PRINCIPLES OF TAXATION

(TAX2601)

CONTENT DOCUMENT
LEARNING UNIT 4

Income of a business entity

CONTENTS
4.1 Background
4.2 Gross income
4.3 Gross income: special inclusions
4.4 Exempt income
4.5 Discussion questions
Self-assessment questions 4.1 – 4.3
Annexure A – case law relevant to this learning unit

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 INTRODUCTION ______________________________________________________

The structure or framework that must be applied to determine a taxpayer’s taxable income was
discussed in learning unit 1. Below is an expanded version of this framework showing some of
the components.

In this learning unit, the first two components of the framework, namely gross income (the
general definition as well as special inclusions) and exempt income, will be discussed to show
you how to calculate a taxpayer’s income for a year of assessment.

Definition
Gross income
Special
inclusions
Income Less:
exempt
income
Less:
General
deductions
Deductions Specific
deductions
gives
Capital
allowances
Taxable income
before capital gains
Plus:

Taxable capital gain

gives

Taxable income
FIGURE 4.1 Taxable income framework

Gross income represents all income items, whereas exempt income represents the income
items that are included in gross income (either by means of the general definition or special
inclusions), but which should be deducted from gross income as a result of their tax-exempt
status.

Video: Taxable income framework

Watch the video uploaded in the LU 3 tab on the module page, which gives an
introduction of the taxable income framework.

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 STUDY PROGRAMME ________________________________________

You should complete this learning unit in weeks 5 - 7 of the programme.

You should spend a minimum of 13 hours on this learning unit.

LEARNING OUTCOMES ___________________________________________

After you have completed this learning unit, you should be able to

• manage and evaluate information regarding the requirements, including applicable case
law, of the definition of Gross income.
• apply special inclusions to the definition of gross income in the calculation of "income".
• apply exempt income in the calculation of "income"

PRESCRIBED STUDY MATERIAL FOR THIS LEARNING UNIT ____________

Chapter 2 in the prescribed textbook

 SECTIONS OF THE PRESCRIBED TEXTBOOK WHICH YOU MAY IGNORE

• 2.1 Introduction
• 2.2.5 Residence
• 2.2.6 Source
• 2.2.7 Source in terms of section 9
• 2.3 The introduction to 2.3 Passive income exemptions
• 2.3.1 Non-resident’s interest exemption
• 2.3.2 Natural person’s interest exemption
• 2.3.4 Dividends and interest paid as an annuity
• 2.3.5 Royalties paid to non-residents
• 2.3.6 Purchased annuities
• 2.3.7 Foreign dividends
• 2.4 Deductions
• 2.5 Conclusion
• 2.6 Integrated questions

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CONTENTS

4.1 Background
(No prescribed text)

In learning unit 1, you were introduced very briefly to the framework that must be used when
calculating taxable income and, ultimately, tax liability. In this learning unit, we will discuss the
first component of the framework, namely income. As you can see from the diagram in the
introduction to this learning unit, we have expanded the framework to show that, for tax pur-
poses, income is made up of gross income less exempt income. In this learning unit, we will
look at what each of these terms means and what is included or excluded by these terms. The
other components of the framework will be dealt with in later learning units. Gross income is
defined in section 1 of the Income Tax Act, but before we discuss the definition, you need to
understand the concepts of resident and non-resident. This is necessary because the gross
income definition distinguishes between South African residents and non-residents. The
implication of this is that the rules used to calculate gross income for South African residents
differ to those used for the calculation of the gross income of non-residents.

A person other than a natural person (in other words, a business entity such as a company or
a close corporation) is a resident of the Republic of South Africa if it is

• incorporated, established or formed in the Republic, or

• has its place of effective management in the Republic

The first requirement is a matter of fact and is therefore not really open to any interpretation.
The second requirement, namely the place of effective management, is not always as easily
determinable and therefore, SARS has issued interpretation note 6 to clarify what is meant by
"place of effective management".

Have a look at interpretation note 6 (Issue 2) on SARS's website

(https://www.sars.gov.za/wp-content/uploads/Legal/Notes/LAPD-IntR-IN-
2012-06-IN-6-Resident-Place-of-effective-management-companies.pdf).

