills and
development levy
Development
Levies Act 9 of
1999
(Tax base can be broadly classified into 3 tax base categories: income / wealth /
consumption)
Tax base for income is income earned or profits generated by taxpayers during a year of
assessment
- Tax base for wealth consists of the value of assets or property of the taxpayer
- Tax base for consumption is the amount spent by taxpayers on goods & services
- The burden is on the taxpayer and it is paid to SARS by the employer/taxpayer

Normal tax:
- Also called income tax
- Imposed by the Income Tax Act 58 of 1962 (ITA)
- Tax base = taxable income
- Tax base category = income
- Income tax also consists of:
o PAYE
§ Pay as you earn
§ Employees tax that is deducted by employer by employee’s
remuneration
o Capital gains tax
§ Tax that is levied on the disposable of a capital asset
§ Taxes the growth in value of that assets up until date that asset is
disposed of
o Corporate income tax
§ Tax paid by resident or non-resident companies that operate a
permanent company or branch in SA
§ The non-resident will be taxed on income that is sourced from SA
§ Charged at a fixed rate of 28%. Recently it was announced that it will
be reduced to 27%.
Withholding tax:
(Forms part of normal tax along with PAYE, capital gains tax and corporate income tax)
- Imposed by ITA
- This is tax that is withheld at the source. What happens is the payer withholds a
certain percentage of the amount owed to someone and they pay it over to SARS
on behalf of that person. Only the net amount gets paid to that other person and a
portion of that gets paid to SARS. This is referred to as a third party
- burden on the taxpayer and it is paid to SARS by the withholding person (AKA third
party)
- Tax base = Gross amount payable to non-resident/beneficial owner

- Withholding tax from the source places a responsibility on a person that owes an
amount of money to another person, to withhold an amount of tax from the amount
owed to that other person -> Only the net amount is then paid to that other person
(normally a non-resident) -> The tax withheld by the payer must be paid over to the
South African Revenue Service (SARS) on behalf of the recipient
- Types of withholding tax: (3 types)
o (1) Taxes withheld on payments of remuneration by employers to
employees
§ The employer has a duty to withhold tax from the employee’s
remuneration and pay it over to SARS
§ Not a final tax. It is rather deducted from normal tax
§ Amount is subject to relief ito the Employment Tax Incentive Act 26
of 2013
o (2) Taxes withheld on payments of dividends by companies to beneficial
owners
§ Dividends tax is also a withholding tax that is payable on the amount
of any dividend paid by a resident or non-resident company that is
listed on the stock exchange in SA to a beneficial owner
§ Dividends tax is a final tax
o (3) Taxes withheld on payments to non-residents
§ The withholding taxes are withheld by a resident paying an amount to
a non-resident and are paid over to SARS by the resident (middleman)
on behalf of the non-resident (on whom the tax liability rests)
§ A reduced rate for withholding taxes may apply depending on the
relevant applicable double taxation agreement between South Africa
and the other country
§ There are four types of payments made by a resident to a non-resident
which are subject to withholding tax
• Withholding tax on payments to non-resident sellers of
immovable property
• Withholding tax on royalties
• Withholding tax on interest

• Withholding tax on payments to foreign entertainers and
sportspersons
Turnover tax: (also forms part of normal tax)

- Imposed by the ITA
- It is a simplified tax system that is aimed at making is easier for micro businesses to
meet their tax obligations
- Tax base = taxable turnover
- Provides for an elective turnover tax for micro-businesses with an annual turnover of
R1 million or less
- Turnover tax is a tax calculated on the taxable turnover of a registered micro
business, and not on its taxable income
Dividends Tax: (forms part of normal tax)

- Imposed by the ITA
- Tax base = gross amount of dividend
- This is tax on shareholders who are the beneficial owners of the shares of the
company where dividends get paid to them
- Dividends tax is payable at a fixed rate of 20% on the amount of any dividend paid
by a resident company or a non-resident company that is listed on a recognised
stock exchange in South Africa, with certain exceptions like:
o Headquarter companies, oil and gas companies and international shipping
companies
- There are certain exemptions meaning that they do not pay tax, or they are entitled
to a reduced rate, usually this happens in the case of foreign residents and there is
a tax treaty.
Donations tax: (forms part of wealth tax base)

- Imposed by s54 of ITA to prevent the avoidance of estate duty through the
gratuitous distribution of property while the resident is still alive
- Tax base = value of property disposed of under donation (category = wealth)
- Donations tax is a tax on the gratuitous (free – if they give something back in return)
transfer of wealth (property)

- Donations tax is levied on the value of all donations, other than those specifically
exempt, made by a donor who is a resident
- First R100 000 is free of tax, after that amount, it will be subject to donations tax
- From 1 march 2018, donations tax is levied at 20% on the aggregate value of the
property donated, not exceeding R30mil and then 25% on donations exceeding
R30mil. (section 64 of ITA)
Value-added tax: (forms part of consumption tax base)

- Imposed by VATA 89 of 1991
- Tax base = taxable supplies of goods and services (category = consumption)
- Output tax is levied at 15% (since 1 April 2018) on the supply of goods or services
by a registered VAT vendor in SA
- The final consumer bears the cost of VAT
- VAT is also levied on certain goods and services imported into SA
- There are certain goods that are charged at 0% VAT or are exempt from VAT. (zero-
rated and exempt are not the same thing!!)
- Examples of zero-rated goods are: eggs, bread, milk, maize meal, potatoes.
(amongst others)
- The Burden is on the customer to pay and this is paid to SARS by the vendor.
Transfer duty: (forms part of wealth tax base)

- Transfer duty is levied ito TDA 40 of 1949 on the cost price of fixed property using a
sliding scale
- The person buying the property is liable to pay the transfer duty
- It is a wealth tax payable by the purchaser upon the acquisition of certain property
in SA
- Tax base = value of property acquired or property value enhancement via
annunciation of rights (category = wealth)
Estate duty: (forms part of wealth tax base)

- Levied ito EDA 45 of 1955 to tax the transfer of wealth from the deceased estate to
the beneficiaries
- Levied on residents of SA or non-resident that lives on SA property
- The estate duty is carried out by the executor of the estate but can also be paid by
a beneficiary of the deceased in certain circumstances
- Levied on the dutiable value of the estate of a deceased person at a fixed rate of
20% of the dutiable value that does not exceed R30 million and 25% of the amount
that exceeds R30 million.
- Tax base = dutiable amount of estate (category = wealth)
- When a person dies and they have an estate -> this estate duty must be paid
Securities transfer tax (forms part of wealth tax base)

- Imposed by the STTA 25 of 2007 at the rate of 0,25% of the taxable amount of the
transferred security
- Payable by the purchaser on:
o The transfer of listed and unlisted shares in companies incorporated in SA
o The transfer of shares of foreign companies listed on any recognised stock
exchange in SA
o The transfer of members’ interests in a close corporation
- Tax base = taxable amount of transferred security (category = wealth)
Customs and excise duties and levies (forms part of consumption tax base)
- There are 2 types of taxes imposed by the CEA 91 of 1964:
o Customs duties are imposed on the importation of goods into South Africa
with the aim of protecting the local market and raising the revenue in SA
(encourages us to shop locally instead of ordering internationally
o Excise duties and levies are imposed on certain luxury or non-essential
goods manufactured and/or consumed in South Africa
- Tax base category = consumption
- Calculated as a percentage of the value of the goods. It also encourages people to
buy locally
- Levies that are levied in SA are: fuel levy, sugar tax, environmental tax (plastic bags),
electricity tax and sin tax (tax on alcohol and tobacco)
- General knowledge: from 1 Jan 2023, vape tax will be introduced on vaping
products, which will be at least R2,90.
Unemployment insurance contributions (forms part of normal tax)

- Also called UIF

o Gives short-term relief to workers who have been recently unemployed or
who are unable to work because of maternity, adoption, paternal leave, or
illness (it benefits the employee)
- Determined with reference to remuneration of specified employees as per the UICA
4 of 2002 to provide relief to employees during short periods of unemployment.
- The amount contributed by the employee is deducted from the employee’s gross
remuneration.
- Contributions are made by both the employer and employee in equal parts (1% of
gross remuneration is paid by each)
- But the employer withholds it and then pays it over to SARS. so the employer pays
a total contribution of 2% within the prescribed period
- Tax base = remuneration (category = income)
Skills development levies (forms part of normal tax)

- Determined with reference to remuneration of specified employees as per the SDLA
9 of 1999
- Contributions are made by employers only
- Tax base = remuneration (category = income)
- Levy imposed to encourage learning and development in SA
Note:
- Direct tax is levied directly on the person and its paid directly to SARS
- Indirect tax is levied on the transaction and passes from the payer to the supplier to
SARS (customer> supplier >SARS) e.g. VAT is an indirect tax.
The incidence of tax liability / burden of tax:

When it comes to VAT:
• Burden of tax rests of the consumer
• Liability to pay the tax rests on the vendor
• e.g.) if you order food from steers and see a VAT amount on your slip, you paid that
amount at the same time you paid for your food, but steers will pay that VAT
amount (that you paid them) to SARS
When it comes to income tax:
• The burden of tax rests on the employee
• The liability to pay tax rests of the employer
• e.g.) PAYE -> when you start working, your employer will deduct tax from each of
your salaries and pay it to SARS on your behalf

When it comes to withholding tax:
• The burden rests on the taxpayer
• The liability to pay the tax rests on the person withholding the tax
Tax incidence refers to the burden of liability in terms of the paying of the tax
ADMINISTRATION OF TAX LEGISLATION

- SARS = gov department dealing with SA tax admin -> founded ito SARSA 34 of
1997
- Administrative requirements and procedures ito tax laws are regulated by the Tax
Administration Act 28 of 2011 (TAA)
- SARS is responsible for administering the relevant tax Acts drafted and legislated by
the National Treasury
- The Commissioner of SARS must collect taxes and ensure compliance with tax laws
- SARS must also interpret the tax laws of SA
INTERPRETATION OF TAX LAW

- Ito s102 of the TAA, burden of proof lies with taxpayer to claim any exemption,
non-liability, deduction, abatement, set-off, or exclusion
- No provision in any tax Act can contravene the provisions of the Constitution or the
BoR. Ito s39(2) of the consti, all interpretations of tax law legi must promote the
spirit, purport, and objects of the BoR
- 2 most important sources of tax law:
o Tax law legislation
o Judicial decisions
Tax legislation:
- Essential sources to use when interpreting tax legi = taxing statutes and their
regulations, double taxation agreements, definitions in the TAA and the
Interpretation Act
- Non-essential sources that provide guidance = Interpretation Notes and Binding
General Rulings

Regulations:
- S107(1) of the ITA enables the min of finance to make regulations regarding certain
matters, such as:
o Duties of all persons engaged in the administration of the ITA
o The limits within which these persons are to act
o The nature and content of the accounts to be rendered by the taxpayer and
their manner of authentication
o The method of valuation of limited interests in the property (annuities,
fiduciary, usufructuary etc.)
- These regulations are published in the gov gazette and have the same power as legi
Double Taxation Agreements (DTA):

- DTA = agreements to avoid the imposition of double taxation when residents of a
country transact in another country -> DTA are entered into by the govs of the
respective countries
- DTA’s are published in the gov gazette
- Where there is conflict between the ITA and the DTA -> the DTA takes preference
Definitions:
- The main source of definitions of words used in tax legislation are contained in s1 of
the ITA
- All definitions are subject to their provisos (exceptions)
- If there are inconsistencies between the ITA and TAA -> ITA prevails
The Interpretation Act:

- When is it necessary to look at the Interpretation Act 33 of 1957 for guidance?
o If a term used in the ITA is not defined in another tax Act (aka the ITA does
not define a term)
o Ambiguities exist in the ITA
- If a definition given in the ITA differs from the definition given in the Interpretation
Act -> the definition in the ITA takes preference unless the context indicates
otherwise
- If a term is not defined in primary legi or the Interpretation Act -> dictionary may be
used. If uncertainty still exists -> case law may be used.

Interpretation Notes and Binding General Rulings (BGRs):
- SARS publishes Interpretation Notes that do not form part of tax legislation -> serve
only as guidelines
- Interpretation notes do not have the force of law unless they are binding private or
class rulings (binding on SARS, NOT on the taxpayer or the court)
- an Interpretation Note does not bind the Commissioner, unless it contains a
statement that it is a Binding General Ruling (BGR) in which instance the
Commissioner is bound to its interpretation
- In cases where an interpretation note has been recognised by both SARS and the
taxpayer, the court may consider the interpretation note when interpreting legi
Judicial decisions:
- If a taxpayer is aggrieved with his assessment, he may appeal along the following
appeal route as provided for by the TAA:
o Tax board -> Tax court -> Provincial divisions of the HC -> SCA
- Tax board:
o Deals with appeals where the tax amount in dispute does not exceed R1000
000
- Tax court:
o Not a court of law and has no inherent jurisdiction
o Tax court is not bound by its own decisions, but it is bound by the HC and
the SCA (ito the principle of legal precedence)
o A decision by the tax court is only binding on the parties to the specific case
- Provincial Divisions of the High Court:
o A provincial division of the HC is generally bound to their own decisions, but
they are not bound to the decisions of other provincial divisions
- The Supreme Court of Appeal (SCA)
o Not bound by the decision of any provincial division
o SCA is bound by its own decisions
o All subordinate courts are bound to the decision made by the SCA (legal
precedence)

- The English stare decisis rule entails the legal precedence rule -> the rule of law
established in a previous judgment is binding upon a lower court and that courts of
equal rankings must follow their own previous decisions.
- Aka there is a hierarchy of courts
- The ratio decidendi (reasons behind a court’s decision) is the part of the judicial
decision that creates precedent
- Obiter dicta are statements made in passing that are not binding, but may have
persuasive authority
- Income tax decisions in foreign countries do not create legal precedent in SA, but
may still have persuasive force
Rules of interpretation / Interpretation of tax

legislation:
- SARS are given their powers by legislation and that’s why interpretation is so
important
- the taxpayer needs to understand and interpret this legislation because they hold
the burden of proof to determine what section supports their case or issue
- s102 TAA -> the taxpayer will bear the burden of proof where there is a dispute
with SARS (he must prove that he correctly interpreted and applied the tax law
legislation)
Old method
- Strict literal / textual approach
- -> The interpreter primarily concentrates on the literal meaning of the words of the
provision that must be interpreted to determine the purpose of the legislator
- Ito this approach, one may equate the grammatical meaning of the words to the
intention of the legislator/parliament
- This approach is still used as a starting point today
- However, if the text is ambiguous/unclear or if the strict literal meaning will be
absurd -> then the strict literal meaning may be departed from

Modern methods
- Purposive / contextual approach
- -> All surrounding circumstances and resources (history of the provision, its broad
objectives, the constitutional values underlying it and its interrelationship with other
provisions) are taken into account to determine the purpose of the legislation
- S39(1) and (2) of the consti indicates that this is the favoured approach
- Objective approach
- Laid out in Natal Joint Municipal Pension Fund v Endumeni Municipality 2012 (4)
SA 593 (SCA)
- When interpreting legislation, the emphasis should be on considering both the
context and the words of the provision, with neither dominating the other (there
must be a balance between the text and the intention)
- One should furthermore not impose one’s own views as to what would have been
sensible for others to intend
- The process of interpretation should be an objective process
- A sensible meaning must be preferred to an unsensible one
The contra fiscum rule:

- = Where a provision of the Act is open to more than one interpretation, the court
must follow the interpretation that favours the taxpayer
- This rule applies when an ambiguity exists in the interpretation of the wording
The substance over form rule:

- = If problems in interpretation arise, courts will be concerned with the substance
rather than the form of the agreement/transaction
- In other words, courts will give effect to the intention of the parties rather than the
wording of the agreement
- Refer to the Kilburn v Kilburn case -> the courts will not be deceived by the form of
transaction… it will remove the veil… and examine its true nature and substance…
FRAMEWORK FOR CALCULATING TAXABLE

INCOME AND TAX PAYABLE
- Tax base = the amount on which tax is imposed

- Ito normal/income tax, the tax base is the taxable income of a person for a year of
assessment
o ‘Person’ = natural persons and companies
o ‘Year of assessment’ = tax year
o Year of assessment for natural persons ends on the last day of February (and
begins first day of March)
o Year of assessment for companies ends on the last day of the financial year
of the company (aka the last day of any of the 12 months in a year)
- The year of assessment (the tax year) for individuals is always from the 1st of march
and ends on last day of february the following year
o e.g.) the 2022 year of assessment is from 1 March 2021 to 28 Feb 2022
- Tax season opens in june and clause in nov -> this is the period in which to submit
your tax returns
Taxable income of a natural person:
- Taxable income = (section 1 of the income tax act) it is the aggregate of the
amount remaining after deducting all the amounts allowed to be deducted from
income and all amounts included in taxable income in terms of the Act
- We are taxed on a progressive tax rate, meaning the higher your taxable income,
the more tax you will pay. (tax rate increases as tax base increases)
Step 1: Gross Income:
- Gross income is defined in s1(1) of the ITA

- For a resident:
o Gross income = the total amount, in cash or otherwise, received by or
accrued to or in favour of the resident, excluding receipts and accruals of
a capital nature.
o Residents are taxed on their worldwide income
- For a non-resident:
o Gross income = the total amount, in cash or otherwise, received by or
accrued to or in his favour from a source within South Africa, excluding
receipts and accruals of a capital nature
o Non-residents are only taxed on their income from a South African source
Look at the tax table to calculate normal tax according to our framework:
https://onlinetax.sagesouthafrica.co.za/Mobi/Home/TaxTables

THEME 3 – JURISDICTION TO TAX

Gross income continued:
- From the definition of gross income, one can see that there are certain requirements
that must be met for an amount to qualify as gross income, such as:
- In the case of a resident:
o There must be an amount, in cash or otherwise
o That is received by or accrued to or in favour of such resident
o During a year/period of assessment
o Excluding receipts or accruals that are of a capital nature
- In the case of a non-resident:
o There must be an amount, in cash or otherwise
o That is received by or accrued to or in favour of a such non-resident
o During a year/period of assessment
o From a source within SA
o Excluding receipts and accruals that are of a capital nature
- Liability for South African normal tax is therefore dependent either:
o The place of residence -> for a resident (Residents are taxed on a residence-
based system)
o The source of income -> for a non-resident (Non-residents are taxed on a
source-based system)
THE CONCEPT OF RESIDENT

- In S1 of the ITA under the definitions section -> ‘resident’ is defined as follows:
o [para (a) subsection (i)] A natural person who is ordinarily resident in the
Republic (SARS Interpretation Note 3 explains what this means), OR
o [para (a) subsection (ii)] A natural person who is not at any time during the
relevant year of assessment ordinarily resident in the Republic but meets the
requirements of the physical presence test (the Act then proceeds to lay out
the reqs) OR
o [para (b)] a person (other than a natural person) which is incorporated,
established, or formed in the Republic or which has its place of effective
management in the Republic
- The concept of ‘resident’ (residence of natural persons) can be divided into 2 tests:
o The ordinarily resident test
o The physical presence test
The ordinarily resident test

- The term ‘ordinarily resident’ is not defined in the ITA -> the interpretation given by
the courts must be followed
- Cohen v CIR [1946] -> court held the following:
o A person’s ordinary residence would be the country to which he would
naturally and as a matter of course return from his wanderings (his real home)
-> main ruling of the case
o One should not only consider the person’s actions during the year of
assessment to determine whether he is ordinarily resident in a particular
country. The person’s mode of life outside the year of assessment under
consideration should also be considered
o Physical absence during the full year of assessment is not decisive
- CIR v Kuttel [1992] -> court followed the principle formulated in Cohen and held
the following:
o Even though the taxpayer still had a house in SA and occasionally visited SA,
he was not ordinarily in SA because there was no evidence to show that the
taxpayer did not set up his principal residence in the USA
- SARS published Interpretation Note No. 3 which contained guidelines and factors to
consider when determining whether a natural person is ordinarily resident in a
country
- According to this guideline, the question of whether a natural person is ordinarily
resident in a country is one of fact and each case must be decided on its own
merits, taking into consideration principles established by case law
- According to SARS, the following factors, although not exhaustive, will be
considered as a guideline:
o An intention to be ordinarily resident in SA
o Employment and economic factors
o Location of personal belongings
o Nationality

o Most fixed and settled place of residence + where the person stays the most
often
o Place of business + where his family is located
o The status of the individual (is he an immigrant? Does he have work permits?
Etc.) + has he made an application for permanent residence/citizenship?
o Period abroad, purpose and nature of visits + frequency of and reason for his
visits
- A taxpayer immigrating TO South Africa will be treated as being ‘ordinarily resident’
in SA from the day on which he becomes ordinarily resident – NOT for the full year
of assessment
o From the beginning of the year to the day he becomes ordinarily resident ->
he will be taxed as a non-resident
- A taxpayer who emigrates FROM South Africa to another country will cease to be a
resident (and thus considered as a non-resident) from the date that he emigrates
(the day on which he boards the aircraft)
o From the beginning of the year until the day before he emigrates -> he will be
taxed as a resident
o From the day he emigrates until the end of the year of assessment -> he will
be taxed as a non-resident
o E.g.) if a natural person emigrates on 1 October 2021, his 2022 year of
assessment as resident will be from 1 March 2021 to 30 September 2021,
and his 2022 year of assessment as non-resident will be from 1 October
2021 to 28 February 2022.
The physical presence test

- A natural person (who does not qualify as ordinarily resident) can be deemed a
‘resident’ (for tax purposes) if he is physically present in SA for certain periods (and
thus meets the requirements of the physical presence test)
- This test only applies to persons who are NOT ordinarily resident at any time
during the year of assessment but is physically present in SA for a period:
o Exceeding 91 days during the current year of assessment, and
o Exceeding 91 days in aggregate during each of the previous 5 years of
assessment, and
o Exceeding 915 days in aggregate in the previous 5 years of assessment
- The following rules apply to the physical presence test:
o For the purposes of determining the number of days a person is physically
present in SA -> a part of a day counts as a whole day
o A day spent in transit is not included as a day if the person does not formally
enter the country through a port of entry
o The +91 and +915 days of physical presence need not be continuous
- My own understanding -> if a person is resident ito the physical presence test, it
means that he has been in SA for:
o More than 91 days during the current year of assessment AND
o More than 91 days in each year for the past 5 years (he needs to also have
been here for more than 91 days of each individual years for 5 years) AND
o More than 915 days in total over the past 5 years (he needs to also have
been here for +915 in total over the 5- year period)
- All 3 reqs must be met
- Step 1: look at the current year of assessment - check if more than or equal to 91
days
- Step 2: look at the previous 5 years and check each for more than or equal to 91
days (look at the 5 before the year of assessment.
- Step 3: add up the days from the last 5 years ignoring the current year of
assessment days.
- Even if a person meets the requirements of being a resident, that person will not be
a resident of SA is he is deemed to be exclusively a resident of another country in
terms of a double taxation agreement (tax treaty) between the gov of SA and the
other country
- A person will be a resident from the first day of the sixth year once all the reqs of the
physical presence test are met
o Why the sixth year? -> this is the current year of assessment after a period of
5 consecutive years of assessment in which the person was physically
present in SA for the qualifying periods mentioned above

- A person who is a resident ito the physical presence test will cease to be a resident
if that person remains outside of SA for a continuous period of at least 330 days
immediately after the date the person ceases to be physically present in SA
o The 330- day period must be continuous -> this means that they must be
absent for over 2 years of assessment
o The 330- day period will only commence once the reqs for the physical
presence test have already been met. the 330- day period will also only
commence the day after the person leaves the country.
o If the 330- day period of absence is fulfilled -> then the person will be
deemed to have stopped being a resident on the day he left the country
- If a person, who is ordinarily resident in the Republic, is physically absent for a
continuous period of at least 330 days (e.g. to study in a foreign country) -> he will
not cease to be a resident
o Why? -> the physical presence test does not apply to a person who is
ordinarily resident in the Republic.
Ordinarily resident test Physical presence test

When does the person He becomes a resident that He becomes a resident from
day he becomes ordinarily the first day of the relevant
become a resident?
resident in SA (determined by year of assessment during
various factors) which all the reqs of the PP
test are met
When does the person He becomes a non-resident He becomes a non-resident

the day he emigrates from SA from the day that he ceases to
cease to be a resident?
(Interpretation Note No. 3) be physically present in SA if
he remains outside of SA for a
continuous period of 330 full
days from the day he leaves
the country
(Interpretation Note N0. 4)
PRACTICE EXAMPLE
Scenario:
- Craig is ordinarily resident outside of SA. He was temporarily seconded to SA by his
employer on 1 Nov 2015 to oversee a contract that was expected to last for two
years. Due to unforeseen problems with the contract, Craig only left SA to return
home on 30 Nov 2021 (6 years later). Throughout these years, Craig was physically
present in SA except for when he took his annual leave (35 days) each year from
2017 to 2021.
Question:
- Is Craig resident in SA during the years of assessment ending 29 Feb 2016 to 28
Feb 2022?
Remember:
- The Q is asking us if Craig is a resident for tax purposes during the relevant years of
assessment
- The year of assessment ends of the last day of Feb and the new year of assessment
begins on 1 Mar.
- Craig is NOT ordinarily resident in SA – even during his secondment. In order to be
a resident, he needs to meet the reqs of the physical presence test
- Jan has 31 days. Feb usually has 28 days. Mar has 31 days. April has 30 days. May
has 31 days. June has 30 days. July has 31 days. Aug has 31 days. Sep has 30
days. Oct has 31 days. Nov has 30 days. Dec has 31 days = 365 days
- In a leap year, Feb has 29 days. This results in the year having 366 days. Leap years
occur every 4 years.
Solution:
2016 year of assessment:
- Craig arrived in SA on 1 Nov 2015. The year of assessment for this tax year ended
on 29 Feb 2016. During this year, no annual leave was taken.
- How long was he physically present in SA for this year of assessment? -> he was
here for 122 days
o Nov has 30 days + Dec has 31 days + Jan has 31 days + Feb has 28 days (+
1 extra day for a leap year) = 121 days
o Note: Feb usually has 28 days. Whenever it has 29 days it means that year is
a leap year so 1 extra day must be added. Leap years happen every 4 years
which means the next leap year will occur in 2020.
- Craig is present in SA for more than 91 days in this year of assessment. However,
he has not been physically present in SA for more than 91 days in each of the 5
years prior to the 2016 year of assessment
- Therefore, he is not resident ito the PP test for this year
- This year of assessment began on 1 mar 2016 and ended on 28 Feb 2017. During
this year of assessment, he took 35 days of annual leave
- How many days was he physically present in SA for this year of assessment? -> he
was here for 330 days
o 365 days in a year – 35 days of leave = 330 days
- Craig is present in the Republic for more than 91 days in this year of assessment
and in the prior year, but not in each of the four years prior to that [remember that
the PP test requires that he must be in SA for +91 days of each year for 5 years. He
can only become resident on the first day of the 6th year once all the reqs have been
met]
- He is therefore not resident in terms of the physical presence test
- This year of assessment began on 1 Mar 2017 and ended on 28 Feb 2018. During
this year, he took 35 days of leave
- How many days was he physically present in SA for during this year? -> he was
here for 330 days
and in the two immediately prior years, but not in the three years prior to that.
- He is therefore not resident in terms of the physical presence test.
- This year of assessment began on 1 mar 2018 and ended 28 feb 2019. During this
year, he took 35 days of leave
- How many days was he physically present in SA during this year? -> 330 days
o 365 – 35 = 330
- Craig is present in the Republic for more than 91 days in this year of assessment,
for more than 91 days in each of the three prior years, but not in the two years prior
to that.

- This year of assessment began on 1 mar 2019 and ended on 29 feb 2020. During
this year he took 35 days of leave.
- How many days was he physically present in SA for this year of assessment? -> he
was here for 331 days
o Remember that when feb has 29 days -> it is a leap year -> 366 days
and in the four immediately prior years, but not in the year prior to that.
- This year of assessment began on 1 mar 2020 and ended on 28 Feb 2021. During
this year, he took 35 days on leave.
- How many days was he physically present for in SA during this year? -> he was
here for 330 days
and for more than 91 days in each of the five prior years.
- One more requirement must be met -> was craig here for more than 915 days in
aggregate in the previous 5 years of assessment? -> YES
o 121 + 330 + 330 + 330 + 331 + 330 = 1772 (this exceeds 915 days)
- Therefore, Craig is present in the Republic for more than 91 days in this year of
assessment, for more than 91 days in each of the five prior years and in aggregate
for more than 915 days in the five prior years.
- He is therefore resident in terms of the physical presence test from 1 March 2020,
the first day of the year of assessment.
- The 2022 year of assessment began on 1 Mar 2021. Craig already became a
resident on 1 Mar 2020. He left SA on 30 Nov 2021. No leave was taken this year.
- How many days was he physically present in SA during this year of assessment? ->
275 days

o 31 days in Mar + 30 days in April + 31 days in May + 30 days June + 31 days
in July + 31 days in Aug + 30 days in Sep + 31 days in Oct + 30 days in Nov
= 275 days
- Craig became a resident in 2021 but also still meets the reqs of the PP test again in
2022.
- Craig ceases to be a resident from the day that he ceases to be physically present
in SA if he remains outside of SA for a continuous period of 330 full days from the
day he leaves the country
- This means that Craig will remain an SA resident (for tax purposes) until he has been
absent from the country for more than 330 consecutive days that commence
immediately after 30 Nov 2021 (the day he leaves the country).
- From 30 Nov 2021, if Craig does not return to SA for +330 consecutive days -> he
will be deemed a non-resident on 30 Nov 2021. His 2022 year of assessment as a
resident will thus end on 29 Nov 2021. Craig will be taxed as a non-resident in the
next succeeding year of assessment from 30 Nov 2021 to 28 Feb 2022.
Residence of persons other than natural persons:

- Who is a person other than natural persons?
o A company
o A close corporation
o A trust
- According to the definition of resident in the Income Tax Act (ITA), a person other
than a natural person is defined as being ‘resident’ if it:
o Is incorporated, established, or formed in the Republic OR
o Has its place of effective management in the Republic
- Why is it important to know if a company / close corporation/ trust is resident in
SA?
o -> If they are resident in SA, they are liable for tax in SA on its worldwide
receipts
- E.g.) Should Facebook pay tax in SA on profits it receives from China?
o In order for Facebook to be taxed on its worldwide income, Facebook (which
is a person other than a natural person) must be resident in SA. Facebook
was not incorporated in SA which means the first test/req has not been met.
The key management and commercial decisions regarding Facebook do not
occur in SA. Therefore, Facebook should not pay tax in SA for profits it
makes in China
- Remember: a person (this includes the above-mentioned juristic persons) is NOT a
resident in SA if he/they/it is deemed to be a resident exclusively of another country
ito a tax treaty/double taxation agreement
- In cases of dual residency -> we must look at the tax treaty to see what the
tiebreaker is
- The place of incorporation is a matter of fact and each case must be decided on its
own merits. However, the place of effective management is more complex and
depends on the relevant facts and circumstances
How to determine where a juristic person is effectively managed:
- SARS Interpretation Note 6 says that the place of effective management is the
place where key management and commercial decisions that are necessary for the
conduct of its business as a whole are in substance made
- A company may have more than one place of management, but it can only have one
place of effective management at any one time
- E.g.) A trust (and other similar entities) is resident in SA if 1 of 2 reqs are met
o If the executors/administrators/trustees are resident in SA -> then the trust is
resident in SA
o If the trust/entity is administered from SA (aka the trustees meet to attend to
the affairs of the trust in SA) (even if the trustees themselves are not resident
in SA) -> then the trust is resident in SA
o This shows that the place where the assets of the entity are effectively
managed (and where the relevant decisions are predominantly made) is
crucial
CHANGE OF RESIDENCE
Change of residence for natural persons:
How:
- If the person is a resident ito the physical presence test -> he can change residence
by remaining outside of SA for +330 continuous days
- If the person is ordinarily resident in SA -> he can change residence by formally
applying at SARS together with a financial exist ito a Reserve Bank application
Consequences:
- When a natural person, who is a resident, ceases to be a resident during a year of
assessment -> an exit charge ito S9H of the ITA is triggered when there is a change
of residence
o The exist charge is triggered through either a capital gain or an income gain
o This section also provides for a disposal of the person’s assets (at market
value) -> disposal occurs on the date immediately before the day on which
he ceases to be a resident
o Market value = the price that could be obtained upon sale of the asset
between a willing buyer and willing seller in an open market
Note:
- End of year of assessment = on the date immediately before the day he ceases to
be a resident
- Commencement of next succeeding year of assessment = on the day he ceases to
be a resident
Change of residence for persons other than natural persons:

How:
- A juristic person can change residence by either incorporating in a foreign
jurisdiction OR it can change its place of effective management
Consequences:
- When a company ceases to be resident and/or becomes a headquarter company
OR if a controlled foreign company (CFC) ceases to be CFC -> the following is
triggered:
o Exist charge is triggered (capital gain or income gain)
o Deemed disposal of all assets and shares at market value -> disposal occurs
the date before the day the company ceases to be resident or becomes a
headquarter company
o A dividend in specie is deemed to be declared which triggers dividends tax
(s64EA(b) ITA)
Note:
- End of year of assessment = on the date immediately before the day the company
ceases to be resident or becomes a headquarter (HQ) company

- Commencement of next succeeding year of assessment = the day on which the
company ceases to be a resident or becomes a HQ company
What is a controlled foreign company (CFC)?
- Remember: if a CFC ceases to be a CFC there is also an exit charge that is
triggered
- Definition is in the legislation
- A CFC is a foreign company where:
o More than 50% of the total participation rights are directly or indirectly held
by residents
o More than 50% of the voting rights are directly or indirectly exercisable by
residents
o The financial results of that foreign company are reflected in the consolidated
financial statements of a resident company
- Rule: the resident (natural person or juristic entity) must include a portion (iro voting
rights or participation rights) of the CFC’s net income in that person’s taxable
income
Assets excluded from the provisions of S9H ITA:

- Immoveable assets/property situated in SA
- Assets that will (after the juristic person ceases to be a resident or CFC) be
attributable to a permanent establishment of that person situated in SA
- Qualifying equity shares that were granted to that person less than 5 years before
the date on which that person ceased to be a resident
- Equity instruments which had not yet vested at the time the person ceases to be a
resident
- Qualifying employee broad based shares granted less than 5 years before the
person ceases to be resident
- Any right of the person to acquire any marketable security contemplated in S8A ITA
- NOTE: there is NO deemed disposal of these assets ^

CROSS-BORDER TRANSACTIONS
Overview:
- Global trade has increased
o Pro: positive impact on economy
o Con: poses a challenge from an income tax perspective as these
transactions may attract tax in more than 1 jurisdiction
- This has resulted in various cross-border transactions (umbrella term) where parties
in different jurisdictions transact with each other
- Examples of cross-border transactions:
o Foreign persons setting up businesses in SA or rendering services to south
Africans (these are called in-bound transactions)
o SA businesses may carry on trade in other parts of the world (these are
called out-bound transactions)
o Cross-border transactions are not limited to businesses transactions -> also
includes investment transactions
- The interaction of tax laws of different countries can sometimes create loopholes for
taxpayers (this is bad for the country bc it deprives the gov of funds that would be
used to provide basic services for ordinary citizens). To address this problem, the
Organisation for economic Co-operation and Development (OECD) published
various action plans with measures to counteract base erosion and profit sharing
(BEPS)
Principles of SA taxation of cross-border transactions (CBT):

- SA has a residence-based system of tax (since 2001) -> this means that:
o Residents are subject to income tax in SA on their worldwide income
o Non-residents are only subject to income tax (often in the form of withholding
tax) in SA on amounts derived from a south African source
- Starting point: determine whether or not the person who derives income from a
CBT is a resident of SA for tax purposes
- A CBT may be subject to tax in:
o The jurisdiction where the income is sourced (source country) and/or

o The jurisdiction where the recipient of the income is a resident (country of
residence) -> this tax usually arises if the country of residence follows a
residence-based tax system
- Double taxation is where the person is taxed for the same transaction in both
countries (aka he is taxed twice). This is not economically feasible
- Various measures exist to prevent double taxation from obstructing CBT:
o Countries that follow a residence-based tax system generally provide relief to
its residents for certain foreign taxes incurred in respect of cross-border
transactions.
o Certain cross-border transactions are exempt from tax
o Governments enter into agreements to avoid double tax imposed on the
residents of a country when they transact with or in the other country. These
agreements are referred to as tax treaties or double tax agreements (DTAs) -
> DTAs usually limit the taxing right of one of the countries

How to determine the taxation of CBT:
- All CBTs follow the same principles as per the schematic framework
SOURCE RULES (S9 ITA):

- The source of income is central to the taxation of both residents and non-residents
- Before 2001: SA had a source-based tax system
o During this time, source of income played an important role in determining
income tax liability of BOTH residents and non-residents

- Under the current system:
o Source of income is relevant for non-residents to determine whether an
amount will be subject to tax in SA
o A resident is subject to income tax in SA irrespective of whether the amount
was derived from a south African source or not
- The source of income can be determined in terms of statutory source rules (s9 ITA),
tax treaties or common law established by judicial decisions
- Starting point for when we deal with source rules: are we dealing with a resident or
a non-resident?
o If we are dealing with a resident -> there is no need to look at source rules. It
does not matter if the SA resident is receiving income from SA or outside SA
because in both cases they will be taxed on that income (residents are taxed
on their worldwide income)
o If we dealing with a non-resident -> then we look at the source rules (is it
sourced in SA or outside of SA?)
Common law source principles:

- If the source of a specific type of income is not specified in the legislation or tax
treaty -> it must be determined with reference to case law
- SA authority for the determination of the source of an amount = CIR v Lever
Brothers & Unilever Ltd (1946):
o The word ‘source’ refers to the originating cause of the receipt of the money
o If the source of income must be determined with reference to case law (as
opposed to statutory source rules), the inquiry involves 2 questions:
§ (1) What is the originating cause of the income?
§ (2) Where is the originating cause located?
- If an amount has more than one originating cause -> the source of the income is
based on the dominant cause
- Each case must be decided on its own facts
Source of rental income:
- Statutory source rules (S9 ITA) do not deal with rental income -> so we refer to the
common law source rules
- The originating cause of rental income is usually (not always) the asset used to earn
rental income
- COT v British United Shoe Machinery (SA) (Pty) Ltd:
o This case can be applied to moveable property
o The source of rent is not always the asset + the place where the asset is
being used is not always the source of rent
o Regard must be had to the nature of the property, the nature of the lessor’s
business, and the duration of the lease
o In cases where the emphasis is on the property (not the business) -> the
source is located where the property is used
o In cases where the emphasis is on the business (not the property/asset) (e.g.
car rental company) -> the source of the rental income will be where the
business is located
- Example:
o Jay-Z, an American rapper, receives rental income ito a lease agreement
entered into with a student renting his flat in Hatfield. Will the rent that Jay-Z
receives from SA be sourced in SA?
o Answer: YES
§ What is the originating source of the income (rent)? -> immoveable
property
§ Where is the originating source located? -> in SA
Statutory source rules:

- Statutory source rules are mostly derived from S9 of the ITA and deal with
dividends and passive income such as interest and royalties
- S9 ITA does not include everything. If s9 ITA is missing something -> then we need
to look at the common law
Source of dividend income:
- S9(2)(a) ITA -> dividends
- The source of dividend income depends on the residence status of the
company that pays the dividend
o If the dividend is declared/paid by a south African company -> the source of
the divided is in SA
o If the dividend is paid by a non-resident company (a foreign dividend) -> the
source is outside of SA

Source of interest income:
- S9(2)(b) ITA -> interest
- In order to determine the source of interest income, we can look at 1 of 2
things:
o The residence of the person paying the interest
o The place where the funds/credit is being used/applied
- Interest is from a South African source if 1 of the following reqs are met:
o The funds/credit are used/applied in SA
o The interest is incurred by a person resident in SA
§ -> 1 exception: unless the SA resident incurs interest from a
permanent establishment outside of SA. If this is the case, then the
residence of the payer does not cause the source of interest to be in
SA
- Note: a permanent establishment outside of SA means that it has presence in
another country by having a fixed place of business where you carry on operations.
For example: an office. An American business has a branch in SA but it is not
incorporated in SA
- Any interest that does not meet one of the criteria to be from a South African source
is derived from a source outside SA
- Example:
o Scenario: X Pty is a Mauritian tax resident who advanced a loan of R10
million to Y (Pty) Ltd who is a SA’n tax resident. The loan bears interest at a
fixed rate of 11% per annum. Y (Pty) Ltd used the funds to start its business
in SA
o Question: what is the source of the interest received by X?
o Solution: the interest that accrues to X is from a SA’n source for the following
reasons: (ito S9 ITA)
§ The interest is incurred by a SA’n tax resident
§ The funds are used in SA’n operations
§ The interest is not attributable to any permanent establishment of Y
outside SA
o Note: even if Y was NOT a SA’n tax resident -> the interest would still be
from a SA’n source bc the funds are used in SA
- As the source rules for interest are legislated, it is not necessary to consult case law
to determine the source of the interest that accrues to the respective persons
Source of royalty income:
- S9(2)(c)-(f) ITA -> royalties
- A royalty is any amount that is received/accrues for the use, right of use or
permission to use intellectual property (intellectual property includes patents,
designs, trademarks and copyrights)
- The same rules that apply to interest income apply here
- Royalties are from a South African source if 1 of the following 2 reqs are met:
o The royalties are incurred by a person resident in SA
§ 1 Exception: If the SA resident incurs royalties that are attributable to a
permanent establishment outside of SA, then the residence of the
payer does not cause the source of the royalties to be from SA
o The royalties are received by/accrue to a person in respect of the use/right to
use intellectual property in SA -> irrespective of the residence of the payer
- “know-how” payments = payments where the source of income is derived from
imparting knowledge and information or rendering assistance/services relating to
such information
- Know-how payments follow the same rules as royalties
o Know-how payments incurred by a person who is a SA’n resident are from a
SA’n source, unless the amount is attributable to a permanent establishment
outside South Africa. Alternatively, know-how payments received by or that
accrue to a person in respect of the imparting of such knowledge or
information, and assistance or services relating to such information, for use in
South Africa are from a South African source
- Example:
o Scenario: X Ltd is a Mauritian tax resident company who developed
intellectual property and registered a patent in Mauritius. X makes its
intellectual property available to Y (Pty) Ltd who is a South African company.
Y uses the patented technology in its manufacturing business in SA and pays
X a usage-based royalty.
o Question: discuss the source of the royalty income received by X from Y

o Solution: the patent registered in Mauritius is intellectual property. The
amounts payable by Y are for the use of this intellectual property and
therefore royalties. As the source rules for royalties have been legislated, it is
not necessary to consult case law to determine the source of the royalties
that accrue to X. The royalties that accrue to X are from a South African
source for the following reasons:
§ The royalties are incurred by a SA’n tax resident (Y)
§ Since the intellectual property is used in Y’s south African
manufacturing operations, the royalties are not attributable to any
permanent establishment of Y outside of SA
o Note: the fact that the patent is not registered in SA does not affect the
source of the income
o Even if Y was not a SA’n tax resident, the royalties would still have been from
a SA’n source because the intellectual property was used in south African-
based manufacturing operations
TAX TREATIES:
Note:
- Tax treaties refer to the countries/parties as the ‘contracting states’
- S108(1) ITA makes provision for the National Executive to enter into an agreement
with the gov of another country with the view to prevent, mitigate or discontinue the
levying of tax under the laws of the countries on the same income, profits or gains.
It also allows for SA to render reciprocal assistance in the administration and
collection of taxes under the laws of SA and the other country
- All the tax treaties concluded by the SA gov are available on the SARS website on
the Legal Counsel page under the heading International Treaties & Agreements
Why do countries enter into tax treaties?