Read paragraph 4.2 of this document specifically to gain an understanding of

which circumstances may indicate the place of effective management of an
entity. You will not be required to list these circumstances, but they will give
you a better understanding of what this term means.

You first need to determine whether an entity is a resident for tax purposes,
because

• residents are taxed on all (worldwide) income, according to the resi-

dence basis of taxation
• non-residents are taxed on income received from a South African
source only, or income which is deemed to have been received from
a South African source

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The source of income is where the income has its origin. To determine the source of income,
two aspects need to be considered:

• the cause of the income

• the location of that originating cause

The source rules do not form part of this module and will be dealt with in detail on third year
level. For the purposes of this module, you will only be required to apply the gross income
definition to residents. Non-residents will be dealt with on third year level.

4.2 Gross income

(Textbook: sections 2.2.1 Total amount, 2.2.2 In cash or otherwise, 2.2.3 Received by or
accrued to and 2.2.4 Capital)

Once you have established that the taxpayer is a resident of the Republic, you need to consider
whether an amount which is received by the taxpayer, must be included in its gross income or
not. We now turn to an explanation of the definition of gross income as it applies to residents.

Below is an extract from section 1 of the Income Tax Act, which contains the definition of “gross
income”.

Gross income in relation to any year or period of assessment, means,

(i) in the case of any resident, the total amount, in cash or otherwise, received by
or accrued to or in favour of such resident, or
(ii) in the case of any person other than a resident, the total amount, in cash or other-
wise, received by or accrued to or in favour of such person from a source within or
deemed to be within the Republic,
during such year or period of assessment, excluding receipts or accruals of a
capital nature

From the above definition, you can see that before an amount may be included in the gross
income of a taxpayer, that amount must comply with all the requirements or criteria for the
definition of gross income, namely

• the total amount

• in cash or otherwise
• received by, accrued to, or in favour of a person
• during the year of assessment
• excluding amounts of a capital nature

Over and above these requirements, which must ALL be met, the definition also includes

• amounts (whether of a capital nature or not), which are specifically listed after the defini-
tion

We refer to this list as special inclusions. We will discuss these special inclusions later in this
learning unit.

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The criteria contained in the definition of gross income have to be complied with, and the inter-
pretation of each concept contained in the definition has been tested in the South African courts
over decades. Not all the criteria are easily interpreted in different situations and as a conse-
quence of decided tax cases, many important legal principles have been established. As you
will remember, we introduced you to what is called "legal precedent" in learning unit 1. It is the
application of this legal precedent that informs us how to apply some of the principles of the
definition of gross income in situations where interpretation is not straightforward.

You will need to learn the names (only the names, not the numbers that have been added for
the sake of completeness) of the case law (tax court cases) mentioned in this learning unit, as
you will be required to list them under the appropriate criteria for the gross income definition
when you consider whether an amount should be included in gross income or not. It is not
necessary to learn the content (the facts and conclusion) of these tax cases, as this will be
considered in detail on third year level. A list of the relevant case law is provided at the end of
this learning unit in Annexure A. Only these court cases may be referred to when answering a
question in an assessment.

We will now discuss each of the criteria for the definition of gross income separately. For each
criteria, read the applicable paragraph in the prescribed textbook first. Then we will introduce
to you some applicable court cases that will provide insight when applying the criteria.

4.2.1 Total amount in cash or otherwise

Study sections 2.2.1 Total amount and 2.2.2 In cash or otherwise of the
prescribed textbook.

As determining an "amount" is not always straightforward, we apply the ruling in Commissioner

for Inland Revenue v Butcher Bros (Pty) Ltd 13 SATC 21. In this court case it was established
that where an asset is received other than in cash, an "ascertainable money value" needs to
be determined and the onus is initially on the Commissioner to prove that an "amount" has
accrued to the taxpayer.

4.2.2 Received by, accrued to, or in favour of

Study section 2.2.3 Received by or accrued to of the prescribed textbook.

In Geldenhuys v Commissioner for Inland Revenue 14 SATC 419, it was suggested that an
amount is only "received" by a taxpayer if it is received by him (her) "on his (her) own behalf
and for his (her) own benefit".

In CIR v People's Stores (Walvis Bay) (Pty) Ltd 52 SATC 9, it was confirmed that the meaning
of "accrued to" is the amount "to which he has become entitled".

An amount must be included in income at the earliest date of it being received or accrued.
Therefore, if an amount has accrued on 1 April, but it was only received on 30 April, then the

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amount is regarded as income on 1 April. It will not be included again on 30 April, as it has
been taken into account already.

4.2.3 Year of assessment

This criterion is implied in the definition because tax payable is calculated on an annual basis,
therefore we need to decide into which "tax year" an amount of income will fall. This could have
implications if the rate of tax were to change.

A company's year of assessment is the same as its financial year. For example, if the com-
pany's financial year end is on 31 March 2024, then the year of assessment will be
1 April 2023 to 31 March 2024.

Only an amount received or accrued in a particular year of assessment will be included in gross
income for that year of assessment.

This criterion is generally a matter of fact and very few court cases have dealt with it.

The debate that takes place in terms of this criterion is about in which year an amount is accoun-
ted for if it accrues in one year and is received in a later year of assessment. This was discussed
under the previous heading.

4.2.4 Excluding amounts of a capital nature

Study section 2.2.4 Capital of the prescribed textbook.

For any amount that a taxpayer receives, it needs to be established whether the amount is of
a revenue or a capital nature. This is an important concept in income tax. Capital is compared
to a tree and revenue to the fruit of the tree (CIR v Visser 8 SATC 271). For example, in a
manufacturing business, the plant, equipment and machinery represent the "tree" and the items
produced the "fruit".

As the capital nature often depends on many variables, the courts have established tests that
can be used to assist in deciding whether income is of a capital nature or not. These tests are
often loosely grouped into two main groups:

• subjective tests
• objective tests

The subjective tests (as mentioned under the headings in section 2.2.4 of the prescribed
textbook) that are applied to determine whether an amount is of a capital nature or not relate
to the

• nature of the receipts

• sale of assets
• intention
• continuity
• change of intention

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When the courts look at objective tests (matters of fact) they will consider the following as
indications:

• manner of acquisition
• period for which the asset is held
• manner of disposal
• nature of the asset disposed of
• reason for the receipt
• legal nature of the transaction
• accounting treatment of the transaction

Consider the following case study. This will help you understand how the above tests are
applied in practice.

Case study

Mint (Pty) Ltd has been carrying on the business of growing herbs for many
years on the land it owns. This is the only business of the company. During
the 2014 year of assessment, Mint (Pty) Ltd bought an additional farm from a
deceased estate at a favourable price. At the time, the company did not need
the additional land, but it decided to hold it until it was required for planting
herbs at a later stage. Because of the economic recession, the company deci-
ded that it no longer required the land for future use and sold the farm in Feb-
ruary 2024 as land suitable for livestock farming. The amount was received in
cash by Mint (Pty) Ltd on 5 March 2024.

REQUIRED

Would the amount received by Mint (Pty) Ltd for the sale of the farm be capital
in nature for the year of assessment ended 31 March 2024?

Solution

In order to determine whether an amount received by a taxpayer is of a capital

nature, you need to apply the subjective and objective tests and base them on
all the facts to determine the nature of the amount.

Manner of acquisition – The property was acquired by means of a market-

related transaction.

Intention on acquisition – The taxpayer's intention was to acquire the farm as

an income-producing asset (an investment intention).

Change of intention – The fact that the taxpayer acquired the farm knowing
that he could sell it at a profit is not a clear indication that the asset was acqui-
red with a speculative intention (in other words, buying an asset at a favour-
able price for the purpose of selling it shortly afterwards at a profit). In addition,
the fact that it has decided to sell the farm would not automatically indicate a
change in the taxpayer's intention.

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 Period for which the asset was held – The company held the asset for almost
eight years.

Nature of the asset disposed of – The asset is a farm, which can be used as
an income-producing asset in Mint (Pty) Ltd’s business.