- Purpose of tax treaties:
o Tax treaty allocates taxing rights to the contracting states to impose taxes ito
their respective domestic laws
o Avoid/eliminate double taxation
o Render reciprocal assistance in tax administration issues (such as collection
of taxes)
o Exchange information
Application of tax treaties:

- A tax treaty cannot impose a tax liability on a taxpayer that such taxpayer
would not otherwise be liable for under the domestic tax laws of a country
o Why? -> a country can only impose tax on a transaction ito its domestic laws
o What does this suggest? -> A tax treaty must be read with the domestic tax
law of a country when it becomes effective
o Starting point to determine tax implications of a transaction: is the
transaction subject to tax ito the domestic laws of the country?
§ Aka is the transaction subject to tax in SA ito the ITA?
§ If no -> no need to consider the tax treaty
§ If yes -> the tax treaty must be considered to determine whether SA
may impose the tax ito the ITA
- Once the tax treaty has been approved by parliament -> it will be published in the
Government Gazette -> thereafter, the tax treaty has the effect of being enacted in
the ITA
o What does this suggest? -> where any provision of ITA applies to a
transaction to which the treaty also applies, then the treaty provisions must
be considered/read as if they form part of ITA
o In other words, the provision of ITA must be read in conjunction with the
relevant treaty provision, irrespective of whether the provisions make explicit
reference to a treaty or not
- Tax treaties enjoy preference over domestic law
o Some tax treaties that SA entered into contain rules that determine where
income is deemed to arise. A deemed source rule in a tax treaty overrides the
application of the statutory or common law source rules
o If there is a discrepancy between the ITA and the treaty -> the treaty will take
precedent/preference
o When determining the source rules:
§ We first look at the S9 rules in ITA
§ If it is not in S9 then we look at the common law

§ Then we look at the tax treaty that is applicable in our case (how does
it deal with that particular income?)
General comments on tax treaties: (just read over and understand)

- The first step to determine whether the provisions of a particular tax treaty apply to
a transaction is to establish whether the treaty has come into force. Most treaties
contain a provision towards the end of the agreement that specifies how and when
the treaty will enter into force
- A tax treaty applies to persons who are residents of one or both of the contracting
states that entered into the agreement. This means that a person is only entitled to
the benefits of the treaty if that person is a resident of one of the countries that
concluded the treaty
- A resident (ito a treaty) is a person who is liable to tax in one of the contracting
states by reason of domicile, residence, place of effective management or any other
similar criterion
o The definition of resident specifically excludes a person who is deemed to be
exclusively a resident of another country for purposes of the application of
any tax treaty entered into between South Africa and the other country
- Treaties normally include tie-breaker rules that are used to determine the residence
of a person if that person is resident in both of the contracting states from their
domestic tax perspectives
o E.g.) If a natural person is resident in the Netherlands by reason of the fact
that he ordinarily resides there but is also deemed to be a resident in South
Africa based on the physical presence test, the tie-breaker rules in Article 4(2)
of the tax treaty between South Africa and the Netherlands will apply
- A treaty applies to the taxes specified -> mostly apply to taxes on income and on
capital imposed on behalf of a contracting state (irrespective of the manner in which
they are levied)
- Income derived by a resident of one of the contracting states from immovable
property situated in the other contracting state (for example, rental income earned
from a property situated in the other country) may generally be taxed in the country
where the immovable property is situated (source country)

- Dividends paid by a company that is a resident of one of the contracting states
(source country) to a resident of the other contracting state (country of residence)
may normally be taxed in both countries
- Interest that arises in a contracting state (source country) and that is paid to a
resident of the other contracting state (country of residence) may generally be
taxed in both countries
o If the recipient of the interest is the beneficial owner of the amount, the right
of the source country may be limited
o If the debt in respect of which the interest is received is effectively connected
to a permanent establishment situated in the country of source, the business
profit provisions take preference
- Royalties that arise in a contracting state (source country) and are paid to a
resident of the other contracting state (country of residence) are exclusively
taxable in the country of residence
o An exception exists if the royalties are effectively connected to a permanent
establishment situated in the source country, in which case the business
profits provisions apply
o in terms of international precedent, a royalty refers to the exploitation of
intellectual property and not merely having access to it. The definitions of
royalty also differ between treaties.
- Salaries, wages and other similar remuneration derived by a resident of a
contracting state from exercising employment in the other contracting state
(source country) may be taxed in both countries
o In circumstances where the payment of this remuneration is not paid or
borne by a taxable person in the source country and the person’s presence
in the source country does not exceed a specified number of days during a
12-month period (for example 183 days), the source country may, however,
not tax this income.
o salaries, wages and similar remuneration paid by one of the governments to
an individual for services rendered to that government are only taxable in the
country whose government pays the amounts. Such payments are, however,
only taxable in the other country if the individual renders the services in the
other country and is a resident and national of that country. This exception
applies to remuneration earned by personnel of foreign diplomatic missions
and consular posts

THEME 4 – GROSS INCOME

LECTURE 5 – DEFINITION OF GROSS INCOME
Remember:
Gross income is step 1 of calculating the taxable income of a natural person
Definition of gross income:

- Gross income is defined in terms of section 1 of the Income Tax Act 58 of 1962
(ITA)
- S1: “Gross income, in relation to any year or period of assessment, means-
o (i) In the case of any resident, the total amount, in cash or otherwise,
received by or accrued to or in favour of such resident, or
o (ii) In the case of any person other than a resident, the total amount, in cash
or otherwise, received by or accrued to or in favour of such person from a
source within the republic.
- During such year or period of assessment, excluding receipts or accruals of a
capital nature
In basic terms:
- Gross amount =
o For resident = total amount (in cash or otherwise) received by or accrued to
that resident
o For non-resident = the total amount (in cash or otherwise) received by or
accrued to that non-resident from a source with SA

From this definition, we can see 5 elements at play:
- Is it a resident or non-resident?
o Apply ordinarily resident test and/or physical presence test
o If it’s a non-resident -> determine if the source of income is from a SA’n
source (follow schematic diagram)
- Is cash or otherwise?
- Is it received by or accrued to that person?
- During the year/period of assessment
- Excluding receipts of a capital nature (this is dealt with under capital gains tax)
AMOUNT IN CASH OR OTHERWISE:

- The receipt or accrual of an amount in cash is included in a person’s gross income.
The value of non-cash items should also be included
- ITA does not define what ‘amount in cash or otherwise’ means -> so we look at
case law
Lategan v CIR:
- Facts: Lategan produced grapes for the local cooperative in the Cape -> his grapes
mixed with other grapes -> then it was fermented -> they started making wine of it -
> the cooperative bottled up the wine and sold it -> only part of the proceeds were
paid to Mr L in cash. The other part would be paid in instalments during the
following year.
- The court had to decide whether the full amount constituted the total amount for
purposes of gross income or only the part he received in cash. The court also had
to determine whether the outstanding amount that was going to be paid in
instalments accrued to him in the year of assessment that was in question
- This case dealt with 2 aspects:
o The aspect of cash or otherwise
o The issue of ‘accrued to’
- The issue was that Mr L was entitled to the proceeds of the sale of the wine in
relation to the grapes that he delivered to the Co-op. He had a personal right
against the Co-op for the payment in relation to the grapes that he provided them.
- The question was whether this personal right is an amount that must be included in
gross income?

- The court said that the word ‘amount’ should be given a wider meaning than
merely referring to money, and must include the value of every form of
property earned by the taxpayer, whether corporeal or incorporeal which has a
monetary value
o In other words, we don't just look at something if it is money. It need not be
money. As long as the personal right has monetary value then it is sufficient
to include that in the gross income
o e.g.) if I exchange my mobile phone for a bicycle, then the bicycle that I
receive has a monetary value (there is a value attached to it and I can
appraise it) and that amount can be included in my gross income
- The court held that an amount accrues to a taxpayer in the year of assessment
when the taxpayer becomes entitled to it - notwithstanding the fact that it may
be payable in a future year of assessment
o In other words, just because it wasn’t payable at that time, doesn’t mean that
it did not accrue to the taxpayer
- The court also held that where the taxpayer acquired a right during a year of
assessment to receive instalments of an amount during subsequent years, the
present value of the right at the end of the year should be included in the taxpayer’s
gross income
o NOTE: this position has now changed. The ITA has been amended and a
proviso was added in S1 -> the face value of the amount (as it appears in the
records) must accrue (NOT the present value)
CIR v Butcher Brothers:
- There was a long lease agreement for a building. As part of the lease agreement,
the lessee had to make improvements to the property in the form of knocking down
the existing building and replacing it with a complete brand new building. They had
to build an entertainment theatre together with a parking lot. The receiver of revenue
argued that the value of the building must be included the landlord's gross income
because apart from the rent he's also receiving a building.
- The court was asked to rule on whether the improvements to the land qualified as
an ‘amount’ received by or accrued to the taxpayer (landlord) for the purposes of
gross income.

- The court's final ruling was that it was impossible at the time when the lease
agreement was entered into to determine what the value of the building would be
o This is because there was also nothing in the lease agreement stating what
the building should look like. It just said that the existing building is not going
to last forever so it must be knocked down and a new building must be
erected
o Since the lessee has the benefit of the piece of land and the existing building,
the lessee must replace the building against some sort of reduced rent that is
paid
- The court held because it is impossible to add value to this, it cannot be included in
the landlord's gross income. The court said that no amount was received by or
accrued to the taxpayer by the end of the year of assessment because the
improvements did not have an ascertainable money value at the time.
- This case was decided before the inclusion of the leaseholds property in s1(8) of the
definition of gross income in the ITA. Under the new definition, the open-market
value of the leasehold improvements is included in gross income
o e.g.) a landlord rents a flat to a tenant. As part of the lease agreement, the
tenant must (by the end of the lease agreement the tenant must completely
refurbish the kitchen. Then that value of the improvement must be included in
the landlord’s gross income bc he gets a benefit out of it
CSARS v Brummeria Renaissance: -> case about interest-free loans
- CSARs argument was that there is a monetary value to granting somebody an
interest free loan, and if the interest-free loan is granted somebody in exchange for
goods and services supplied -> then that interest-free loan is not really a loan, but
it's rather some form of payment in exchange for the goods and services
- Facts: the investors in a retirement village did not compensate the taxpayer (the
developer) in cash for the construction and supply of the residential units when he
developed the village. Instead, the investors granted interest-free loans to the
taxpayer (developer). Usually people have to pay levies on loan amounts -> in this
case he did not have to do that bc the loan was interest free
- The court held that the right to use the loan capital interest-free was a right that
had an ascertainable monetary value

- The test is to determine whether a right has monetary value. This is an
objective test.
- The court and provided a formula to determine what is the value of the benefit of
having a loan where you don't pay any interest.
- SARS interpretation note 58 was published after this case in which these
principles are laid out -> dealing with how the monetary/market value of an interest
free loan is calculated.
o Note: the principles in Brummeria only apply if an interest free loan is
used in exchange for goods or services supplied
o The loan itself is capital, but the fact that you don't pay any interest on it,
means that the loan is income in the hands of the person who obtains the
loan because you would have otherwise incurred that interest to the bank.
Now since you are not incurring that interest to the bank, it is a form of
income/benefit you receive (and must form part of gross income)
RECEIVED BY
- An amount must either be received by or it must accrue to a taxpayer during a year
of assessment to be included in the taxpayer’s gross income for that year
- If a taxpayer did not receive an amount or if an amount did not accrue to the
taxpayer, the amount is not gross income and therefore not subject to income tax
- Even though the value of an asset may increase overtime and that increase may
have an ascertainable monetary value, until the asset is sold -> the increased value
is not received by and has not accrued to the owner
- The interest that a person would have received had he invested an amount of
money in an interest-bearing account instead of keeping it in a safe, cannot be
included in the person’s gross income because the person did not receive the
interest and neither did it accrue to him.
- The ITA has not defined what ‘received by or accrued to’ means -> so we look at
case law
- The court interpreted “received by” broadly to mean -> when you receive something
for your own use and benefit
Geldenhuys v CIR -> usufruct
- Mrs Geldenhuys was the beneficiary of a will in the form of a usufruct -> aka she
received the rights to the use of the farm and the flock of sheep on behalf of the
trustees. After a certain period, Mrs G was no longer interested in the usufruct and
agreed with the trustees that she will sell the flock of sheep. So she sold the sheep
and received the money. However, since she was not the owner of the sheep -> she
had to give the money to the trust. The Revenue authority included the price of her
sale in her gross income on the basis that she was the usufruct and that the amount
was physically received by her.
- Mrs G argued that she didn't receive the amount for her own benefit -> it is for the
benefit of the trust. She is just the usufruct which means that she received the
benefit that if the flock of sheep were to grow bigger, then she can benefit from the
use of the sheep by selling the additional sheep, collecting wool from the sheep,
and drinking the milk of the sheep.
- When she sold the entire flock of sheep -> the number of sheep were either lower or
exactly the same as the number of sheep that she received as a usufructuary. So
there's no added income that she received(if she received 30 sheep and sold 30
sheep then there is no benefit for her).
- The court was required to rule on whether the amount received from the sale of the
flock should be included in her gross income
- The court said that indeed, Mrs G did not receive the mount for her own benefit, but
rather for the benefit of the trust (as if she was an agent acting on behalf of the
trust). For that reason, the benefit cannot be added to her gross income.
Additionally, she did not have the intention to receive the amount for her own
benefit.
- An amount is ‘received’ by a taxpayer if it is received by him on his own behalf
and for his own benefit
- An amount received by a taxpayer on behalf of another person is therefore not
gross income for the taxpayer
Pyott Ltd v CIR -> deposit
- Pyott was a biscuit company that packed and sold their biscuits in steel containers.
Every time someone bought a container, a deposit had to be paid for the steel
container. If you return the steel container to the retailer, then you get your deposit
back.
- Question was whether the deposit received by Pyott should be included in its gross
income?
- Pyott’s argument was that the deposit cannot be included in their gross income
because they did not receive the deposit amount for their own benefit. They just
keep the amount in trust on behalf of the purchaser/consumer
- It is important to always refer back to the actual deposit agreement between the
parties
- If ownership of that bottle is never transferred to the purchaser/consumer, then it is
a deposit in the strict sense
- If the consumer does not have to return the container and he can become the
owner of the container -> then there is no duty on the consumer to return the
container and get the deposit back
o If the container breaks or the owner does not return the container -> you will
not be entitled to your deposit
o Court held in this case, bc we don't know if the container will be returned or
not and the obligation to return the deposit only arises once the container is
returned -> the deposit must be included in the gross income for that
container
o The deposit received could qualify as gross income if the taxpayer
receives the amount on its own behalf and for its own benefit
- In other words, the court ruled that the amount that the taxpayer received for the
sale of the containers should be included in its gross income at its face value
because it was an amount of cash received by the taxpayer. The taxpayer was not
entitled to exclude the amount it was still going to refund customers from its gross
income
- This must be distinguished from a rental deposit where the deposit is for a flat that
you rent. In these cases, the deposit is a holding deposit where the landlord is
supposed to keep that amount separate. At the end of the lease agreement, you are
entitled to get your deposit back. It is only if you break something in the house that
an amount will be deducted from the deposit.
- There is uncertainty about the deposit given for a house -> because of this
uncertainty, the deposit on a house does not form part of your gross income.
However, every case must be decided on its own merits depending on the facts.
- Additionally, if an amount is received as trust money and the taxpayer is not the
beneficial owner, but merely the trustee, the amount does not qualify as gross
income because the taxpayer does not receive it on its own behalf and for its own
benefit
ITC 1918 (2019) -> gift cards
- Gift cards have an expiry date and if they are not exchanged for goods/services by
the expiry date then they expire and the retailer keeps the money that was spent on
the gift card.
- ITC is a big retailer that sells gift cards (gift cards are those vouchers you get for
someone on their birthday)
- This particular retailer kept separate the amount that they received for these gift
vouchers sold (instead of adding it to their gross income). Their argument was that
the Consumer Protection Act (CPA) specifically instructs the retailer to keep these
amounts received separately because it does not belong to the retailer, but still
belongs to the customer and it is only when the customer returns or redeems the
voucher that the retailer becomes the owner of the money intrinsic to that gift card.
When the gift card expires, only then will the retailer become the owner of the
money.
o In other words, the amounts of money ITC received for the sale of gift cards
was not added to their gross income. They kept that income separate so that
they would not be taxed on it.
- SARS audited ITC and said that the amount should be included in gross income
because ITC received the amount for their benefit to use for/by themselves
- Even after hearing this, ITC still argued that the CPA specifically instructs them to
keep the amount separate.
- How did ITC keep these amounts separate?
o Everyday when they sell gift cards, the amounts are deposited by way of
EFT/card payment directly into their (separate) bank account or they received
cash at the till which were separated from the rest of the money at the end of
each day and deposited into their separate gift card account. Only once the
gift cards are exchanged for goods and services or expires then ITC transfers
the amounts back into the business account.
- The court held that the Consumer Protection Act (CPA) takes preference over the
Income Tax Act. The CPA indeed instructs the taxpayer/retailer to keep the
amount separate and that the taxpayer does not become the owner of that
amount until such time that the gift card is either expired or it is exchanged for
goods and services. Therefore the amount (receipts for the gift cards) should
not be included in the gross income
o Lecturer thinks this judgement is wrong. CPA and ITA are equal in footing to
each other.
o There is another problem that arises because of this judgement: if you
separate an amount into a different trust that does not qualify as a trust
account -> if the retailer were to go bankrupt the creditors (the customers
and SARS) would have access to this separate bank account and be able to
claim from it. The CPA does not overrule this right of the creditors and gift
card holders to have a personal right against the retailer for the value of the
gift cards
Illegal income:
Should income received from illegal activity be taxed? -> YES
- If it is not then it shows that crime pays and people should rather make their money
through crime so that they income is not taxed
CIR v Delagoa Bay Cigarette Co Ltd
- The seller sold cigarettes illegally, but was also involved in an illegal gambling
procedure (if you buy cigs from him then you could get a scratch token and win
something. At this time, scratch cards were illegal). He received income from this.
When the receiver of Revenue included this in his gross income, he complained and
said:
o That tax should exclude illegal income
o The gov expropriated this money, so he did not benefit from it anyways and
should not be taxed on it
- The court held that ITA does not distinguish between whether the amount received
was legal or illegal and thus must be included in your gross income. He received the
amount with the intention of keeping it for himself.
- Court also found that whether the business carried on by the taxpayer was legal
or illegal is not material for the purpose of determining whether its income
should be subject to tax. The receipts and accruals from illegal activities will
therefore still be included in the taxpayer’s gross income.

MP Finance Group CC v CSARS
- MP Finance Group operated an illegal Pyramid Scheme. Although they knew that it
was illegal to do so and they that there was a duty ito this ponzi scheme to return
the initial investments back to the investors, they still appropriated/received the
money for themselves.
- The court had to rule on whether the amounts invested in the scheme qualified as
gross income for the taxpayer -> court said that the deposits qualified as gross
income for the taxpayer
- The court said that just bc an agreement is illegal does not mean that it does not
have legal consequences. Illegal agreements still have legal consequences
o The contract itself is considered null and void bc it is illegal -> but just
because it was an illegal contract does not mean that it has been
relieved of all legal consequences. It can still have fiscal/tax
consequences
o They knew they were supposed to return the deposits but they still decided
to keep the deposits for themselves. Thus they had the intention to use and
appropriate the money for themselves.
o Therefore, the taxpayer ‘received’ the deposits within the scope of the
‘gross income’ definition bc the deposits were accepted with the
intention of retaining them for the taxpayer’s own benefit. Although the
taxpayer was legally obliged to return the deposit, that was not the tax
payer’s intention
- The principles laid out in the MP Finance case can also be applied to money stolen
through robbery or burglary etc. What is important is whether the thief intended to
benefit from the money (Interpretation note 80)
- This case talks specially about intention. It does not matter how the money was
obtained. If the thief/robber has the intention to keep the proceeds for himself -> the
rei vindicatio has no place in tax law.
- Although we know that the thief can steal your money/property, the thief will never
be the owner of that money. This is why some thieves may think “ok im gonna steal
this money and only give it back if the owner claims it via rei vindicatio”. BUT the rei
vindicatio does not apply in tax law. So if the thief sells your property for money, he

is selling it as if he is the owner. So the income received from the sale of this
property must be included in the gross income of the thief
- An important principle in tax law was created in the United States during the time of
Al Capone. Al Capone made lots of money through illegal activities cus he kept
finding legal loopholes. However, he was finally caught for tax evasion because he
never recorded these transactions in his gross income. In that basis, they jailed him.
- The principle (and warning) that was laid down in the Al Capone tax case was that
tax legislation cannot be interpreted in such a way to compensate for the lack of
criminals laws
o If the criminal laws are insufficient to catch and penalise a criminal, you
cannot manipulate the tax laws to fulfil the duties that the criminal law is
lacking
- Would you incriminate yourself by paying for tax on stolen goods? -> NO
o In terms of the Tax Administration Act (TAA) there is the right against self-
incrimination
o The info you submit to SARS is confidential. SARS may not disclose it to the
National Prosecuting Authority
§ 1 exception: may only disclose info to the NPA if it relates to a tax
crime (not a regular crime)
LECTURE 6
ACCRUED TO
- Amounts that accrue to a taxpayer must be included in their gross income
- ‘Accrued to’ means that the taxpayer became entitled to an amount. In other words,
at the time that a taxpayer obtains a vested right to a future payment, the amount
accrues to the taxpayer.
Lategan v CIR [also discussed under lecture 5 ‘amount in cash or otherwise’]
- Remember: the man got paid for his grapes/wine partly in cash (during the current
year of assessment) and partly in instalments (during the subsequent year of
assessment). The court had to ask whether the future instalments amounts accrued
to him now for purposes of the current year of assessment.

- The court held that where the taxpayer acquired a right during a year of assessment
to receive instalments of an amount during subsequent years, the present value of
the right at the end of the year should be included in the taxpayer’s gross income
o NOTE: this position has now changed. The ITA has been amended and a
proviso was added in S1 -> the face value of the amount (as it appears in the
records) must accrue (NOT the present value)
o This means that the face value of the amount should be included in a
person’s gross income
CIR v People’s Stores
- The taxpayer was a retailer that sold goods to its customers for cash and on credit.
The credit sales were made under the taxpayer’s six- months- to- pay revolving
credit scheme.
- The court had to decide whether the instalments that were not yet payable and that
were still outstanding at the year of assessment had accrued to the taxpayer and
should be included in the taxpayer's gross income.
- The court in this case followed the principles in the Lategan case and also held
that:
o An amount does NOT have to be due and payable to the taxpayer for it
to accrue to the taxpayer
o The taxpayer acquired a right during the year of assessment to claim
payment of a future amount
o In other words, since the right vested in the taxpayer in the year of
assessment, it accrued to the taxpayer in that year. And since the right has
an ascertainable monetary value, the right qualifies as an amount and should
be included in the gross income.
Mooi v SIR:
- The taxpayer’s employer granted him an option to acquire shares in the company at
a specific price. The option was subject to certain conditions including that the
construction of the company's mine had to be completed and that the taxpayer
needed to still be an employee at the time that the option would be exercised. The
taxpayer accepted the option in one year but only exercised it in three years’ time.
When the option was exercised, the value of the shares was more than the option
price.
- The court was required to consider whether the difference between the price of the
shares when the option was exercised and the option price should be included in
the taxpayer's gross income
- The taxpayer argued that the right accrued to him when the option was granted and
the value of the right at that time should be included in his gross income. However,
the court found that the right granted to the taxpayer was a contingent right, as it
was subject to the conditions mentioned above. The right only accrued to the
taxpayer when the conditions were fulfilled and the right became exercisable.
- The court made a key ruling -> accrual occurs when all the conditions are
fulfilled and the right becomes exercisable.
o This is because, in this case, the option still had conditions. The taxpayer
must be unconditionally entitled to the amount. There must not still be some
conditions that the taxpayer must fulfil.
Summary:
- The Lategan case and the People’s Stores case -> you have to be entitled to the
amount
- Mooi case -> the court added to this and said that you have to unconditionally
entitled to the amount
- This is when the amount will be said to have accrued to the taxpayer
- Key point: an amount accrues to a taxpayer when the taxpayer becomes entitled to
the amount, but only when that entitlement is unconditional
Don't confuse a true condition with terms of an agreement
- The terms of an agreement are subject to the condition. The condition must be met
before the contract operates.
- A true condition in a contract is an uncertain future event - we don't know if it will
indeed happen
- I will give R500 to X if she passes her exams. The accrual is conditional on the fact
that she must still pass the module. We can't include the R500 in her gross income
now bc there is an unfulfilled condition attached to the accrual

VALUATION OF RECEIPT OR ACCRUAL
How do we value an amount received by or accrued to a taxpayer? / How much is actually
included in the gross income?
Receipts:
- -> Actual amount received
- The value of the receipt is the amount that has been received during the year of
assessment
- e.g.) If someone pays you R500 then you received R500
Accruals:
- More complicated than receipts because when it comes to most cases of accruals,
the person has not received the money yet but they are unconditionally entitled to it
- We know that the value of money decreases over time. If you become entitled to
R500 in 2015 but will only be paid that amount in 2017, then do we include R500 in
your gross income or do we work out how much R500 is worth in 2017? (it will be
less than it was in 2015)
- In the People’s Stores case + the Lategan case -> the court held that you must
look at the present value. The present/discounted/lower value is what should be
included in the gross income. However, this position has now changed
- The new position is codified in S1 of the ITA and contains a proviso which says the
following:
o -> When a person becomes entitled to an amount during the year of
assessment + the amount is payable on a date(s) after the last day of that
year, then the face value (and not the present value) of that amount shall be
deemed to have accrued to the person during such year
- e.g.) If you become entitled to R500 in 2015 -> we look at the face value of this
amount during the year of assessment that you become entitled to it (so the face
value would be R500 -> this will be included in your gross income)
Example:
- Scenario: a taxpayer sold and delivered goods in 2022 worth R30 000. Payment for
these goods is only due 2 years later (in 2024). In 2024, the amount of these goods
decreases to R18 000.
- Question: calculate the amount to be included in gross income

- Remember: by virtue of the amendment to ITA which introduced a proviso to the
definition of ‘gross income’ in S1, we know that when a person becomes entitled to
an amount during the year of assessment (2022) and that amount is payable on a
date falling after the last day of that year (a date in 2024), then the face value
(R30 000) of that amount (and not the present value of R18 000) shall be deemed to
have accrued to the person during such year (2022)
- Solution: an amount of R30 000 (and not the discounted present value of R18 000)
will be included in the gross income of the taxpayer in the year of assessment in
which the sale was concluded (2022).
UNQUANTIFIED AMOUNTS
Sometimes there are situations where assets/goods are sold, but the consideration of
those goods/assets includes an amount that cannot be quantified in the current year of
assessment
- In such situations, the unquantified amount is deemed NOT to accrue in that year of
assessment (S24M ITA)
- Accrual only occurs once the amount has been quantified (accrual occurs in the
year when it becomes quantifiable)
Example:
- A farmer sells his mielie crop on 28 Feb 2022 to Afgri for R4500 per ton and the
crop will be delivered in April 2022 (after the 2022 year of assessment). The farmer
does not know how much crop he will manage to harvest (thus he does not know
the amount of money he will receive). In other words, it is unquantified
- Should he include the selling price of his crop in his gross income for 2022?
- According to S24M of the ITA, you will not include the selling price in the 2022 year
of assessment in the gross income. The amount will only be included in the farmer’s
gross income in the 2023 year of assessment when it is quantified.

DISPOSABLE INCOME AFTER RECEIPT OR

ACCRUAL (WITHOUT PRIOR CESSION) VERSUS
DISPOSAL OF A RIGHT TO FUTURE INCOME (PRIOR
CESSION)
Disposal of income after receipt or accrual (no prior cession):
- You received R500 but you lost it or disposed of it (or maybe it was even stolen
from you) shortly after. Will you still be liable for tax on this amount?
- General rule = disposal of income after receipt or accrual will not affect tax
liability
o The fact that you lose the income is irrelevant
o Therefore, you will still be taxed on this amount because you received it or it
accrued to you for your own benefit
CIR v Witwatersrand Association of Racing Clubs
- The taxpayer was an association formed by a number of horse racing clubs. The
taxpayer decided to hold a horse racing event for the benefit of two charities.
- The association received money from the race and paid off the expenses they had
incurred in respect of the race and undertook to hand over the net proceeds to the
2 charities.
- The court had to consider whether the proceeds from the race should be included
in the taxpayer's gross income.
- The court held that the association/taxpayer had to pay tax in respect of the
profits that were received because the association donated the proceeds only
after they were received by it for its own benefit. The moral obligation to
donate the proceeds does not affect ‘receipt’ or ‘accrual’
- The taxpayer argued that it was acting on behalf of the charities (aka the association
wanted the charities to pay tax since the event was to raise money for them).
However, the court held that the taxpayer was liable to pay the expenses incurred
during holding the event because the race was conducted by the taxpayer itself as
principal and not as an agent for the charities.

- The court held that the proceeds from the race were gross income for the taxpayer
because it was the taxpayer, and no one else, who became entitled to the proceeds
of the race. The court also said that although the taxpayer was not going to keep
the proceeds from the race for itself, but pay it to the two charities, the taxpayer
was not thereby relieved from liability for tax. A moral obligation to hand over the
proceeds to the charities did not destroy the beneficial character of the receipt of
those proceeds by the taxpayer.
o In other words, the court said that the association did NOT act as an agent
on behalf of the charities. If the taxpayer had, in fact, acted as agent on
behalf of the charities -> the proceeds from the event would have accrued to
the charities, because the association would not have been entitled to the
amounts
o The accrual of the income and the resulting tax liability (in the hands of the
association) would have been avoided if the race meeting had been arranged
in terms of a contract which stated that all of the proceeds would be for the
account of the charitable organizations and that the association would only
act as an agent of the charitable organizations. The amounts would then
have been received in favour of and on behalf of the charitable organizations
(aka the amount must be donated before it accrues)
Disposal of a right to future income (cession):

- Remember: when it comes to income disposed of after receipt/accrual -> the
amount remains taxable in the hands of the person who disposed of it (disposing
party)
- However, when it comes to disposal of a right to future income -> the income will, in
future, accrue to the recipient of the right (provided that it has been properly ceded)
- Cession means that one person (the transferor, or cedent) transfers his rights to
another person (the cessionary). Delivery of rights occurs through cession.
Van der Merwe v SBI
- Main ruling: a right to future income that has been ceded properly will accrue in the
hands of the recipient
- e.g.) You are renting out a flat and because of that lease agreement, you have a
right to future income. If you decide to cede this right to future income to someone

else, then the rental income will not accrue in your hands but in the hands of the
cessionary
ITC 265
- Main ruling: the transferor should divest himself totally of any right to claim the
income when that income accrues in the future
- If you have ceded the right to future income, but are still receiving the income ->
then you have not ceded the income fully/properly (and thus it could still be taxed in
your hands)
SIR v Smant
- Sometimes there are cases where you can cede your right to future income, but you
(the taxpayer) still own the property that is receiving the income.
- In this case, the taxpayer ceded the right to future income to the cessionary.
However, payment was still being made to the taxpayer/cedent. The cedent duly
paid the full amount to the cessionary.
- Where the taxpayer has ceded the right to future income, it is irrelevant whether the
property is still in the taxpayer’s hands. In other words, the fact that the
taxpayer/cedent is still receiving income after ceding the right to that income to
someone else is irrelevant as long as the taxpayer duly pays this income to the
cessionary. When this happens, the amount is received on behalf of and for the
benefit of the cessionary. Therefore, the amount accrues to the cessionary (and they
will be taxed on it).
- The mere fact that the cedent received the money physically does not mean that he
received it for his own benefit or that the amount had accrued to him
Specific anti-avoidance provisions:

- It is possible to cede a right to future income in an attempt to avoid potential tax
liability
- Taxpayers sometimes do this to try avoid/evade tax or reduce their tax liability (this
is bad)
- As such, there are certain anti-avoidance provisions in the ITA designed to
counteract such avoidance
- S7 ITA is an example of a specific anti-avoidance provision that says -> income
disposed of to a spouse or minor child would still be taxable in the hands of the
disposing spouse/parent
- Example 1 -> s7(2) ITA
o If a spouse receives income in consequence of a donation made by his/her
spouse with the sole/main purpose to avoid tax -> then the donor spouse will
be taxed on the income that the recipient spouse received in consequence of
such donation
o This is to avoid situations where people give money to their spouse/children
to avoid paying tax
- Example 2 -> S7(4) ITA
o If a parent donates money to a third party and the third party donates money
to the child of the donor parent (this is a cross donation) -> then the money
the child receives will be deemed as income received or accrued to the
parent that made the donation to the third party
o S7(4) ITA deems the income received by a minor child from a donation,
settlement, or other disposition made by a third party to be received by the
child’s parents if the child’s parents have made a cross donation, settlement,
or other disposition to the third party of his/her family
- Example 3 -> s7(7) ITA
o If a taxpayer cedes a right to future income whilst retaining ownership in the
property (movable/immovable) OR if the taxpayer is entitled to regain
ownership in the future -> then any rent, dividends, interest, royalties, or
similar income iro that property is deemed to accrue to the donor/cedent ->
irrespective of whether that amount would have been exempt in the hands of
the cessionary
o In other words, the cession of income in respect of an asset of which the
cedent retains ownership will in terms of the definition of gross income
accrue to the cessionary, although the ownership has been reserved
o e.g.) Tumi bought a big house in Centurion. He divides the house into 2
medium sized apartments. He grants a lifelong usufruct to his mother to stay
in one of the apartments. His mother divides her apartment into 2 small
bachelor apartments. She rents out one bachelor apartment to a varsity
student for R2000 per month. Who must include the R2000 rental income in
their gross income?
§ Tumi must include this this amount in his gross income
o S7(7) ITA deems the income received by the cessionary in such cases to be
included in the gross income of the cedent (owner of the property)
LECTURE 7 (PART A)
RECEIPTS AND ACCRUALS OF A CAPITAL NATURE
Abbreviations:
- “Receipts and accruals of a capital nature” = RACN
- “Receipts and accruals” = R&A
- Receipts and accruals of a capital nature are EXCLUDED from gross income
- The ITA does not define what RACN are -> so we have to look at case law
- There is a difference between R&A-CN (excluded from gross inc) and R&A of a
revenue nature (included in gross inc)
- However, it is sometime difficult to determine whether a R&A should be regarded
as capital or revenue -> the court have laid down a number of guidelines to help us
make us make this distinction and determine whether an amount is capital nature or
not.
- WJ Fourie Beleggings v CIR 71 SATC 125:
o Court stated that it has not been possible to devise a definite/decisive test to
determine whether a receipt or an accrual is of a capital nature, despite the
issue coming up regularly
- Therefore since there is NO decisive test -> we have to look at the principles that
have been established by case law over the years.
Why is the distinction important?
- R&A of a capital nature are excluded from gross income. These do not attract tax.
- R&A which are NOT capital in nature attract tax in full as part of the taxable income
of the taxpayer for the year of assessment.
- The burden of proof that an amount is capital in nature is on the taxpayer (S102 Tax
Administration Act)
o Aka the taxpayer must prove that an asset was acquired for the purpose of
investment
o This means the taxpayer bought the asset as an investment to produce
income from it. He did not buy the asset to sell it for a profit.
o The taxpayer must prove what his intention was behind buying the asset
- The inquiry whether an amount is of an income or capital nature is a question of fact
which has to be decided on the merits of each case
- The court will take into account the guidelines which have been laid out in earlier
cases, but it will also have regard to the totality of all the relevant facts and
circumstances of the particular case that comes before the court.
- The most important test used by the courts in deciding whether a receipt in respect
of a disposal of an asset is income or capital in nature = the intention of the
taxpayer
- If the taxpayer acquired the asset with the intention of selling it for a profit -> the
proceeds will be income in nature (and thus included in gross income)
- If the taxpayer acquired the asset and held onto it with the intention to produce
income from that asset -> then the proceeds from selling this asset will be capital in
nature
o E.g.) purchasing a rental house in order to produce rental income
o E.g.) purchasing shares to produce dividend income
- The burden of proof rests on the taxpayer to prove his intention
- His creditability will be considered by the court
- Even though the court will consider the taxpayer’s own feelings/opinion and self-
interest, the opinion of the taxpayer is NOT decisive
- The court will then test the evidence given by the taxpayer, against the surrounding
facts and circumstances
- In other words, the court will use objective factors to establish the taxpayer’s true
intention
Objective factors that the court will consider to determine the

intention of the taxpayer (and thus to determine whether it is income or capital in
nature)
(1) Nature of the taxpayer
- Is the taxpayer a company or individual?
- If it is a company -> what is the purpose of the company?
- If he is an individual -> what is the intention of the individual?