On the given facts, it can be argued by Mint (Pty) Ltd that it acquired the farm
with the intention of developing it as a produce farm. Owing to the economic
recession, however, this did not transpire, and since the land was surplus to
its requirements, a decision was made to sell the property.

The sale of the property amounted to the sale of a capital asset and not the
sale of an asset to make a profit. The proceeds would therefore be of a capital
nature and not included in gross income.

When studying the definition of gross income, make a detailed summary of

each criteria that an amount must comply with before it can be included in
gross income. You should be able to apply the principles discussed to deter-
mine whether an amount should be included in the gross income of a taxpayer
and state the applicable case law.

Although amounts of a capital nature are excluded from gross income, such amounts could
nevertheless be subject to income tax in accordance with the Eighth Schedule to the Act, which
regulates capital gains tax (CGT). This topic is discussed in learning unit 7 of this module.

Work through the following practical example:

Gross income

Bank A receives a deposit of R1 000 on 1 March from Trading (Pty) Ltd.

This money is deposited into a savings account at the bank as an
investment. Six months later, Trading (Pty) Ltd withdraws the amount and
the bank pays the company an amount of R1 050, comprising R1 000
original capital invested and R50 interest earned.

REQUIRED

Determine, giving reasons, whether

(a) the amount of R1 000 received by Bank A will be gross income

(b) the amount of R1 050 received by Trading (Pty) Ltd is gross
income

Solution

To establish whether the money received by Bank A on 1 March and the

money received by Trading (Pty) Ltd six months later should be included
in the gross income of the respective taxpayers, the following approach
may be followed:

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 • What is the specific principle, from the definition of gross income,
which applies to the amount or receipt?
• How can this specific principle be applied to this amount or receipt?
• What is the conclusion if the principle is applied?
This approach can be illustrated by the application of the above example:

(a) The receipt of R1 000 by Bank A

Principle: “Received” means that a taxpayer receives an amount for

his/her own benefit (Geldenhuys v. Commissioner).

Application: Bank A receives the amount on behalf of Trading (Pty) Ltd to

keep as a deposit in its name.

Conclusion: The amount is not received on behalf of and for the benefit
of Bank A; therefore, it will not be included in the gross income of Bank A.

(b) The receipt of R1 050 by Trading (Pty) Ltd

Principle: Capital amounts are excluded from gross income. Capital

represents the "tree" and the income derived from the capital represents
the "fruit" of the tree (CIR v. Visser).

Application: The original amount invested, namely R1 000, represents

the “tree” (capital) which has earned “fruit” (interest) of R50.

Conclusion: The invested capital received by Trading (Pty) Ltd will be

excluded from gross income, since it is capital in nature, but the income
(interest) will be included in gross income, as it is revenue in nature.

Complete the online self-assessment quiz, "Gross Income Definition", in the

LU 4 tab on the module page.

4.3 Gross income: Special inclusions

(No prescribed text)

The definition of gross income includes a list of specific amounts in paragraphs (a) to (n) (of
the definition in the Act), which are included over and above the amounts already included in
gross income under the general definition of gross income discussed in 4.2 above. This means
that, although an amount may be excluded from the definition of gross income because it did
not comply with any one of the criteria of the definition, the special inclusions contained in
paragraphs (a) to (n) have the effect that amounts covered by the provisions of these
paragraphs are nevertheless included in the gross income of the taxpayer.

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You do not need to know all the special inclusions, as some of them relate to individuals and
will be dealt with on third year level. The special inclusions relating to a business entity are
discussed in the paragraphs that follow.

4.3.1 Lease premiums

A lease premium is an amount that the lessee (person renting the property) pays to the lessor
(person owning the property and who is renting it out) in addition to the monthly rental. It is a
once-off payment that is usually made at the beginning of the lease period. The full amount of
the lease premium is included in the lessor's income in the year of assessment in which it is
received or when it accrued to the lessor.

4.3.2 Leasehold improvements

A lease agreement may specify that the lessee be obliged to erect/effect improvements on the
leased land or to the leased buildings. This means that the person who is renting the property
will incur costs to improve or extend the property, thereby increasing the value of the asset for
the lessor (owner). The value of the improvements effected to the property must be included in
the gross income of the lessor in the year of assessment in which the agreement was con-
cluded. The value to be included is the amount stipulated in the lease agreement as the value
to be expended on the lease improvements. If the actual value of the improvements (e.g.
R700 000) is more than the amount stipulated in the agreement (e.g. R550 000), then the
amount to be included in gross income remains the amount in the agreement (R550 000). (The
lessee is able to claim a deduction for the leasehold improvements over the period of the lease
– this will be dealt with on third year level.)

4.3.3 Proceeds from the disposal of certain assets

If a taxpayer sells an asset that was manufactured, produced, constructed or assembled by

him, then the full proceeds received by him must be included in gross income. In other words,
this disposal will not be treated as a transaction of a capital nature because he manufactured
the asset. Note that the proceeds will still be included in gross income, even if he used the
asset as a capital asset and then disposed of at a later stage.

4.3.4 Dividends

Any amount received or accrued by way of dividends (local and foreign dividends) is included
in gross income. There are exemptions pertaining to certain dividends (dealt with in section 4.4
below), but the dividend received or accrued must still be included in gross income first.

4.3.5 Recoupments

When a taxpayer sells a capital asset, the recoupment (for income tax purposes) pertaining to
this transaction must be calculated. (This calculation is dealt with in learning unit 6 of this
module.) The recoupment amount must be included in gross income.

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4.4 Exempt income

(Textbook: section 2.3.3 South African dividends)

You now have an understanding of which items will be included in gross income – either by
means of the gross income definition or by means of the sections pertaining to special inclu-
sions. The next component of the framework, namely exempt income, is deducted from gross
income. Exempt income refers to certain types of income that are included in gross income but
that the Income Tax Act does not want to subject to tax, that is, they are not regarded as income
(refer to the framework at the beginning of this learning unit) and are therefore deducted from
gross income to calculate total income.

Be very careful with your use of terminology. Exempt income is very different
from deductions.

When we refer to income, we say that it is either taxable or exempt (depen-

ding on the rules).

Exemptions are contained in section 10 of the Income Tax Act, and may exempt the taxpayer
(e.g. public benefit organisations) from paying normal income tax or may exempt the type of
income (e.g. government grants received) fully or partially from normal income tax.

Some of the taxpayers that are exempt from tax include

• any level of government in the Republic

• any institution, board or body, which as its principal objective conducts scientific, technical
or industrial research
• body corporates established in terms of the Sectional Titles Act 95 of 1986
• share-block companies established in terms of the Share Blocks Control Act 59 of 1980
• public-benefit organisations
• pension funds, retirement annuity funds and benefit funds
• recreational clubs approved by the Commissioner in terms of section 30A of the Income
Tax Act
• Public benefit organisations mainly comprise non-profit entities
established with the main objective of advancing public benefit activities
and approved as such by SARS. These activities include educational,
religious, cultural and environmental conservation activities.
• The exemptions in respect of certain taxpayers apply to normal income
tax only, and such taxpayers may still be liable for other forms of
taxation, such as value-added tax (VAT).

The types of income, which are exempt for a South African enterprise, are the following:

• dividends (see section 2.3.3 in the prescribed textbook)

• government grants (an amount received from government in terms of any programme or
scheme that has been approved in the national annual budget process will be exempt from
normal tax)

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 Without looking at the previous pages of your study guide or prescribed text-
book, list the categories of taxpayers that are exempt from normal income tax,
as well as the forms of exempt income.

You may find the answer in our notes in the preceding text, or in the prescribed
textbook. Did you remember them correctly?

Although certain amounts may be exempt from income tax (e.g. dividends in certain circum-
stances), note that these amounts are nevertheless first included in gross income and then
exempted. Once the second component of the framework, namely exempt income, has been
calculated, the relevant exempt amounts are deducted from gross income. The result of this
calculation is "income".

4.5 Discussion questions

The definition of “gross income” and special inclusions are usually assessed in a discussion
type of question, as opposed to a calculation type of question. This requires that a student
needs to learn the necessary skills to answer these types of questions in a way that obtains the
maximum number of marks.