(2) The holding period
- Was the asset held for many years? -> this is usually a sign of investment
- Or was the asset sold quickly? -> usually a sign of wanting to make a profit
(3) The financing method
- How did the taxpayer pay for this asset?
- Did the taxpayer use their surplus funds that they had lying around to purchase this
asset?
- Or did they finance with huge loans? -> usually a sign of a profit making scheme
(4) Treatment of the asset prior to realization
- How did the taxpayer treat this asset before he sold it?
- Was it abandoned property?
- Or was it an asset that the taxpayer has been producing income from?
(5) Reason for the realisation
- Why did the taxpayer sell this capital asset? What was his reason?
- Did the taxpayer sell his assets to his best advantage? -> if yes, then the proceeds
are capital in nature
o E.g.) you own a piece of land that you have had for a while (so it’s an
investment) and you have now decided to sell it. However, you struggle to
sell it (maybe you cannot find a buyer or the market is bad). If you divide the
land into smaller stands/plots and sell it that way -> then you are selling it to
your best advantage. Or if you decided to send money on connecting your
property to the main road or adding a water hole in order to attract a buyer ->
then you are selling it to your best advantage
- Or did the taxpayer sell his asset as stock in trade? -> if yes, then the proceeds are
income in nature
o If the taxpayer has now become a real estate agent or a property developer
or has started engaging in the business of buying and selling land -> this is
regarded as a profit making scheme so his proceeds from this sale will be
income in nature
(6) Circumstances of acquisition or disposal
- Was there a change in intention between acquisition and disposal?
- Even if the taxpayer acquired the asset as an investment, he can still sell it with the
intention of making a profit (intention can change)
- E.g.) if you buy an asset as an investment and have now become involved in buying
and selling more property (and thus you want to sell your asset to make money) ->
you are engaged in a profit making scheme. You have gone beyond merely
disposing of the asset
(7) Continuity of activities
- Is the taxpayer continuing with this business of buying and/or selling assets?
- If it is a once off sale of investment property -> proceeds are capital in nature
- If he buys and sells more and more property -> he is engaged in a profit making
scheme and his proceeds are income in nature
(8) Subsequent treatment of proceeds
- After selling the asset/property, does the taxpayer take the money and walk away? -
> proceeds are capital
- Or does he use this money to try make more money by buying and selling more
property and thus continues with his business of trading? -> proceeds are income
The court will look at the taxpayer’s own evidence (which is not decisive) and then the
court will test his evidence against these objective factors to determine the nature of the
amount
- If the amount is income in nature -> it will be included in his gross income
- If the amount is capital in nature -> it will be excluded from his gross income (aka he
won’t be taxed on it)
TIP: in a test, we must not only mention these factors but we must apply them to the
specific facts
Case law that attempts to determine whether an amount is capital in

nature or not:
CIR v George Forest Timber Company -> deals with the nature of the asset
- Facts: the taxpayer company carried on business as timber merchants and
sawyers. It acquired land with a natural forest for the purposes of its business. The
taxpayer cut down a number of trees each year, which were then cut up in the mill
and sold as stock in trade.
- Legal issue: were the receipts from the sale of the timber revenue or capital in
nature?

Court held:
- In selling the timber, the company did not realise a capital asset, but created and
sold a new product.
- General rule = capital is wealth used to produce fresh wealth.
- The court distinguished between fixed and floating capital:
o Floating capital is consumed and disappeared in the very process of
production
§ In this case, the timber was the floating capital as it was being
consumed and disappeared in the process of production
§ Income generated from selling a floating capital asset is not
considered to be of a capital nature
o Fixed capital produces wealth, but remains intact
§ In this case, the fixed capital was the land with the natural forest on it
because it remained intact
- The receipts from selling the timber were found to have been from the sale of
floating capital, and were thus not of a capital nature
- The court thus established the fixed and floating capital test
However,
- This case was decided in 1934 and new developments have taken place since then
-> so you can use this test, but you should NOT rely heavily on it. You have to
consider other cases that have stated other necessary considerations
o E.g.) Natal Estate’s case
o E.g.) Pick n Pay Employee Share Trust case
CIR v Visser -> deals with the nature of the asset
- Facts: the taxpayer was an influential businessmen in the area who acquired mining
options for a period of two years over certain properties, which were later not
renewed and thus expired. A third party negotiated and offered the taxpayer an
interest in a company to be formed if the taxpayer would refrain from taking up the
options in competition with him and also to assist the third party to acquire the
previously lapsed options. The taxpayer agreed to this proposal. The arrangement
was then confirmed in a letter which stated that the taxpayer had been promised
shares in consideration of the services he will be rendering to the third party

- Legal issue: are the shares that the taxpayer received capital nature, and therefore
excluded from his gross income? Or where they of a revenue nature and thus
included in his gross income?
Court held:
- The nature of the transaction and the taxpayers intention when he entered the
transaction should be considered.
- When though the taxpayer’s intention wrt the transaction is not decisive, it is
still important in deciding whether the profit made on the sale of the asset is
income or merely an enhanced value of a capital asset.
- A taxpayer’s intention is not determine by what the taxpayer says his intention is.
Instead, the taxpayer’s intention is determined by an inference from the intention to
be drawn from the facts of the case.
- The court made an distinction between the economic meaning of capital and
income (this is known as the ‘tree and fruit’ principle)
o Income is the interest/revenue that the capital produces (e.g. the fruit of a
tree)
o Capital is the principle that produces something (e.g. the actual tree)
- Even though this ‘tree and fruit’ principle is a useful guideline, the court warned that
its application is often difficult because what is principle/tree in one person's hands
may be interest/fruit in the hands of another
o E.g.) Law books in the hands of a lawyer are a capital asset. However,
lawbooks in the hands of a bookshop is stock in trade.
o E.g.) property in the hands of a real estate agent is stock in trade, but
property in a normal person’s hands could be a capital asset if they are not in
the business of buying and selling property
- The court decided that income may be described as a product of a person's wits
and energy. Therefore, the consideration received by the taxpayer (which is the
shares) was a product of his wits, energy, and influence, and was therefore held to
be of an income nature.
Elandsheuwel Farming (Edms) Bpk v SIB 1978 1 SA 101 (A) -> deals with the intention
of a company
- Facts: the taxpayer was a company that acquired a property that was used for
farming purposes. One of its shareholders carried on farming activities on the
property for about 4 years. The farm was then leased to other tenants who also
used the property for farming purposes. 6 years after the company acquired the
property, its shareholders sold its shares in the company. The price of the
company's shares was based on the value of the property as agricultural land. The
new shareholders were property developers. A year later, the company was sold to
a local municipality at a significant profit.
- Legal issue: were the proceeds from the sale of this property of a capital nature (and
thus should be excluded from the company’s gross income), or were they
revenue/income in nature?
Court held:
- The new shareholders (property developers who appreciated the potentialities of the
land for township development) devised a scheme to make a substantial profit by
acquiring the shares in the company at a price based on the agricultural value of the
land, and then selling the land to the municipality for township development.
- The shareholders intentions should be attributed to the company itself
- Because the new shareholder’s acquired control of the company + the value of the
shares was based on agricultural value of the land -> there was a change in
intention at the time of disposal wrt the company's purpose
o In other words, when the new shareholder’s acquired control of the
company, their intentions are now attributed to the company
o Even though the old shareholders used the property for agricultural
purposes, the new shareholders are now selling the land as trading stock as
part of a profit making scheme (therefore, there was a change in intention of
the taxpayer/company)
- Therefore, the profit realised on the sale of the land was of a revenue nature and
should be included in the company's gross income.
CIR v Pick ‘n Pay Employee Share Purchase Trust 1992 (4) SA 39 (A) -> deals with
business conducted with a profit making purpose
- Facts: the taxpayer was the Pick ‘n Pay Employee Share Purchase Trust, which had
been established to administer a share purchase scheme for the benefit of
employees of the group. The trust claimed that it was created and maintained to
enable employees to purchase shares in Pick ‘n Pay (the employer company).
Shares were purchased in order to make them available to employees entitled to

them in terms of the rules. In terms of its constitution, the Trust was compelled to
repurchase shares from employees who are required to forfeit their holdings.
- Legal issue: were the profits made from the share dealings (aka the proceeds
generated from buying and selling shares) by the Trust capital or revenue in nature?
Court held:
- Although there are variety of tests that have been laid down to determine whether or
not a receipt is revenue or capital, these are just guidelines -> there is no single test
applicable.
- The amount received by the trust will be revenue in nature if they qualify as receipts
made by an operation of a business being carried out in a scheme for profit making.
o In other words, for receipts to be revenue in nature:
§ The taxpayer must carry on the business AND
§ The business should be conducted with a profit making purpose!!
- The proceeds on the sale of an asset will only be taxable where the realisation
occurred in the course of a profit making scheme
- Even though the trustees might have contemplated the possibility of profits, it was
not the purpose/intention of the company to found a trust to carry on a profit
making scheme
- Any receipts that were received by the trust were not intended or worked for, but
were rather purely fortuitous (they were a stroke of luck) in the sense that any
receipts made were an incidental by-product of this arrangement. Pick ‘n Pay did
not intend to make profits.
- The purpose of the Trust and the purpose of buying/selling shares was not to make
a profit, but rather to make shares available to the employees of PnP + take those
shares away in the event that they resigned (to deter unwanted resignations)
- Key point of this case: there must be a scheme of profit making before the proceeds
become taxable. The fact that the memorandum of the company permits the
company to trade does not automatically mean that the sale of an asset constitutes
trading.
- This case confirms the principle that was held in the earlier case of Natal Estates

LECTURE 7 (PART B)
NOTE:
- CIR = Commissioner for SARS
- SIR = Secretary for Inland Revenue
- COT = commissioner of taxes
CIR v Stott 1928 AD 252 -> deals with selling an asset to the best advantage
- This case assists in determining what is NOT considered to be a scheme of profit
making
- Facts: the taxpayer was a surveyor/architect who, on multiple occasions, purchased
land when he had the funds to invest, and one year and he acquired two properties
that he subdivided into smaller plots. He acquired the first property as a seaside
residence. The property was larger than required but was only for sale as a whole.
He built a cottage on the part of the land he needed. The excess land he cut up into
smaller plots and sold it and made substantial profit. The second property he
acquired was a fruit farm which was subject to a long term lease when he acquired
it. After the tenant defaulted on the payments he subdivided the fruit farm and sold
it at a profit. During a particular year, he derived profit from the sale of plots of land,
which was subdivided from the two properties
- Legal issue: was there a scheme of profit making in relation to any or all of the
properties in question?
Court held:
- Unless some other factor intervened to show that the article/asset/property was
sold in pursuance to a scheme of profit making (and thus shows a change of
intention), the intention with which the taxpayer acquires an
asset/property/article is decisive/conclusive in determining whether the receipts
from the sale of land were capital or gross income
- In this case, the taxpayer acquired each of the properties as an ordinary investment
using surplus funds. There was no evidence to show that the taxpayer, at any time
after purchasing the properties, considered dealing with them as part of a business
of buying and selling land (thus there was no evidence of a profit making scheme)
- The mere fact that the land was subdivided into plots, rather than sold as a whole
could not buy itself out of the character of the proceeds derived from the land from
capital to revenue. And the fact that the taxpayer was a surveyor and thus knew
somewhat more than the ordinary public about the value of land made no
difference.
- Every person who invests his surplus funds in land or stock or any other asset
is entitled to realise such asset to the best advantage. Doing this does NOT
alter/change an investment of capital into a trade or business for earning profits
- In this case, the receipts / amounts realised in the hands of the taxpayer were held
to be accruals of a capital nature
- Key point of this case: subdividing your property and selling it to the best
advantage and maximising whatever profit you can get from your capital asset
-> does NOT mean that you engaged in a scheme of profit making. One must
look at the intention of the taxpayer at the time he acquired the asset and at the
time that he sold it + whether or not there was any change of intention In between
that period indicating a profit making scheme
CIR v Nel -> deals with realisation of a capital asset
- Facts: the taxpayer had purchased Krugerrands with the intention of holding them
for long term investment as a hedge against inflation. Although the Krugerrands
escalated in value over the years, and despite the fact that he had so many
opportunities to sell them, he never did so and it never entered his mind to do so.
However, one day he urgently and unexpectedly needed to purchase a car for his
wife. He reluctantly sold 1/3 of his coins to pay for the vehicle. Thereafter, the
taxpayer made a gain of R67 000 after disposing the Krugerrands, which he
considered as being of a capital nature. When assessing the profits to tax, the
commissioner of SARS claimed that the nature of the Krugerrands was unique in
the sense that they are not income producing assets, other than the fact that they
can be worked into jewellery. They do not have any economic utility except for
being sold when cash is required. Thus, the commissioner argued that a special rule
should be developed in the case where no income is earned on the investment.
- Legal issue: did the sale of the Krugerrands represent capital or revenue profits?

Court held:
- The taxpayer was unwilling to sell his Krugerrands but was obliged to do so
because he had no other available means of purchasing a car that his wife
urgently/unexpectedly needed.
- The evidence showed that the taxpayers purpose in selling the Krugerrands was
not to make a profit, but rather to realise a capital asset in order to acquire
another capital asset.
- The mere decision to sell an asset that was originally held as an investment is
not necessarily to be regarded as transformation/change/alteration of those
profits from a capital nature into a revenue in nature. Instead, something more
than the mere disposal is required for the profits to be revenue in nature, such as
a change in intention and/or engaging in a profit making scheme etc.
- Therefore in this case the proceeds derived from the sale was capital in nature
CIR v Richmond Estates (Pty) Ltd -> deals with the realisation of a capital asset
- This is one of the only cases where the taxpayer managed to convince the court of
its intention in intention from initially holding an asset as stock in trade (for a profit
making scheme) to eventually holding it as a capital asset (to produce an income)
- Facts: the taxpayer was a company that was formed to control the investments and
savings of its sole shareholder and director. The company's memorandum of
association empowered them to trade with and invest in land. For some time, the
company made profits from trading in land and from receiving rent from properties
that were late. Due to legislative changes, it became difficult for the company to
purchase land in the area that it traded in. So the shareholder decided that the
company would cease trading in land and would rather develop the properties to
receive rental income. In other words, the company/taxpayer was initially engaged
in the business of buying and selling land for a profit making scheme, whereas ow
the company just wanted to focus on letting the property to receive rental income.
However, this change in intention was not recorded in a formal resolution of the
company. Two years later, there were more legislative changes that the shareholder
believed were going to negatively impact the value of the properties he was letting.
Because of this, he decided to sell the properties and make a substantial profit.
- Legal question: could a company change its intention in relation to an asset from
one of profit making to one of capital in nature?
Court held:
- When the company decided to develop the properties to receive rental income ->
this indicated a change in intention from trading stock to capital assets
- The court took into account the special circumstances of this case, namely that the
managing director and the sole beneficial shareholder of the company were the
same person. Therefore, the fact the change of intention was not formally recorded
but was only evidenced by the shareholder’s statement was no reason for
concluding that the taxpayer’s intention did not change
- The capital assets were sold because of the pending legislative changes outside of
the company's control that would negatively impact the value of the properties.
Therefore, the mere decision to sell an asset at a profit does not mean that the profit
was income in nature.
- In this case, the profits from the sale of the properties were thus held to be of a
capital nature.
Natal Estates Ltd v CIR 1975 4 SA 177 (A) -> deals with change in intention
- Facts: the taxpayer owned a large piece of land and it carried on the business as a
grower of sugar cane and manufacturer of sugar (this agricultural land was held as a
capital asset for over 45 years). The directors of the company were aware of the
possibility that the local authority could expropriate the land for public development
so they appointed town planners and surveyors to investigate the possibility of
residential development on the land. Thereafter, they were told that they should wait
until the market was better -> so the residential development project was
temporarily suspended. Then a newly elected Board of Directors decided to
proceed with the project. They consulted engineers and architects, and also
appointed financial advisors and marketers to the project (the costs for this develop
thus increased a lot). The taxpayer proceeded with the development bit by bit and
started to sell the developed land directly to the public and investors. Thereafter,
the Commissioner of SARS assessed the taxpayers receipts from the sale of the
land as being revenue in nature.
- Legal issue: are the proceeds from the sale of agricultural land and properties
income/revenue or capital in nature?

Court held:
- The original intention of the taxpayer to hold the assets as an investment is an
important factor, but it's not decisive because a taxpayers intention can change.
- The mere decision to sell an asset at a profit is not an indication that a
taxpayer that acquired the asset with an investment purpose changed its
intention to a scheme of profit making -> something more is required -> from
the totality of the facts, one should enquire whether the taxpayer crossed the
Rubicon (going beyond the point of no return) and gone over to the business of
using land as stock in trade and/or embarked upon a scheme of selling land
for profit?
- A change of intention implies something more than the mere decision to sell an
asset of a capital nature. In this case, the taxpayer had gone over to the business of
township development on a grand scale. They made much more of an effort to
consult engineers and architects, financial advisors and marketers and spent a lot
more money and effort on this project than they did when they treated the land as a
capital asset.
o Therefore, the taxpayer had indeed crossed the Rubicon -> it had gone from
merely holding an investment to embarking on a scheme of profit making on
a grand scale.
o Crossing the Rubicon indicates that the company changed its intention
o The proceeds were thus revenue/income in nature
- Key point of this case: This case is a reminder for taxpayers, that although a
person may realise his capital assets to his best advantage, he must be careful not
to cross the Rubicon by embarking on extensive and elaborate activities to realise
his capital assets –> such activities constitute a scheme of profit making
John Bell Co. (Pty) Ltd v SIR 1976 (A) (38 SATC 87) -> deals with change in intention
- Facts: the taxpayer was a company that operated a textile business from the
premises that it owned. After the business relocated to other premises, the directors
of the company decided to sell the original premises. However, the property market
at the time was not performing well, so the directors decided to wait until the market
had improved. This resulted in them waiting renting the property out for a period of
11 years. Once the market had improved, the property was sold at a profit.
- Legal issue: were the proceeds from this sale capital or revenue in nature?
Court held:
- The court reiterated and confirmed the principles decided in the Natal Estates case
- A taxpayer is entitled to realise his property to his best advantage. There was no
factual evidence in this case that indicated that the taxpayer had had a change of
intention to use the property as trading stock.
- Something more than merely selling the asset is required to change the character of
the capital asset and render its proceeds gross income.
- The taxpayers decision to wait for the market to improve with the object of selling
the property at a high profit does not affect the character of the asset. A person
may realise his capital assets to his best advantage, even if it necessitates waiting
for a long time while the market value of the asset increases.
- The taxpayer must embark on some scheme for selling such assets for profits and
use the assets as a stock in trade in order for the amount to be regarded as revenue
in nature.
COT v Levy -> deals with mixed purpose
Facts:
- the taxpayer acquired 25% of the shares in a company and was also one of its four
directors. The company was formed to acquire and develop land in the area that
was thought likely to develop. The taxpayer had an open mind when he bought the
shares as to what would be the best thing to do with the property. Although he
hoped that the property, and therefore the shares, would appreciate in value (aka
that he would make a profit from it), he was more interested in obtaining a good
revenue from the property. He agreed with the other shareholders to develop the
property to obtain a better return from it. In other words, his dominant intention was
to get revenue from the property (aka hold it as an investment where he would earn
income). 3 years after the taxpayer acquired the shares, another person purchased
all the shares from the four shareholders and the taxpayer thus made a substantial
profit from the sale. The taxpayer argued that the proceeds realised on the sale of
shares in a company were capital in nature.
Legal issue:
- Was the taxpayer correct in his assertion that the proceeds are capital in nature?

Court held:
- Where the purposes of a taxpayer regarding an asset are mixed, one should
seek and give effect to the dominant factor that induced the taxpayer to
acquire the asset. In other words, if there are 2 possible motives for acquiring an
asset -> the dominant motive prevails
- Based on the evidence in this case, the taxpayers dominant intention in acquiring
the shares was to hold the shares as an income earning investment.
- After purchasing the shares/property, he never tried to sell them. He only sold it
when someone made him an offer. The taxpayer accepted the offer with a view to
realise his investment. Therefore, the proceeds were held to be of a capital nature.
- Therefore, the intention of the taxpayer at the time that the asset is purchased is
important if there is no change of intention at a later stage.
- If the taxpayer is an individual, it does not matter that he purchased the property
with two motives, as long as the dominant motive can be established. The dominant
motive is the one that will prevail.
o Cases where there are 2 possible motives (such as this case – where the
dominant motive prevails) is different from cases where an asset is
purchased with a dual motive where both motives are equally important -> in
such cases the revenue motive prevails (e.g. the Nussbaum case)
CIR v Nussbaum -> deals with secondary purpose
Facts:
- The taxpayer inherited listed shares and with active and careful investment, he built
a substantial portfolio of listed shares over a number of years. SARS considered 3
years of assessments and held that his profits from the sale of the shares as being
revenue in nature.
- The taxpayer testified that over the years, he used surplus income to consistently
add shares to the portfolio he had inherited. When he purchased shares, he did so
with an intention to produce dividend income and to protect his capital from
inflation. He never purchased shares for a profitable resale. He testified that he
would only sell the shares if a better dividend yield could be achieved with other
shares, or where his shares in a specific company distorted the balance he aimed to
achieve.

- He also testified that he changed his approach when he turned 60-years old and
decided to build up readily available cash resources to meet future and medical
expenses and also to buy a house (that he was in need of now that he is getting
old).
- So he sold shares bit by bit in order to invest the proceeds in fixed interest
investments. He argued that his criteria for selling the shares was that he would sell
shares with a poor dividend yield, regardless of whether he would realise a profit or
a loss from the sale
- SARS argued that during the years under consideration, the taxpayer had changed
his intention towards his shares -> he had gone over to holding/purchasing them
with a dual purpose. Although his main aim was still investment, he had a
secondary purpose -> which was to use his portfolio as stock in trade and to sell
shares for a profit when he felt it appropriate to do so.
Legal issue:
- Did the sale of the shares amount to the realisation of capital assets (in which case
the proceeds would be capital) or the disposal of trading stock (in which case the
proceeds would be revenue)?
Court held:
- The taxpayer had two dual motives and purchased/sold the shares for a dual
purpose
o Motive 1 = he wanted to make dividend income from these shares (if this
was the only motive then the shares would be an investment/capital asset)
o Motive 2 = to make a profit at some later stage in his life (this is a revenue
motive / profit making purpose)
- The court looked at the scale and frequency of the taxpayers transactions. In this
case, the taxpayer entered into a significant number of share transactions which
profitable to him.
- Although the taxpayer testified that his intention with buying and selling the shares
was to invest the shares, if you look beyond the taxpayers own version of events, it
is clear that the profits were not merely incidental to the taxpayers investment
activities, but the taxpayer had a secondary and profit making purpose when he
purchased and sold the shares.

- Since the taxpayer purchased the shares for investment purposes AND also
contemplated dealing with the shares for the purpose of making a profit -> it cannot
be argued that the profit from the sale of the shares was merely incidental (because
he had the intention to make a profit off of them at a later stage)
- Since the taxpayer did not have a dominant intention (bc he was pursuing both
motives equally) -> the profit gained from his secondary purpose was of a revenue
in nature (and thus prevails in this case)
Berea West Estates (Pty) Ltd v SIR -> deals with a realisation company (= a company
that is formed for the purpose of selling property)
Facts:
- The taxpayer was a company that was formed for the purpose of selling land (aka it
was a realisation company). At the time of forming the company, the land was held
by a deceased estate and trust. The administration of the deceased estate had
been running for 22 years, and due to a number of reasons, the estate could not be
wound up. So the executors were pressed to finalise the estate, and for this reason,
the deceased estate and the trust transferred the land to the company so that the
company could sell the land. The beneficiaries of the deceased estate and the trust
became the shareholders of the company and any proceeds from selling the land
were to be distributed to them.
- Before the transfer of the land to the company, the executors of the deceased
estate had obtained approval to establish townships on the land. The townships
were only proclaimed after transferring the land to the company, but they were
subject to the fact that roads had to be built and there had to be a water supply
before individual plots could be sold.
- At the time that the company was formed, there was no obvious buyer for the land
as a whole. So the company decided to develop the land so that it could be sold in
individual plots, and the money would be used to develop a further area on the land.
Legal issue:
- Did the taxpayer/company deviate from its original intention of realising the property
to trading it for profit? Were the receipts from selling the plots of a capital nature?

Court held:
- Where a company is formed for the purpose to sell an asset (aka it is a
realisation company) and it does so at best advantage -> this does not mean
that the company traded for profit.
- In deciding whether the company was merely acting as a realisation company or
was rather carrying on the business of trading for profit -> one has to look at the
facts leading to the company's incorporation, its memorandum and articles,
and the company's subsequent conduct
- In this case, the taxpayer (which is the realisation company), had to sell a very large
piece of undeveloped land, and could do so only by subdividing the land and
developing the property, which involved spending a lot of money. The fact that the
taxpayer spends a lot of money does not mean that it was trading for profit.
- This case is distinguishable/different from the case of Natal Estates
o Natal Estates case -> the taxpayer carried on the business of selling land for
profit at a grand scale and using the land stock in trade
o Berea West Estates case -> the taxpayer merely sold the land at best
advantage and did not deviate from the purpose for which the company was
initially establish (to sell property)
- Therefore, the receipts from selling the plots were of a capital nature
CSARS v Founders Hill (Pty) Ltd -> deals with a realisation company
Legal position before this case:
- -> it was assumed that the use of a realisation company would lessen the burden of
proof upon a taxpayer to prove that it merely realised the capital assets to the best
advantage, and that the proceeds of the sale of the asset would be capital in nature.
Legal position after this case:
- -> It is only in exceptional circumstances that such a realisation company will not be
liable for income tax on the proceeds of the realisation
Facts:
- The taxpayer (realisation company) formed to acquire and realise surplus land that
was owned by AECI Ltd which it held as a capital asset. From the memorandum of
association/incorporation, it was evident that the purpose of the company/taxpayer
was to realise the land at best advantage

Legal issue:
- Were the receipts from the sale of the land of a capital nature?
Court held:
- The taxpayer was formed solely for the purpose of acquiring the property from
the holding company (AECI limited) and then selling it at a profit. Since the only
purpose was the realisation of the property -> such property was thus stock in
trade
- This case was distinguishable/different from the Berea West Estates case:
o Berea West Estates case -> apart from the purpose of selling the capital
asset to its best advantage, there was a real justification for the formation of
the realisation company. Without the formation of the realisation company,
the realisation of the capital asset would have been very difficult (remember:
the deceased estate and trust had issues winding up the estate so the
realisation company was formed to facilitate the sale on behalf of the
beneficiaries of the estates. Thus, there was a real need for the formation of
this realisation company)
o Founders Hill case -> here the realisation company was just being used to
trade
- The taxpayer’s profits/gains were made by an operation of a business carrying out
the scheme of profit making. Therefore, the revenue derived from capital
productively employed and must thus be taxable income.
- Key point: it is only in exceptional circumstances that a realisation company will not
be liable for income tax.

LECTURE 8 (CAPITAL VS REVENUE)
BLUE BLOCK (Damages & compensation)

- Income can either be revenue in nature or capital in nature
- We also distinguish between income earning structures and income earning
activities
o Income earning structures -> income is capital in nature
o Income earning activities -> income is revenue in nature
- Over time, “typical cases” have developed that we will now look at. These
typical cases are:
o Damages and compensation
o Copyright, inventions, patents, trademarks
o Shares
o Debt and loans
o Restraint of trade
o Gifts/donations
o Gambling
- When someone gets paid damages and/or compensation, does the
damages/compensation make good the loss to an income earning structure or
to an income earning activity?
o Structure -> damages/compensation is capital in nature
o Activity -> damages/compensation is revenue in nature
- Example:
o You have a law firm and a fire burns it down. It burns all the books,
computers, files, furniture etc. The insurance then pays out to replace all the
books and computers etc. This pay-out makes good the income earning
structure because that is the structure you created in order to make/earn
money. The income from the insurance will be capital in nature
o In your law firm, a file (that has all the info about a specific client) gets stolen.
The file and its documents is worth a certain amount of money so you claim
that from your insurance. This would be a loss of an income earning activity
bc the file documents all the activities you’ve done to create the income. To
compensate you for that loss, the income will be revenue in nature.
WJ Beleggings v CSARS:
- The taxpayer (WJ Beleggings) was operating a hotel. The customer wanted his
business/employees to stay in the hotel so that they could do work in that area. So
the customer entered into a long term agreement with the hotel so that the hotel
could close their doors to the public for 3 months. Shortly after entering the
contract, the customer said they no longer need the hotel and so they terminated
the agreement (this is breach of contract). The customer paid the hotel
compensation for this loss of income.
- Court said there’s a big difference between a contract that is the means of
producing income (like a licence agreement) and a contract that is directed by its
performance to make a profit (like a sale, lease, or service agreement)
- WJ Beleggings argued that the compensation was for the loss of a contract (which
is a capital asset). Early termination of that contract will then constitute income of a
capital nature. The court disagreed with this

- The court said that if the contract is an income earning structure, then the income
will be capital in nature. If the contract is to make a profit, then the income will be
revenue in nature.
- In this case, the hotel itself was an income earning structure. The agreement to rent
the rooms in the hotel for long term period is just the profit making scheme (activity).
It is the agreement to make a profit that is the income earning activity. Early
termination of the contract affects the income earning activity, which means that
compensation for this is revenue in nature
Stellenbosch Farmers Winery Ltd v CSARS
- Stellenbosch farmers winery (SFW) had an exclusive licence agreement to sell a
particular type of international whiskey in SA without any competition. The original
licence grantor later told SFW that they want to venture into SA directly and on their
own and no longer need SFW to distribute the whiskey for them. They said that they
will compensate SFW for early termination of the license
- SARS argued that such compensation constitutes the loss of future income that
they would have earned by selling the liquor (aka they said that this affects the
income earning activity).
- On the other hand, SWF argued that that the licence agreement is an income
earning structure, not an income earning activity. Income earning activity is the sale
of the liquor. But without the licence, they cannot sell and distribute the liquor. The
licence agreement is their capital investment. The early termination fee is to
compensate for the loss of the income earning structure, not necessarily a loss of
the future profits. The court agreed with this
- Court said that the early termination makes good the loss of an income earning
structure (the licence), not the loss of future profits. Therefore, compensation is of a
capital nature
YELLOW BLOCK (Copyright, inventions, patents, trademarks,

goodwill)
- Sale of intellectual property (IP) is dealt with exactly the same as any other asset
- If the intellectual property constitutes somebody's income earning structure -> then
the proceeds of the sale of that intellectual property will be capital in nature

- Example:
o I come up with the idea of the creepy crawly (in other words I create a
patent). I sell this ides to a swimming pool company so that they can
manufacture creepy crawlies. That idea / intellectual property would be a
capital asset in my hands, because it is my income earning structure. When I
sell it, it will then constitute a proceeds/income of a capital nature
- However, if I am a dealer in IP rights -> my income is revenue in nature (why? -> bc
my IP is my income earning activity)
- Example:
o A middleman/go-between guy (dealer in IP rights) will buy IP rights from IP
traders/original inventors and sell/distribute/market these ideas to companies
like Verimark (the highest bidder)
o The IP dealer’s income from the sale will be revenue in nature bc he
purchases the IP rights with the intention to make a profit
BROWN BLOCK (shares)

- The normal rules also apply when it comes to share transactions
- If you purchase shares as an investment and then sell the shares -> proceeds will
be capital in nature
- If you purchase shares as a share dealer (so every morning you sit and buy shares
and then sell them in the afternoon to diff people etc.) -> proceeds will be revenue
in nature (bc you buy them with the intent to make profit off of them / profit making
scheme)
- Same applies to cryptocurrency. If you buy crypto with the intent to keep it as an
investment and sell it later on, then your proceeds will be capital in nature. But if
you start dealing in crypto to make profit, then your income will be revenue in nature
CSARS v Capstone
- Capstone was a retail and clothing company and was very close to being liquidated.
So Capstone looked at their internal business rescue procedures and it told them to
invest in a company that shows good growth with the intention to benefit from the
dividends of that company. So Capstone invested in Steinhoff (a furniture retail
company) with the intention of getting dividends that could get them out of their
financial predicament. Thereafter, the value of the Steinhoff shares increased
significantly. When this occurred, the director of Steinhoff decided to take
advantage of this and sell their shares. So Capstone sold their shares within 5
months of purchasing them and made considerable profit that they used to rescue
their business
- SARS argument was that the proceeds of the sale of the shares is revenue in nature
because of the short period Capstone kept the shares. From the point of view of
SARS, Capstone purchased the shares with the intention to make a profit
- Capstones argument was that they bought the shares as an investment for an
indefinite period (aka they didn’t know how long they would have to keep the
shares). They purchased the shares (as a long term investment) with the intent to
rescue their business and avoid insolvency
- Capstone was just lucky that there was a favourable market a short period after
they bought their shares. The profit they made was mere exploitation of the
favourable market. This is no different from anyone else who sells their shares when
they see the shares jump in value to the highest value it will be before it drops
again. The court agreed with this
- The court said that from the beginning, the primary purpose of buying the shares
was to keep them as an investment for an indefinite period and use the dividends to
rescue their business. The shares were not bought to speculate with. The proceeds
of the sale of the shares is thus capital in nature in the hands of Capstone
CIR v Pick n Pay (PnP) Employment Share Trust
- PnP created a shared trust on behalf of the employees to act as a conduit to buy
shares for the employees and then give the shares to the employees later on as part
of the performance management. However, when buying the shares, there was an
incidental profit. It was never the intention of the trustees to create the trust to make
a profit. The profits they made were purely fortuitous (by a stroke of luck). There was
a favourable market so they sold the shares and made a profit in the trust
- The court agreed with PnP and said that since there was no intention to make profit
(aka no profit making scheme), any profit that was fortuitously made will be capital
in nature
GREEN BLOCK (Debt & loans)

- Sometimes a taxpayer (e.g. a law firm or a retail company) will sell his debtors book
to a debt collector. If the firm does not have a debt collection wing, then it is useful
for them to sell their debtors book (listing all the amounts that certain debtors owe
them) rather than opening a new costly debt collection wing or getting the debt
themselves. The debt collectors attorney buys the debtor book and assesses how
high the chance is of actually getting the debt (that has been outstanding for very
long). For example, if the outstanding debt is R100 000, the attorneys may offer to
sell the debtors book for R60 000 and agree that the debt collector will then cede
his rights to the debt collection attorneys to collect the debt. The question is: if the
attorneys sell the debtor book, is the proceeds in the hands of the attorneys/retail
company capital or revenue in nature?
- If the retail company collects the debt themselves then it would be revenue in nature
bc it is the normal amount for goods and services supplied. Bc of the accrual
system, the amount in the debtors book would be in the gross income already (aka
it would have already been taxed) bc it accrued to them. So the proceeds of that
sale would be revenue in nature
- Debt purchased with the intention to make a profit -> revenue in nature
- Example:
o A debt collector attorney purchases a debtors book (worth R100 000) for
R50 000. At the end of the debt recovery procedure, the attorney recovers
R90 000 of the debt (even though he bought the debt for R50 000). The
attorney thus makes a profit of R40 000. This profit will be revenue in nature
in the hands of the attorney
- However, sometimes debt can be purchased as part of an agreement. If someone
sells the business as a ‘going concern’ (that means they sell their business WITH all
the clients, goodwill, name, debts etc.) -> the debtors book (which is a capital asset
in the hands of the seller of the business) is sold as part and parcel of the going
concern. In this case, the proceeds of the sale of the debtors book (which is
included in the purchase price of the business) is capital in the hands of the
purchaser who collects the debt thereafter (aka it will not be included as part of his
gross income). This amount was included in the gross income when it was in the
hands of the original seller and when the original seller sold the goods and services
to the customers. The amount cannot be taxed twice
- Summary:
o Debt purchased with intention to collect at a profit -> revenue in nature

o Debt purchased as part of an agreement to purchase a going concern ->
proceeds of collection is capital in nature
o Sale of going concern which is inclusive of the debtors book -> amount
received for debtors book is capital in nature
- Interest on a loan -> capital in nature (tree and fruit principle)
RED BLOCK (restraint of trade)

- Examples of restraint of trade agreements:
o If you resign, then the first year after you resign you may not work for a
similar business in the whole of Pretoria
o I develop a patent for something and then sell my patent into Verimark.
Verimark enters into restraint of trade with me and says I may not
manufacture anything similar and I may not sell the patent to anyone else. I
may also not disclose any of my drawings to anyone else, except for
Verimark
- Restraint of trade in constitutional unless it impairs the economic freedom of the
other person to an unconstitutional extent
- Even if the restraint of trade (hereafter ‘RoT’) is unconsti -> it does not change the
payment received for the RoT -> tax treatment remains unaffected
- RoT = capital in nature bc it affects one’s income earning structure (general rule)
o E.g.) As an attorney, the only work that you can do is being an attorney. If
you sell your attorney firm, and you're not allowed to open a similar to any
firm in a wide radius -> it means that your income earning structure and the
all the capital that you've built, is being impaired -> the RoT payment makes
good the fact that you do not have that economic freedom anymore (it
impairs economic freedom)
o Capital in nature -> NOT tax / not included in gross income
- However, there are exceptions to this general rule -> there are specific rules
created by the legislature/legislator in the Income Tax Act (ITA) to include specific
types of RoT in gross income
o If the RoT complies with the reqs in either S1(cA) or S1(cB) of the ITA ->
payment received for RoT will be revenue in nature (thus included in gross
income)

o S1(cA) ITA -> if RoT was received by a labour broker, received by personal
service provider received by personal service company or trust, the restraint
of trade will be revenue in nature.
§ E.g.) Personal services: you provide a personal service for me. And the
strain of trade is I pay you triple the amount that you would normally
charge to commission a painting because I want the painting to be
one of a kind. The painter may never make a similar painting like this
one
§ E.g.) You are an independent contractor and I want you to render your
services to me. Although you are not employed by me, I pay you extra
for you to render your services exclusively to me and to no one else.
The extra amount I pay to you (the RoT), must be included in your
gross income
o S1(cB) ITA -> where the RoT is received by a natural person and it is in
respect of either past, present, or future employment or the holding of an
office, that RoT payment must be included in gross income (bc it is revenue
in nature)
§ Even if you are an employee, if the payment does not relate to your
employment -> it will be capital in nature
§ E.g.) if I work for a law firm and in my spare time I write a piece of work
that is copyrighted (maybe like a textbook), if the law firm purchases
this copyright from me and tells me that I cannot use it elsewhere ->
S1(cB) does not apply and the income I receive from the law firm will
be capital in my hands bc it is my income earning structure (I sold my
copyrights to the fim/my employer but it does not relate to my
employment as an attorney). The employment agreement is separate
from the RoT agreement
GREY BLOCK (gifts / donations)

- Receiving a gift or donation -> capital in nature in the hands of the recipient
- If the recipient merely gets rid of the gift (like re-gifting it to someone else or selling
it) -> proceeds will be capital in nature

- However, if the recipient’s intention changes in order to make a profit on the
gift/donation (aka they sell it as part of a profit making scheme) -> proceeds are
revenue in nature
- Although the donation is capital in nature in the hands of the recipient -> donor will
still be liable for donations tax
Example:
- A man (donor) gives me a flat/apartment: receipts of value of flat = capital in nature
- If I do not want to stay in the flat:
o If I improve the flat and start advertising it for millennials in order to sell the
flat at a profit -> proceeds = revenue in nature
o If I just sell the original flat at the best possible price -> proceeds = capital in
nature
PINK BLOCK (gambling)

- If gambling is mere entertainment -> proceeds = capital in nature
- If gambling is done professionally as a business activity (goes beyond standard
entertainment towards a profit-making scheme) -> proceeds = revenue in nature
[Morrison v CIR]
- It does not matter what form the gambling takes -> it could be legal or illegal, it
could be blackjack or poker or lotto or horse racing etc, it could be in a casino or
even in someone’s house etc.
o If its professional -> its revenue
o If its entertainment -> its capital
- The gambler will have to convince SAES of his true intention behind the gambling
- Illegal gambling = dog fights and cock fights -> income from illegal activities is still
received by or accrues to the person and thus must be included in his gross income
(proceeds are revenue)
- There might be capital gains tax on the winnings -> will learn about this later

LECTURE 9 (GROSS INCOME SPECIAL

INCLUSIONS)
https://www.mylexisnexis.co.za/Library/Document.ashx?domainID=0ds6c&format=pdf&do
cumentVersion=null&displayVersion=null (Income Tax Act)
- We already know the general rule is that receipts or accruals of a capital nature are
excluded from gross income. However, the ITA creates exceptions to this rule. The
exceptions are listed under the S1 definition of gross income in paragraphs A to N
o Step 1: does the amount meet the reqs of the def of gross income?
§ If yes -> included in gross income
§ If no -> step 2
o Step 2: is the amount specifically included in one of the specific paragraphs
under the S1 definition?
§ If yes -> included in gross income (even if it is a capital receipt in
nature) (these are the specific inclusions in gross income we will
discuss below)
§ If no -> excluded from gross income
Specific inclusions in gross income despite their capital nature:

(1) Alimony payments (para b of ITA S1 def of gross income)
- When a couple gets divorced (divorce order), there is a court order instructing the
paying spouse to make alimony or maintenance payments to the receiving spouse
(maintenance order)
- Receiving spouse:
o Maintenance amount must be included in their gross income (para b
inclusion)
o However, the amount is exempt from the receiving spouse’s income
S10(1)(u)
o In other words: maintenance received = exempt income -> receiving spouse
must include the amount from the alimony payments in their gross income,
and then immediately subtract those amounts from the gross income as an
exemption