When you need to answer a discussion type question on second year level on gross income or
special inclusions (and on the general deduction formula in a later learning unit), you need to
take note of the following:

• You must mention ALL the requirements of the definition;

• This is the theoretical part of the answer for which you will receive marks accordingly;
• But, then you need to do the application part of the discussion.
• This entails that you must apply the facts of the case study to each of the requirements.
• This is the more difficult part of answering the question as you need to identify and link
these correctly.
• Even though you must mention all the requirements, usually one or two of them is more
important (needs more discussion) than the other requirements, in a specific case study,
which you must discuss in more detail
• You will obtain the most marks for your effort if you can identify the correct issue (e.g.
whether the amount accrues or not, or whether the transaction is of a revenue or capital
nature) from the facts in the case study and link it to the correct requirement.
• It is also necessary to conclude on each of the requirements on whether that specific
requirement is satisfied or not.
• You also obtain marks for the mention of relevant and correct case law, except if it is
specifically stated that you can ignore case law. However, the correct court case must
be linked to the correct requirement.
• Finally, you always need to come to a final conclusion on whether an amount must be
included or not included in gross income. This conclusion must be BASED on your
discussion. For example, you cannot state that one of the requirements of the gross
income definition are not met, but then concluded that an amount must be included in

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 gross income, as you are contradicting yourself. The conclusion must be a valid
conclusion based on your discussion.

Go to the Forum, learning unit 4, and discuss the concepts of the gross
income definition. Try to think of examples where a receipt will not form part
of the gross income of a taxpayer and explain why not.

WRAP-UP

In this learning unit, the components of gross income (i.e. the gross income definition and spe-
cial inclusions) and exempt income were studied. The calculation of “income”, which includes
the components of gross income and exempt income, were thus dealt with.

Income is like the contents of a basket – the amounts contained in the

basket are subject to income tax.

Using this analogy, in line with the definition of gross income, certain
amounts are put into the basket.

The special inclusions make us put more into the basket than we may have
included in the basket during the first round.

Finally, exempt income provisions allow us to take some amounts out of

the basket.

Remember, however, that you cannot take an amount out of the basket if it
was not in the basket in the first place. Therefore, what is left in the basket
is what we refer to as income.

Also remember that the term “income” is a defined term for tax purposes
(as per section 1 of the Income Tax Act). It is therefore different from the
term when used for accounting purposes.

Listen to the podcast available under Learning Unit 4 on myUnisa, which

gives a summary of what the term income is for tax purposes.

Self-assessment questions – learning unit 4

Below are three questions which you can attempt. A document containing the suggested
solutions to these questions together with more additional questions and solutions will be
uploaded under the learning unit 4 tab on the module page.

You must always first attempt a question without looking at the answer and then, once you are
done, compare your answer to the suggested solution. Revisit those areas in the study material
that you struggled with when you attempted a question. This is the best and proven study
method that you can apply

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QUESTION 4.1 (5 marks, 6 minutes)

Lights (Pty) Ltd sold one of its manufacturing machines to another company for R50 000. At
the date of sale, the machine had a “Rnil” tax value and the accountant calculated that the tax
recoupment from this transaction was R50 000.

REQUIRED MARKS

Discuss whether the amount referred to in the above case study should be
5
included in the gross income of the taxpayer.

Source: Adapted from De Swardt, Hamel, Mitchell, Nieuwoudt, Stark & Venter 2014 (Tax workbook)

QUESTION 4.2 (10 marks, 12 minutes)

Dinepe Fela (Pty) Ltd (Dinepe) is a South African company that sells contemporary art.
Dinepe’s financial year ends on 31 March. On 28 March 2024, it sold an artwork worth
R10 000 to an advertising company. The advertising company purchased the artwork to hang
it in their reception area. Instead of paying cash for the artwork, the advertising company offered
Dinepe an advertising campaign, also worth R10 000. On 30 March 2024, Dinepe accepted the
advertising campaign instead of cash. The campaign would consist of 10 monthly adver-
tisements in a local newspaper, commencing during April 2024.

REQUIRED MARKS

Discuss whether the receipt of the advertising campaign would constitute

gross income for Dinepe Fela (Pty) Ltd, as defined in the Income Tax Act 58 10
of 1962 for the year ending 31 March 2024.

QUESTION 4.3 (10 marks, 12 minutes)

Brand Guru (Pty) Ltd is a South African resident company that earns its income through
branding all newly registered companies’ names, images, logos and the printing of business
cards. The year of assessment ends on 31 March 2024. The following receipts and accruals
relate to its current year of assessment:

Receipts and accruals Notes R

Consultation fees 1 285 000
Company logos designed 2 165 000
Business cards 3 10 000
Lease premium and rent 4 805 000
Sale of building B 5 2 000 000

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QUESTION 4.3 (continued)

Notes

1. Consultation fees

Brand Guru (Pty) Ltd earned consultation fees of R285 000 during the year of assessment
in the Republic for company name and logo ideas proposed to clients.

2. Company logos designed

An amount of R165 000 was received from Botswana with regard to company logos
designed for newly registered companies in Botswana.

3. Business cards

Brand Guru (Pty) Ltd entered into a contract to produce business cards for Lucky Pet
(Pty) Ltd. In terms of the contract, Lucky Pet (Pty) Ltd will pay the R10 000 owing for the
business cards on 1 May 2024 only. The business cards were designed and printed on
15 March 2024 and delivered to Lucky Pet on the same day.

4. Lease premium and rent

On 1 July 2023, Brand Guru (Pty) Ltd entered into a lease contract with Busy Bee (Pty)
Ltd. From 1 July 2023, a monthly rental amount of R45 000 is payable to Brand Guru
(Pty) Ltd for the lease of building A. A lease premium of R400 000 was also paid to Brand
Guru (Pty) Ltd on 1 July 2023.

5. Sale of building B

Brand Guru (Pty) Ltd sold building B in Pretoria for R2 000 000. It has been rented out
for the past 10 years.

REQUIRED MARKS

Calculate the total gross income amount of Brand Guru (Pty) Ltd for the year
of assessment ending 31 March 2024. Give brief reasons why an amount is 10
included in gross income or not. You must ignore any double-tax agreements
that may be in force with Botswana.

We could assess this learning unit in assignments by asking you to

• determine, with reference to the criteria established, whether a specific legal entity will be
classified as a resident for tax purposes
• list the requirements of the gross income definition, together with the applicable case law
• apply the requirements of the gross income definition to a practical situation, providing
reasons why an amount should be included in gross income or not

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• state the year of assessment in a practical situation
• apply the subjective and objective tests to determine whether a transaction is of a capital
nature or not
• determine, in a practical case study, which amounts are specifically included in gross
income
• determine, in a practical case study, the amounts that will be exempt from income tax
• apply the special inclusions to a taxable income calculation
• apply exempt income to a taxable income calculation
• calculate income (as defined)

Refer to the Annexure on the next page.

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ANNEXURE: CASE LAW RELEVANT TO GROSS INCOME (LEARNING UNIT 4)

Butcher Bros (Pty) Ltd, CIR v 1945 AD 301 13 SATC 21

Geldenhuys v CIR 1947 (3) SA 256 (C) 14 SATC 419
Lategan v CIR 1926 CPD 203 2 SATC 16
Mooi v SIR 1972 (1) SA 674 (AD) 34 SATC 1
Natal Estates Ltd v SIR 1975 (4) SA 177 (A) 37 SATC 193
People’s Stores (Walvis Bay) (Pty) Ltd, CIR v 1990 (2) SA 353 (A) 52 SATC 9
Pick ‘n Pay Employee Share Purchase Trust, CIR v 1992 (4) SA 39 (AD) 54 SATC 271
Stott, CIR v 1928 AD 252 3 SATC 253
Visser, CIR v 1937 TPD 77 8 SATC 271
Witwatersrand Association of Racing Clubs, CIR v 1960 (3) SA 291 (A) 23 SATC 380

Notes:

1. For ease of reference the list is presented in alphabetical order according to the name
the case is known by. Therefore, CIR v Butcher Bros (Pty) Ltd is listed as Butcher
Bros, CIR v.
2. Only these court cases may be referred to when answering a question in an
assessment.

© Unisa

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