- If the paying spouse refrains from paying -> the receiving spouse can request the
court to grant a maintenance order instructing the paying spouse's retirement
fund to pay the total maintenance
o This is a once off payment (not a monthly payment)
o S7(11) ITA -> any payment made from a reserve in a pension fund ito a
maintenance order is deemed to be accrued to the member of the fund (the
paying spouse)
o So this amount must be included in the gross income of the paying
spouse
o This amount must still be included in the receiving spouse’s gross income (ito
para b) but will be exempt (ito s10(1)(u))
- Inclusion is exempt if divorce or separation occurred after 21 March 1962
My understanding:
- If the divorce occurs after 21 March 1962 -> amount is included in receiving
spouse’s gross income (1 exception) but it is an exemption for the receiving spouse
(tax liability falls on paying spouse)
o Maintenance (that is received) must be included in the receiving spouse’s
gross income unless it is a S7(11) payment
§ Although it is included in receiving spouse’s gross income, it is
exempted from tax ito S10(1)(u) (so it must be subtracted when we do
the calculations)
§ A S7(11) payment means that the maintenance is paid (once-off) from
an individual retirement/pension reserve ito a maintenance order
o If the maintenance is a s7(11) payment, it must be included in the paying
spouse’s gross income
- If divorce occurred before 21 March 1962 -> it is included in the receiving spouse’s
gross income but paying spouse was entitled to a deduction (exemption) (tax
liability falls on receiving spouse)
(2) Restraint of trade (para cA and para cB of ITA S1 def of gross income)
- A natural or juristic person's right to trade freely is an incorporeal asset. Any
compensation for the restriction or loss of such a right (restraint of trade agreement)
is a receipt of a capital nature (general rule -> excl from gross inc)
o Para cA and cB = exceptions
o Para cA applies to juristic persons
o Para cB applies to natural persons
- Para cA -> any amount received by or accrued to any person who is/was a labour
broker, is/was a personal service company, or is/was a personal service trust,
as compensation for any RoT imposed on such a person, are specifically included
in gross income (even though it is of a capital nature)
o Labour broker = a person who, for reward, provides a client with persons to
render a service or to work for the client and such service/work is paid by the
labour broker.
o Personal service provider = a company / close cooperation / trust, where
service is rendered by somebody in that company personally to the client
§ E.g.) consulting service, bookkeeping, design company etc.
o If RoT payment is received by a company that is not a personal service
provider -> amount does NOT form part of gross income
- Para cB -> RoT payments received by or accrue to any natural person, which are
related to any past, present, or future employment OR holding of an office ->
are specifically included in gross income
(3) Compensation for termination of employment (para d)
- Amounts received due to loss/termination/cancellation/variation of employment is
normally capital in nature, but are specifically included in gross income of recipient
ito para d
o Death can also be the reason for the termination
o Any amount which becomes payable following the death of any person is
deemed to be an amount which accrued to such person immediately before
his death
o So the amount is included in the deceased’s gross income (not the
beneficiary’s gross inc) for the period ending on the date of his death
- This includes amounts received as a result of employer-owned policies of
insurance that are paid out or cede to an employee, director, or any of their
dependants
o Employer/company = policyholder
o Director/dependent/employee = policy beneficiary

o Such amounts are included in the gross income of the employee or director
(NOT their dependants or nominees) -> BUT they are exempted from tax ito
S10(1)(gG) ITA (so we must subtract these amounts)
- This excludes amounts:
o Received as annuities (para a)
o Amounts paid from pension, provident, or retirement funds (para e)
- Who is a “holder of office”?
o = directors
o NOT attorneys or auditors
o This distinction becomes applicable when there is -> breach of service
contract, loss of directorship, variation in leave entitlement etc.
(4) Lease premiums (para h)
- The following 3 things must be distinguished from each other: upfront rent &
premiums & deposits
o There is no hard and fast rule to this distinction -> we must always look at
the facts of the case
- Lease premiums = amounts paid by the lessee to the lessor, whether in cash
or otherwise, for the use (or right of use) of certain assets distinct from and in
addition to, or instead of, rent
o E.g.) rights of use or occupation of land, building, machinery, motion picture
film, tape/disk, patent design, trademark, formula etc. in addition to rent of
the asset
o We get the definition of premium from case law bc it is not defined in the ITA
o The above definition was laid out in CIR v Butcher Bros
- Lease premiums must have an ascertainable monetary value
o A lease premium is usually, but not necessarily, received as a cash lump sum
at the commencement of the lease (when lease agreement is signed) and is
not refundable
o It is often received for the right to lease -> the payments are made (once off)
for the right to use the property, as opposed to instalments that are made
every month for payments to use the property

- Aspects of a rental deposit and a rental receipt that are different from lease
premiums:
o A rental deposit is generally received upfront, but its purpose is to cover
potential damages that may occur during the lease period. And then it is
normally refundable to the lessee at the end of the lease period if it is not
required to cover damages
o An upfront rental receipt (aka bullet rental) is for the rights of use. It remains
rent in nature. (e.g. pay 6 months in advance for the year)
- Lease premiums must take place ito a lease agreement between the two
parties
o Lessor is taxed (once-off) -> the whole amount of the premium is included in
his gross inc in the year he receives it
o The amount is paid from the lessee to the lessor (as consideration in addition
to rent)
§ The lessee may deduct this amount as an expense ito S11(f)
§ This is not a once-off deduction. The deduction is spread over the
number of years:
• Either the number of years which the taxpayer is entitled to use
or occupation OR
• 25 years (if the lease period is more than 25 years -> 25 years is
the limit)
• Whichever ^ is greater/longer
(5) Leasehold improvements (Para h)
- Para h -> Lessor/owner must include the value of the improvements effected on his
land or to his buildings by the lessee in his gross income
- This inclusion only applies if the lessor has a right to have improvements effected to
his property (aka the lessee must have a legal and enforceable obligation ito an
agreement to effect improvements on the land/buildings of the lessor)
- The lessor must include the full amount in the year in which the improvements
or the rights to have the improvements effected, accrue to the taxpayer
o If improvement amount is stated in the lease agreement:
§ date of accrual = date on which all the parties sign the lease
agreement
§ Amount included in lessor’s gross inc = amount stated in lease
(whether it be the actual value or the amount to be expended)
o If improvement amount is NOT stated in lease agreement:
§ date of accrual = date the improvement is completed
§ amount included in lessor’s gross inc = amount that represents the fair
and reasonable value of the improvements (objective test -> look at
facts and circumstances)
- Lessor must include the full amount for that year in his gross inc -> he is not
allowed to spread the improvement amounts over the period of the lease
- Since the lessor will only become entitled to the benefit of the improvements upon
expiry of the lease -> the commissioner may allow a special allowance to be
granted as a deduction to the taxpayer (lessor)
Other provisions that lay out specific inclusions:

- Annuities (para a)
- Services rendered (para c and n)
- Fund benefits (para e)
- Computation for amounts due (para f)
- Compensation for imparting knowledge and information (para gA)
- Taxable fringe benefits (para i)
o = Benefits received by an employee from an employer that cannot be turned
into cash/money
- Proceeds from the disposal of certain assets (para jA)
- Dividends (Para k)
- Subsidies and grants (Para l)
- Amounts received by or accrued to S11E sporting bodies (para lA)
- Gov grants (para lC)
- Key-man insurance policy proceeds (para m)
- Amounts deemed to be receipts and accruals and S8(4) recoupments (para n)
- Amounts received ito certain short-term insurance policies

THEME 5 – EXEMPT INCOME

LECTURE 10
When it comes to the overall calculation of taxable income:
- Step 1: Determination of gross income
- Step 2: Subtraction of all the receipts and accruals included in gross income but are
exempt from tax
Note:
- Exempt income is NOT the same as a deduction
- Exempt income = amounts received or accrued that are not subject to normal tax
- Legislator’s motivation for exempting certain receipts and accruals from gross
income -> achieve certain policy objectives, such as:
o Incentivize investments
o Provide relief to the poor
o Ensure that the income of organizations that are not directly involved in
commercial activities (such as religious orgs, amateur sports orgs, and
charities) are not subject to tax.
o Ensure that the same amount of income is not subject to double taxation
- 4 types of exemptions:
o Exemptions incentivizing investments
o Amounts received from tax free investments
o Exemptions relating to dividends
o Exemptions incentivizing education
Exemptions incentivizing investments

(1) Interest received by natural persons (s10(1)(i) ITA)
- Where a natural person receives interest from a source in SA, the following
amounts qualify as exemptions:
o If person is younger than 65 years -> the first R23 800 interest received
during the year
o If person is 65 or older (or would have been 65 if he was alive) -> first
R34 500 interest received during the year

- This exemption does not apply to interest received from tax free investments
- This exemption does not apply to non-natural persons (like companies, trusts etc.)
(2) Interest received by non-residents ito S10(1)(h) ITA
- Only interest that is received from an SA source will be included in a non-resident’s
gross income
- The source of interest is from an SA source if:
o The interest is paid by an SA resident (unless the interest is attributable to a
permanent establishment of the non-resident outside SA) OR
o The interest is received by or accrues to a person in respect of the use or
application of funds or credit in SA
- Interest received from a non-resident is exempt from normal tax, unless:
o The (natural) person was physically present in SA for a period exceeding 183
days in aggregate, during the 12-month period, preceding the date on which
the interest is received by or accrues to that person OR
o If the debt from which the interest arises is effectively connected to a
permanent establishment of that (natural) person in SA OR
o If the debt from which the interest arises is effectively connected to a
permanent establishment of that (juristic) person in SA
- Interest received by a non-resident is not tax free -> may be subject to a 15%
withholding tax

My personal understanding of this example: if the company is a ‘subsidiary’, it means

that it is its OWN permanent establishment – it is NOT the permanent establishment of the
main non-resident company.
Amounts received from tax free investments (S12T ITA):

- This type of exemption is also to incentivize investments + encourage household
savings
- All amounts received from a tax reinvestment by a natural person or a diseased or
insolvent estate of such a person is exempt from normal tax
- Dividend paid to a natural person iro a tax-free investment is also exempt from
dividends tax
- Tax free investment = a financial instrument or a policy owned by a natural person
and administered by a person designated by the Minister of Finance
o Aka it is a financial instrument or policy that can only be issued by: a licensed
bank, a long-term insurer, a manager of registered collective schemes, the
national government, a mutual bank, a cooperative bank, and a manager as
defined in the CISCA
- When it comes to the return amounts you receive from tax-free investments, you
don’t have to pay income tax, dividends tax, or capital gains tax. HOWEVER, there
is a limitation on the amount that you can contribute to such tax- free investments
o Annual contribution limit = R36 000 per person during a year of assessment
o Lifetime contribution limit = R500 000 per person
- Example: you can open up multiple tax-free savings accounts and can invest
R12 000 in Old Mutual, R12 000 in ABSA, R12 000 in Investec etc. but you your
total must not be more than R36 000 per year or R500 000 in your lifetime

- The annual lifetime limit will NOT be affected by:
o Amounts received from a tax-free investment that are reinvested elsewhere
(these amounts will not be taken into account as a contribution to the annual
limit)
o Transferring an amount from one tax-free investment to another tax-free
investment of a person (this will also not be taken into account when
determining whether a person has exceeded the annual OR lifetime
contribution limits)
§ However, transferring an amount from one individual (or his estate) to
another individual will be taken into account and will affect the
contribution limit
- What happens when a person exceeds the contribution limits?
o If person exceeds the annual limit -> penalty of 40% on the excess amount
(the amount by which they exceeded the maximum limit. Aka 40% of excess
contribution is deemed to be normal tax payable)
o If person’s total investments exceed R500 000 -> penalty of 40% on excess
amount (which will also become normal tax payable)
- The deceased or insolvent estate of a person may also hold tax- free investments ->
returns from these investments will continue to be exempt from income and
dividends tax
- Tax- free investments account cannot be used as transactional accounts (e.g.
cannot withdraw money from an ATM using your tax-free investment acc)
- Examples of tax-free investments:
o Opening a fixed deposit account with a bank or a retail savings bond with a
bank or the national government
- If you invest in a tax-free investment and you receive interest or dividends from that
investment -> S12T(2) applies
o -> the interest / dividends are exempt from normal tax
o However, this does not affect the S10(1)(i) interest exemption or the S10(1)(k)
dividend exemption
o It is also possible for a person to be entitled to both exemptions ^

Exemptions relating to dividends (S10(1)(k)(i) ITA):

- Dividend = any payment by a company to a shareholder for a share held in that
company
o Dividends are basically the distribution of a company’s after-tax income
- Dividends received from an SA resident company are exempt from normal tax
o This does not mean that the exemption only applies to SA resident
companies
o It means that the dividend comes from and is distributed by an SA resident
company (aka the dividend is from a source within SA)
- Although these dividends may be exempt from normal tax, they may be subject to
dividends tax. Companies are subject to 28% normal tax on their taxable income +
the dividends declared by the company are subject to 20% dividends tax withheld
by the company
o In other words: a company will be taxed 28% normal tax on their taxable
income. After the company has been taxed, they will have income leftover
(dividends) that must be distributed among the shareholders. These
dividends by the company are subject to 20% dividends tax -> this is
withheld by the company from the dividends declared and paid to SARS on
behalf of the shareholder (the beneficial owner of the dividend). To avoid
double taxation, these dividends are not subject to tax in the hands of the
shareholders
o This exemption applies irrespective of whether the recipient is a natural
person, corporate identity, resident, or non-resident
Exemptions incentivizing education (S10(1)(q) and S10(1)(qA)):

- Examples: bursaries + scholarships
S10(1)(q) ITA:
- = any bona fide scholarship or bursary granted to enable any person to study at a
recognized educational or research institution is exempt from normal tax
- The following reqs have to be met for a bursary or scholarship to qualify for
this exemption:
o (1) The scholarship/bursary must be a bona fide scholarship/bursary
o (2) The scholarship/bursary must be granted to enable or assist a person to
study
§ Aka it cannot be granted after you have completed your studies
o (3) The person must study at a recognized educational or research institution
§ E.g.) college, university, school
o (4) Where the bursary is awarded to an employee or relative of the employee,
further reqs must be met
§ Remuneration by proxy
§ Limitations on amount
§ Salary sacrifice
S10(1)(qA) ITA:
- This section exempts bona fide scholarships/bursaries granted to enable a disabled
person to study at a recognized educational or research institution
- The exemption reqs are the exact same as the reqs under s10(1)(q). However, the
last req (bursaries that are granted to a relative with a disability) is subject to a
higher threshold

Type of scholarships / bursaries:
(1) Scholarships / bursaries granted to a non-employee
- These are open scholarships/bursaries that someone can apply and compete for,
and if they are awarded the scholarship/bursary based on merit -> it will be exempt
from normal tax (S10(1)(q))
- The person applying for it does not have to be an employee or relative of an
employee of a particular employer/organization/institution
(2) Scholarships / bursaries granted by an employer to an employee
- These types of scholarships/bursaries are exempted from normal tax as long as the
employee agrees to reimburse the employer if he fails to complete his studies –
UNLESS the failure occurs as a result of death, ill health, injury (s10(1)(q))
o In other words, if the person fails to complete their studies bc of death, ill
health, injury -> the scholarship/bursary will still qualify for exemption
o However, if the person fails to complete his studies for any other reason ->
they will be disqualified from this exemption
- Same reqs apply if person is disabled (s10(1)(qA))
(3) Scholarships / bursaries granted by an employer to relatives of an employee
(3rd type)
- Where a scholarship or bursary is granted by an employer to enable a relative of an
employee to study at a recognized educational or research institution -> the amount
will be exempt from normal tax if the following conditions are met: (s10(1)(q))
- (1) The remuneration proxy of the employee in relation to a year of assessment
may not exceed R600 000
o Remuneration proxy = remuneration that the employee received from the
employer during the immediately preceding year of assessment.
o E.g.) if there is an employee whose relative has been granted a bursary by an
employer to study in the 2020 year of assessment (YoA) -> you must look at
the employee’s remuneration in the 2019 YoA (and this amount must be less
than R600 000)
o Calculation of remuneration by proxy (RbP):
§ RbP must be determined wrt the number of days in that year the
employee was employed

§ E.g.) if person’s salary is R20 000 and they were employed from June
of the preceding year -> (R20 000 divided by number of days person
was employed) x 365 days = RbP
§ If employee was not employed by the employer at all during the
immediately preceding year -> then the employee’s RbP is determined
wrt the number of days in the first month of the employee’s
employment
§ E.g.) (salary divided by number of days employee was employed) x
365 = RBP amount
o Same reqs apply if person is disabled (s10(1)(qA))
- (2) The amount of any scholarship/bursary awarded to the relative that is
exempt is limited to the following amounts:
o Grade R – 12 = R20 000 (R30 000 if disabled)
o Qualifications located at NFQ level 1 - 4 = R20 000 (R30 000 if disabled)
o Qualification located at NFQ level 5 – 10 = R60 000 (R90 000 if disabled)
- (3) The remuneration proxy must not be subject to an element of salary
sacrifice
o Salary sacrifice = employee agrees to a reduction in his cash salary for a
non-cash benefit
o Exemption is not allowed if the employee’s remuneration is reduced bc of the
granting of a scholarship/bursary

SELF STUDY SECTIONS:

- Textbook sections: 5.4.8 + 5.6.1 + 5.6.6 + 5.7.2
Exemptions relating to employment: [ss10(1)(o)(i) and (iA)]

Salaries paid to an officer or crew member of a ship
- If a South African ship is engaged in international shipping or fishing outside of SA -
> remuneration received by the officer or crew member on the ship is exempt from
normal tax (regardless of how long the person was outside of SA)
Exemptions relating to government, gov officials, and gov

institutions:
Government and local authorities [s10(1)(a) and 10(1)(bA)]
- Receipts and accruals of the SA gov -> exempt from normal tax
- This exemption applies to national, provincial, and local govs AND to govs of other
countries
Semi-public companies and boards, governmental and other multinational
institutions [s10(1)(bB), (t), and (zE)]
- The receipts and accruals of the following semi-public companies and boards are
exempt from normal tax:
o Council for Scientific and Industrial Research
o South African Inventions Development Agency
o South African National Roads Agency
o Any traditional council or traditional community (tribe)
o Armaments Corporation of South Africa Limited
o Compensation fund or reserve fund (and a mutual association licensed ito
COIDA -> certain reqs must be met)
o Any water service provider
o Development Bank of Southern Africa
o National Housing Finance Corporation
o Small Business Development Corporation Limited
o Institutions established by a foreign government that perform their functions
ito an official development assistance agreement

o Multinational organizations providing foreign donor funding ito an official
development assistance agreement
o The following multilateral development financial institutions:
§ African Development Bank
§ World Bank
§ International Monetary Fund
§ African Import and Export Bank
§ European Investment Bank
§ New Development Bank
Exemptions for organizations involved in non-commercial activities:

Public benefit organizations [s10(1)(cN) and S30]:
- Receipts and accruals resulting from any public benefit activity (non-trading activity)
of any approved public benefit organization are exempt from normal tax
- The following are examples of public benefit activities:
o Welfare and humanitarian services to homeless children, elderly people,
abused persons
o Health care services to the poor, education on family planning and HIV/AIDS
o Land and housing for low-income groups and residential care for elderly
people
o Education and development on all levels and training to unemployed ppl,
disabled ppl, and gov officials
o Religion, belief, philosophy activities
o Cultural activities -> protection of the arts, customs, libraries, and buildings
of historical and cultural interest, youth leadership
o Conservation, environment, and animal welfare activities like environmental
awareness programs and clean-up projects
o Research and consumer rights activities
o Sport activities and recreation
o Provision of funds to a foreign public benefit organization
- S30(1): Public benefit organization =
o Any org that is a non-profit company, trust, or association of persons that
has been incorporated/formed/established in SA

o OR an SA agency or branch of a non-resident company/association/trust that
is exempt from tax in its country of residence
- The sole/principle objective of the org must be to carry out public benefit activities
in a non-profit manner with an altruistic/philanthropic intent and the activities of the
org must be carried out for the benefit of the general public at large. Additionally,
the minister must approve the public benefit org before the exemption will apply
- The following receipts and accruals (R&A) of a public benefit org are exempt
from normal tax:
o R&A derived otherwise than from any business undertaking or trading activity
o R&A derived from any business undertaking or trading activity if:
§ The activity is integral/directly related to the sole/principle object of the
org
§ The activity is of an occasional nature and on a voluntary basis without
compensation
§ The activity is approved by the minister by notice in the gov gazette
o R&A derived from any business undertaking or trading activity other than the
above to the extent that the amount does not exceed 5% of the total R&A of
the org during the relevant YoA OR R200 000 (whichever is greater)

THEME 6 – TRADE AND PRE-TRADE

LECTURE 1 - THE TRADE REQUIREMENT
Overview:
- The next step in the calculation is determining the allowable deductions
- For an expenditure or loss to be deductible:
o The amount must have been incurred in the carrying on of a trade
o Must comply with S11(a) ITA (positive terms) -> the general deduction
formula
o Must comply with S23 ITA (negative terms) -> aka it must not be a listed
prohibited deduction
- First step: establish whether the taxpayer was carrying on a trade
o If no -> no deductions possible
- Second step: pre-trade expenditure
What does “carrying on trade” mean?

- Expenditure can only be deducted from the income derived from the carrying on of
a trade (S11 ITA) -> can be seen that ‘carrying on of a trade’ is a prerequisite for
deduction of expenditure
- In other words, the taxpayer must be engaged in some form of trade before he can
make deductions for his expenditure (this is the trade requirement)
- Implications of this rule/requirement -> the following expenditures are NOT
deductible:
o Expenditure incurred prior to the commencement of that trade (however,
certain pre-trade expenditure is allowed as deductions)
o Expenditure not incurred in carrying on a trade
- If person is earning a mere salary -> he is not engaged in trade -> under general
circumstances he cannot make a deduction for his expenditure (e.g. fuel costs of
driving to work everyday etc.)

o There are exceptions to this rule (e.g. if the employer provides the employee
with a fringe benefit like a cellphone allowance -> cost of phone may be
deducted)
- If person is earning commission -> he is engaged in trade -> can make deductions
as long as the other reqs are met
- Term “trade” has been given wide meaning in S1(1) ITA -> includes any activity
(particularly every profitable activity) + there is no closed list of activities that
constitute trade
- Although trade usually implies a continuity of actions/activities, a single venture can
also qualify as trade (this was held in Stephen v CIR)
o It can be seen that continuity is not a prerequisite
o A single venture is NOT the same as a single activity/action
o A single venture is a single conglomerate of activities
o The activities concerned (their nature + extent) should be examined as a
whole
o Examples:
§ Creating a business with the intention of transferring it to someone
else
§ Building a complex
§ Forming a realization company to dissolve another company
- The purpose/motive/intention for which the taxpayer trades is irrelevant (this was
held in Burgess v CIR)
o A taxpayer can still carry on a trade even if he has no intention of making a
profit
o Can be seen that profit motive is not a prerequisite
- There is also NO req that the taxpayer must make a profit when carrying on his
trade. One can still be engaged in trade even if one suffers a deliberate loss
o Can be seen that profit is not a prerequisite
o Example: PnP wanted to open up a branch in some townships, but the
market was saturated with other retailer groups. So PnP tapped into the
market by trading at a deliberate loss -> sold their trading stock at a value
lower than the cost price to gain that market share. Even though deliberate
loss was suffered, this is still regarded as trading
- These principles were confirmed in:
o De Beers Holdings (Pty) Ltd v CIR
o Modderfontein Deep Levels Ltd v Feinstein (1920 TPD).
- Despite its wide meaning, the term ‘trade’ does not include all activities that might
produce income
o In other words, just bc the taxpayer makes an income does not necessarily
mean he is trading
- Trade does NOT include income in the form of interest, dividends, annuities, or
pensions (passive income -> little to no activity involved in earning the income)
o Expenditure may not be deducted from passive income bc the taxpayer is
not engaging with any form of trade. SARS interpretation note 33 says that
something more than mere investment of money into a bank account is
needed -> an active step is needed
o Examples of active steps taken wrt passive income:
§ You invest your money in an interest-bearing instrument -> take it out
later -> invest it elsewhere -> take it out later -> invest it elsewhere
again (these are active activities). In other words, I borrow money
merely to invest it elsewhere
§ You rent out a property -> you go to the property to make inspections
and make sure everything is in order -> these are active activities to
engage with the property (you don’t just sit back and relax and
passively earn rental income) -> expenditure you incur in your active
activities will be deductible bc you engaged in trade
- In cases where there is more than just mere investment of money (aka active and
engaging steps are taken) -> SARS interpretation note 33 says that the expenditure
incurred in earning passive income may NOT be more than actual income
o Aka the deduction amounts cannot be greater than the income amount
o Loss suffered cannot be carried over to the next year
- Examples:
o If the expenditure spent to fix the flat you rent out (R120 000) exceeds the
interest you earn on that passive rental income (R100 000) -> expenditure
you deduct cannot be more than R100 000 -> you suffer a loss (of R20 000) -
> loss cannot be carried over to next year of assessment
o If I borrow money merely to invest it elsewhere: I borrow money from bank 1
who says I must pay 3% interest on my loan -> I then take this borrowed
money and invest it in bank 2 (who says I will earn 7% on the money I invest)
-> as my money grows I repay bank 1 the money I owed them with interest
etc. -> however if bank 1 increases the interest to 10% I will suffer a loss ->
the loss I suffer (expenditure) may not be more than the actual income I earn
from bank 2
- A person who accumulates his savings and invests them in interest-bearing
securities or shares held as assets of a capital nature does not derive the income
from carrying on any trade. However, if capital is borrowed specifically to reinvest,
such a transaction results in trade income and the expenditure is, therefore,
allowable. Interest incurred to earn interest income = allowable deduction
PRE-TRADE EXPENDITURE
- When we are dealing with pre-trade expenditure (hereafter ‘PTE’), the requirement
of trade (discussed above) falls away
o Why? -> Because the taxpayer has not started trading yet – he is still busy
setting up his trade
- What is PTE?
o It is the expenditure and losses incurred when commencing a trade or setting
up an income-producing structure
o In other words, it is expenditure and losses incurred before trade
commences -> for the purpose of setting-up an income-earning structure ->
that were not previously allowed as a deduction
o E.g.) when a taxpayer sets up a business, he incurs various expenses in
preparation for the carrying of that business before he starts trading. For
example, if the taxpayer does not have his own property to base his
business, he must enter into a lease agreement. He may be required to pay a
deposit, or 1 month rent in advance etc. This forms part of his PTE. He
cannot make a deduction for this expenditure bc he has not started earning

income. He has no income against which to make the deduction. What can
he do about these expenses/losses? -> turn to S11A ITA
- General rule = expenditure and losses are generally only deductible if incurred after
the commencement of a trade
- However, S11A allows certain PTE incurred before the commencement of the trade
as an allowable deduction once the trade is carried on
o The PTE deduction must comply with the S11(a) general deduction formula
or it must be a specific deduction,
o It must not be a prohibited deduction,
o It must be subject to the S23H limitations
o It must be deductible in the year that the trade commences
- If the PTE qualifying for this deduction exceeds the taxable income from that
trade, the excess may NOT be set-off against income from another trade
o The PTE is ring-fenced iro a specific trade
o The excess MAY be carried forward to the following year of assessment +
set-off against the taxable income of the SAME trade
o E.g.) the expenditure you incur in the 2020/2021 year of assessment (when
you set up and start with your trade) will be deductible in the 2021/2022 year
of assessment

Don’t get confused:

- S11(a) -> general deduction formula
- S11A -> pre-trade expenditure
LECTURE 2 - GENERAL DEDUCTION FORMULA

- S11(a) and S23(g) ITA read together -> gives a general deduction formula (laid out
in Port Elizabeth Electric Tramway Co Ltd v CIR (1936 CPD))
- The general deduction formular can be broken down into the following
elements:
o Expenditure and/or loss
o Actually incurred
o During the year of assessment
o In the production of the income
o That is not of a capital nature
o To the extent that it is laid out or expended for the purposes of trade
- For an amount to be deducted, it must satisfy all of these elements ^
“EXPENDITURE AND LOSSES” (1st element of general deduction formula)

- Expenditure is different from loss
o Expenditure is voluntary (you choose to pay for certain things)
o Loss is involuntary (trading stock is destroyed or stolen from you)
- Expenditure refers to voluntary payment of money, spending of funds,
disbursement, consumption etc.
- Expenditure requires that there is an obligation / liability to make payment
CSARS v Labat (2011 SCA):
- Facts: Labat Africa wanted to obtain a license to manufacture medicine. Didn’t have
enough money to do this. They agreed they will issue more shares and give that as
payment for the license. This would result in the original license holder becoming a
joint owner in Labat Africa through the shares. Labat Africa tried to deduct the cost
of the issuing of the shares (aka the wanted to deduct the value of the license).
- Legal issue: does the issuing of shares in exchange for something constitute an
expenditure? (no)
- Court held: expenditure requires the following:
o (1) There must be impoverishment / diminution (even if only temporary)
OR
o (2) there must be a movement of assets
- It can be seen that expenditure does not always have to be in the form of money
being spent. Sometimes we barter with transactions instead of money
“ACTUALLY INCURRED” (2nd element of general deduction formula)

- ‘Actually’ incurred has a wider scope than ‘necessarily’ incurred. ‘actually’ and
‘necessarily’ do not mean the same thing
o An expenditure does not have to be a necessary expenditure in order for it to
incur
o E.g.) Pick ‘n Pay plays music in their shops. They incur costs in the form of
royalties when they play the radio for the customers. It is not necessary for
shops to play music for us (thus its not a necessary expenditure)

- To be deductible, the amount has to actually incur
- Actual payment during the YoA is not necessary for an amount to be incurred
- Although the expenditure need not be necessary, excessive expenditure may be
disqualified from deduction
o How? -> SARS can make a rule that the type of expenditure goes beyond
what is reasonably required in the trade and is therefore not deductible
Edgars Stores Ltd v CIR 1988(3) SA 876 (A))
- What is the test for determining whether an amount actually incurred? -> a liability
must exist
- A liability means an unconditional legal obligation -> no condition must be attached
to the obligation/liability
- A condition is an uncertain future event
- In this case, Edgars could only make a deduction if they made a profit and that
profit was verified by auditors. The question of whether they make a profit is an
uncertain future event. Edgars anticipated that they would make a profit so they
went ahead and made a deduction based on a ‘guesstimate’ of what their profit
would be. The court said this was wrong. the profit has not been calculated yet nor
verified by the auditors – thus its still subject to a condition. Since there is a
conditional liability, the amount is not actually incurred and thus no deduction can
be made
- Only once the condition is fulfilled, is there an unconditional liability to make
payment. Actual payment is not required – just the liability to make payment is
required for the amount to actually incur
- In other words, unconditional liability needs to exist for expenditure to actually incur.
It does not matter whether the lability has been discharged or not. This is why
actual payment is not a requirement for the deduction of an expenditure (this was
held in Caltex Oil (SA) LTd v SIR)
- Key point: in order for an amount to actually incur, there needs to be an
unconditional legal liability to pay the amount. The liability needs to be definite
and absolute during the YoA
Limitations on the actually incurred amount/expenditure claimed as deductions:
The words ‘actually incurred’ exclude the following types of deductions (but note the
exceptions*):
- Uncertain expenditure
o E.g.) you draw up a budget and anticipate that for the rest of the year, you
will have R5000 for fuel/petrol expenditure. However, at the end of the year
you may find that you only spent R2000 on petrol. The R5000 was an
uncertain expenditure and thus is not deductible
- Expenditure that may arise in the future
o E.g.) if you live in a complex then you have to pay money into a reserve fund
in case something bad happens to the complex. This is not expenditure
actually incurred bc there is no liability on you to make payment. If nothing
bad happens, you do not have the liability to make payment for any
expenditure.
- Impending or expected expenditure
o E.g.) your car broke down. You automatically know that you will have to pay
for its repair (this is an impending or expected expenditure that you will
incur). But since there is no liability to pay yet, the expected expenditure
cannot be deducted
o However, once you go to the mechanic, he might say he needs a R5000
advance to fix your car. Now there is liability on you to make the payment ->
thus this amount actually incurs to you and will be deductible. It is no longer
an impending expenditure.
- Expenditure of a capital nature*
o When a taxpayer has originally acquired any asset with the purpose of
holding it as an asset of a capital nature, such expenditure will not be
deductible
o However, if the taxpayer subsequently changes his intention and starts using
the asset as trading stock -> expenditure may qualify as a s11(a) deduction
(bc now the expenditure is revenue in nature)
§ Deduction only becomes available with regard to the expenditure
incurred AFTER the taxpayer changes his intention (cost price =
market value of asset on conversion date)

- Disputed expenditure*
o If there is a legal obligation on the taxpayer but the taxpayer disputes the
validity of this claim against him -> the liability to pay is conditional -> the
disputed expenditure is not actually incurred
o Why? -> bc the legal obligation is conditional (it needs to be unconditional).
The condition is that the dispute must first be settled before it can actually
incur.
o The moment the court confirms the amount the taxpayer must pay -> this is
the amount that actually incurs
o This ^ was held in CIR v Golden Dumps (Pty) Ltd 1993 4 SA 110 (A)
- Expenditure of unquantified amounts*
o If an amount is unquantified -> you cannot make a deduction in the year
while the amount is still unquantified -> the unquantified amount will only
incur in the year of assessment (YoA) in which is can be quantified
(S24M(2)(b) ITA)
o E.g.) you buy crop at R1 per watermelon in 2020. You don’t know how many
watermelons will be produced. This is an unquantified expenditure and
cannot be deducted in the 2020 YoA. 1000 watermelon seeds were planted
but only 3 watermelons are harvested in 2022. The amount (R3) becomes
quantified in 2022 -> this is the year the deduction can be made
“DURING THE YEAR OF ASSESSMENT” (3rd element of general deduction

formula)
- Expenditure is only deductible in the year of assessment (YoA) in which it is incurred

- Expenditure cannot be carried forward to a subsequent YoA or carried back to a
previous YoA, even though it may relate to the income of those particular years ->
this general rule is subject to exceptions
- Look at S23H and S24M(2)(b) of the ITA for the exceptions
o S24M(2)(b) -> If an asset is acquired for an unquantifiable amount, such
expenditure is deemed to be incurred only in the YoA that the amount can be
quantified
- If an amount is not claimed as a deduction in the correct year of assessment, the
deduction may not be claimed in a later year
“IN THE PRODUCTION OF INCOME” (4th element of general deduction

formula)
- “In production of income” does NOT mean the same thing as “in relation to
trade”
o In relation to trade -> you are engaged in trading activities
o In production of income -> while you are executing your trading activities, the
expenditure you incur must be in the production of income in that particular
trade
- S23(f) ITA prohibits a deduction of expenditure incurred iro any amounts received
or accrued that are not included in the term ‘income’
o If the deduction does not relate to the production of income in your trade ->
the deduction cannot be claimed
o If expenditure relates to production of income of your trade -> it is an
allowable deduction
o If expenditure relates to something other than your trade from which you
make income (e.g. expenditure relating to dividends)-> it is an exempt
income (cannot be claimed as a deduction)

- Test is objective -> laid out in Port Elizabeth case
Port Elizabeth Electric Tramway Co Ltd v CIR (1936 CPD)
Facts:
- Taxpayer was a transport company. One of their drivers died in an accident while on
the job. The company was compelled to pay compensation to the deceased’s
dependents. The company tried to claim a deduction for the payment of this
amount. Receiver of revenue said that the company couldn’t claim this expenditure
as a deduction bc it was not part of the company’s income earning activities. The
company disagreed. Who is correct?
The two-stage test to determine whether the expenditure was in the production of
income requires 2 questions to be asked:
- (1) What action gave rise to the expenditure? What is the purpose for the
expenditure (aka why was it incurred)?
o Action giving rise to the expenditure = employment of the driver
o Purpose of expenditure = earn income by transporting things
- (2) Is this action so closely connected with (or is it a necessary concomitant of)
the income-earning activities of the business from which the expenditure
arose that it forms part of the cost of performing that income-earning activity?
o Income earning activity = transporting things
o Is employing a driver closely connected with transporting things? -> yes ->
employing a driver forms part of the cost of transporting things
o There is inherent potential risk of accident when driving any vehicle -> close
connection further established (risk is part of income earning activities -> it is
a necessary concomitant)
Court held:
- The expenditure (compensation to the family) = allowed as a deduction bc it forms
part of the production of income
Extra note:
- The test must be applied objectively -> don’t feel sorry for the taxpayer if you have
to tell him his expenditure does not meet the test

- If accident was caused by gross negligence of taxpayer -> not deductible

- Just bc the expenditure must be incurred in the production of income, does not
mean that it is necessary to actually earn income (this was held in Sub-Nigel Ltd v
CIR)
o The expenditure that produces income does not have to incur the same year
that it produces income
o Even if the income is only earned in a future year, if the expenditure was
incurred for the purpose of earning income, it is deductible
- Examples of expenditures incurred in the production of income (and are thus
deductible):
o Premiums paid on insurance policies against loss of income
o Losses due to fire
o Expenditure incurred to induce current and future employees to enter and
remain in the service of the taxpayer
o Amounts paid in terms of a service agreement
o Portion of audit fees
o Expenditure incurred with a dual purpose -> expenditure must be
apportioned fairly and reasonably
§ This was held in CIR v Nemoiim (Pty) Ltd
§ Calculation is needed
§ See doctor example below

- Examples of expenditures that are not deductible bc they were not incurred in
the production of current or future income:
o Amounts paid to former employees on retirement in recognition of prior
services rendered
Example of apportionment of expenditure that was incurred with a dual purpose:
- A doctor must go to an international conference every year to be updated on new
medical advancements. This year the conference is in France. The cost of traveling
to France is a necessary expenditure closely related to his income earning activities
bc if he doesn’t go to the conference, he won’t be able to continue practicing as a
doctor. So this expenditure will be deducted from his gross income. However, if he
decides to extend his stay and go sight-seeing, the costs he incurs to do this are
not related to his income earning activities and therefore cannot be deducted from
his gross income. The expenditure of travelling to France was incurred with a dual
purpose -> so the expenditure must be apportioned
“NOT OF A CAPITAL NATURE” (5th element of general deduction formula):

- Remember: PROCEEDS of a capital nature are excluded from gross income bc that
amount is likely to be taxable for capital gains purposes (main factor we look at:
intention of taxpayer)
o Capital = excluded from gross income
o Revenue = included in gross income
- The same applies to EXPENDITURE/DEDUCTIONS of a capital nature -> cannot be
deducted from the gross income (however, we do NOT look at the intention of the
taxpayer -> only look at objective factors)
o Capital = not deductible from gross income
o Revenue = deductible from gross income
- We need to determine whether the deduction is of a capital of revenue nature -> NO
universal or single test
- 2 tests have been developed (via case law) to determine the nature of a deduction -
> we need to apply BOTH tests simultaneously
Fixed vs floating capital test (test no. 1)
- Floating capital -> revenue in nature -> deductible
o = capital that frequently changes from money to goods and vice versa

o E.g.) dealer in secondhand cars takes money to buy cars -> sells them ->
buys more cars -> sells them -> lots of transactions
- Fixed capital -> capital in nature -> non-deductible
o = capital used to acquire or improve property, plant, tools, any other asset
etc.
o E.g.) fixed capital in the hands of the dealer in secondhand cars will be his
showroom, the furniture in the showroom, his adverts, a delivery vehicle etc.
o These ^ are fixed assets. Fixed assets are something you acquired in order
to produce income. Fixed assets are your income earning structure
- Extra note:
o Another factor we can look at is the enduring benefit of the capital asset (this
is not a decisive test)
o Asset that endures for a short period (e.g. a few months) -> more likely to be
revenue
o Asset that endures for a substantial period (e.g.3 years) -> more likely to be
capital
o Degree of longevity -> question of fact and depends on the circumstances
Operations vs structure test (test no.2)
- Expenditure incurred to perform income earning operations -> revenue in
nature -> deductible
o This is your day-to-day expenditure that you incur when performing your
activities/operations in making income
o E.g.) salaries you pay to the typist and article clerk, the cost of driving to
court, cost of printing documents etc. (these are income earning activities)
- Expenditure incurred to establish, improve, or add to the income earning
structure -> capital in nature -> not deductible
o E.g.) assets such as your printer, computer, books, subscription to
LexisNexis, furniture in office, building, showroom, air con etc. (these are
income earning structures)
o Air con in the hands of the attorney = capital in nature
o Air con in the hands of the air con salesman = revenue in nature

o SIR v Cadac Engineering Works (Pty) Ltd (1965 A) -> If the expenditure is
more closely related to the taxpayer’s income-earning structure than to his
income-earning operations, it is capital expenditure.
Examples of expenditure that is capital in nature (and thus not deductible):
- Amount paid to extinguish business competition (aka costs expended to acquire the
income earning right or structure of another business so that they close down)
- Amount paid to purchase the good will of a business (goodwill = assets + clientele)
(this is money spent to create a source of income)
- Fees paid to transfer a liquor license from one premises to another
- Money spent to acquire fixed capital assets for use in a business (e.g. factory,
machinery etc.) + expenditure connected to such acquisition (e.g. transfer duty,
installation costs etc.)
- Expenditure incurred by a company obtaining share capital (e.g. underwriting
commissions, advertising, legal costs etc.)
- Cost of erecting a model house on hired site for exhibition of goods of a furniture
dealer (this advertising is of a permanent nature and thus results in the creation of a
capital asset)
- Expenses incurred by a freelance journalist in building up their business
Losses:
- Loss of a capital nature -> not deductible
- Examples of losses of a capital nature that are not deductible:
o Where you lend money to someone, and they don’t pay it back (this does
NOT apply in cases where the money is lost by
moneylenders/financiers/banks)
o If you (the tenant) make improvements to the lease property ito a terminated
lease agreement where there is no duty on the lessor to pay you back for the
improvements -> this is a loss of a capital nature
o Where your fixed capital asset has been destroyed (e.g. fire) or stolen
o Losses on the realization of shares
Overview of future unit:

- Prohibited deductions -> these are deductions that comply with the reqs of the
general deduction formula (s11(a)), but are prohibited ito S23 from being deducted

- Special deductions -> these are deductions that generally do not comply with the
general deduction formula, but are allowed ito statute to be deducted
- When determining whether something is an allowable deduction:
o First step: is it a listed as a special deduction?
§ If yes -> deductible
§ If no -> go to step 2
o Second step: does it comply with the general deduction formula?
§ If yes -> deductible
§ If no -> non-deductible
LECTURE 3 – PROHIBITED DEDUCTIONS

- Prohibited deductions = deductions that comply with s11(a) (the general deduction
formula), but are prohibited from being deducted ito s23
- These are the S23 prohibited deductions
- The following costs are not allowed as a deduction:
(1) Private maintenance expenditure (S23(a) ITA)

- Costs incurred in the maintenance of any taxpayer, his family, or establishment (his
private home) -> not allowed as a deduction
- These are costs related to the taxpayer feeding and clothing himself, providing his
family with the necessities of life, and maintaining a certain standard of living
(2) Domestic or private expenditure (S23(b) and S23(m) ITA)

- These are costs of the taxpayer’s private life as opposed to his life as a trader
- Domestic or private expenditure includes: rent of, cost of repairs, expenditure in
connection with -> any premises NOT occupied for the purposes of trade, any
dwelling house, or domestic premises (private home)
o Rent, repair, and upkeep of private home
- The only time that the costs of a private home can be deductible is if there is a
certain part of the home that is occupied for purposes of trade
o Aka this should be read together with the trade requirement in S11(a)
(taxpayer must be engaged in trade)
o A part of the private home only qualifies as being occupied for the purposes
of trade if it is:
§ Specifically equipped for the purposes of the taxpayer’s trade and
§ Regularly and exclusively used for trade purposes
o This amount will be apportioned from the cost of the upkeep of the house
o Calculation of part of home used for trade:
§ Total square meters of office -> divided by total square meters of
house -> multiplied by expenditure -> = amount that is deductible
- Private and domestic expenditure also includes:
o the cost of a household servant to enable the taxpayer’s spouse to take up a
job
o Expenses incurred from travelling between his residence and place of
business
o Medical expenditure
(3) Recoverable expenditure (S23(c) ITA)

- Loss or expenditure that is recoverable under any contract of insurance, guarantee,
security, or indemnity -> not allowed as a deduction
- E.g.) there is a loss in either your private property or your business property and you
incur that loss in your own name and pay for it out of your own pocket, and then
later you claim that amount from the insurance company -> this is recoverable
expenditure
- E.g.) you buy a printer that has a guarantee sticker on it. Your printer breaks. Printer
company says they will reimburse you for a new one -> this is recoverable
expenditure
- Recoverable amount = meaning uncertain but it most probably means that there is
not only a possibility to recover the amount, but that you actually go and recover it
o If you don’t recover it in the year that the amount becomes recoverable ->
you cannot deduct it
(4) Interest + penalties on outstanding taxes, and taxes (S23(d) and

S7F ITA)
- Any taxes imposed under an Act that is administered by the Commissioner -> not
allowed as a deduction
o E.g.) VAT, customs duties, transfer duty, capital gains tax
- Interest on outstanding tax + tax penalties -> not allowed as deductions
o Tax penalties include understatement penalties

o E.g.) you send in a tax return that omits certain info or has fake deductions.
The tax penalties you incur from doing something like this are not deductible
from your gross income
- HOWEVER, sometimes SARS pays interests to a person (aka interests is included in
their taxable income). In these instances, the person must repay this interest. This
means that it must be deducted in the YoA that it accrued to the person (S7F)
(5) Provisions and reserves (s23(e) and S11(j) ITA)

- Income carried over into a reserve fund or capitalized on in any way (e.g. a
contingent liability) -> not allowed as a deduction
- UNLESS the Act specifically allows for the creation of a reserve-type of allowance
(e.g. a doubtful debt) -> allowed as a deduction
(6) Expenditure incurred to produce exempt income (S23(f) ITA)

- This refers to exempt income (remember that taxable income = gross income –
exempt income)
- Expenditure incurred iro any amounts that do not qualify as ‘income’ as defined in
S1(1) -> not allowed as a deduction
- Examples of exempt income:
o Expenditure incurred in the production of gross income (S10)
o Amounts excluded from the definition of gross income
o Expenditure incurred to produce dividends
o Expenditure of a general character that cannot accurately be appropriated
either to income or to non-taxable amounts (aka where the nature of the
expenditure cannot be attributed accurately) -> these amounts should be
apportioned (aka only a part of it will be deducted)
§ In other words, the expenditure is partly incurred to incur exempt
income and partly incurred to incur taxable income
§ Apportionment requires one to look at the purpose of the expenditure
+ the close of the connection between the expenditure and the
income-earning operations
- E.g.) money you spent to invest in shares will not be deductible

(7) Non-trade expenditure (S23(g) ITA)
- Sometimes expenditure can be incurred with mixed motives -> partly for trade
purposes and partly for private purposes -> must be apportioned
- Only the expenditure relating to the trade portion can be claimed as a deduction
- If the money was not used or expended for the purposes of trade -> not allowed as
a deduction
(8) Notional interest (S23(h) ITA)

- Interest which might have been made but was forfeited due to the taxpayer
employing/venturing his capital in his trade rather than investing it in a bank -> not
allowed as a deduction
- Notional interest = hypothetical interest
- E.g.) you have R1 million. You have the option to invest your R1 million in an
interest-bearing account where you will earn interest at 0.5%. However, you choose
to rather invest your interest in a restaurant with the intention of making a much
bigger profit (50% turnover) compared to the bank account. But then COVID
happens -> your restaurant flops and your R1 million investment yields nothing.
Hypothetically, you would have earned 0.5% interest. This is not deductible
(9) Restraint of trade (S23(i) ITA)

- Restraint of trade payments -> generally not allowed as a deduction (bc it is capital
in nature)
- UNLESS it is an allowable exception ito S11(cA) -> see ‘specific deductions’ below
for the reqs that must be met for a restraint of trade to be deductible
(10) Unlawful activities (S23(o) ITA)

- Expenditure incurred iro unlawful activities -> not allowed as a deduction
- The following examples constitute expenditure incurred in unlawful activities:
o Payments of fines and penalties imposed bc of unlawful activities (even if the
unlawful activity was carried out in another country)
o Payment of bribe
o Unfair marketing
o Violation of traffic laws
o Contravention of municipal bylaws

o Activities listed in chapter 2 of the Prevention and Combating of Corrupt
Activities Act (PCCA) -> includes corruption + bribes
- A conviction is not required for this section to apply ^
- Be careful here. Just because the question says the income was earned from an
illegal activity, does NOT necessarily mean that it will not be deductible. There are
very specific unlawful activities that are prohibited deductions and they are
mentioned in PCCA Act
o Example: prostitution is an illegal activity, but it is NOT mentioned in PCCA.
This means that prostitutes will be taxed on the income they make (bc there
is nothing in the Act that says illegal income cannot be taxed). So the cost
incurred by the prostitute to render her services would be expenditure
incurred in the production of unlawful activities, but it is not a prohibited
deduction ito S23(o)
- Fruitless and wasteful expenditure that was made in vain and that would have
been avoided if reasonable care was taken by the public entity -> not allowed as a
deduction
o Wasteful and fruitless expenditure incurred by a normal person (e.g.
spending thousands of rands to fix a worthless car) -> will be deductible
Prohibitions against double deductions: (S23B)

- Although an amount may qualify as a deduction under more than one section of the
Act -> no amount may be deducted more than once
- If the amount qualifies as a specific deduction AND a deduction ito the general
deduction formula -> specific deduction takes precedence over the general
deduction formula
o If you don’t comply with the reqs of the specific provision -> you can fall
back on the general deduction formula
Excessive expenditure (S23(g))

- Expenditure is excessive when it is NOT incurred in the production or income and
when it is NOT expended for trade purposes, but is rather inspired by some other
motive -> excessive expenditure is not deductible
- Excessive expenditure is typically where the expenditure is made with the intention
to reduce the taxable liability

- If the commissioner becomes suspicious and is of the opinion that the expenditure
is excessive bc there is motive to reduce tax liability of the recipient taxpayer-> he
may reject the amount -> if this happens then the amount will be fully taxable in the
hands of the taxpayer
o E.g.) if you pay your employee an excessive salary -> the employee will be
taxed on the full amount even though you will not be able to make a
deduction
- Factors to determine whether expenditure is excessive:
o The open market value and the nature of the services rendered
o The nature of the business
o The relationship between the employer and the employee
o The amount of the remuneration in relation to the net profit earned by the
employer
o The dependence of the remuneration paid on the profits earned
o The presence of motives other than ordinary commercial ones (e.g. the
avoidance of tax or the expression of family feelings)
- In most cases, the open market value of the expenditure will be deducted
- Example of excessive expenditure:
o Where the employer pays a travel allowance to the employee that is out of
proportion to the amount that the employee would use for business purposes
o A boy works for his dad as a delivery boy and gets paid R35 000 per month
with a cell phone allowance
§ Here we look at the amount of the remote remuneration in relation to
the net profit of the employer
§ The dad would have paid the boy an allowance anyways so we can
see that the dad just wants to make a deduction of R35 000 per
month. Why else would the dad pay the son R35 000 is the market
salary is R3000? Here we can see that the dad has a motive other than
the ordinary commercial reason.
§ Here the expenditure is definitely excessive, and the commissioner is
likely to reject it

Cost of assets and VAT (s23C)
- We use the ‘determined value’ of an asset to calculate a fringe benefit in the hands
of the employee. The determined value includes VAT
- The VAT portion of the cost of an asset has the following impact:
o If taxpayer is a vendor + input tax deduction is claimed -> amount of actual
input tax must be excluded from the cost/market value of the asset (the
expenditure)
o If taxpayer is a non-vendor + no input deduction is claimed -> VAT portion
must be included in cost of the asset
- This section applies to the notional input tax claimable as a deduction by a vendor
when he acquires secondhand goods
- Where a VAT vendor leases an asset under an instalment credit agreement -> a
portion of the input tax paid must reduce each lease rental payment
- The portion is calculated as:
LECTURE 4 – SPECIFIC DEDUCTIONS

[combination of chap 6 and chap 12 of textbook]
Introduction:
- Apart from the deductions allowed under the general deduction formula (S11(a)),
ITA sets out certain special/specific deductions from s11(c) – (w) that may also be
deducted from a taxpayer’s gross income
- These specific deductions would not ordinarily be available under the general
deduction formula either bc they are capital in nature OR they are not incurred in the
production of income
(1) Advertising
- There are no specific provisions in ITA dealing with advertising, so advertising must
comply with the general deduction formula
- Advertising expenditure incurred by an already-trading business will be allowed as a
deduction if the expenditure complies with the general deduction formula, namely:
o The costs must be in the production of income
o The costs must not be capital in nature
- When advertising costs result in the acquisition of an asset of a permanent
nature (a direct enduring benefit) -> they are of a capital nature
o ITC 469 case
§ The taxpayer was a furniture retailer who set up showrooms. One day
they decided to erect a model house to exhibit its furniture in the
house. The advertising structure was designed to stay there for longer
than a few months. The court said that this was a semi-permanent
structure which will last a long time. Therefore, it has an enduring
benefit and is thus capital in nature (cannot be deducted)
- If a donation is made for moral reasons (to support a good cause) without any
business purpose whatsoever -> no deduction will be allowed
o Why? -> bc expenditure is not in the production of income
- Sometimes retailers make donations as part of their advertising costs
o CIR v Pick n Pay Wholesalers
§ PnP went to a fundraising event and decided to make a donation once
they saw the other retailers making donations. PnP then tried to make
a deduction saying that this expenditure was an advertising cost
§ Receiver of revenue said that there was no business reason to make
this donation. PnP just felt morally compelled to do so. Donations
made as moral obligations are NOT deductible
- However, if a retailer hosts something like a bake-off or a race or a competition for
charity -> this expenditure will be deductible
o The retailer is advertising themselves whilst promoting the charity event ->
therefore the expenditure is incurred in the production of income
o These events are usually referred to a sponsorships
(2) Restraint of trade (S11(cA) ITA)

- A restraint of trade is capital in nature (bc you are preventing someone from using
their capital), so we don’t include it in the gross income
- HOWEVER, there is a specific provision (S11(cA)) that says that where an amount
was paid as a restraint of trade to a natural person, labour broker, or personal

service provider -> that restraint of trade amount must be included in the gross
income of the recipient.
- In order for a restraint of trade (RoT) amount to qualify as a specific deduction under
S11(cA), the following reqs must be met:
o There must be an amount that was actually incurred
o In the course of the carrying on of a trade
o That constitutes compensation for the restraint of trade
o And the RoT is imposed on a person who is either a natural person, a labour
broker, or a personal service provider
- If the above-mentioned reqs are met, then the amount that that is deductible is the
lesser of the RoT amount divided by the number of years that the restraint applies
OR 1/3 of that amount (whichever is lesser/smaller)
o If the RoT is over a 5 year period -> the amount must be divided by 5 (and
then that 1/5 of the amount must be deducted over the 5 year period)
o If the RoT is only valid for 2 years -> then the 1/3 rule will apply (so 1/3 of the
amount will be deducted over a 3-year period)
-
(3) Copyrights, inventions, patents, trademarks, and know-how:
- The cost of taking out a patent -> capital expenditure unless a dealer in patent
rights incurs it
- A trader or manufacturer’s costs of registering a trademark or trade name -> capital
expenditure
- Cost incurred for the outright acquisition of a patent or trademark -> capital
expenditure unless it is acquired for the purpose of speculation
o Here, the taxpayer expends an amount to obtain an enduring right to use
(and own) an asset
- An outright acquisition must be distinguished from the situation where the taxpayer
makes a repetitive payment for the use of an asset
- Payments for the use of an asset -> revenue in nature -> will be deductible ito the
general deduction formula
o E.g.) lease payments or rent expenditure for the use of an asset (as opposed
to capital expenditure for the outright acquisition of the asset)
- Annual royalty payments for the use of a patent or trademark -> are deductible
o Why? Bc the expenditure relates to the right of use – not to the obtaining of
enduring ownership
- It does not matter whether the costs are paid in fixed or variable instalments
(4) Damages and compensation

- Payments for damages or compensation resulting from negligence will only be
deductible if the negligence constitutes a ‘necessary concomitant’ of the trading
operation
o Close connection between income-earning business/trading activities +
action that causes damage must exist
- Example:
o If a taxpayer sells petrol lamps as his principal business, there is an inherent
risk of injury if one of the lamps explodes. Here, payments for consequential
damages and compensation are incurred in the production of income due to
the risk being an ‘inevitable concomitant’ of the trade
(5) Goodwill (amount paid for the acquisition of the goodwill of a

business)
- If the business is purchased to derive an income -> expenditure is NOT deductible
(bc of its capital nature)
- If the business is purchased for the purpose of resale at a profit -> cost of
acquisition is deductible from the proceeds derived from the resale of the goodwill
(6) Legal expenditure (s11(a) and S11(c) ITA)

- Legal expenditure can be deducted either under S11(a) or under S11(c)

- First check if it complies with the general deduction formula (s11(a)). If it doesn’t,
then you can try make the deduction under S11(c)
Legal expenditure under s11(a): (general deduction)
- The court in Port Elizabeth Electric Tramway Co Ltd v CIR (1936 CPD) made the
general deduction formula reqs iro legal expenditure a bit more stringent.
- In order for legal expenditure to be deducted under s11(a), the taxpayer must show
that the legal expenditure is linked to an operation undertaken with the object of
producing income, rather than merely to protect an existing source of income
o Legal expenditure must be linked to the production of income -> then it will
be deductible under s11(a)
o Legal expenditure must not just protect an existing source of income ->
otherwise not deductible
- E.g.) you apply for a liquor license -> liquor board rejects your application -> you
sue them bc you won’t be able to sell alcohol and make an income from your liquor
shop. Here, the legal expenditure will be deductible under s11(a) bc it is incurred
with the object of producing income
- E.g.) a liquor license has already been granted to you to sell liquor in a specific area
-> liquor board grants license to someone else in the same area -> you sue them.
Here, the legal expenditure will not be deductible bc it is incurred to porrect existing
income
- If s11(a) doesn’t apply -> taxpayer may resort to S11(c)
Legal expenditure under s11(c): (specific deduction)
- The s11(c) reqs are much broader than the s11(a) reqs. This gives more leeway for
a person to make a deduction for legal expenditure
- Legal expenditure is deductible under s11(c) if it -> is a legal expense that was
actually incurred on a claim, dispute, or an action in law that occurred because of
the taxpayer’s ordinary operations or the carrying on of his trade
o Amount is actually incurred
o In your ordinary operations or your trade
§ Aka it is not necessary that the expenditure must be incurred in the
production of income
o There must be a dispute

§ The moment there is a reason for action to arise, there is a dispute.
Any form of resolution of that dispute will be regarded as legal action.
doesn’t not have to be in a court of law
o Must not be capital in nature
- Examples of such legal expenditure:
o Fees or services of a legal practitioner,
o Expenses incurred and in procuring evidence or expert advice,
o Court fees,
o Witness fees and expenses,
o Taxing fees,
§ Taxing fees is not the payment of taxes. Taxing fees refer to stamp
duties or court fees
o The fees and expenses of sheriffs and messengers of the court
o And other expenses of litigation
- The legal expenditure we incur to prevent a claim for compensation + compensation
and damages -> deductible
- Examples of legal expenditure that are deductible ito S11(c) that would not
ordinarily be deductible under s11(a):
o Legal expenditure incurred to protect income
§ E.g.) your driver crashes into a different driver and now there is a claim
against you for R1 million. You dispute this and argue how the
damage does not exceed R500 000. Here you are trying to reduce
your deductible expenditure
o Legal expenditure incurred to prevent the reduction of income
o Legal expenditure incurred to prevent an increase in deductible expenditure
o Legal expenditure incurred to avoid a loss or resist a claim for compensation
§ ITC 1310 -> accountant breaches restraint of trade contract and then
incurred legal expenditure in defending his breach. This is a deductible
expenditure bc the legal expenditure was incurred in the ordinary
operation of his trade
§ ITC 1154 -> a company sold goods through its agents, but the agents
weren’t happy, so they breached their agency contracts prematurely.
Any damages suffered by the agents is incurred in the ordinary
operations undertaken by the taxpayer in carrying on is trade ->
therefore deductible
§ ITC 1241 -> a company wanted to use a metal crushing machine on
land demarcated as residential property. Municipality tried to stop
them with a court order. the company then tried to stall the
municipality from evicting them by opposing the municipality’s
application in court. The court said that although the method of
resolving the dispute was questionable and unscrupulous, the cost
itself is deductible bc it was incurred to protect the income source (the
machine) so that they could carry on producing income
§ ITC 1598 -> taxpayer was a farmer. He had a use right to water which
the grantor breached. Farmer sued grantor to have access to water
again. Court said that the right of water is a capital asset in the hands
of the farmer. Therefore, the legal expenditure he incurred was to
protect his right that was capital in nature -> not deductible
- Further example:
o An attorney hears someone gossiping about him saying that he doesn’t know
anything about the law and ill-advises his clients. The attorney sues this
person for defamation.
§ The good name of the attorney is a capital asset. This means that legal
expenditure incurred to protect this capital asset is also capital in
nature -> therefore not deductible
o An attorney hears someone gossiping about him saying that he is a slut and
he’s ugly. The attorney sues this person for defamation.
§ This legal expenditure will not be deductible bc the claim is not
connected to the operations of carrying on his trade as an attorney
o A newspaper company incurred legal expenses to resist a claim for damages
for libel (slander and defamation)
§ These legal expenses would be deductible under s11(c) bc the risk of
libel actions are an inevitable concomitant of the trade of the
newspaper company

-
- Both s11(a) and s11(c) require that legal expenditure should not be of a capital
nature
- When are legal costs of a capital nature? -> if the purpose of the legal costs is
to:
o Protect trademarks, designs, and similar assets
o Eliminate competition
- If legal costs are capital in nature -> not deductible
- Legal expenditure incurred in the acquisition of a capital asset is also not deductible
o E.g.) legal costs paid for the cost of transfer of an income-producing property
into the name of a taxpayer
- If the legal expenditure is connected to an asset that is used as trading stock for the
taxpayer -> it is deductible
- Legal expenditure to secure an enduring benefit for a trade -> capital in nature
- legal expenditure incurred in the creation of a right to receive income -> capital in
nature
- legal expenditure incurred in the actual earning of the income itself -> revenue in
nature
(7) Provisions for anticipated losses or expenditure (S23(e))

- Provisions made for anticipated losses and expenditure -> not deductible (bc it has
not actually incurred)
- There are a few exceptions
o E.g.) doubtful debt
o E.g.) deduction of future expenditure on contracts

(8) Repairs (s11(d) ITA)
- Expenditure actually incurred during the YoA on repair or beetle treatment of
property occupied for trade purposes (immoveable property) + repair of
machinery/implements/utensils/articles used for trade purposes (moveable
property) -> allowed as a deduction under s11(d)
- If the cost of the repairs is a recoverable expenditure -> no deduction is allowed
o E.g.) Your delivery vehicle (aka machinery used for trade purposes) breaks
down and you incur certain expenditure to repair the vehicle. If the vehicle is
under warranty (meaning that the amount you have paid for the expenditure
can be claimed against the warranty) -> the expenditure is recoverable and is
NOT allowed as a deduction
o E.g.) there was a hailstorm and all the windows in the building shattered. If
the building is insured, then the cost of repairing the windows will be
recoverable under the insurance agreement -> therefore NOT deductible
o E.g.) any form of cost recovery applies. If your car is parked and then
someone bumps it while parking, the cost to repair your car can be
recovered from the culprit -> therefore not deductible
- ‘Repairs’ need to be distinguished from ‘improvements/
replacements/renewals’
o Replacement/improvement costs -> not deductible (bc replacement is a
capital expenditure)
§ Reconstruction of thing in its entirety and/or replacing the heart of the
thing along with other parts -> points towards it being a
replacement/improvement
§ Original asset does not have to be damaged (but it can be)
o Repair costs -> deductible (even if it is a capital asset being repaired)
§ Dismantling the entire thing and re-erecting it using old parts and only
replacing the irreparable parts and/or only replacing the heart of thing
(not other parts) -> points towards it being a repair
§ Original asset must be damaged
- ITA does not define ‘repair’. So we look at the ordinary dictionary meaning
- Repair = restore or mend something to its former condition

- CIR v African Products Manufacturing -> it is NOT necessary that you repair the
item in the identical original form
o Sometimes when you repair an item, you can't find the exact same parts to
repair it in its original form. So you have to upgrade it.
o Even if the new part is an improvement from the old part -> still constitutes a
repair if you only replace the irreparable part
o E.g.) you drop your phone and the screen cracks. You go to have the screen
replaced but cant find the exact same screen you used to have. There is only
an HD screen now. The cost of the HD screen is a repair cost -> deductible
- It is NOT a requirement that repair must be a better option than replacement. In
other words, it is not a req that repair is an absolute necessity
o E.g.) you get into a car crash and completely total your car. You spend
thousands of Rands trying to fix and repair the car to its former condition –
even though replacing the entire car would have been the cheaper option. If
though you went against your better judgement, you can still make a
deduction on the repairs
- If a new asset has been created that results in an increase in the income-earning
capacity -> it is an improvement/replacement
- If an asset is just restored to a state in which it will continue to earn income as
before -> it is a repair
Examples of replacement/improvement:
- Buying a car in a scrap yard and rebuilding the car from scratch. You replace the
interior, repaint the car, replace the tyres, replace the engine -> reconstruction of
thing in its entirety
- If you drop a computer and the screen cracks. You decide to not only replace the
screen, but also the hard drive and battery. This most likely constitutes
reconstruction of the thing in its entirety bc you replaced the heart of the laptop and
other parts
- If something new is added to the original asset -> it is an improvement. (e.g.
underpinning foundations to remedy cracks in a building)
Examples of repair:
- Your car breaks down because the engine stops working and is beyond repair. You
dismantle the entire car and replace the irreparable engine with a new engine. You

don’t do anything else to the car -> this is a repair bc even though you have
replaced the heart of the thing, you didn’t go beyond ‘repairing’ the car by replacing
other parts
- Rhodesia Railways Ltd v Collector of Income, Bechuanaland -> if it is necessary
to dismantle and re-erect the entire asset in order to repair it, it remains a repair
- The lessor sees that the taps aren’t working in the apartment. Instead of repairing
them, he replaces them with new taps. He tries to claim this expense as a
deduction by saying that it was a repair/refurbishment to his practice. However, this
is no longer just a repair. This is improvement by replacement of assets. This is a
capital expenditure and is thus not deductible
- If an asset has been worn out by use or wear & tear, and maintenance is needed to
keep the asset in good working order -> maintenance costs constitute repairs that
are deductible under s11(d) (however, the asset must be worn out)
-
- Repairs will be deductible regardless of whether income was actually received
during the current year of assessment
- If property or asset is not used for trade purposes, then repairs to it will not be
deductible
o E.g.) repairs to a vacant premises that has been hired by a taxpayer to
prevent his competition from occupying the premises -> these repairs are not
deductible bc the property is not being occupied for the purposes of trade
o E.g.) if a landlord repairs the apartment after the tenant moves out and then
the landlord decides to live in the apartment -> repair costs are not
deductible
o E.g.) you purchase a second-hand asset to use in your business, but the
second-hand asset needs repairs before you can start using it in your trade -

> repairs costs are not deductible bc the asset has not yet been employed by
the taxpayer for purposes of his trade
(9) Doubtful debts (S11(j) ITA)

- Sometimes people owe debt to a taxpayer
- There are 2 types of debts that can be deducted from a taxpayer’s gross
income
o Doubtful debts -> debts that are unlikely to be paid
o Bad debts -> debts that will definitely not be paid
o A debt first becomes doubtful before it becomes bad
- When it comes to doubtful debts, we must distinguish between the period
before 1 January 2019 and the period after 1 January 2019
o Requirements differ
§ The main difference is that before 1 Jan 2019, only debts that the
commissioner considered to be doubtful were considered. However,
after 1 Jan 2019, ANY debts due to the taxpayer are considered (it no
longer has to be considered by the commissioner)
o Calculations differ -> page 361 and 362 of textbook (don’t need to memorize)
- Before 1 Jan 2019 -> in order for a doubtful debt to be deductible:
o Debt must be due to the taxpayer
o Commissioner must consider the debt to be doubtful (we don’t have this req
anymore)
o Debt would have been allowed as a bad debt if the debt becomes bad
§ If the debt were to become bad, it must be allowed as a deduction
§ The debt must have been previously included in the taxpayer’s income
- After 1 Jan 2019 -> in order for a doubtful debt to be deductible:
o The debt must be due to the taxpayer
o The taxpayer would have been allowed to deduct this debt as a bad debt if it
were to become a bad debt (same as above)
Example:
- X owes you R1000. It’s 2018. You keep phoning and messaging X, but they are not
replying to you. It is doubtful that X will pay you back in the 2018/2019 YoA. So, you
make a deduction of R1000

- The amount of the doubtful debt must be included in the taxpayer’s income in the
following year of assessment. This means that you have to include this R1000
doubtful debt that was deducted in 2018/2019 in your gross income for the
2019/2020 YoA
o Why? Bc there is still a possibility that you will get the R1000. The amount
still accrues to you
- In 2019/2020 you call X again. X tells you that they have become insolvent, and you
can claim against X’s estate if you want. You are of the opinion that X’s estate is not
worth claiming. So, you decide to abandon the claim
- The moment you abandon a claim (a doubtful debt), it becomes a bad debt
- Since the debt becomes bad in the 2019/2020 YoA, you have to make the
deduction as a bad debt (no longer as a doubtful debt). You have to claim the
deduction in the year in which the debtor became insolvent (or earlier if the debt
went bad before insolvency)
- Thereafter, you delete X from the books. You do not include the R1000 in the
2020/2021 YoA bc now it has been written off as a bad debt
(10) Bad debt (S11(i) ITA)

- Bad debt = debt that will definitely not be paid to the taxpayers
- In order for a bad debt to be deductible, the following reqs must be met:
o The debt must have become bad during the year of assessment,
o The debt must have been included in the taxpayer’s gross income either in
the current or the previous YoA, and
o The debt must be due to the taxpayer
- When does a debt become bad? -> we have to deduce this from normal activities
and other branches of law
- A debt becomes bad when:
o When a debtor commits an act of insolvency + the debt is written off
§ Unless you decide to claim against the insolvent estate -> then the
debt is not yet bad bc it can still be claimed from the estate.
§ The money you get from his estate -> don’t put it in your gross income
bc the R1000 X owes you was already included in your gross income
as ‘accrued to’

§ If there is a remaining amount that X still owes you (maybe bc his
estate did not have enough money to pay you the full amount) -> this
amount will be deducted from your gross income as a bad debt
o When the claim against the debtor prescribes
§ If the claim you have against a debtor prescribes after a certain period
of years, your rights against the debtor fall away by operation of law
§ The money you don’t get -> deducted as a bad debt
o When the right to claim the debt has fallen away
§ E.g.) if the debtor owes you money ito a contract that is later found to
be void -> that amount can be deducted as a bad debt
- A debt must have become bad during the YoA for it to be claimed in that year.
Unlike doubtful debts, a bad debt cannot be accumulated and written off in a later
year
- It is possible for bad debts to later be recovered. If this happens -> the amount
must be included in the taxpayer’s gross income in the year that it is recovered
o E.g.) you deleted X from the books in 2019/2020 when he said he was
insolvent. However, X approaches you again in 2023/2024 and says that he
just won the lottery and can finally pay you back the R1000. -> in the
2023/2024 YoA, the amount must again be included in your gross income as
a recovered bad debt (previous assessments cannot be reopened)
- If a bad debt is claimed as a deduction, the taxpayer must keep record of the
following info:
o Name of debtor
o Date the debt was incurred
o The amount written off
o Reasons for writing off the debt
o Circumstances in which the debt became due
§ E.g.) goods supplied, work performed, money lent, purchase of a
business including its assets and debt
- If the taxpayer sells his business (including the debt owed to him) during the YoA
the debt became bad -> taxpayer won’t be allowed to claim a deduction for the bad
debt (or the doubtful debt that would become bad) bc the debt is not due to the
taxpayer anymore
- When a taxpayer compromises with a debtor and waives his right to a portion of the
debt owing to him -> the waived portion cannot be ranked as a bad debt (taxpayer
also waives his recovery right in this regard)
- If the taxpayer buys or inherits a business (including its bad debt) -> he is not able
to deduct this bad debt -> loss is capital in nature
- Finance companies and moneylenders are not allowed to write off bad debts.
However, these losses are still deductible ito S11(a)
o Why? -> bc they are losses incurred in the production of income + they are
not capital in nature
- If a bad debt arose from the taxpayer’s business that no longer exists anymore ->
taxpayer can deduct the bad debt incurred from a previous business from a
different trade
- If the bad debt is recoverable from some other person under a guarantee or
suretyship agreement -> bad debt will not be deductible
- VAT should be excluded when calculating bad debt
(11) Assessed losses

-> Specific deductions under S20 ITA
-> Discussed below
ASSESSED LOSSES
[combination of chap 7.1and chap 12 in textbook]
- Assessed losses fall under the category of specific deductions bc there are some
assessed losses that can be deducted from the income
- Assessed losses in the hands of a natural person has different rules to assessed
losses in the hands of a company or close corporation. We will just focus on the
natural person
- Assessed loss means:
o Expenditure or losses that you've incurred in that year exceeds the income
that you've produced and that trade for that year
o Deductions > income
o Taxable income for a specific year of assessment (YoA) is a negative amount

- S20 ITA allows the following wrt natural persons: (these rules do not apply to
companies)
o Balance of the assessed loss suffered in the previous year may be
carried forward to the following year
§ The assessed loss of last year will form part of the deductions from
this year
§ Even if the taxpayer does not derive any income during the following
YoA -> he can carry it over to the third year
§ The taxpayer does NOT need to be engaged in trade in that YoA to
benefit from the set-off (however, the trade req must still apply to
companies as per SA Bazaars v CIR)
o The assessed loss that you've suffered in one trade in that same year
may be deducted from another trade carried on by the same taxpayer.
§ When a taxpayer produces income from different sources of trade
§ E.g.) If you are an attorney but you also own rental properties. If you
don’t have any lessees and thus suffer a loss from your non-trade,
then your loss from the rental properties may be deducted from your
income as an attorney
- ‘Assessed loss’ can also be referred to as a ‘S20 set-off’
- Conshu (Pty) Ltd v CIR
o There must be some form of taxable income from which this assessed loss
can be deducted
o If there is no form of income -> then the assessed loss cannot be deducted.
This loss must be carried over to a following year

Limitations regarding the set-off of assessed losses (S20A ITA):

- S20A ITA = ring fencing provisions -> certain assessed losses that cannot be
deducted according to the normal S20 rules
o If an assessed loss is ring fenced, it means that even if you have multiple
sources of income, if one source of income suffers a loss -> you can only
deduct that loss from that source. You can't set it off against other sources
of income.
o In other words, a ring is put around every single one of those trades and you
deal with them as if they are separate entities.
Examples of assessed losses that are ring-fenced:
- Foreign losses (loss from trade carried on outside of SA) -> fully ring-fenced -> can
only be set-off against foreign income, NOT from an SA source of income
o This is to protect the existing tax base
o However, SA assessed losses can be set-off against foreign taxable income
- Assessed losses may not be deductible from / set-off against any amount received
by or accrued to a person as a retirement lump sum benefit (or a severance benefit)
- Ring-fencing only applies when you (a natural person) are a top earner in the
maximum marginal rate of 45% (aka you earn R1 656 601* or more a year from
your main trade)
§ Maximum marginal tax rate for 2020 = R1 5 00 000
§ Max marginal tax rate for 2021 = R1 577 300
§ Max marginal tax rate for 2022 = R1 656 600
o If you are not in this category -> your assessed loss will NOT be ring-
fenced even if it fits into one of the mentioned categories of suspect trades
o If you are in this category -> next step: is it a suspect trade?
§ If yes:
• If there is a reasonable chance that he will earn taxable income
soon -> assessed loss will not be ring-fenced (can be set-off
against income from another trade in that same year)
• If there is a reasonable chance that he will suffer a loss again ->
his assessed loss will be ring-fenced (can only ever be set-off
against future taxable income from that specific activity)
§ If no:
• If the taxpayer has suffered loss for more than 3 years out of 5
years for that specific trade + there is no escape clause to
assist him -> S20A ring-fencing will apply (will be regarded as a
suspect trade)
o It is not necessary to wait for 5 years before ring-fencing
can apply
o However, profit made in any YoA can delay the potential
ring-fencing
- What are suspect trades? -> they are your secondary trades you earn income
from (they are not your main trades)
o E.g.) you are an attorney, but you also trade in cryptocurrencies on the side
- Examples of suspect trades:

- Practical example: you are a barber (main trade), but you also farm canaries in your
backyard and sell them at your barber shop (secondary trade). If your farming
activity suffers a loss -> you cannot deduct this loss from your income as a barber
Further notes:
- An insolvent person and the insolvent estate are deemed to be the same person for
the purposes of determining any deduction or set-off to which the insolvent estate
may be entitled
- An assessed loss incurred prior to the date of sequestration of a natural person (the
insolvent) can be set off against the income of the insolvent estate from the carrying
on of any trade in South Africa
- Insolvent person cannot carry forward an assessed loss (unless there is a court
ordering stating otherwise)



THEME 7 – CAPITAL GAINS TAX

[chap 17 of textbook]
Important links:
Link to Income Tax Act 58 of 1962:

https://www.mylexisnexis.co.za/Library/Document.ashx?domainID=0ds6c&format=
pdf&documentVersion=null&displayVersion=null
Link to the Eighth Schedule:

https://sars.mylexisnexis.co.za/#
Link to SARS guide on CGT:

https://www.sars.gov.za/wp-content/uploads/Ops/Guides/LAPD-CGT-G02-The-
ABC-of-Capital-Gains-Tax-for-Individuals.pdf
LECTURE 1 - PART 1
- Remember:
o If the taxpayer’s proceeds are revenue in nature -> it is included in the gross
income
o If proceeds are capital in nature -> it is excluded from gross income (but
what then what happens next?)
o If the proceeds that arises from the disposal of an asset is capital in nature ->
then we need to look at taxing that gain ito the capital gains tax regulations
- Capital gains tax will hereafter be referred to as ‘CGT’

- CPT is dealt with in the Eighth Schedule of the Income Tax Act (‘ITA’)
o When we speak schedules, we refer to ‘paragraphs’
o When we speak about Acts, we refer to ‘sections’
- CGT formula:
o Proceeds less base cost equals capital gain or loss
o Proceeds – base cost = capital gain/loss
- Remember to distinguish between revenue and capital
o Revenue -> full amount is included in the gross income (after the relevant
deductions, the revenue will be subjected to normal tax)
o Capital -> first we must calculate the capital gain/loss ->
§ If it is a gain -> we include this amount (net taxable gain) in the taxable
income at a certain rate
• 40% for individuals
• 80% for companies
§ If it is a loss -> the capital loss gets rolled forward to the next year of
assessment (YoA)
• A capital loss can only be set off against a capital gain (aka
capital loss will reduce a capital gain)
• Effective tax rate for CGT is lower than that for normal tax
payable
- Example:
o A company that sells printers also uses printers in their offices. The printers
they sell to people = trading stock. The printers they use in their own offices
= capital asset. Profits from sale of trading stock = revenue in nature
(included in gross income and able to claim a deduction). Profits from selling
their own printer (capital asset) at a profit = capital in nature (capital gain will
be included in the company’s taxable income at a certain rate)
- If you included proceeds received in the gross income, you cannot use the same
proceeds again for calculating a capital gain.
- Similarly, expenditure incurred that was allowed as an interest deduction
cannot be utilised again by including it in the base cost for calculating a capital
gain
o You have to pick and choose. Either its revenue and gets included in gross
inc. OR its capital and the CGT rules apply
o Expenses that have a causal link to an income can either be treated as a
deduction (aka if you included that profit in your gross inc then you can claim
a deduction under S11) OR the expenses will be added to your base cost
(aka if the expenses were incurred in relation to a capital asset)
o Proceeds less base cost = capital gain/loss
- CGT was introduced in SA from 1 Oct 2001 to levy tax on the disposal of assets
that are capital in nature (this is called the valuation date)
- If asset was acquired before valuation date -> will not be subject to CGT unless its
value increases after valuation date
- If asset was acquired after valuation date -> increase in value will be subject to CGT
- S26A of ITA links ITA to the 8th schedule
o S26A says that the taxable capital gain of that person for a YoA shall be
included in that person’s taxable income for that YoA
Who is liable for CGT?

- Look at para 2 of 8th schedule
- ANY person can be liable for CGT, not just registered taxpayers -> wide scope
RESIDENTS
- Residents are taxed on their worldwide income
- Residents are liable for tax on capital gains resulting from the disposal of any
worldwide assets
- E.g.) if you, an SA resident, own a villa in France and sell it -> you will be subject to
CGT in SA (subject to the double tax treaty)
NON-RESIDENTS
- Non-residents are taxed on SA-sourced income
- Non-residents are only liable for tax on capital gain arising from the disposal of:
o Immoveable property situated in SA
o Any interest in immoveable property situated in SA
§ E.g.) non-resident can hold shares in a company that is situated in SA
§ E.g.) non-resident can be the beneficiary of a trust that owns
immoveable property in SA
§ In order for this sort of interest (that has been disposed of by a non-
resident) to be subject to CGT, both of the following reqs must be
met:
• (1) 80% of the market value of that interest at the time of
disposal is directly or indirectly attributable to the immovable
property in SA, AND
• (2) non-resident must hold 20% interest

o Any asset that is connected to a permanent establishment in SA
- Since non-residents are not registered for tax in SA, how does SARS keep track of
them?
o -> to facilitate the collection of CGT from the non-resident selling the
immovable property in SA, S35(a) of ITA levies a withholding tax that is
withheld by the purchaser on the purchase price. This amount is paid over to
SARS on behalf of the non-resident seller.
o If the seller is a natural person -> the percentage that is withheld from the
purchase price is 7.5%.
o E.g.) David (non-resident) sells his flat to Fred (SA resident) for R3 million.
Fred (the purchaser) will then have to withhold 7.5% of the purchase price
and pay it over to to SARS on behalf of David bc David is a non-resident
selling immovable property in SA. This serves as a prepayment on the tax
owed by David who will then also have to complete and submit a tax return
to SARS
-
Basic framework and building blocks of CGT:
- What do you need to trigger a capital gain or capital loss event? -> ALL 4 building
blocks must be present -> starting point for each question on CGT
o Just because all 4 blocks are present, doesn’t necessarily mean that CGT will
be triggered
- There must be an asset -> there must be a disposal of the asset -> proceeds must
be received for this disposal -> the asset must have a base cost
- All 4 terms are defined in para 1 of the 8th schedule

- Only after you have established that all 4 blocks are present -> then you can
look at the CGT formula
o CGT formula is applied for EACH individual asset being disposed of
o However, disposal of personal use assets = EXCLUDED from CGT
§ E.g.) If you don’t use your car for business purposes (aka to generate
income) -> you won’t be subject to CGT when selling your car bc it is
a personal use item
ASSET – building block 1

- Is there an asset?
- Defined in para 1 of 8th schedule
- Asset = as property of whatever nature, and any right to, or interest in such
property
o Property of whatever nature = moveable, immoveable, corporeal, and
incorporeal assets
o The right to and interest in the property can also be of any nature
- This definition is very wide and also includes non-capital assets kept as trading
stock
o However, disposal of trading stock is already included in gross inc bc its
revenue in nature (thus it has already been taken into acc for inc tax
purposes). It will NOT be taken into acc again for CGT purposes -> avoid
double taxation. Additionally, the cost of acquiring the trading stock can be
claimed as a deduction
- Example: D sells lawnmowers for a living. Profit from selling lawnmowers will be
revenue in nature and included in his gross inc bc they are trading stock. Cost of
acquiring the lawnmowers (base cost) can be deducted ito S11. Even though the
lawnmowers qualify as an asset, their proceeds will deem to be nil bc it has already
been included in his gross inc. The base cost will also be deemed to be nil bc D
already claimed the deduction for acquiring those assets. No CGT consequences
here.
- Definition of an asset specifically EXCLUDES currency
o E.g.) a R200 note (cash) is NOT an asset
o However, the definition still includes gold/platinum coins, and cryptocurrency

DISPOSAL – building block 2
- Has the asset been disposed of?
- Look at para 11 of 8th schedule (also para 12 and 13)
- Disposal = an event, act, forbearance or operation of law which results in the
creation, valuation, transfer, or extinction of an asset
- Examples of events that qualify as disposal: (more listed in para 11(1) of 8th Sch.)
o Sale of asset
o Donation of asset
o Abandonment of asset
o Cessation of residence
o Loss or destruction of asset
o Exchange of asset (more examples listed on page 614 of textbook)
- General rule = if a person held an asset at the beginning of the year and no longer
has at the end of the year -> the asset was disposed of
- Examples of non-disposal events: (these events don’t satisfy this building block ->
listed in para 11(2))
o Transfer of an asset as security for debt
o cancellation or extinction of a share in a company
o where a person disposed of an asset but, due to cancellation or termination
of the agreement, the person re-acquires the asset and both parties are in
their former position in the same year of disposal
o more examples on page 614-615 of textbook
Deemed disposals:
- look at para 12 of 8th Sch + S9H of ITA
- A deemed disposal means that a person is deemed to have disposed of an asset at
market value and immediately reacquired that same asset at market value
- A deemed disposal is a disposal that takes place fictitiously and is used to establish
the base cost of the asset or it can be used to trigger a capital gain/loss event
- Examples of when deemed disposals occur:
o E.g.) when an person ceases to be an SA tax resident -> there will be a
deemed disposal and an exit charge is triggered in the form of a capital gain
o E.g.) when a personal use item becomes a non-personal use item
o E.g.) when a non-personal use item becomes a personal use item
o E.g.) when a non-resident becomes a resident
§ Assets are deemed to be disposed of at market value the day before
residency ceases
§ S9H(4) ITA excludes certain assets from this deemed disposal (these
assets won’t be subject to CGT).
• Assets that are NOT excluded = immoveable property, any
interest in immoveable property in SA, and any asset connected
to a permanent establishment in SA
o E.g.) when a capital asset becomes trading stock
o More examples from page 617 onwards in textbook
- Note:
o Asset sold as personal use item -> no CGT (personal use items are excluded
from CGT)
o Asset sold as non-personal use item -> CGT (proceeds – base cost)
o Depending on the circumstances, both the base cost and the proceeds of
the asset can be determined with ref to the market value of the asset when it
is disposed of (e.g. when its use changes from personal to non-personal)
Time of disposal:
- Look at para 13 of 8th Sch
- Time of disposal is important bc it could impact the rate at which capital gain is
taxed and whether or not a capital loss can be set off against a capital gain
- In other words, time asset is disposed can impact the tax rate. This is bc taxpayer is
taxed depending on what his marginal rate for the year is (this can fluctuate year to
year)
- E.g.) If client concludes a sale agreement (aka a disposal of asset agreement) that
contains a suspensive condition -> the date of disposal will be the date that the
suspensive condition is met
- More examples on page 622 of textbook

LECTURE 1 - PART 2
PROCEEDS – building block 3
- Are there proceeds received for the disposal of the asset?
- Proceeds = the total amount received by or accrued to a person in respect of
that disposal
o There are 3 elements to this definition
§ Amount
§ Received by or accrued to
§ In respect of
- ‘Amount’ -> anything with monetary value including cash
- ‘Received by or accrued to’ -> same meaning as we discussed in the gross income
section (theme 4)
- ‘In respect of’ -> there has to be a causal connection between the receipt/accrual
and the disposal
-
- Certain amounts are excluded from the definition of proceeds (these are listed
in para 35(3) 8th Sch):
o Where a seller grants discount to a purchaser -> the proceeds will be
reduced by that discount amount (Yvonne example)
o Disposal of assets for unaccrued amount of proceeds ito para 39A
§ Where an asset is disposed of, but the proceeds only accrue in future
years of assessment (e.g. due to a suspensive condition) -> any
capital loss triggered from this sale is ring-fenced by para 39A until all
the proceeds have accrued to the seller

o Amounts taken into acc in taxable inc for normal tax purposes (i.e. amounts
already included in gross inc or that was taken into acc when determining the
taxable inc of that person)
o Amounts repaid/repayable to the purchaser
o Any reduction of the proceeds as a result of:
§ Cancellation / termination / variation of agreement
§ Prescription / waiver of claim
§ Release from an obligation
§ Any other event where the price of the asset is reduced
o Discussed further on page 660 of textbook
BASE COST – 4th building block

- What is the base cost of the asset?
- Base cost = cost of acquiring the asset in the first place
- Look at para 20 of 8th Sch
Asset acquired BEFORE valuation date (before 1 Oct 2001):
- Cannot apply CGT calculation retrospectively
- The taxpayer with a pre-valuation date asset has to establish the base cost of this
asset at the valuation date
o In other words, if the asset was acquired before 1 Oct 2001, the taxpayer
must establish what the market value of the asset was on 1 Oct 2001
o Value of asset at valuation date will be the base cost of that pre-valuation
date asset
- Base cost for pre-valuation asset = value of asset on 1 Oct 2001 + expenditure
incurred on or after 1 Oct 2001
o It is possible for other costs to be added to the base cost, such as: direct
costs, improvement costs, acquisition costs etc.
- There are 3 methods for determining the value of an asset at valuation date:
o (1) 20% of the proceeds less allowable expenditure incurred on or after 1
October 2001
o (2) Or you can take the market value of the asset as at 1 October 2001.
o (3) Or you can apply the time apportionment-based cost method
o More examples on page 642 – 648 of textbook + page 7 of SARS guide

o Note: it is not necessary to memorise calculations. SARS has put a TAB
calculator on its website where you can key in the info and it works the
answer out for you
Asset acquired AFTER valuation date (after 1 Oct 2001):
- Base cost for post-valuation asset = expenditure incurred to acquire the asset
- Para 20 of 8th Sch. lists certain qualifying expenditure that can be INCLUDED
in the base cost of an asset acquired after 1 Oct 2001, such as:
o Cost of acquisition or creation of the asset,
o The cost of valuing the asset to determine capital gain or capital loss,
o Transfer costs,
o Remuneration of an accountant/legal adviser/broker/agent for services
rendered (e.g. cost of establishing maintaining or defending the legal title in
the right to that asset)
o Moving costs,
o Advertising costs,
o Expenditure actually incurred to affect an improvement or enhancement to
the asset which is still reflected in the state of the asset at the time of its
disposal
o More examples on page 624 – 627 of textbook
- It is important for the taxpayer to establish the base cost of the asset (burden of
proof on taxpayer). If he cannot do this, the base cost will be assumed to be nil (R0)
o The lower the base cost is, the higher the capital gain payment will be (this is
bad for the taxpayer)
o The higher the base cost, the smaller the amount of CGT that must be paid
(this is good for the taxpayer)
o For CGT purposes, you are taxed on the growth in value of your asset from
the valuation date (if it’s a pre-valuation date asset) OR from the date you
acquired the asset (if it’s a post-valuation date asset) up until the date you
sell the asset
§ If value grows -> there will be a capital gain
§ If value doesn’t grow or asset devalues -> there will be a capital loss

Certain qualified expenditure is EXCLUDED from the base cost ito para 20(2) of 8th
schedule:
- Borrowing costs (e.g. interest, bond registration costs, bond cancellation costs)
- Expenditure that relates to holding costs (e.g. repairs, maintenance, insurance,
security)
o Note: repairs and maintenance are excluded from the base cost for CGT
purposes, but improvements are included in base cost
o However, for income tax purposes -> only repairs can be deducted, NOT
improvements
There is also certain expenditure that must REDUCE the base cost ito para 20(3):
- Expenditure already allowed as a deduction for income tax purposes
- Expenditure reduced, recovered or paid by another person
- Example:
o X buys second-hand iPhone from seller for R2000. X later realizes that the
phone didn’t come with a charger. She disputes this with the seller and seller
agrees to pay back R500 to X. a year later, X sells the phone for R1600.
o Capital gain = proceeds less base cost
o Proceeds = R1600
o However, the base cost has to be reduced by the money that she got back
from the seller (expenditure recovered/reduced/repaid).
o X initially paid R2000 but this expenditure was reduced by R500. Therefore,
the base cost is R1500
o This gives X a capital gain of R100 (R1600 – R1500)
o Extra note: if she used this phone for business purposes -> it would be
subject to CGT. However, if she used the phone for personal reasons ->
excluded from CGT
Determining the market value of the asset:
- Generally, the price is based on willing buyer, willing seller at arm's length in an
open market

- However, other rules may also apply depending on the type of asset
o E.g.) Financial instruments listed in a recognised exchange -> the market
value will be the ruling price on the exchange of close of business on the last
day before the disposal
- See more examples of page 655 of textbook (also look at page 662)
Identical assets:
- Look at para 32 of 8th Sch.
- Identical assets = group of similar assets where, if one asset is sold, it may not be
physically possible to identify the specific asset
- The requirement here is that if the asset is sold, it should realize the same amount
regardless of which asset is sold and must have the same characteristics as the
similar assets, but they would have individual identification numbers
o E.g.) Kruger Rands
o E.g.) shares
- Further explanation on page 655 of textbook
-
Part disposals:
- Further explained from page 657-658 of textbook
- Part disposals take place when you don’t sell the entire asset
- If you only sell a part of the asset -> you need to allocate a portion of the base cost
to the part of the asset being sold in order to do your CGT calculation
- Certain events would NOT trigger a part disposal for CGT purposes:
o (1) Granting an option
o (2) Granting variation or cession of a right of use of an asset (e.g. entering
into a lease agreement)
o (3) A lessee making an improvement to the leased property
o (4) Replacement of part of an asset that where that replacement constitutes a
repair
§ E.g.) If you repair a window in your house -> that wouldn't constitute a
part disposal of the entire house. Therefore, none of the base cost of
the house will be allocated to the window being replaced.
-
o In this example ^ (17.36) -> there wasn’t a part disposal
-
o In this example ^ -> there was a part disposal. Money was only offered for
half the property. The other half will remain in David’s ownership. We can
also see that the property is a pre-valuation date asset
o Base cost = R700 000. Market value at disposal = R100 000. Market value of
entire asset = R400 000.
o Market value of entire asset divided by market value at disposal -> multiply
that answer by base cost. This answer will give you the base cost of the part
being disposed of (R280 000)
o Next step in calculation is to work out the capital gain or loss. Capital gain =
market value of entire asset – base cost of part being disposed of (R120 000
= R400 000 – R280 000)
o In this example, there wasn’t really a part disposal

LECTURE 2 - PART 1
Remember:
- Starting point = all 4 building blocks must be present
- However, just bc all 4 blocks are present -> doesn’t necessarily mean that there will
be a capital gain or loss that arises from the disposal of the asset
- Disposal of an asset triggers a CGT event
Practice examples
Identify if there will be a CGT event with the following transactions:
I sell my house:
- Answer: Yes there is a CGT event
- Reason: Selling immoveable property = disposal of an asset
I sell my car:
- There would be a CGT event (bc there is disposal of an asset), but ito para 53 of
the 8th schedule, personal use items are excluded from CGT. Therefore, you won’t
calculate CGT on the sale of your car
- Why is this different to selling my house (which is also a personal use item)? ->
disposal of immovable property, even if it's a personal asset will be subject to CGT
Someone owes you money and you write-off that debt:
- There would be CGT event here
- Why? -> the right to collect debt constitutes an incorporeal asset (which is included
in the wide definition of as asset in para 1 of the 8th schedule)
- Writing off the debt constitutes disposal of an asset (you are giving up your right to
claim the debt)
I lose a R100 note I had in my pocket:
- There is NO CGT event that is triggered here
- Why? -> currency is EXCLUDED from the definition of an asset
- An asset is one of the building blocks -> all 4 must be present (this req has not been
met in this example)

I win the national lottery:
- There is a CGT event here
- Why? -> as a ticket holder with the winning numbers on your ticket, you have a right
to claim your winnings. As soon as you exercise that right, you dispose of it in return
for your winnings
- However, the winnings from the national lottery will be exempt from CGT (this is a
general rule)
- Extra note: CGT will be triggered/present in the following scenarios:
o If the winnings are derived by a company, close corporation, or trust OR
o if the winnings arise from foreign gambling games/competitions OR
o if the winnings are derived from illegal gambling games/competitions in SA
Mamelodi Sundowns transfers a player’s contract to Kaiser Chiefs for a transfer fee:
- CGT will arise in this scenario
- Why? -> look at 4 building blocks
- Asset = contractual rights that the club has regarding a player
- Disposal = transferring of the contractual right by the club to claim performance of
the player
- Base cost = transfer fee
- Proceeds -> general rule = if you had something of value and you no longer have it,
you most likely have a CGT event
o Mamelodi Sundowns had a player (something of value = player’s contract).
Now they no longer have it bc it’s been transferred to Kaiser Chiefs
CGT formula:
- PROCEEDS – BASE COST = CAPITAL GAIN or LOSS
- Proceeds > base cost = capital gain (positive value)
- Proceeds < base cost = capital loss (negative value)
- Capital gain or loss is calculated separately for each asset disposed of in each year
of assessment
o E.g.) if you disposed of 10 assets in one year -> you have to do 10 different
CGT calculations

- Assessed capital loss cannot be set off against the taxpayer’s taxable income -> it
has to be carried forward to the next year if there is no capital gain to set the loss
off against
o E.g.) if you make a capital gain in one year on a certain asset and you also
make a capital loss on a different asset in the same year -> you can set the
gain and loss off against each other
- If you have an excess of capital loss that year that couldn’t be utilised -> it can be
rolled over to the second year of assessment
- The lower the base cost -> the higher the capital gain amount is -> the more tax
that the taxpayer has to pay
o There are ways in which to reduce your capital gain with the disposal of an
asset -> look at para20(3) of the 8th schedule + pg 628 of textbook + second-
hand iPhone example in the notes
o Don’t forget that there is also certain qualifying expenditure that can be
included and excluded from the base cost that will change the capital gain
amount -> look at para20(2) of 8th Sch + pg 628 of textbook + repairs
example in the notes
Example 1:
- 4 building blocks = asset + disposal + proceeds + base cost

- In terms of the paragraph 1 definition of an asset, the asset in this example would
be the shares (building block 1 is present)
- In terms of paragraph 11, disposal includes the sale of an asset (building block 2 is
present)

- As per the paragraph 1 definition of base cost, the base cost in this example would
be the cost of acquisition of the shares. Additionally, in terms of paragraph 20, the
broker’s consultation costs is a qualifying expenditure that can be added to the
base cost
o Base cost = R150 000 + R10 000
o Third building block is present
- As per the paragraph 1 definition of proceeds, the proceeds in this scenario would
be the R180 000 that he received for the disposal of his shares (the selling price of
the asset) (4th building block is present)
- All 4 building blocks are present. Based on the facts, a CGT event has been
triggered
- Although we have already answered the question, let’s take the example further.
Because we have a CGT event -> we can now apply the CGT formula to see if
Suhail had a capital gain or a capital loss
- When he sold the shares, he received R180 000 as his proceeds. His base cost
would be the R150 000 (cost of acquisition of shares) PLUS the R10 000 (broker’s
service fees). Therefore, the base cost is R160 000.
- CGT formula: proceeds – base cost = capital gain or capital loss
o R180 000 – R150 000 = R30 000
o 30 000 -> positive number -> indicates it is a capital gain
o Proceeds > base cost
- Therefore, Suhail has a capital gain of R30 000.
- Hypothetically speaking, what if Suhail sold his shares after the market crash
and only received R80 000 for them?
o His proceeds would be R80 000. His base cost would remain at R160 000
o Proceeds – base cost = capital gain or loss
o R80 000 – R160 000 = - R80 000 -> negative number indicates capital loss
o proceeds < base cost
- This capital loss can be set-off against any capital gain that Suhail made in the
same year of assessment.
- When can the capital loss be carried forward to the following year of assessment?
o If there is no capital gain to set the capital loss off against in the current YoA,
or
o There is an excess capital loss after it has already been set-off against the
capital gain
- The capital loss will be carried forward indefinitely (year after year) until it can be
utilized to reduce future capital gain
Example 2:
Answer to (a)(i): -> building blocks for the holiday home:

- House = asset ito para 1
- Sale of house = disposal event ito para 1 and para 11
- Cost of acquisition (R1 500 000) + included improvements (R500 000) = base cost
(R2000 000) ito para 1 and para 20
- She sold the house for R2 500 000 = proceeds ito para 1
Answer to (a)(ii) -> building blocks for the shares:
- Shares = asset ito para 1
- Sale of shares = disposal event ito para 1 and para 11
- She bought the shares for R300 000 = base cost ito para 1
- She received R250 000 for her shares = proceeds ito para 1
Answer to (b) -> what is the capital gain/loss on the sale of Gina’s holiday home?:
- Here we need to apply the CGT formula
- Proceeds – base cost = capital gain/loss
- R2 500 000 – R2000 000 = R500 000
- There is a capital gain of R500 000
Answer to (c) -> what is the capital gain/loss on the sale of Gina’s shares?
- We have already identified the 4 building blocks. So now we just have to apply the
formula

- R250 000 – R300 000 = - R50 000
- The is a capital loss of R50 000
Answer to (d) -> what is Gina’s totalled capital gain/loss?
- In the current year of assessment, we have calculated that she has had a capital
gain of R500 000 and a capital loss of R50 000. When you total these two figures
together, you get R450 000 (500 000 – 50 000).
- But what about the capital loss of R300 000 she had from last year? -> see next
lecture
LECTURE 2 - PART 2
EXCLUSIONS
- Just bc all 4 building blocks have been met, doesn’t necessarily mean that there will
be CGT consequences. There are certain things that meet all the blocks but are
specifically excluded from CGT application
Exclusion of personal use items:
- Personal use items are excluded from CGT
- Personal use items are items that are used mainly for non-trade purposes (mainly =
more than 50%)
- E.g.) personal jewellery, private art collection, private furniture, motor car, household
appliances etc.
- Even though personal use items are excluded from CGT, there are exceptions to
this general rule -> exceptions are in para 53(2) of the 8th schedule
- Exceptions: (if you dispose of the following assets -> they will still be subject
to CGT even though they are personal use items):
o Immoveable property
o Shares
o Aircraft with an empty mass that exceeds 450kgs
o A boat exceeding 10m in length
o Compensation for personal injury or illness
o Donation or bequest of an asset to an approved public benefit organisation
o A tax-free investment under S12T

o Lump sum payments from pension, preservation, provident, and approved
retirement annuity funds
o Winnings from gambling/games/competitions which are authorised by and
conducted under the laws of SA (e.g. the national lottery)
- Why do these exceptions exist? -> these assets usually increase in value over time
(as value grows, CGT increases) -> SARS wants to benefit from the disposal of such
assets
Annual exclusion:
- Para 5 of 8th schedule
- Also see page 610 of textbook
- Natural persons and special trusts qualify for an annual exclusion of R40 000 per
annum against the totalled capital gain or loss
- If the taxpayer dies -> the annual exclusion is R300 000 for the year that he dies
- Totalled capital gain/loss less annual exclusion = aggregate capital gain/loss
o Total CGT – R40 000 = aggregate CGT
o Total capital gain/loss -> para 3 + 4 of 8th schedule
o Annual exclusion -> para 5 of 8th sch
o Aggregate capital gain/loss -> para 6 + 7 of 8th sch
- Annual exclusion cannot be rolled forward
- If the full annual exclusion is not utilised in that year of assessment -> the unused
balance is lost (falls away)
- Example 1:
o
o Total CG less annual excl = aggregate CG
o R50 000 – R40 000 = R10 000
o Why R40 000? -> bc Lerato is a natural person who hasn’t died
- Example 2:
o Why is her capital gain nil (R0)? -> the annual exclusion (40 000) exceeds her
totalled capital gain (30 000)

o When annual exclusion > totalled capital gain -> it cannot create a capital
loss so it just reduces the capital gain to nil
o She has a remaining R10 000 leftover from the annual exclusion -> if she
doesn’t utilize this amount then it falls away (does not get carried over to the
next year)
- Example 3:
o Same explanation as example 2

o Annual exclusion can be applied to BOTH a capital gain AND a capital loss
Primary residence exclusion:
- Remember: even though immoveable property (such as a home) is a personal use
item -> it is an exception to the general rule that personal use items are not
subjected to CGT (para 53)
- If a person sells immoveable property, that disposal will be subject to CGT
- HOWEVER, there is an exclusion that is available to the SA resident taxpayer
here and it’s called the primary residence exclusion
o If the house is sold for more than R2 million -> the first R2 million will be
disregarded for CGT purposes (remaining amount will still be subject to CGT)
(para 45(a) of 8th Sch)
o If the house is sold for less than R2 million -> the full capital gain will be
disregarded (para 45(b) of 8th sch)
o NOTE: First apply s45(b) -> if that doesn’t work/apply -> then apply s45(a)
o These exceptions provide relief for the taxpayer
- What does “residence” include? (para 44)
o Boat
o Caravan
o Mobile home
- What does “primary” mean? (para 44) -> both reqs must be met
o Primary residence means that that residence is used mainly (more than 50%)
for domestic purposes, AND
o It is where the taxpayer ordinarily resides as his main residence

- If a person does not live in his home for a period of 2 years, he will still be
treated/deemed as being ordinarily resident for those 2 years if the one of the
following circumstances apply:
o His old home was in the process of being sold whilst his new home (primary
residence) was in the process of being acquired
o His home was in the process of being built and land was being acquired to
erect the primary residence
o The primary residence had accidently been rendered uninhabitable
o The taxpayer dies
- The exclusion applies per primary residence - and NOT per person holding an
interest in the primary residence
o What does this mean in a practical sense? = Where 2 people are married in
community of property and own a house together -> the R2 million exclusion
must be apportioned between them (each gets R1 million off)
o Apportionment only applies if more than 1 natural person holds an interest in
the same primary residence
o See page 665 of textbook for further detail
- In order for the primary residence exclusion to apply, the following reqs must
be met:
o The exclusion is limited to a land size of 2 hectares
§ (land must not exceed this)
o The exclusion is limited to the period it was occupied as primary residence
§ (this means that person does not have to be living in the house when
they want to dispose of it – the exclusion will still apply as long as they
used the house for their primary residence for a part of the time that
they owned it)
o The exclusion is limited to residential use of the primary residence
§ If any part of the house is used for non-residential purposes (trade
purposes or renting it out etc.) -> that part of the house will be
excluded from the R2 mil exclusion)
o See examples on pages 666-696 of textbook

ROLLOVER OF CAPITAL GAIN OR LOSS
- If capital gain/loss is not triggered in the current year of assessment -> it will be
rolled forward to the next YoA
- This means that CGT can be delayed until a future event or date occurs
- There are 3 main rollover provisions
o Involuntary disposals -> para 65 of 8th sch
o Reinvestment in replacement assets -> para 66 of 8th sch
o Transfer of assets between spouses -> s9HB of ITA
Involuntary disposals:
- When an asset is stolen, destroyed, lost, expropriated + the taxpayer receives
compensation for this + the taxpayer uses the compensation to replace the asset
- This ^ constitutes involuntary disposal
- Remember: disposal triggers a CGT event. The taxpayer won’t want to be taxed for
the disposal of an asset that was stolen from them, or burnt in a fire etc.
- Therefore, in order for a taxpayer to elect to defer to capital gain to the
following year, certain reqs must be met: (para 65)
o An asset must have be disposed of (an asset other than a financial
instrument)
o Disposal must have taken place by way of operation of law, theft, destruction
o Proceeds must accrue to him by way of compensation (e.g. an insurance
pay-out) and the proceeds must be equal to or greater than the base cost of
the asset
o The compensation must be used to acquire a replacement asset (the
replacement asset must also constitute an asset)
o The contract to acquire the replacement asset must be concluded within 12
moths after date of disposal of original asset
o The replacement asset must be used within 3 years of the involuntary
disposal
- When the replacement asset is sold -> then CGT will apply

- Example:
o The destruction of Heidi's holiday home constitutes a disposal event under

para 11.
o However, the time of disposal (regulated by para 13) provides that the date of
disposal is the date on which the insurance company paid out the full
compensation due.
o As a result, the house is treated of having been disposed of on 18th Oct
2019.
o Under para 35, the proceeds of the disposal comprise of the insurance
payment that she received for the destruction of her home
o The result is that Heidi is treated as having disposed of a holiday house in the
year of assessment ending 29 February 2020 at a capital gain of R50 000
(R60 000 proceeds – R550 000 base cost)
o If she's able to satisfy the commissioner that she concluded a contract to
replace the destroyed holiday home within one year of its disposal, and that
she'll bring its replacement into use within three years of that disposal ->
She'll be entitled to disregard the capital gain of R50 000 in the year of the
disposal, and the gain will be held over and bought into account when the
replacement home is disposed of
- See page 677 – 679 of textbook for more detail
Transfer of assets between spouses:
- Look at S9HB of ITA
- Rollover applies as if the transferee steps into the shoes of the transferor
- This means that when spouse 1 transfers an asset to spouse 2, it will be deemed
that transferee acquired the asset on the same day as the transferor at the same
base cost, using the same manner etc. (in other words, CGT will be rolled over until
the transferee disposes of the asset)

- The relief will NOT apply if the transfer is made to a spouse that is a non-resident
UNLESS the asset remains in the CGT net of SA (e.g. if the asset is immoveable
property in SA, an Interest in immoveable property in SA etc.)
o The man gave/transferred his holiday house to his non-resident wife

o However, since the asset is immoveable property (and thus remains in the SA
tax net) -> CGT will be rolled over
o If the asset was a BMW car (which is not immoveable property) -> CGT will
apply for this disposal/transfer ito S9HB
- Further explanation of page 682 of textbook
CALCULATING TAXABLE CAPITAL GAIN
- After you identify the 4 building blocks in the scenario -> you must follow these
steps
- Step 1: CGT formula
o Do this step for each asset
- Step 2: look at rollovers and exclusions and reductions etc. to see if the capital
gain/loss you calculated in step can be reduced
o Do this step for each asset
o Add up all your capital gains and add up all your capital losses

o When you total your capital gains/loss -> capital losses are subtracted from
capital gains
o This will give you the total capital gain/loss
- Step 3: calc the aggregate capital gain/loss (total CG/L – annual exclusion).
Remember the annual exclusion is R40 000 for natural persons
- Step 4: calc the nett capital gain/loss (aggregate CG/L – assessed capital loss
brought forward from prev year)
- Step 5: calc the taxable capital gain/loss
o If your step 4 answer is a capital gain -> multiply this answer by the inclusion
rate (40% for individuals / 80% for companies)
o If your step 4 answer is a capital loss -> then we don’t proceed with step 5.
We just rollover the loss to the following year (losses can’t be taxed)
o Only gains can be included in taxable income
- This ^ is how your calculation will look visually

- Read this table together with the steps written out above to see where you put your
answers

Examples:
Answer to (e): -> calc the aggregate capital gain/loss

- The R40 000 annual exclusion will apply here bc she is a natural person
- Aggregate CG/L = total CG/L – annual exclusion
- Aggregate = 450 000 – 40 000
- Aggregate = R410 000
- This is a capital gain (which means we must apply an inclusion rate in the next step)
Answer to (f): -> calc the taxable capital gain:
- First: we must deduct any capital loss from previous years that have been rolled
forward (the facts say she has a capital loss of R300 000 from a prev year)
- Second: we must calc the nett capital gain
o Nett capital gain = aggregate – assessed loss brought forward
o Nett capital gain = R410 000 – R300 000
o Nett capital gain = R110 000
- Third: we must calc the taxable capital gain
o Gina is a natural person -> so the 40% inclusion rate applies to her
o Taxable CG = nett CG x inclusion rate
o Taxable CG = R110 000 x 40%
o Taxable CG = R44 000

How would the answer have changed if Gina was selling her primary residence
instead of her holiday home?
- The house that she ordinarily resides in would qualify for the primary residence
exclusion
- First: CGT formula
o capital gain on the house she sold is R500 000 (R2 500 000 proceeds –
R2000 000 base cost)
- Second: rollovers and exclusions
o Primary residence exclusion is R2 000 000 (bc she sold her house for more
than R2 million)
o Capital gain less exclusions = total capital gain/loss
o R500 000 – R2000 000 = nil
o Therefore, she made a capital loss
- The shares remained the same -> R50 000 capital loss
- Third: add up the capital losses
o R50 000 + 0 = R50 000 (this is her totalled capital loss)
- Fourth: calc the aggregate capital loss
o Aggregate loss = annual exclusion – totalled capital loss
o Aggregate loss = R40 000 – R50 000
o Aggregate capital loss = R10 000
- Fifth: since our answer in step is a loss -> we roll it over to the following year (along
with other previous years’ capital losses)
o R10 000 + R300 000 = R310 000 (this is her nett capital loss)
o We don’t proceed with calculating taxable capital gain bc there was no gain

LECTURE 3
Keep the following framework in mind when learning all the work:
The following framework must be kept in mind when learning taxable capital gain:
New Adventure Shelf 112 Pty Ltd v C:SARS 7007/2015 (WCHC) & 310/2016 (SCA):
Facts:
- The appellant (the taxpayer) triggered a CGT event with the sale of immovable
property in the 2007 year of assessment.
- The sale was cancelled in one of the subsequent years before the purchase price
was paid in full.
- In terms of the cancellation, the property was returned to the appellant and the
appellant (seller) retained the payments already made by the purchaser/buyer as
damages for the breach of contract.
- However, the appellant wanted to reopen the 2007 year of assessment (the 2007
tax return) and have SARS withdraw that assessment as well as reduce their tax
liability (since they never received the full proceeds for the disposal of the asset) In
other words, they wanted to reduce the proceeds.

- The contract said that the payment arrangement between the buyer and the seller
(appellant/taxpayer) was that payment will be made over certain periods (in other
words, the payment didn’t fall within 1 year of assessment).
- Ito the contract, the full proceeds accrued to the taxpayer/seller in 2007.
Thereafter, the taxpayer had to account for CGT on the full proceeds in 1 year
o In basic terms: the buyer “bought” the house and the proceeds of that sale
accrued to the seller in the 2007 YoA (so he was taxed on this for CGT
purposes). The buyer was supposed to pay the amounts in instalments over
a few years. The buyer didn’t do this and breached the contract a few years
later. Now the seller wants to reopen the 2007 assessment so that the CGT
he paid can be reduced
o Since the contract between the taxpayer and the purchaser didn't have any
suspensive conditions that would delay the taxpayer’s entitlement to the
proceeds -> the taxpayer thus became unconditionally entitled to the full
proceeds and was thus taxed on the full proceeds due to the accrual
principle
Court held:
- The taxpayer/appellant/seller did not qualify for any form of relief
- Any adjustments due to the cancellation had to be made in the same year as the
cancellation
- Para 35(4) of the 8th schedules states “where during any year of assessment a
person has become entitled to any amount which is payable on a date(s) falling after
the last day of that year, that amount must be treated as having accrued to that
person during that year”
- For tax purposes, a matter such as this cannot be dealt with retrospectively
o This means that you can't go and change previously submitted tax returns
based on a subsequent event.
o This is because tax is an annual event + assessments cannot be held open
indefinitely for conditions to be fulfilled, nor can they be reopened to give
effect to subsequent events

Extra note:
- Remember the Caltex Oil (SA) Ltd v SIR (1975 A) case:
o For expenditure to actually incur, it is not necessary that the expenditure has
to actually be paid during that year of assessment
o Events that may have an effect on upon the taxpayer’s liability to normal tax
are relevant only in determining his tax liability in respect of the fiscal year in
which they occur, and cannot be relied upon to redetermine such liability in
respect of a fiscal year in the past
- For the taxpayer, capital loss was triggered upon cancellation of the contract
- This was a problem for the taxpayer bc capital loss can only be set-off against
capital gain (which he doesn’t have)
- How could this situation have been avoided?
o The contract could have been drafted so that the accrual of the proceeds of
a profitable sale is deferred or is staggered. In other words, a suspensive
condition could have been added to delay the accrual of proceeds for the
seller
What is the current position if a contract is cancelled?

- The first step is to establish whether the contract was cancelled in the same year
the contract was entered into or in a subsequent year
- If contract was cancelled in the same year it was entered into:
o Parties will be restored to the same position they were in before the
agreement
o This will be treated as a non-disposal event for CGT purposes -> no CGT will
arise
o Remember that disposal is needed to trigger a CGT event
o This position is governed by para 11(2)(o) of the 8th schedule
- If contract was cancelled in a subsequent year after it was entered into + there
is a full restoration of the parties to their previous positions:
o When a person who disposes of an asset to another person ito an agreement
and reacquired that asset from the other person by reason of the cancellation
or termination of that agreement -> the restoration of both persons to the
position they were in prior to entering into that agreement must be treated as

having acquired that asset for an amount equal to the base cost of the asset
prior to the disposal (para 20(4) of 8th sch)
§ Basic terms: when a sale contract is cancelled, and the parties are
restored to their previous positions -> para20(4) reinstates the base
cost of the asset
o The cancellation restoration will nullify the capital gain or loss event that was
triggered in the year that the contract was entered into (para 3(c) and para
4(c) of 8th sch)
- Remember: in the New Adventure Shelf case, the taxpayer relied on para 35(3)(c)
which says that when there is a cancellation of a contract, but the asset isn’t
reacquired, then there is a reduction of proceeds (this is not a full restoration –
which the taxpayer was in need of at the time)
- So now there has been recent changes to para 35(3) that took effect from 15 Jan
2015
o Para 35(3)(c) now states that the proceeds may not be reduced in terms of
any cancellation or termination of agreement that results in the asset being
reacquired by the person that disposes it
- The above rules (the new rules) apply to contracts that were cancelled after 1 Jan
2016

Flowchart of steps to calculate taxable capital gain:
Examples:
- In this example, there are 3 assets being sold -> have to do the CGT formula for
each one
- First step for each asset -> identify whether all 4 building blocks have been
established
o Helpful tip: know which assets are excluded from CGT so you can spot them
before applying the 4 blocks
- Second step: follow the steps on the flowchart
o We must calc the CGT of each asset (also apply exclusions and rollovers to
each asset)
o Then we add up all the capital gains and loss and total them against each
other

Asset 1 = the house
- The house is an asset as per the para 1 definition (1st building block present)
o Although the house is a personal use item, it is an exception to the rule ito
para 53 and is thus still subject to CGT
- Sale of the house qualifies as a disposal event ito para 11 (2nd building block
present)
- His base cost of the house is R80 000 (3rd building block present)
o Why is it R80 000?
o The house was built in Aug 1999 (this is before 1 Oct 2001). Therefore, the
house is a pre-valuation date asset. This means we need to take 1 of the 3
methods to establish the base cost at valuation for this house
§ In the example, they gave us the market value of the house at
valuation date – which was R80 000 (this is 1 of the methods to
determine base cost)
o Even though he paid repair costs to fix up the house, repair costs are holding
costs which are specifically excluded from CGT ito para 20(2) of the 8th
schedule (so we do not add this amount to the base cost)
- He got an offer of R300 000 on the house and accepted this offer -> this qualifies as
proceeds (4th building block present)
- Since all 4 blocks are present -> we can move onto the CGT formula
o Proceeds – base cost = capital gain/loss
o R300 000 – R80 000 = R220 000
- There are no exclusions or rollovers that apply here based on the facts
o Even though the house is his, the primary residence exclusion does not apply
bc it is not his main place of residence ito para 44
Asset 2 = DJ deck
- Asset = DJ deck (definition of asset in para 1)
o This is not a personal use item. He mainly uses the DJ deck for trade
purposes to get money on the weekend) -> therefore not excluded from CGT
- Disposal = sale of DJ deck (qualifies as disposal ito para 11)
- Base cost = R3250
o Where do we get this amount?

o He bought the DJ deck for R3000 -> then we look to see if there is any
qualifying expenditure that impacts this amount (look at para 20)
o Advertising costs (R250) is a qualifying cost that must be included in the base
cost
o Therefore, base cost = 3000 + 250
o Base cost = R3250
- Proceeds = R1200 (para 35)
o This is how much he sold the DJ deck for
o But he bought is for R3000
o Which means he sold it at a loss
- All 4 building blocks ^ have been met. Now we can proceed to the CGT formula
- R1200 – R3250 = - R2050 (this is a capital loss)
Asset 3 = TV
- TV is a personal use asset -> this is an asset that is excluded from CGT ito para
53(2) of the 8th schedule
- Therefore, we don’t proceed further as his proceeds from this asset will not be
taxed
Next step: add all the capital gains and losses from each asset to get a total capital
gain/loss
- We can proceed with this step bc there were no exclusions or rollovers mentioned
in the scenario. If there were -> we would do that step before this one
- House = capital gain of R220 000
- DJ deck = capital loss of R2050
- TV = excluded
- Total capital gain/loss = capital gain – capital loss
o Total capital gain = 220 000 – 2050
o Total capital gain = R217 950
Next step: apply the annual exclusion to calculate the aggregate capital gain/loss
- He is a natural person so he gets an annual exclusion of R40 000
- Aggregate capital gain/loss = totalled capital gain – annual exclusion
- Aggregate = R217 950 – R40 000
- Aggregate capital gain = R177 950
Next step: calculate the nett capital gain
- Net capital gain/loss = assessed capital loss brough forward from previous years –
aggregate capital gain
- The facts do not tell us that he has any previous assessed capital loss (therefore, we
can assume it is nil)
- Net capital gain = R177 950
Next step: calculate the taxable capital gain
- He is a natural person so the inclusion rate for him is 40% (if he was a company ->
his inclusion rate would be 80%)
- Taxable capital gain = net capital gain x inclusion rate
- Taxable capital gain = R177 950 x 40%
- Taxable capital gain = R71 180
- This amount will be included in his taxable income (the big framework)
- (if it was a capital loss -> it would be excluded from his taxable income and would
be rolled forward)

THEME 8 – THE TAXPAYER

[chap 18, 25, 27 of textbook]
There are 4 types of taxpayers that become problematic in practice:
- Partnerships
- Insolvent estates
- Deceased estates
- Minors
PARTNERSHIPS
[Chap 18 of textbook]
- Partnership = legal relationship between 2 or more persons who carry on a business
and where each partner contributes either money or labour with the objective of
making a profit and sharing it between them
- A partnership is NOT a separate legal entity from its partners (partnership is
not a taxpayer for normal tax purposes)
o -> therefore, the partnership itself is not liable for normal income tax
o -> partnership cannot own assets
o -> partnership cannot incur liabilities
o The only thing that the partnership itself is liable for is VAT on taxable
supplies made by the partnership
- Every individual partner is liable for the normal taxable income of the
partnership in relation to their partnership share (s24H)
o Where the partnership receives income -> it is deemed to be received by
each member of the partnership
o Deductions and allowances are allocated to the individual partners
- Example:
o Partner A has an 80% stake in the business and partner B has 20%. This
means that partner A must include 80% of the partnership profits in his gross
income, and partner B will include 20% in his gross income
- 3 types of partnerships:
o General partnership -> all partners manage the business and are personally
liable for its debts

o Limited partnership (partnership en commandite) -> only certain partners
are involved in managing the business + only liable for the partnership debt
to a limited extent
§ A limited partner’s liability towards a creditor of the partnership is
limited to the amount that the limited partner contributed to the
partnership
§ Deductions or allowances that a limited partner may claim may not
exceed (in aggregate) the sum of:
• the amount that the limited partner may be held liable for to
any creditor of the partnership
• Any income received by or accrued to the limited partner from
the partnership business
o Silent partnership -> there is a silent partner who shares in the profits/loss
of the business, but is not involved in its management
- When calculating the taxable income of the partnership -> first determine the
taxable income of the partnership as if it were a separate legal entity -> then
apportion this amount among the partners according to their agreed-upon profit-
sharing ratio
o Commissioner must have regard to the terms of the partnership agreement
o If there is an assessed loss -> must also be apportioned among the partners
according to their shares/rights
- Each partner is deemed to be carrying on the trade + each partner is entitled to set-
off his share of the assessed loss against any income derived during the same year
from sources outside the partnership
- Partners are jointly and severally liable for the tax liability of the partnership
o A partnership creditor may recover an amount due to him jointly from all the
partners or from any of the individual partners
o Partner A holds an 80% share in the business and partner B holds 20%. If
partner A doesn’t pay his part of the tax, partner B will be liable for partner
A’s tax liability toward the partnership to make good the loss -> the assessed
loss in B’s hand will be limited to 20% (why? Bc deductions and allowances
are allocated to partners in the same ratio as the shared profits and losses)

o The amount B contributed to make good the loss -> expense of a capital
nature -> B can claim this amount against A
- Income is deemed to accrue to or be received by a partner ON THE SAME DAY
that the amount accrues to or is received by the partnership
o The date of accrual is important. The date of distribution of profits among the
partners is NOT important. Even if profits are only distributed once a year as
per a partnership agreement, the amount will still accrued to/be received by
the partners on the same day as the partnership
o Accrual is an unconditional entitlement to an amount
o So when the partnership becomes unconditionally entitled to an amount, that
amount accrues to the partnership, but it also simultaneously accrues to
every partner in that partnership
o Even if the partner didn’t receive income from the partnership
- There is NO employment relationship between a partner and a partnership -> the

relationship between partners is one of agency (COT v Newfield)
o This means that a salary paid to a partner is NOT subject to employee’s tax
- The only time it is deemed for there to be an employment relationship is when:
o Partner or partnership claims a deduction for contributions made to a
pension fund, provident fund, or retirement annuity fund
o Contributions made by a partnership for the benefit of a partner = taxable
fringe benefit
o Partner must include fringe benefits in his gross income -> subject to normal
tax
o Although the value of a fringe benefit will be included in a partner’s gross
income, it will still not be subject to employees’ tax
- Partners are connected persons
- Individual partners must bear the consequences of any transactions that gives
rise to capital gains tax (CGT)
o CGT = tax paid on the proceeds you get from realizing a capital (non-trading
stock) asset
o The disposal of an interest in a partnership asset qualifies as a disposal of an
asset for CGT purposes
- What happens when a partner leaves the partnership?
o Common law position = existing partnership is dissolved, and a new
partnership is formed -> too strict for SARS
o SARS regards each partner as having a fractional interest in the partnership
assets. When a partner withdraws from the partnership -> there will be a
disposal iro his interest. Capital loss/gain must be determined for each
partnership asset -> remaining partners will have an increase in their base
cost. The proceeds received by the leaving partner are deemed the market
value of his partnership interest
- When a partnership asset (such as a partner’s interest) is disposed of -> its
proceeds are deemed to accrue to each partner at the time of disposal, in
proportion to each partner’s interest -> proceeds must be apportioned among the
partners according to: (in order)
o The partnership agreement
o Partnership law
o Profit-sharing ratio
Dissolution/termination of partnership:
- Partnerships may be dissolved in several ways:
o Ceasing to trade
o Death or retirement of a partner
o Admission of new partner
- If any of these events occur -> partnership agreement is cancelled (old partnership
ceases to exist)

- If partnership continues to trade after one of these events occur -> new agreement
is entered into (new partnership formed)
- Where a former partner receives a lump sum amount from the remaining partners
for his share -> amount should be included in his gross income -> bc the amount
has already accrued to him at the same time it accrued to the partnership -> he is
liable for tax on this amount
o Difference between the amount that accrued to him and the amount that he
agrees to receive -> capital loss in his hands
o If the agreement results in him receiving more than the amount that accrued
to him -> the excess amount will be a capital gain in his hands
- If the outgoing partner receives an amount from the other partners as
consideration for his share of the partnership assets -> amount will be capital in
his hands even if the amount is paid in instalments -> subject to CGT
- If the outgoing partner receives an amount by way of annuity -> amount will be
included in the outgoing partner’s gross income
INSOLVENT ESTATES
- When a natural person becomes insolvent, there are 3 taxpayers that have to
be dealt with:
o Taxpayer 1 = insolvent natural person before sequestration (until the day
before sequestration)
o Taxpayer 2 = insolvent estate (on the day the sequestration order is granted)
o Taxpayer 3 = insolvent natural person after the sequestration order is granted
(the day on which the seq order is granted and onwards)
- Taxpayer 3 does NOT refer to the rehabilitated insolvent person
- Taxpayer 3 is taxed on income that accrues to or is received by him in his personal
capacity
o In other words, if taxpayer 3 enters employment or carries on the business
after his sequestration, taxpayer 3 is liable for tax on that income in his own
right as taxpayer 3 (even if the income is paid to the trustee)
- Voluntary surrender: date of sequestration = day the court accepts surrender of the
estate

- Compulsory sequestration: date of seq = day the court grants a provisional
sequestration order
- When an insolvent partnership is sequestrated -> the individual partners must be
sequestrated too. On the other hand, when an insolvent partner is sequestrated ->
the partnership is dissolved + sequestrated partner’s share is withdrawn + new
partnership is formed (if the other partners carry on with the business)
- What happens when the sequestration order is set aside? (S98 TAA)
o The tax assessments that were issued for taxpayer 1 and taxpayer 2 must be
set aside as if they never existed
o Taxpayer 3 will carry on
o Any assessed losses suffered by taxpayer 1 and 2 after the sequestration
order has been set aside may be carried over to taxpayer 3
o The amount carried over to taxpayer 3 will be reduced by the amount that
was allowed to be set-off against the income of taxpayer 2 from the carrying
on of the trade
o Any assessments raised in the hands of taxpayer 3 will have to be set aside
so that the natural person can benefit from the assessed losses to be carried
over to the estate
- Note: this ^ is not the case when it comes to the rehabilitation of the taxpayer. In
the case of rehabilitation -> all 3 taxpayers still exist
- What happens if the sequestration order is NOT set aside?
o Taxpayer 1’s assets pass over to taxpayer 2 -> but this is NOT deemed to be
‘disposal’ of the assets. Why? Bc taxpayer 1 and taxpayer 2 are deemed to
be the same person for purposes of allowances, recoupments, and capital
gains/losses. The assets are only realized when they are sold by the trustee
o Primary and secondary rebates available to taxpayer 1 and 3 will be
apportioned proportionately -> days included in assessment divided by 365
or 366
o An assessed loss of taxpayer 1 can be set-off against the income of taxpayer
2 from the carrying on of the trade
o Any tax payable by taxpayer 1 on income earned prior to the date of
sequestration, even if it has become payable only after that date, is a debt
due to SARS by taxpayer 2

- Taxpayer 2 is registered as a separate tax entity from taxpayer 1. The ONLY
time that taxpayer 1 and 2 are deemed to be the same person for tax purposes
is when the following needs to be determined:
o The amount of any allowance, deduction, or set-off to which taxpayer 2 may
be entitled (e.g. assessed losses and bad debts can be carried forward from
taxpayer 1 to taxpayer 2)
o Any amount which is recovered or recouped -> must be included in the
income of taxpayer 2
o Any taxable capital gain or assessed capital loss of taxpayer 2
o The annual and lifetime contributions iro tax-free investments -> any amount
received by or accrued to taxpayer 2 iro a tax-free investment held by
taxpayer 1 on the date of seq will be exempt from normal tax
- For all other purposes beside these one ^ taxpayer 1 and 2 remain separate entities
- Taxpayer is not entitled to local interest exemption, but it is entitled to the local
dividend exemption
- Taxpayer 2 pays normal tax at the rates applicable to natural persons. However,
taxpayer 2 does not qualify for any of the personal rebates
- Trustee of insolvent estate = representative taxpayer ito of the income received
by/accrued to taxpayer 2 -> trustee represents taxpayer 2 in all taxation matters
DECEASED ESTATES
- When a natural person dies, 3 taxpayers must be dealt with:
o Taxpayer 1 = The deceased person
o Taxpayer 2 = The deceased estate
o Taxpayer 3 = The beneficiaries (heirs or legatees)
- A deceased person ceases to be a taxpayer on the date of his death. A new
taxpayer is created (the deceased estate) -> separate legal entities for tax purposes
- Normal tax consequences wrt income received by /accrued to him still arise
before and after his death
o This income can be taxed either in the hands of the deceased, the hands
of the deceased estate, or in the hands of the beneficiaries
§ E.g.) if deceased person owned a farm, the income from the farm until
the date of death -> taxable in the hands of the deceased
§ E.g.) income generated by the farm after death but before transfer to
beneficiaries or being sold to a 3rd party -> taxable in the hands of the
deceased estate
§ E.g.) income generated by the farm after it has been transferred or
sold -> taxable in the hands of the beneficiaries or 3rd party
o Final normal tax payable by the deceased will be paid out of the deceased
estate
o The deceased estate will pay estate duty on the value of the estate
- If capital gains tax (CGT) are realized before his death -> taxed in the hands of the
deceased
- If CGT are realized on the date of death -> taxed in the hands of the deceased
- If CGT are realized after death -> taxed in the hands of the deceased estate
- Executor = representative taxpayer -> represents the deceased person in all
taxation matters
- Deceased person’s period of assessment = first day of current year of assessment
until the date of his death
- The beneficiaries of the deceased are not taxed on the inheritance itself (bc it is
capital in nature). However, any income that is derived from the inheritance/legacy
after the deceased dies will be taxable in the hands of the beneficiaries
o If the inheritance / legacy consists of assets from the deceased estate ->
receipt of capital nature in the hands of the beneficiaries -> CGT
consequences if the assets are disposed of later
o Income produced by inheritance/legacy -> revenue in nature in hands of the
beneficiaries
- When a person dies -> his assets are deemed to be disposed by him on the
date of his death at market value
o This deemed disposal is for CGT purposes
o Consequence: capital allowances that have been claimed may be included in
the deceased’s gross income
o This rule applies to beneficiaries (other than a spouse) + a non-resident
surviving spouse
o This market value rule does not apply to the following: (these assets are
instead deemed to be disposed of at their base cost)
§ Assets awarded to a SA resident surviving spouse
§ Long-term insurance policy
§ Interest of the deceased in a retirement fund
- The deceased person will be entitled to the rebates on a pro rata share
o The age the deceased would have been on 28/29 February had he still lived -
> used to determine which of the personal rebates apply
o E.g.) if a natural person died on 1 April 2020 -> YoA started on 1 March 2020.
He won’t be entitled to the rebates for the entire remaining year until 28/29
Feb 2021. Instead, he will be entitled to the rebates from the first day of the
YoA (1 Mar 2020) until the day of his death (1 April 2020) -> so in this case he
will be entitled to 1 month worth of rebates that apply to natural persons
o If deceased would have been 65 years or older at the end of the first YoA
during which he died -> he will qualify for the secondary rebates which will
be proportionally reduced for the period he was alive
o 75 years or older -> tertiary rebate (proportionally reduced)

- Although the deceased estate (taxpayer 2) is treated as a natural person for normal
tax purposes, the deceased estate is NOT entitled to the personal rebates that
apply to natural persons
- If the deceased person was a resident at the time of his death, the deceased estate
is also deemed to be a resident
o If deceased was a non-resident -> certain assets will be subject to CGT
consequences
- Any amount received by or accrued to the deceased estate iro a tax-free investment
-> exempted from normal tax -> will be deemed a contribution and be subject to
annual and lifetime contribution limits
- Expenditure incurred relating to administration charges + commission payable to
the executor -> deductible (bc it is incurred in the production of income in the
deceased estate)
- Expenditure incurred relating to executor fees (for selling the assets) -> not
deductible (bc they are not related to the production of income of the estate)
- Assessed loss of taxpayer 1 at the time of death cannot be carried over to taxpayer
2 -> must just fall away
o An allowance granted to one taxpayer may not be included in the income of
the other taxpayer in a subsequent year -> bc the deceased person and
deceased estate are 2 separate taxpayers
- When assets are sold to 3rd parties (rather than being transferred to the
beneficiaries) -> capital gains/losses could be realized by the deceased estate
o When assets are sold to 3rd parties -> proceeds on disposal will be the selling
price -> received by executor of deceased estate
- If deceased person was married in community of property:
o -> executor administers the assets of the joint estate
o Income accruing from half of the joint assets up until the date of death is
taxed in the hands of the deceased
o The other half is taxed in the hands of the surviving spouse

MINORS
- Minors = persons under the age of 18
- Minors can become majors (even if they are not 18) when they become
emancipated or get married
- If a minor gets divorced before they are 18 -> they still retain their majority status
- Minors are taxed in their own right for income tax purposes. However, in most
cases the parent or guardian will submit a tax return on behalf of the minor -> there
are problems to this so ITA provides for two anti-avoidance rules
- First problem: parent must pay alimony/maintenance to the child. if the parent didn’t
want to be taxed on this, they would donate the amount to the child to that the child
can earn interest on the proceeds of that donation. The income will fall into the
hands of the child and since it would be less than the annual threshold, it would not
be taxed
- To fix this ^ problem, S7(3) ITA says that when a parent makes a donation to a child
(a minor child or a stepchild) and income accrues to the child as a result of that
donation -> then the income is deemed to be the income of the parent
- After this section was promulgated, a new problem was created as the parents
invented a new scheme to avoid tax
- Second problem: parents that siblings of each other would agree that they will
donate the amounts to each other’s children. So parent 1 (with child 1) would
donate R1000 to child 2 (her niece), whereas parent 2 (the sister of parent 1) would
donate R1000 to child 2 (her niece). This is called a cross-donation
- To fix this ^ problem, S7(4) ITA says that any income that accrues to a minor child
or stepchild as a result of a cross donation between parents will then be included in
the hands of the parent of that child and not in the hands of the cross donator
o Aka the amount will be included in the parent’s gross income
- It is NOT a requirement that the cross donation must be made between connected
parents who are siblings of each other. Cross donations can also be made between
friends and business partners

THEME 9 – TAX ADMINISTRATION

Important links for this section of work:
Link to Tax Administration Act 28 of 2011

https://www.mylexisnexis.co.za/Library/Document.ashx?domainID=bkkrc&format=pdf&do
cumentVersion=null&displayVersion=null
Link to the Tax Administration Regulations:

https://www.mylexisnexis.co.za/Library/Document.ashx?domainID=fbbpf&format=pdf&do
cumentVersion=null&displayVersion=null
LECTURE 1 PART 1
Introduction to the TAA:
- Chap 2 of the consti says that everyone has the right to administrative action that
is lawful, reasonable, and procedurally fair
- S33(2) of the consti says that everyone whose rights have been adversely affected
by administrative action is entitled to be given written reasons
- In order to give effect to these consti rights ^ the Promotion of Administrative
Justice Act (PAJA) was enacted
- In their capacity as administrators of tax legislation, SARS are subject to the
provisions of PAJA
- This means that the administrative process followed by SARS and any decision
made by SARS that constitutes administrative action must be lawful, reasonable,
and procedurally fair
- This suggests that the taxpayer not only has relief ito the Tax Administration Act
28 of 2011 (hereafter ‘TAA’), but the taxpayer may also take a decision of SARS
upon review to the High Court (HC) ito PAJA
o E.g.) SARS cannot knock on your door and demand to look through every
document you have that they can use against you for the collection of extra
taxes. The TAA and PAJA protect the taxpayer from the abuse of power of
SARS
- The TAA 28 of 2011 came into effect from 1 October 2012
- Before this date, each tax act was governed by its own administrative provisions
- The TAA index shows that the TAA is divided into 20 chapters -> each chapter
deals with a specific area/issue
- Who determines SA tax legislation? -> the national treasury
- The national treasury publishes the relevant tax laws and bills and is then
responsible for their enactment
- On the other hand, SARS idoes NOT have the power to enact legislation (legi).
SARS just enforces the tax legi
- Both SARS and the national treasury report to the Minister of Finance
- The TAA applies to the Income Tax Act (ITA), VAT Act, Transfer Duty Act, Estate
Duty Act, and Securities Transfer Duty Act
o These are the tax Acts ^
- However, the TAA does NOT apply to the Customs and Excise Act
What is the purpose of the TAA?
- Purpose of TAA laid out in s2 of TAA

- Purpose of TAA = ensure the effective and efficient collection of tax by:
o Aligning the administration of tax Acts to the extent practically possible,
o Prescribing rights and obligations of taxpayers and other persons to whom
this Act applies,
o Prescribing the powers and duties of people engaged in the Administration
of Tax Act (e.g. SARS)
o Generally giving effect to the objects and purposes of administration
What is a “practice generally prevailing”?
- Answer is in s5 of TAA
- Practice generally prevailing = a practice set out in official publication regarding the
application or interpretation of a tax Act
o This includes: interpretation notes published by SARS, binding general
rulings, practice notes, or public notices issued by senior SARS officials or
Commissioners

- A practice generally prevailing is NOT legally binding because it's not
legislation
o Does not carry legal weight
o Not binding on the taxpayer or on the courts
o It is merely an interpretation of legislation published by SARS, which can be
overturned in court, or it can be withdrawn as legislation changes
- Marshall and others versus the Commissioner for SARS [2018]
o The Court cited the following: Why should a unilateral practice of one part of
the executive arm of government play a role in the determining of a
reasonable meaning to be given to a statutory provision? It might be justified
where the practice is evidence of an impartial application of a custom
recognized by all concerned, but not where the practice is unilaterally
established by one of the litigating parties. In those circumstances, it is
difficult to see what the advantage evidence of the unilateral practice will
have for the objective and the independent interpretation by the courts of the
meaning of legislation in accordance with constitutionality compliant
precepts, it is best avoided.
o In basic terms: the court is saying that the interpretation given to a rule by
one party is not necessarily binding on the other party. If both parties agree
on the interpretation of the rule, the court MAY consider it. A unilateral
interpretation must be avoided
o Where there are disputes on the interpretation of law -> the court should not
consider the interpretation notes bc it is just SARS interpretation of how the
legi should be applied (not legally binding even if both parties agree on it)
o In other words, where the practice of SARS is evidenced by an interpretation
note which is accepted by both SARS and the taxpayer –> the court may
consider the practice generally prevailing, but it has to be tested against what
the legislation says
- The SARS website contains all of its interpretation notes
- Although the interpretation notes are not legally binding, taxpayers can still use
them as guidance

- SARS comprehensive guide to capital gains tax (CGT):
o Just a guide
o Not binding
o Does not qualify as practice generally prevailing
o Taxpayers are advised to consult these publications when they have to
interpret certain schedules etc.
An important distinction:
- There is a difference between the Tax Administration Act 28 of 2011 and the Tax
Administration Regulations (there are various rules ito the TA regulations)
- Aka there is a difference between ‘the Act’ and ‘the rules’ -> they interact with one
another
- The rules govern the following:
o The procedure to be followed when lodging an objection and appeal against
an assessment or decision,
o The procedure for alternative dispute resolution,
o The conduct and hearing of appeals,
o Application on notice to a tax court and transitional arrangements
- One of the main aims of the regulations / rules is to set out the practical procedure
for dispute resolution
o Look at rule 6 and 7
- When we refer to the Act -> we talk about ‘sections’

- When we refer to the regulations -> we talk about ‘rules’
“Business day”:
- With all dispute processes, there are certain timelines between each action + a
prescribed number of days for the other party to respond. The majority of the TAA
requires action to be taken within a number of business days.
- Definition of business days in s1 of TAA -> business day is NOT a Saturday,
Sunday, or public holiday, and the period between 16 Dec and 15 Jan (both days =
inclusive)
- However, sometimes the TAA does refer to calendar days (which includes
weekends etc.)
Non-compliance and offenses ito the TAA:

- This info falls under chapter 17 of the TAA
- We can distinguish between the following:
o Criminal offences for non-compliance (s234)
o Tax evasion & obtaining annual refunds via fraud/theft (s235)
o Criminal offence for filing a return without authority (s237)
- “Tax offense” = an offense ito the tax Act or any other offenses involving fraud on
SARS relating to the administration of a tax Act or theft of moneys due or paid to
SARS for the benefit of the National Revenue Fund
- “serious tax offense” = a tax offense for which a person may be liable on conviction
to imprisonment (exceeding 2 years) without the option of a fine or a fine exceeding
the equivalent amount in the Adjustment for Fines Act
Criminal offenses relating to non-compliance with tax Acts (s234 TAA):
- This section was amended with effect from Jan 2021
- These offenses can be divided into:
o Conduct that is willfully committed
o Conduct that can be negligently or willfully committed (these are still
criminally prosecuted even if they are negligent)
- A negligent act can even include a small administrative oversight
- Learn the types of conduct listed in the Act below

- Summary of this section:

o Anyone who commits one or more of the following acts listed above ^ is
guilty of an offense and is liable upon conviction to a fine or imprisonment of
a period not exceeding 2 years

Criminal offenses relating to evasion of tax and obtaining undue refunds by fraud or
theft (s235 TAA):
- Anyone guilty of committing one or more of the acts listed in s235 -> fine or
imprisonment for not more than 5 years
- If a tax practitioner assists their client to evade tax -> very serious implications
Criminal offenses relating to filing return without authority (s237 TAA):
- Anyone guilty of committing one or more of the acts mentioned in s237 will receive
a fine or imprisonment for a period not exceeding 2 years
Persons involved in the tax administration process:

(1) The taxpayer
- Definition of taxpayer is found in s1 and s151 of TAA -> a taxpayer includes:
o A person who is or may be chargeable to tax or with a tax offense
o A withholding agent
o A responsible third party
o A person who is the subject of a request to provide assistance under an
international tax agreement
- The concept of the taxpayer is also dealt with in sections 151 – 162 of the TAA

(2) SARS / commissioner of SARS / SARS official
- There are 3 tiers ^
- Definition in sections 1 & 6 -12 TAA
- Sections 6 – 10 TAA -> powers of SARS
- The TAA contains measures that prevent potential abuse of power by SARS officials
(3) Tax Ombud

- Sections 14 – 21 of TAA
- The tax ombud was established to provide taxpayers accessible and affordable
remedies
- The tax ombud can assist the taxpayer with dispute matters relating to procedural
or administrative service which arises from the application of the TAA by SARS.
- However, the taxpayer can only approach the tax ombud for help once the taxpayer
has exhausted all other available complaint resolution mechanisms in SARS (s18(4)
TAA)
- The tax ombud operates independently from SARS and is appointed by the Minister
of Finance
o The current tax ombud is judge Bernard Ngope
o The tax ombud officer is somewhere in Menlyn
(4) Registered tax practitioners

- Sections 240 – 243 TAA
- Every person that provides advice to another person in relation to a tax act or
assists in completing documents to be submitted to SARS must register as a tax
practitioner with a recognized controlling body
o So the tax practitioner is registered with both the controlling body (there are
various ones) and with SARS
- Ito s240 TAA, certain persons don’t have to register as tax practitioners
o E.g.) if you are a candidate attorney and you provide advice or assist in
completing a document under the supervision of a tax practitioner (such as
your director -> who is registered as a tax practitioner and who assigned you
with the job and approves your assignment)
- Remember: ito s234, when someone is negligent in registering as a tax practitioner,
they can, if convicted, be subjected to a fine or even imprisonment
Tax returns:
- S22 TAA -> a person must apply to register for tax within 21 days of becoming
obliged to register
- A return can be submitted to SARS either by way of:
o Self-assessment (VAT 201 form) OR
o SARS assessment (ITR 12 form for natural persons + ITR 14 form for
companies)
- An assessment is basically a determination of tax liability with a tax refund
- Example of self-assessment:
o A company registered for VAT needs to file their VAT returns by the 25th of
the next month following the VAT period -> the taxpayer submits the VAT
return in which they set out their various VAT outputs and inputs they are
claiming -> the taxpayer will either be in a VAT refund position (get refund
from SARS) or a VAT payable position
§ VAT output: VAT levied on the sales that they declare
§ VAT input: VAT levied on payments they have made
§ VAT refund position: input > output
§ VAT payable position: input < output
o This is a self-assessment bc the taxpayer fills in the VAT forms -> but SARS
can then still ask for supporting documents (e.g. invoices to support your
input VAT claims etc.)
o In other words, the taxpayer will self-determine their tax liability with a tax
refund
- Example of SARS assessment:
o The taxpayer (individual or company) will submit all the relevant info to SARS
in the tax return and then SARS will issue the assessment
- The tax return must be submitted in the prescribed form and time (s25 & 27 TAA)
- Retention of records ito s29 – s32 TAA:
o The taxpayer must retain documentation for 5 years from submitting the
return
o This ^ is the general rule, but there are some exceptions where the records
must be kept for longer

§ E.g.) where the records are relevant for an audit or an investigation
that the taxpayer is aware of -> the records must be maintained until
the audit is complete
Preparation of a tax return:

- When preparing a return, a taxpayer must take the position of the interpretation &
application of the relevant tax legislation -> this is not easy and the taxpayer may
feel uncertain about interpretations of the Act
- To confirm/clarify a taxpayer’s interpretation, for purposes of completing his
tax return, the taxpayer can:
o Obtain an opinion from an independent registered tax practitioner (s223
TAA),
o Apply for an Advanced Ruling (s75-90 TAA),
o Apply for a non-binding private opinion from SARS (s88-90 TAA)
Burden of proof (s102 TAA):

- When proving the taxpayer’s position (VAT refund or VAT payable), the burden of
proof rests on the taxpayer
- The taxpayer must discharge this burden of proof on a balance of probabilities
- Evidence the taxpayer can use to discharge this proof include the documents he
obtains and retains
o This is why it is important to keep accurate and detailed records
- S102(1) lists the things that the taxpayer has to prove

- However, s102(2) indicates a shift in the burden of proof (shift from taxpayer to
SARS)

- Ito s102(2), the burden is on SARS to prove:
o That the estimate (ito s95) is reasonable (this applies when it comes to an
estimate assessment) or
o The facts on which SARS based the imposition of an understatement penalty
(ito chap 16) (this applies when SARS issues a penalty)
Example:
- If SARS challenges the taxpayer’s position (and levies a penalty against him), the
burden of proof is upon the taxpayer to prove that one of his expenses is
deductible. To do this, the taxpayer needs documented proof that he applied his
mind and can substantiate why he is claiming that deduction -> 3 options available
to the taxpayer
- First option: the taxpayer can get an opinion from an independent registered tax
practitioner -> look at s223(3) TAA
o Note: ito s223(3)(b)(i) -> you can't file a return and then get an opinion
afterward to support what you did. The opinion has to be obtained before
you file the return
o In other words, if the tax practitioner confirms that they are of the opinion
that if the matter went to court, the taxpayer had interpreted the legislation
correctly -> then SARS must remit the penalty that is imposed for substantial
understatement (if they are satisfied with the tax practitioner’s opinion)
o If SARS is unsatisfied with the tax practitioner’s opinion (maybe bc they
believe that the tax practitioner gave reckless or grossly negligent advice in

contradiction to the law), they may report the tax practitioner to a recognized
control body (s241 TAA)
o If you have valid reasoning and documentation to support why you took a
decision, why you thought something was deductible, why something is
exempt etc. then you can use that document as proof if the matter ever goes
to court – even if the document does not relate to this substantial
understatement penalty
o When there are matters of dispute on interpretation:
§ It is very important to have kept adequate records
§ It is better to get a tax practitioner to give you his opinion on the
interpretation -> then you can say that you based your interpretation
on the opinion you got
- Second option: the taxpayer may apply to SARS for an advanced ruling (taxpayer
must pay for this)
o An advanced ruling can be 3 things:
§ Binding general ruling
§ Binding private ruling
• Most common
• this is a ruling that is issued regarding the application of a tax
Act to one or more parties in a proposed transaction.
§ Binding class ruling
o The binding effect of these advanced rulings are governed ito s82 and 83 of
the TAA
o Effect: SARS must apply and interpret the tax Act to that person in
accordance with the ruling
§ So the ruling is binding on SARS
§ It is also binding on the party that applied for it (it is not binding on
other people -> so you cannot randomly apply the ruling to your client
if they are not the party who applied for the ruling)
o The ruling can be published for general information if the applying party
consents to it
§ If published, the identities of the parties are kept confidential, but the
facts of the transaction is there for general knowledge
o An advanced ruling can also be withdrawn or modified by SARS at any time
§ SARS must notify applicant of the proposed withdrawal or
modification and give the taxpayer reasonable opportunity to make
representations before the ruling is withdrawn or modified
- Third option: taxpayer can apply for a non-binding private opinion
o This is an informal guidance issued by SARS that is not binding on SARS or
the taxpayer. It can also not be cited in court proceedings
Information gathering:
- S40 TAA -> SARS may select a person for inspection, verification, audit on any
basis, including a random risk assessment basis
- Even after you have submitted your return and have provided SARS with the
relevant info, chap 5 TAA allows SARS to gather info to fulfil the duties in
administering the Tax Act
o E.g.) to ensure that the right amount of tax has been paid etc.
o A taxpayer must be very aware of his rights in this regard
o SARS cannot operate outside the powers given to them by the TAA
o Look at s40-s66 of TAA
o SARS cannot enter domestic premises unless it is used for trade purposes –
without consent of the occupant
- There are 6 information gathering methods at SARS’ disposal:
o Inspection (s45)
o Request for relevant material (s46)
o Production of relevant material in person (s47)
o Field audit or criminal investigation (s42 – 44, 48 & 49)
o Inquiries (s51-58)
o Search and seizure (s59-66)
Rappa (Pty) Ltd v CSARS (20/18875) [2020]
- This case deals with audits
- SARS notified Rappa (the taxpayer that is being audited) that they had stopped the
refund of Rappa’s VAT refunds (of approx. R1.6 billion) while of the audit was taking
place (Feb to June)

- According to SARS, the basis of the audit = there was reason to believe that Rappa
was directly or indirectly involved with some unlawful activities
- Rappa approached the court on an urgent basis (urgent basis = they would not be
able to function as a business without the refunds) for an interim order that SARS
make payment of the refund
- The audit was instituted in March and Rappa said it was taking too long. Rappa
asked the court for an order that SARS complete the audit within 15 days of the
court order being granted
- In other words, Rappa asked the court for 2 things:
o An order that SARS must complete the audit quicker
o An order that SARS must not withhold any further refunds iro the period
that’s not part of the March audit
- S190 TAA -> SARS must pay a refund if a person is entitled to it but need not pay a
refund if that person is under audit, until the audit has been finalized. However, if the
person is under audit but provides acceptable security, then SARS must pay the
refund
- Rappa was not able to offer security for the full amount of the refund + SARS
refused to accept the security for any less -> said they need security for the whole
amount or else they're not paying the refund. Court said this was an unreasonable
position for SARS to take and is not supported by the plain language of the legi
- Court said:
o Rappa is entitled to a refund for as much as it is possible to provide security
for
o Considering the scheme of the TAA as a whole, where SARS has withheld a
refund, particularly where the refund is integral to the business model of the
taxpayer, SARS cannot be allowed to take an indefinite time to complete an
audit. That would mean that the TAA is inherently unfair towards the
taxpayer. The audit has to be completed within a reasonable time taking into
account the circumstances.
- Outcome of case:
o SARS immediately had to pay Rappa the portion of refunds that they could
provide security for
o SARS was directed to complete the audit within a set period of time
o SARS had to pay the cost of the application
LECTURE 1 PART 2
ASSESSMENTS
- Assessment = determination of the amount of tax liability or tax refund
- There are 4 types of assessments:
o Original assessments (S91 TAA)
o Additional assessments (S92 TAA)
o Reduced assessments (S93 TAA)
o Jeopardy assessments (S94 TAA)
Original assessments:
- S91 TAA
- This is the first assessment made by SARS
- This assessment is issued after the taxpayer has submitted his tax return (self-
assessment)
Additional assessment:
- S92 TAA
- After revising an original assessment, if SARS is satisfied that the original
assessment does not reflect the correct application of the tax Act to the prejudice of
SARS or the fiscus -> they can issue an additional assessment for the same year
- The additional assessment will only be issued after SARS has obtained further
information via their information gathering processes (see s40 of TAA)
- SARS does not have unfettered discretion. They can only issue an additional
assessment if there are reasonable grounds to do so (Wingate-Pearse case)
- SARS may not raise an additional assessment after a certain period of time has
passed after the original assessment was issued
o This is called the prescription period (will be discussed more later)
o The date of the original assessment is important in relation to the prescription
of the assessment
o This is to prevent prejudice to the taxpayer

Reduced assessment:
- S93 TAA
- If there was an error made by SARS in the assessment or in the tax returns
submitted by the taxpayer -> SARS must reduce an assessment
- This can be done even if the prescription periods have expired as it would not
prejudice the taxpayer
- There were new changes to S93 -> SARS may reduce an assessment if the
taxpayer iro whom the assessment was issued requests SARS to reduce an
assessment under S95(6)
o This applies in cases of estimated assessments (which will be reduced) once
the taxpayer has submitted the requested material
- More detail on page 1206 of textbook
Jeopardy assessment:
- S94 TA
- This assessment is issued to secure early collection of taxes
- These assessments are usually issued where the taxpayer is deliberately wasting an
asset from which a tax liability could be paid OR where the taxpayer is fleeing the
country (aka he is a flight risk)
- Burden is on SARS to prove that they had reasonable grounds to issue such an
assessment
Estimate assessments:
- S95 TAA
- Where a taxpayer fails to submit a return, files an inadequate return, or does not
submit or respond to a request for relevant material under S46 after delivery of more
than one request for such materials -> SARS may make an original, additional,
jeopardy, or reduced assessment based on an estimate
- In other others, SARS must make the estimate based on the information readily
available to it and then issue an assessment of its choice based on that estimate
(this usually occurs when the taxpayer does not comply with SARS requests to
submit material)
- Burden is on SARS to prove that they had reasonable grounds to issue an estimate
assessment (S102(2) TAA)
- An estimate assessment immediately creates an obligation to pay
o Pay now argue later rule
o Governed by S164 of TAA
o This means that when as assessment has been issued, the taxpayer must
just pay immediately. If he wants to dispute the assessment, he can do so
after he has paid
§ This seems bad for the taxpayer, but he can apply to have the
decision by SARS (to issue an assessment) taken upon review ito
PAJA (bc issuing an estimate assessment constitutes administrative
action)
- Taxpayer may NOT object or appeal against an estimate assessment UNLESS the
taxpayer submits the relevant material requested by SARS
o Taxpayer has 40 days to request SARS to issue an additional assessment or
a reduced assessment (but taxpayer must submit a complete tax return or
give the relvant material to SARS first)
- SARS has introduced automated assessments -> when you are an employee then
your info gets sent to SARS automatically. However, if you have multiple income
streams (beside your main employment -> such as foreign income stream or
deductible expenditure), then you have to add this manually to your return
- What happens if a taxpayer accepts an incorrect automated assessment?
o The taxpayer can make a correction on a tax return
o However, the pay now argue later rule still apples
o He must pay the incorrect amount before he disputes it
o When he disputes it -> he must follow the dispute process with SARS (this is
different from a general litigation process)
- SARS may withdraw an assessment when: (S98 TAA):
o The assessment was issued to the wrong taxpayer
o The assessment was raised for the incorrect tax period (aka it was issued for
the wrong year of assessment)
o The assessment was issued due to incorrect payment allocation

PRESCRIPTION:
- S99 of TAA
- It would be unfair to the taxpayer if SARS had the power to raise an assessment for
any random year no matter how far back it dates
- A taxpayer has a right to finality with his returns -> he has the right to know when a
tax assessment is finalized
- Ito S99 TAA, SARS may not raise an assessment:
o 3 years from the date of the original assessment for income tax
o 5 years from the date of the original assessment by way of self-assessment
for the taxpayer
o Where a dispute was resolved under the dispute resolution process
- This ^ is known as the prescription period -> SARS is not allowed to issue
assessments after the prescription period has expired
- HOWEVER, the prescription period will NOT apply where the tax amount was not
assessed due to fraud, misrepresentation, or non-disclosure of material facts
(S99(2) TAA)
o In other words, if one of these 3 things occur -> SARS may issue an
assessment even if the prescription period has expired
o If SARS alleges one of these 3 things ^ -> the burden is on the taxpayer to
prove otherwise
- Further details on page 1198 of textbook
PENALTIES:
- Penalties can be divided into:
o Administrative non-compliance penalties (s208 – s220 TAA)
o Understatement penalties (S221 – s224 TAA)
Administrative non-compliance penalties:

- A penalty assessment must be issued that gives the taxpayer notice of the
noncompliance in terms of which the penalty is being assessed. The notice
must include:
o The duration of that noncompliance
o The amount of penalty imposed

o The date for paying the penalty
o Automatic increase of penalty
o A summary of the process to request the remittance of the penalty
- There are 2 main types of admin non-compliance penalties:
o Fixed amount penalties
§ S210 – 211 TAA
§ These are imposed when the taxpayer fails to comply with specific
obligations under a tax Act
o Percentage- based penalties
§ S213 TAA
§ These are levied when tax is not paid by a required date
§ The penalty will be a % of the unpaid tax amount
- Under the umbrella of admin non-compliance penalties -> there is also
“reportable arrangement and mandatory disclosure” penalty:
o S212 TAA allows SARS to collect and evaluate information of transactions if
it has any anti-avoidance purposes in mind
o There are very high penalties imposed on specific people (promoters,
intermediaries, people who obtain a tax benefit etc.) when they don’t disclose
certain info to SARS
o See more on page 1201 of textbook
- Remittance of penalties: (s215 – 220 TAA)
o A person who is aggrieved by a penalty may request SARS (in the prescribed
manner and form) to remit a penalty
o The remittance request must include:
§ Description of the circumstances which prevented the taxpayer from
complying with an obligation under the tax Act iro the penalty imposed
§ Supporting docs and info
o There are a number of grounds on which a remittance can occur -> taxpayer
must prove one of these grounds
o If SARS refuses to remit the penalty (even after full compliance with the reqs)
-> taxpayer may object and appeal this decision
o If a taxpayer does not request remittance for penalties and interest -> it is
assumed that the taxpayer accepts them and will pay them
- See page 1202 -1203 for more info
Understatement penalties:
- S221 – s224 TAA
- What is an understatement? -> it is where there is prejudice to SARS or the
fiscus as a result of:
o Failure to submit a return,
o Omission on a return,
o Incorrect statement in a return
o If no return is required, it is a failure to pay the correct amount of tax
o Impermissible tax avoidance arrangement.
- The understatement penalty is where the prejudice to SARS or the fiscus is greater
than:
o R1 million or
o 5% of the amount of tax properly chargeable for the relevant tax period
- If taxpayer commits one of these actions/understatements ^ -> we must determine
under which category his behavior falls (there are 6 possible categories) -> look at
understatement penalty table in S223 of TAA
o E.g.) if the taxpayer omitted something from his return (this constitutes an
understatement) -> was his error due to gross negligence or lack of
reasonable care or was he intentionally evading tax etc.? (these are some of
the categories of behavior in the table)
o The penalty is not necessarily based on a taxpayer’s culpability but rather on
the quantum of the understatement. The more aggravating the behavior, the
higher the percentage
- After you have established what category his behavior falls into -> you must
determine what percentage of the penalty must be applied to him
o E.g.) say his error is due to lack of reasonable care:
§ if it was his first time making this mistake -> he will incur a penalty of
25% (one-time mistake = standard case)
§ If he has made this mistake in the past -> he will incur a penalty of
50% (bc this is a repeat case)

§ If he disclosed his mistake to SARS after he was made aware that he
will be audited -> his penalty will be 5% of his taxable income for that
year
- The penalty must be paid IN ADDITION TO his taxable income for that year (so two
amounts must be paid)
- An understatement penalty will not be levied if the taxpayer made a bona fide
inadvertent error
o SARS’ Guide to Understatement Penalties (this is not a legally binding
document) says that an inadvertent error is a genuine error that results from
the following:
§ Unintentional default,
§ Accidental omission,
§ Unplanned statement,
§ Involuntary failure to pay the correct tax
§ An unpremeditated impermissible avoidance arrangement
o A bona fide inadvertent error = innocent misstatement by a taxpayer made in
good faith and without a deceptive intention, which ultimately results in an
understatement

- Ito S102 TAA, the burden rests on SARS to prove the facts upon which they relied
to levy the understatement penalty (aka they have to prove that there wasn’t a bona
fide inadvertent error)
o SARS cannot do this if they don’t have the relevant info needed
o For this reason, the burden indirectly falls onto the taxpayer to prove he did
commit a bona fide error by providing SARS with the information needed to
support this position
Purlish Holdings (Pty) Limited v CSARS [2019] ZASCA 04
Facts:
- In this case, the SCA was required to give judgement on 2 aspects:

o Whether SARS had proven that it is entitled to impose understatement
penalties ito S222 TAA (yes)
o Whether the tax court was entitled to increase the understatement penalties
imposed by SARS (yes)
Court held:
- An understatement arises only when the conduct referred to in S221 results in a
prejudice to SARS or the fiscus. Onus to prove such prejudice rests on SARS
- The prejudice is not only determinable in financial terms. Prejudice to SARS can
also mean time and human capital resources that were employed to conduct an
audit into the taxpayer’s affairs because the time and those people could have been
used somewhere else
- A tax court does have the power to confirm, reduce, or increase the understatement
penalty imposed by SARS
o However, in this specific case, the tax court did not have the power to
increase the penalty bc the matter was not before the court in a ground of
assessment statement (rule 34)
- The powers conferred on the tax court by the TAA are limited by what is stated in
the tax court rules. S129(3) of the TAA has to be read in conjunction with rule 34 of
the TA regulations
Voluntary disclosure program (VDP):

- VDP was introduced to encourage voluntary compliance by taxpayer (in cases
where they made an error or committed a default) -> if this occurs then the taxpayer
can apply for VDP -> if SARS approves their application, then penalties levied
against the taxpayer for his errors will be reduced
- So the taxpayer will still receive a penalty (albeit a reduced one), but he will not be
criminally prosecuted for his mistake
- An important requirement for VDP is that SARS must be satisfied that:
o They would NOT have otherwise picked up on the error themselves if the
taxpayer didn’t disclose his error to them
o VDP is in the interest of good management of tax systems
o VDP would be the best use of SAR’s resources
- If SARS is already aware of the mistake OR if they would have easily become aware
of the mistake when they conducted their audit -> taxpayer will not qualify for VDP
- In order a VDP application to be valid, certain reqs must be met (these are in S227
TAA):
- VDP does not grant relief for the taxpayer’s debt, penalty, interest etc. -> he must
still pay these things. but his penalty will be reduced
- If SARS approves the VDP application -> the parties will enter into a VDP agreement
ito S230 TAA
- Ito this agreement, SARS may issue an assessment which may not be objected to
or appealed by the taxpayer (s232 TAA)

- Under certain circumstances, SARS may withdraw the VDP agreement (s231 TAA)
o E.g.) if it is established that the taxpayer failed to disclose a matter that was
material for the purposes of making a valid voluntary disclosure (this is a tax
offence)
o -> taxpayer may object to and appeal such a decision
Purveyors South Africa Mine Services (Pty) Ltd v CSARS:
- One of the S227 reqs for VDP is that the disclosure must be made voluntarily
- The court listed the reqs of VDP and said that they have to all be met before a
VDP application can succeed
o The disclosure must be voluntary,
o It must involve a default
o It must be full and complete in all material respects
o It must involve a behavior listed in the understatement penalty table
o It must not result in a refund due by SARS
o It must be made in the prescribed form and manner
- In this case, the taxpayer didn’t pay import VAT on their transactions -> this
constitutes a default (default req is thus satisfied)
o Default is defined the as the submission of inaccurate, incomplete
information to SARS, or the failure to submit information, or the adoption of a
tax position where such submission or non-submission or adoption results in
an understatement
o Must not occur within 5 years of a similar default committed by the taxpayer

- In this case, the taxpayer’s disclosure was not made voluntarily bc they made the
disclosure out of fear (they didn’t want to incur penalties (voluntary req is not
satisfied)
- SARS argued that disclosure did not take place bc SARS already had knowledge
about these facts (aka SARS already knew that the taxpayers didn’t account for
VAT). Court accepted this
o The lecturer critiqued this -> S227 says that the disclosure must be full and
material. It doesn’t say that SARS shouldn’t have had prior knowledge
thereof
LECTURE 2 PART 1
THE DISPUTE PROCESS
[chap 33.5 of textbook]
- Disputes often arise between SARS and the taxpayer during the tax administration
process
o E.g.) when a taxpayer is unhappy with an assessment raised by SARS and
wants to dispute it
- A taxpayer cannot just randomly approach the High Court when they are upset with
SARS. when a taxpayer is aggrieved, he must follow the correct dispute process to
resolve the matter
o Internal remedies (objection and appeal, dispute resolution before a Tax
Board or Tax Court etc.) must be exhausted before the HC can be
approached (S105 TAA)
- Chapter 9 of the TAA deals with the dispute resolution process
- The “pay now, argue later” is important in the dispute process:
o The mere fact that an assessment is disputed by the taxpayer does not
suspend the obligation to make payment of the tax in question
o This rule was established in Metcash Trading Limited v CSARS 2001 (1)
BCLR 1 (CC)
o This rule is now contained in S164 of the TAA
o This rule basically says that if you (the taxpayer) are unhappy with an
assessment that SARS has issued, you still need to pay the amount SARS
tells you pay. You can only dispute the amount AFTER you have paid it
o Although this rule may seem unfair to the taxpayer, it is constitutional
- Is SARS allowed to take money out of your bank account if you owe them
taxes?
o Basically yes -> look at S179 TAA
o Ito S179, a senior SARS official may authorize a notice to be issued to a 3rd
party to pay SARS as satisfaction for the taxpayer’s debt. Such a notice may
be issued to:
§ The taxpayer’s bank
§ The taxpayer’s employer
o However, this can only be done once SARS has issued a final letter of
demand for the outstanding amount due by the taxpayer
SIP Project Managers (Pty) Ltd v CSARS (11521-2020) [2020] ZAGPPHC
- In this case, SARS issued the taxpayer with an additional assessment whereby the
taxpayer owed SARS money. SARS issued this assessment on 30 Nov 2019
- This additional assessment did not come to the taxpayer’s attention
- One day, the taxpayer’s bank contacted him and said that they have received third
party notification to pay SARS R1.2 million owed by the taxpayer
- Taxpayer said he never received a letter of demand to pay any outstanding amount
to SARS
o Remember: before SARS can issue a third-party notification -> they need to
issue a final letter of demand
- The matter then went to court
- SARS proved that the letter of demand was actually issued, but it was dated 7 Nov
2019 (but the assessment was only issued after this date -> this is not in
compliance with the dispute procedures in the TAA)
- The court found SARS’s letter of demand to be premature and unlawful bc the
taxpayer didn’t have an outstanding debt at that time
- Court held that the reqs in S179(5) TAA were not satisfied. For this reason, the
third-party notice was considered null and void
- This case shows how important is is for both SARS and the taxpayer to follow the
correct process during a dispute
- The reason SARS’s notice was null and void is bc they didn’t follow the procedure
that is prescribed in the TAA
- S102 TAA says that the burden of proves rests on the taxpayer (see page 1227 of
textbook for examples). However, there are 2 instances where the burden of proof
rests on SARS:
o Understatement penalties
o Estimates assessments
- When a taxpayer is unhappy with an assessment issued by SARS, he has 2 options:
o He can either request reasons for the assessment within 30 days from the
date of the assessment OR
o He can object to the assessment within 30 days from the date of the
assessment
Request for reasons (1st option available to an aggrieved taxpayer):

- The following info is contained in Rule 6 of the TA Regulations + also page 1228 of
textbook
- Rule 6 of the Tax Act Regulations says that a taxpayer who is aggrieved by an
assessment may, prior to lodging an objection, requests SARS to provide reasons
for the assessment required to enable the taxpayer to formulate an objection in the
form and manner referred to in Rule 7
- If the taxpayer decides to request reasons, the aim is for SARS to provide the
taxpayer with sufficient information/detail and reasons for the assessment to help
the taxpayer understand the basis for the assessment and to help them to formulate
their objection (rule 6(1))

- The taxpayer must deliver the request for reasons to SARS within 30 days from the
date of the assessment.
- SARS may extend this period for the taxpayer up to 45 days (max), but only if they
are satisfied that reasonable grounds exist for not complying with this time period
- If SARS is satisfied that they did in fact provide sufficient reasons to enable the
taxpayer to prepare an objection -> SARS must inform the taxpayer accordingly
within 30 days after delivery of the request
- If SARS is not satisfied with the reasons they gave -> they must provide their
reasons within 45 days from the date that the request for reasons was delivered
- If SARS needs more time to provide reasons due to exceptional circumstances ->
the period can be extended up to 45 days (max)
- Once the taxpayer has received these reasons that they requested from SARS ->
the taxpayer has 30 days to deliver their notice of objection ito rule 7
The taxpayer can object to the assessment (2nd option available to

an aggrieved taxpayer):
- This option is available to the taxpayer regardless of whether or not he requested
reasons for SARS’s assessment
- The taxpayer may object to the assessment within 30 days from one of the following
dates:
o Date of assessment (if taxpayer doesn’t request reasons from SARS)
o Date when SARS provided reasons or date that taxpayer had received notice
from SARS that sufficient reasons were given (if the taxpayer does request
reasons)
- Rule 7 must be read together with S104 of the TAA
- IMPORTANT: the definition of ‘day’ in rule 1 of the regulations refers to business
days (not calendar days)
- Objections are covered in sections 104 – 106 of the TAA -> self-study these

- If a senior SARS official is satisfied that reasonable grounds exist for the delay in
lodging the objection -> the period may be extended by another 30 business days
- If SARS is satisfied that exceptional circumstances exist for the delay -> period to
lodge/file the objection can be extended for up to 3 years
o If you want to know what constitutes reasonable grounds versus exceptional
circumstances -> you can go read SARS Interpretation Note 15 (Issue 5)
o SARS will consider the following factors when deciding whether or not to
condone a late filing of an objection:
§ The prospects of success on the merits
§ The reasons for the delay
§ The period of the delay

- The objection period cannot be extended if the grounds for objection are based on
a practice generally prevailing
- A taxpayer’s objection needs to supply SARS with sufficient information so that they
can make an informed decision when deciding to dismiss or allow the objection
o All the reqs for a valid objection must be satisfied
o Must be well drafted
o Supporting documents should be attached to support the objection
- Requirements for a notice of objection (rule 7(2)):
o Must be lodged in the prescribed form
o Must be lodged within the prescribed period
o Must set out the grounds of objection
§ The specific amount being objected to
§ The grounds of the assessment which are being disputed (documents
required to substantiate the grounds of objection)
o If E-filing is not used, the notice must specify the address at which the
taxpayer will accept notice
o The notice must be signed by the taxpayer
§ (if its signed by someone else -> they need to have the power of
attorney + taxpayer must provide reasons why he couldn’t sign
himself)
o The notice must be delivered to the commissioner at the addressed specified
in the assessment
- If the taxpayer delivers an objection that does not comply with these reqs ^ ->
SARS will consider the objection to be invalid
o If SARS finds the objection to be invalid -> they must notify the taxpayer of
this within 30 days after receiving the notice + they must state the grounds
for invalidity
o When taxpayer receives notice of invalidity from SARS -> taxpayer must
submit a revised and valid objection within 20 days (rule 7(5))
- Remember: “days” = business days (business days do NOT include weekends or
public holidays)
- SARS may allow or disallow an objection, in whole or in part (S106(2))

- If the objection complies with all the reqs + SARS finds the objection to be valid ->
the assessment must be altered accordingly + SARS must notify the taxpayer of this
- If taxpayer is still aggrieved following the outcome of the objection -> he may
appeal against this this (appeal = next step in the dispute process)
- If the taxpayer does not appeal against the outcome of the objection and/or is the
objection is withdrawn -> the assessment/decision becomes final (S100(1))
Computek v The Commissioner, SARS [2012] ZASCA 178
- An audit was conducted by SARS which revealed that the taxpayer had ended
declared and underpaid VAT
- The assessment issued assessed the taxpayer for a capital amount, additional
taxes, interest, and penalties
- The taxpayer filed a notice of objection to this assessment, but nowhere on the form
did the taxpayer indicate that he was objecting to the capital amount
- Because there was no objection to the capital amount -> SARS disallowed the
objection because they assumed that the taxpayer had accepted the figures
- The taxpayer filed a notice of appeal after the disallowance of the objection.
However, the notice of appeal also contained no reference to the amount being
disputed (the capital amount)
- Only when the taxpayer filed their Rule 11 (new rule is rule 32) statement with the
Tax Court was this issue raised. The court a quo found in favor of SARS
- Upon appeal, the SCA held that the taxpayer cannot introduce a new objection
- Objection to something for the first time during the appeal stage constitutes raising
a new objection ground that had not previously been objected to
Basic terms:
- General rule = a taxpayer cannot introduce new grounds of objection
o This rule was est. in Computek and has now been encoded in rule 10(3)
- When he lays out the grounds of objection in the initial notice of objection (as per
rule 7(2)), he must be very clear what he is objecting to
o In this case, various amounts were charged to him, but he did not state the
specific amount that he was objecting to
Appeals:
- Appeals are dealt with in rule 10-11 of the regulations and S107 of the TAA

- If SARS disallowed the objection and the taxpayer is aggrieved by this
decision, the taxpayer has 2 options:
o He can follow the Alternative Dispute Resolution Process (ADR)
o He can follow the litigation process. The litigation process involves an
appeal to the:
§ Tax Board (only if the tax amount in dispute is LESS than R1000 000)
§ Tax Court (only if the tax amount in dispute is MORE than R1000 000)
- Regardless of which option he chooses, if the taxpayer wants to appeal against
SAR’s decision -> he must deliver notice of appeal to SARS within 30 days from
receiving notice of SARS’s disallowance of the objection
- This period ^ may be extended by a SARS official:
o If reasonable grounds exist -> can be extended by 21 days
o If exceptional circumstances exist -> can be extended by 45 days
- If the extension is not granted to the taxpayer -> the taxpayer may raise an
objection to the disallowance of an extension to deliver notice of appeal
- Rule 10(3) states that a taxpayer may NOT appeal on a ground that constitutes
a new objection against any part or amount of the disputed assessment not
objected to
o Earlier in the dispute process: when a taxpayer lodges an objection, he has
to state the grounds of the objection in the notice of objection.
o Later in the process: when a taxpayer lodges an appeal, he has to state the
grounds of the appeal in the appeal notice
o These grounds of objection have to be the same! He cannot introduce new
grounds during the appeal stage that were not specified during the objection
stage
o This speaks directly to the Computek case
§ The taxpayer did not object to a specific amount in the assessment
raised by SARS (he just objected to the assessment in general). When
SARS disallowed this objection, the taxpayer appealed against this. It
was only during the appeal stage where the taxpayer objected to the
capital amount. Objection to something for the first time during the
appeal stage constitutes raising a new objection ground that had
not previously been objected to.
§ If the taxpayer does not raise an objection in its notice of objection,
then the taxpayer is precluded from raising it on appeal before the tax
court/board
o Although the taxpayer may not raise a new objection in the appeal, he may
expand on his already-existing grounds in the sense that he may introduce
legal or factual grounds as to why the amount should not be taxed (doing this
does not constitute a new ground of objection)
- If the taxpayer relies on a ground in their notice of appeal that was not initially raised
in their objection -> SARS may request the taxpayer within 15 days from the notice
of appeal to submit substantiating documents to decide if they will proceed with the
appeal process
Requirements for a notice of appeal (rule 10(2)):
- Must be lodged in the prescribed form
- Must be lodged within the prescribed time period
- The notice must indicate:
o The grounds of objection that the taxpayer is appealing (taxpayer may have
decided not to appeal on all of the objection grounds)
o The grounds for disputing the disallowance of the objection (reasons why the
taxpayer disagrees with SARS’s basis for the disallowance)
o Any new grounds which the taxpayer is appealing (the new grounds being
appealed must not constitute a new objection being raised) (SARS may
request substantiating documents from the taxpayer)
- The notice must specify the address at which the taxpayer will accept notice (be
served the notice)
- The notice must be signed by the taxpayer
o (if its signed by someone else -> they need to have the power of attorney +
taxpayer must provide reasons why he couldn’t sign himself)
- The notice must be delivered to the commissioner at the addressed specified in the
assessment

LECTURE 2 PART 2
Introduction:
- We have just covered the objection and appeal process
- When a taxpayer wants to appeal -> he can choose between the alternative dispute
resolution process and the litigation process
- Whichever option he chooses must be specified in the notice of appeal
- If he chooses the ADR route -> the parties can reach a settlement and the
assessment is then finalized outside of court.
- However, if they follow the ADR route and no settlement can be reached -> the
matter is then referred to the Tax Board or the Tax Court
- If either SARS or the taxpayer is not happy with the findings of the tax court or the
court a quo -> they can appeal to the High Court -> the HC judgement will
eventually have the assessment finalized (S100)
ALTERNATIVE DISPUTE RESOLUTION

- Alternative dispute resolution will hereafter be referred to as ‘ADR’
- ADR is governed by Rule 13-25 of the Regulations and S107(5)-(6) of the TAA
- ADR = an attempt/mechanism to resolve the dispute through mutual agreement
- Rule 107(5) says that appeal proceedings are suspended while the ADR procedure
is ongoing
o Aka clock on taxpayer’s appeal is temporarily stopped during ADR

The ADR procedure entails the following:
- In his notice of appeal, the taxpayer must indicate if he wants to make use of the
ADR
- SARS will then consider if the matter may be resolved by way of ADR + they must
notify the taxpayer accordingly
- Even if the taxpayer didn't propose ADR in their Notice of Appeal -> SARS may
propose it
- The ADR proceedings start as soon as SARS notifies the taxpayer that the matter is
appropriate for ADR -> the parties then have 90 days to finalize the ADR.
- A senior SARS official must appoint the ADR facilitator (who can be a SARS
employee)
- The taxpayer or representative taxpayer must be personally present for the ADR
- The dispute must be resolved by:
o Agreement -> where one party accepts the other's interpretation of the law,
the facts, or both, OR
o The matter may be settled ito rule 23 and 24.
- If the matter cannot be resolved at ADR level -> the matter will proceed to tax board
or the tax court for a de novo hearing
- Page 1230 of textbook
THE LITIGATION PROCESS

The Tax Board:
- Look at Rules 26 – 30 and S108-115 of TAA
- Also see page 1230 of textbook
- When can the matter first be heard by the tax board? (s109)
o When the tax amount in dispute is LESS than R1000 000, AND
o When SARS and the taxpayer are in agreement
- Tax board consists of:
o A Chairperson (legal practitioner from a panel appointed by the minister)
o An accountant and representative of the commercial community (if the
chairperson deems it necessary)

- Chairperson determines the procedures during the hearing as they see fit
o E.g.) if the chairperson believes that the grounds of dispute or the legal
principles should rather be heard by the tax court -> he may direct that the
appeal be set down for a de novo hearing before the tax court
- Both parties have opportunity to present their case in front of the board and the tax
board may decide the matter after hearing the taxpayer’s appeal (this also applies
when the tax court hears the matter)
o SARS presents their side first
o Taxpayer presents their side second (bc they are appealing)
- The tax board must decide the matter on the basis that the burden of proof is on the
taxpayer, UNLESS the appeal is regarding an understatement penalty (this also
applies when the tax court hears the matter)
o Then burden of proof rests on SARS
o Tax board may reduce/confirm/increase the understatement penalty
- If it is an assessment or decision under appeal -> tax board may:
o Confirm the assessment/decision
o Order it to be altered
o Refer the assessment back to SARS for further examination
o Make an appropriate order in a procedural matter
- If a third party prepared the taxpayer (appellant)’s return -> third party must appear
on the appellant’s behalf
- Chairperson must prepare a written statement within 60 days after the conclusion of
the hearing. The written statement must include:
o Tax board’s findings -> facts of the case + reasons for their decision
- If SARS or the taxpayer is unhappy with the tax board’s decision -> they may, within
21 business days from the notice of the tax board’s decision, request the matter to
be referred to the tax court
The Tax Court:

- Look at rules 31-49, rules 50 – 64, S116 – 132 TAA
- Pages 1231 – 1232 of textbook
- The tax court consists of:
o Judge or acting judge of the High court (who is the president of the tax court)
o An accountant selected from a panel of members
o A representative of the commercial community selected from a panel of
members
- The tax court hears matters where the amount in dispute exceeds R1000 000 + and
the parties are in agreement
- However, if the amount in dispute exceeds R50 000 000 -> Judge President of the
HC may direct that the tax court hearing the appeal consist of 3 judges of the HC
together with the usual tax court members (S118(5))
- If it is an assessment or decision under appeal or an application in a
procedural matter -> tax court may:
o Confirm the assessment/decision
o Order it to be altered
o Refer the assessment back to SARS for further examination
o Make an appropriate order in a procedural matter
- Purlish Holdings case:
o SCA had to consider if the tax court had the power to increase the
understatement penalties that were originally imposed by SARS
o In the case of the appeal against the undertaking penalty imposed by SARS,
the tax court must decide the matter the basis that the burden of proof is on
SARS and may reduce, confirm, or increase the uncertain penalty (S129(3)
TAA)
o However, S129(3) TAA must be read together with Rule 34
o Rule 34 says that the issues of an appeal to the Tax Court will be those
contained in the statement of grounds of assessment and opposing appeal
read with the statement of grounds of appeal and, if any, the reply to grounds
of appeal.
o Para 25 of the Purlish case’s judgement: the tax court may only increase the
understatement penalties if the issue had been properly raised for
adjudication before the court
o In this case, SARS did not request the tax court to adjudicate the increase or
reduction of penalties. They only wanted the court to confirm that they were
justified to raise the understatement penalties in the first place. The increase
that the tax court made to the understatement penalties were therefore set
aside by the SCA
- The tax court’s judgement must be published for general information. However, a
decision/judgement by the tax court will NOT reveal the appellant’s name/identity –
unless the sitting was in front of a tax court that was public (s132)
- If the taxpayer or SARS is unhappy with the tax court’s final decision -> they may
appeal the decision to the HC or even the SCA with leave from the president of the
tax court ito S133(2)
- A notice of intention to appeal must be lodged within 21 days from the notice of the
registrar notifying the parties of the tax court’s decision
Promotion of Administrative Justice Act (PAJA):

- If we look at the consti and the BoR, S33 says that everyone has the right to
administrative action that is lawful, reasonable, and procedurally fair -> these rights
have been enacted into legislation (PAJA)
What is the effect of applying PAJA?
- PAJA is an alternative method to approach the court to review a decision by SARS
that constitutes administrative action
- PAJA defines administrative action as = any decision taken or any failure to take a
decision by an organ of state when exercising a power in terms of the Constitution
or provincial constitution or exercising a public power/performing a public function
in terms of any legislation, or a natural juristic person other than organ of state when
exercising public power
- When SARS issues assessments, they are excising a public power or performing a
public function in terms of legislation
- Therefore, the matter being reviewed must constitute a decision that is
administrative action
- Alternatively, where the decision was merely an exercise of public power (aka it was
just a point of law dispute) -> it can be reviewable under the principle of legality
When will PAJA apply?
- We have seen from case law that generally SARS argues that the taxpayer must first
exhaust all the internal remedies (aka they must follow the procedure ito the TAA)
before the application can be brought before the court.
- Alternatively, the argument is that the High Court doesn't have the jurisdiction to
hear the matter bc the Tax Court is authorized and has jurisdiction to hear such tax
matters.
- S105 TAA provides that a taxpayer may only dispute an assessment or decision as
described in S104 in proceedings under this chapter unless if the High Court directs
otherwise
- S104 TAA prescribes that a taxpayer may object to an appeal against any other
decision that may be objected to or appealed against under a tax Act.
ABSA Bank Limited and another v CSARS (2019/21825 [P] [2021] ZAGPHC
- In this case, it was held that S105 provides that a court has discretion to approve a
deviation from the prescribed procedures in the TAA.
- However, a court will not lightly depart from the prescribed process in the TAA.
- Where the dispute relates to a point in law -> this will be considered as an
exceptionality that may justify the court to depart from the prescribed process of
objection and appeal in the TAA + to consider an application for review

THEME 10 – TAX AVOIDANCE VERSUS TAX

EVASION
LECTURE 1 - INTRODUCTION
- Tax avoidance and tax evasion are not the same thing
o Tax avoidance = legal
o Tax evasion = illegal
- Large multinational companies often get involved in tax avoidance schemes -> they
use legal methods to structure their finances to pay minimal taxes
o E.g.) Google used the “double Irish Dutch sandwich’ scheme to artificially
shift their profits offshore -> this is tax avoidance
- Duke of Westminster v IRC (1953):
o
o This quote shows that tax avoidance is legal
- Tax avoidance would be where the taxpayer arranges his affairs in a legal
manner with the result that he reduces his tax liability
o E.g.) A taxpayer can donate R100 000 to his children without having to pay
the donations tax on it because individuals may make annual donations of
R100 000 tax free each year
o The less taxable income one has -> the lower the tax liability
o Tax avoidance is where taxpayers try to lower their income
o The most common way in which companies avoid tax is by shifting their
profits offshore
- Tax evasion is illegal activity that frees the taxpayer from a tax burden.
o E.g.) the falsification of tax returns, non-disclosure of income, or
overstatement of deductible expenditure
o Such activities are intentionally taken by the taxpayer
o Tax evasion is a criminal offence and subject to severe penalties

- Tax avoidance schemes (especially by big companies) result in loss of tax
revenue to the fiscus (this is bad). Tax avoidance schemes are the reason that
the OCED introduced the BEPS action plan
o OCED = organization for economic cooperation and development
o BEPS = base erosion and profit shifting action plan
o Aim of BEPS = close the gap in international tax rules that allow multinational
enterprises to legally, but artificially, shift profits to low or to no tax
jurisdictions
o The action plan comprises of 15 actions, some of which include:
§ Counter harmful tax practices
§ Improve transparency
§ Prevent treaty abuse
§ Improve cross-border dispute resolution
§ More examples on page 1157 of textbook
- Tax avoidance is also called ‘aggressive tax planning’
- Effects of aggressive tax planning include:
o Short-term revenue loss
o Long-term damage to tax system and economy
o Less compliance from taxpayers
o Uneconomic allocation of resources
o Unfair redistribution of tax burden
o Weakening the implementation of economic policy
- In SA, we have multiple anti-avoidance provisions in our tax Acts
o E.g.) S103(2) ITA -> anti-avoidance provision related to assessed losses in
companies (this is the main one we will be dealing with)
o See more examples on page 1159 of textbook
- In the Income Tax Act (ITA), the general anti-avoidance rules are contained in
S80A – 80L
o -> these are known as the General Anti Avoidance Rules (GAAR)
o -> the provisions on impermissible tax avoidance arrangements are set out in
these sections (acts as a safety net in case a specific anti-avoidance
provisions cannot be applied to the transaction)
o -> GAAR draws a line between permissible and impermissible tax avoidance
- Overview of GAAR:
IMPERMISSIBLE TAX AVOIDANCE

ARRANGEMENTS:
- Remember: GAAR = S80A – 80L ITA
- GAAR applies to arrangements entered into on or after 2 Nov 2006
- S80A ITA defines an impermissible avoidance arrangement as follows:

What is the test for an impermissible tax avoidance arrangement? In other words, when
can S80A – S80L apply? -> 4 requirements must be met:
- 1st req = there must be an arrangement
- 2nd req = the arrangement must result in a tax benefit
- 3rd req = the sole/main purposes of the arrangement was to obtain a tax benefit
- 4th req = there must be a lack of commercial substance
o When it comes to the last requirement:
§ We can see that if the arrangement takes place for business purposes
-> 1 of 4 reqs must be met
§ If the arrangement takes place for personal purposes -> 1 of 3 reqs
must be met
§ Both ^ have the same 3 reqs as each other. There is only one
difference. If it takes place in the context of a business, then the
arrangement must also lack commercial substances (this is why we
say that this is the 4th req)

(1) There must be an arrangement (req 1):

- An “arrangement” includes any of the following:
o Any transaction
o Any operation
o Any scheme
o Any agreement
o Any understanding
o Any foregoing involving alienation
- TIP: if the question has any of these words in ^ -> we know that it constitutes an
arrangement for purposes of the impermissible tax avoidance arrangement test (the
ITAA test)

(2) The arrangement must result in a tax benefit (req 2):
- A tax benefit includes -> any avoidance, postponement, or reduction of any tax
liability
- Usually where an arrangement defers a tax payment -> a tax benefit is present
- GAAR only applies to tax mentioned under the Income Tax Act
- this means that a tax benefit (for purposes of the ITAA test) does not include a
reduction of VAT, transfer duty, estate duty etc. -> these are taxes imposed by
other tax Acts (not by ITA -> thus GAAR doesn’t apply to them)
- The existence of a tax benefit can be established by a comparison of the
taxpayer’s situation with an alternative arrangement
o This is called the “but for” test
o To determine whether a tax liability was evaded, the ‘but for’ test must be
applied to a future anticipated tax liability
o Question that must be asked: “but for the X (describe the arrangement), how
might the tax liability have been evaded?”
o In other words, if it wasn’t for that specific arrangement, would a tax benefit
still have occurred for the taxpayer? If the parties didn’t enter into that
transaction, would the taxpayer still have to pay the tax liability?
o See page 1161 of textbook
- As soon as an arrangement results in a tax benefit -> it becomes an avoidance
arrangement
o But this doesn’t necessarily mean its impermissible -> we need to finish
apply the steps of the ITTA test
(3) The sole or main purpose of the arrangement was to obtain a

tax benefit (3rd req)
- Although tax should always be a consideration when entering transactions, it but
not be the driving force behind the transaction
- As soon as we have established that it is an avoidance arrangement (req 3) -> there
is a presumption that the arrangement was entered into for the sole purpose of
obtaining a tax benefit (S80G -> this is called the presumption of purpose)

- If the main purpose of the avoidance arrangement IS to obtain a tax benefit (aka we
have proved the presumption) -> then it becomes an impermissible avoidance
arrangement (S80A)
- The taxpayer bears the burden of rebutting this presumption
o The party who obtained the tax benefit must prove (in light of the relevant
facts and circumstances) that obtaining that benefit was NOT the main
purpose of the avoidance arrangement
o It is unclear what evidence would be required to rebut this presumption
o When it comes to subjective evidence -> the taxpayer would most probably
have to give subjective proof of the relevant facts and circumstances (e.g. he
must give compelling reasons for entering into the arrangement)
o When it comes to objective evidence -> besides for the terms of the
arrangement itself, it is unclear what other objective evidence would be
admissible in court
- There is uncertainty as to whether the purpose behind the arrangement must be
determined objectively or subjectively
o If it is an objective test -> we look at the effect of the scheme
o If it is a subjective test -> we look at the intention/purpose of the scheme
(4) There must be a lack of commercial substance (4th req)

- See pages 1162 – 1164 of textbook
- The next step is to determine whether the avoidance arrangement occurred ‘in the
context of business’ or ‘in a context other than business’
- If it is in the context of business -> 1 of 4 scenarios must be present
- If it is in the context other than busines (private or personal context) -> 1 of 3
scenarios must be present
- No matter the context, only ONE scenario needs to be present this this requirement
to be met
- First scenario: the 4th req is met if the means or manner in which the arrangement
was entered into or carried out would not normally be employed for bona fide
business/purposes other than obtaining a tax benefit
o Substance over form rule applies here

- Second scenario: the 4th req would met if the rights and/or obligations that the
arrangement created would not normally have been created between person’s
dealing at arm’s length
o This is a factual inquiry considered against a hypothetical normal transaction
- Third scenario: the 4th req would be met if the arrangement resulted in the misuse or
abuse of the provisions of the Act
o The court needs to interpret the legislative provisions that the taxpayer relied
on + see whether arrangement frustrates/defeats the object, spirit, and
purport of the provisions (court must follow a contextual and purposive
approach when doing this)
- Fourth scenario: the 4th req would be met if the arrangement lacks commercial
substance [this scenario ONLY applies in the context of business!]
o General rule = an avoidance arrangement lacks commercial substance if it
results in a significant tax benefit for a party, but does not have a significant
effect upon either the business risks or the net cash flow of that party
(S80C(1))
o An objective view is adopted here -> the court will consider the specific
circumstances of each arrangement
o S80C(2) lists some indicators that point towards a lack of commercial
substance.
o Some of these indicators include:
§ Legal substance of the arrangement (the rights/obligations flowing
from the transaction) differs significantly from the form of the
arrangement (what the taxpayer has done in reality)
§ Roundtrip financing is present (discussed below)
§ A tax-indifferent / accommodating party has been included in the
arrangement
§ The arrangement results in elements offsetting / cancelling each other
out
Roundtrip financing:
- Roundtrip financing is dealt with in S80D
- Roundtrip financing is an avoidance arrangement where:
o Funds are transferred between various parties, and
o The transfer results in a tax benefit + significantly reduces business risk by
any connected party
- A common characteristic of unacceptable tax avoidance is that it does not involve a
genuine business arrangement, but it merely tries to bring into existence a tax
benefit through skillful deception -> this is what roundtrip financing does
- When it comes to roundtrip financing, funds are made to appear to pass between
the participants by way of a commercial consideration, but the funds actually travel
in a circle and in the end every participant is financially in the same position as they
were at the start
- In basic terms: roundtripping constitutes an impermissible avoidance arrangement
because parties enter into transactions where they just move lots of cash around in
a circle to obtain a tax benefit

- Once all the S80A requirements of an ‘impermissible avoidance arrangement’ are

present, S80B empowers the Commissioner to take certain action (see textbook
page 1165 onwards for more info)
ASSESSED LOSSES
- S103(2) ITA is an anti-avoidance provision that addresses situations where a profit-
making company acquires/obtains a company that has an assessed loss just so
that the profit-making company can divert taxable income into the company with
the assessed loss
o Why would a company want to buy a company who has an assessed loss? -
> income can be set-off the assessed loss -> this reduces taxable income ->
which then means that the company can pay less tax
- 3 reqs must be met in order for S103(2) to apply:
o (1) There must be an agreement affecting a company/trust or that results in
the change in the shareholding of a company, the member’s interest in the
company, or the trustees of any trust
o (2) The agreement must result in the receipt or accrual of income or a capital
gain by the company during any year of assessment
o (3) The purpose of the agreement is to mainly use the assessed loss to avoid
or reduce a tax liability

- When these 3 reqs ^ are met -> the income that was channeled into the other entity
may not be offset against the assessed loss of the other entity (this is the effect of
S103(2))
- See case law examples on page 1173 of textbook
LECTURE 2
SUBSTANCE OVER FORM RULE
- Courts look at the substance of the scheme and ignore the form of the scheme
- Form of the scheme = what the actual transaction looks like in real life
- Substance of the scheme = what is the true intention of the parties (this is what the
courts focus on)

- In Kilburn v Kilburn it was held:
o Courts of law will not be deceived by the form of a transaction; it will rend
aside the veil in which the transaction is wrapped and examine its true nature
and substance
- in CSARS v NWK it was held:
o There is nothing wrong with arrangements that are tax effective. But there is
something wrong with dressing up or disguising a transaction to make it
appear to be something it is not
- Parties often try to disguise something in a dishonest manner. But if you really
consider the substance of the transaction, you'll see what the true intention of the
parties are, as opposed to what they are fronting it to be
- However, there are limitations to this principle -> the court cannot simply ignore
agreements where parties intend to give legal effect to such agreement
- Possible solution: the transaction must be examined as a whole taking into account
all the surrounding circumstances (CSARS v Bosch)
SIMULATED TRANSACTIONS
- A simulated transaction is a transaction that is not genuine
- Simulated transactions often amount to tax evasion (CSARS v Bosch)
- Examples of simulated transactions:
o Sham agreement concluded -> parties didn’t have the intention to create
obligations
o Agreements with an ulterior purpose than what the agreement pretends
CSARS v NWK 2011 (2) SA 67 SCA
- Courts cannot ONLY look at whether there was intention to give effect to a contract
- Where parties structure a transaction to achieve an objective other than the one
ostensibly achieved -> they will intend to give effect to the transaction on the terms
agreed
- The commercial sense of the transaction must be examined (this is the real
substance / purpose of the agreement)
- If the purpose of the transaction is only to achieve an object that allows the evasion
of tax, or of a peremptory law, then it will be regarded as simulated

Roshcon (Pty) Ltd Anchor Auto Body Builders CC and Others [2014] 2 All SA 654
(SCA)
- For court to declare a transaction a simulated transaction -> it must look at the facts
of each case
- Parties may arrange their affairs to avoid statutory prohibitions, provided their
arrangement does not result in a simulated transaction
- The fundamental question is whether the parties intended that the agreement they
entered should have effect in accordance with its terms
- Simulation is a question of whether the transaction is genuine or not
- A genuine contract cannot be a simulated contract. If a contract was simulated -> it
was a dishonest transaction
Sasol Oil v CSARS 2018 ZASCA 153
- The Court must be satisfied that there is a real intention, ascertainable, which differs
from the simulated intention
- A disguised transaction has a simulated intention behind it
- Just because a transaction is devised for the purposes of avoiding tax liability,
doesn’t necessarily mean it is a disguised transaction
- To establish simulation, one cannot just look at only at the terms of the disputed
transaction. One must also look at the probabilities and context in which terms of
the transaction were concluded

BLR 310 Cram Notes (Theme 1-10)

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

BLR 310 Cram Notes (Theme 1-10)

Uploaded by

Copyright:

Available Formats

CRAM BLR310 Wednesday 04 May 2022

1 CRAM Quality Information, Quickly

BLR310 (TAX LAW)

PROVIDE AN OVERVIEW OF THE SA TAX SYSTEM:

(1) Tax base:

(2) Tax rate structure

(3) The incidence of tax liability

THE REQUIREMENTS FOR A GOOD TAX SYSTEM:

(1) The Equity Principle

(2) The Certainty Principle

(3) The Convenience Principle

(4) The Economic Efficiency Principle

7 CRAM Quality Information, Quickly

(5) The Administrative Efficiency Principle

(6) The Flexibility principle

(7) The Simplicity Principle

8 CRAM Quality Information, Quickly

9 CRAM Quality Information, Quickly

THEME 2 – TAXATION IN SOUTH AFRICA

3. Draft Money Bill

10 CRAM Quality Information, Quickly

Current tax legislation / tax types that are levied at a

Current national taxes levied in SA:

ITA Withholding tax Gross amount Income

ITA Turnover tax Taxable turnover Income

ITA Dividend’s tax Gross amount of Income

ITA Donations tax Value of property Wealth

Value-Added Value-added tax Taxable supplies of Consumption

Tax Act 89 of goods and services

Transfer Duty Transfer duty acquired or property Wealth

Act 40 of 1949 value enhancement

11 CRAM Quality Information, Quickly

Securities Securities Taxable amount of Wealth

CEA Excise duties and Specified goods Consumption

Unemployment Unemployment Remuneration Income

Skills Remuneration Income

12 CRAM Quality Information, Quickly

13 CRAM Quality Information, Quickly

14 CRAM Quality Information, Quickly

Turnover tax: (also forms part of normal tax)

Dividends Tax: (forms part of normal tax)

Donations tax: (forms part of wealth tax base)

15 CRAM Quality Information, Quickly

Value-added tax: (forms part of consumption tax base)

Transfer duty: (forms part of wealth tax base)

Estate duty: (forms part of wealth tax base)

Securities transfer tax (forms part of wealth tax base)

Unemployment insurance contributions (forms part of normal tax)

17 CRAM Quality Information, Quickly

Skills development levies (forms part of normal tax)

The incidence of tax liability / burden of tax:

your salaries and pay it to SARS on your behalf

ADMINISTRATION OF TAX LEGISLATION

INTERPRETATION OF TAX LAW

19 CRAM Quality Information, Quickly

Double Taxation Agreements (DTA):

The Interpretation Act:

20 CRAM Quality Information, Quickly

21 CRAM Quality Information, Quickly

Rules of interpretation / Interpretation of tax

22 CRAM Quality Information, Quickly

The contra fiscum rule:

The substance over form rule: