Study Unit 1.

3 – GROSS INCOME
Student’s approach – chapter 3

TAXF211 2023
K Coetzee
NB Calculation of Taxable income
FRAMEWORK R
Gross Income XXXX
• General Definition
• Specific Inclusions
Less : Exempt Income (XX)
Income XXXX
Less : Allowable Deductions (XXX)
• General Deduction Formula
• Specific Deductions
• Capital Allowances
Taxable Income from Business Activities XXXX
Plus : Taxable Capital Gain XXX
Total Taxable Income for the year of assessment XXXX
Study outcomes

• Motivate, with reasons, whether receipts and

accruals constitute gross income or not;

• Motivate, with reasons, whether proceeds from the

sale of assets, is capital in nature, or not;

• Motivate, with reference to case law, why receipts or

accruals are taxable, or not, and whether it is of
capital nature, or not.
Gross income in terms of Accounting

Service – entity Trading entity

Services rendered xxx Sales xxx

Minus:
Cost of Sales xxx
Plus other income: Gross profit xxx
Interest received xxx Plus:
Dividends receiv. xxx Other income
Profit sale of asset xxx Interest received xxx
Dividends received xxx
Profit sale of asset xxx
Gross income Rxxx
Gross income xxx
 What is GROSS INCOME?
• Section 1 of the Income Tax Act:
'Gross Income' in relation to any year 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;

• An amount must be Gross Income BEFORE subject to

Income Tax

• Definition has 2 parts:

– Residents
– Non-Residents
What is GROSS INCOME? (continued)

• (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,…
Components

In the case of a resident

1.Total Amount in cash or otherwise
2.Received by or accrued to
3.Year of Assessment
4.Capital Nature (excluded)
DEFINITION: 2 PARTS

• Gross Income = starting point for calculation of

taxable income

Gross income

Resident Non-resident
RESIDENT

• NATURAL PERSON (more detail in TAXF221)

– Ordinarily resident in Republic or
– Physical Presence Test (TAXF221)

• Other than Natural Person

– Incorporated in Republic
– Effectively managed in Republic
RESIDENT

COHEN vs CIR
– "Ordinarily resident" = place whereto a person
returns from his / her wanderings.

CIR vs KUTTEL
– Person is usually resident where their main
home/residence is.
NON-RESIDENT

Same definition as that of a resident

EXCEPT
Only amounts from sources
from within South Africa is
included in Gross Income.
COURT CASES

Not all aspects are defined or made clear in the Act

Therefore there are interpretations of the Act:

-some are just the way that SARS does it
- Some are official notices from SARS
- Sometimes a taxpayer is in dispute with how SARS
applies the law and they go to court
- Once the court ruled on an interpretation it is used
afterwards until a new court case rules differently
- THAT IS WHY YOU HAVE TO LEARN THE COURT
CASES TOO
TOTAL AMOUNT: Cash or otherwise

Lategan v CIR (Court case)

WHEN INCOME IS EARNED NOT IN

CASH BUT IN ASSETS
• Value of assets received
• In lieu of cash
• Also included in GROSS INCOME
RECEIVED BY OR ACCRUED TO

• Could be at the same moment

• When not at the same time :

– On first date included in GROSS INCOME
– Second date – nothing – CANNOT be included twice
RECEIVED BY OR ACCRUEDTO

• Accounting
– Recognise income when accrued

BUT

• Tax
– Recognise income earliest of receipt or
accrual
RECEIVED

Geldenhuys v CIR
Any amount received must be on own behalf
and for his own benefit for it to be GI.
(Geldenhuys sold sheep as the usufruct holder)

MP Finance Group v CSARS

Illegal receipts = still GI if the TP intended to
receive for his own benefit, even if TP was not
entitled to the receipts. (MP Finance ran a
pyramid scheme)
ACCRUED

CIR v People’s Stores (Walvis Bay) (Pty) Ltd 52 SATC 9

• Accrued = become entitled to (e.g credit sales)

Mooi v SIR SATC 1

• TP must be unconditionally entitled to an amount
• Only accrued when condition has been satisfied

CIR v Witwatersrand Association of Racing Clubs

• If you donate proceeds after it has accrued to you,
then it is still your GI. If you cede the income before
accrual then it is not GI. (Wits Racing Club donated
money to a charity only after receiving for their own
benefit).
In favor of

• Income received by another person

• On behalf of the taxpayer

• Included in Taxpayer’s GROSS

INCOME
YEAR OF ASSESSMENT

• ONLY amounts received or accrued

• IN a particular year of assessment
• Included in GROSS INCOME
• Individuals = 28 February
• Companies = Financial Year
– eg.

1 March 2022 to 28 February 2023

1 July 2022 to 30 June 2023

Components

In the case of a resident

1.Total Amount in cash or
otherwise
2.Received by or accrued to
3.Year of Assessment
4.Capital Nature (excluded)
CAPITAL NATURE– Receipts or
Accruals

• Capital receipts Not included in

GROSS INCOME - Thus NO income tax
(could attract capital gains tax)

• No definition in Act

• Capital income in one taxpayer and non-capital

income in other taxpayer - possible

• Not easy to determine between capital and

income – different court decisions
CAPITAL NATURE– Receipts or
Accruals

• CIR vs VISSER
–Capital = Tree
–Income = Fruit
CAPITAL NATURE – Receipts or Accruals

• Nature of receipts or accruals NB !!

• Capital Nature = NO Income Tax

payable on receipt/accrual
But maybe capital gains tax

• Income Nature = Income Tax

payable on receipt/accrual

• Therefore very important to DECIDE !!

CAPITAL NATURE– Receipts or Accruals

• All accruals or receipts HAS to be either

capital or income

• Cannot be both

• Courts decide each case based on its own

facts if difference between taxpayer and
SARS
 CAPITAL NATURE– Receipts or Accruals

• Acquire an asset with either of 2 objectives :

al
Capit
• To make an INVESTMENT
– Keep asset
– Earn income from the asset

Incom
e
• To make a PROFIT
– Sell the asset
– At a profit
CAPITAL NATURE

Tests by courts

Subjective
(what a person
"say") Objective
(what a person
"did")
CAPITAL NATURE
Subjective Tests

1.) INTENTION OF Taxpayer NB !!

Was it his intention to embark on a profit-making
scheme ?? Elandsheuwel Farming (Edms) Bpk v SBI

Analyse the intention

1. Intention at time of acquisition of asset NB
2. During period asset is kept (change of intention
during)
3. At time of disposal of asset
CAPITAL NATURE
Subjective Tests

1.) INTENTION of Taxpayer NB !!

Intention at time of acquisition of asset NB

CIR v Stott
Taxpayers’s intention at acquisition is decisive unless
later a change in intention

Elandsheuwel Farming (Edms) Bpk v SBI

We must test Intention at time of acquisition of asset
and during period of owning the asset (change of
intention?) and Intention at time of sale or realisation
of asset
 CAPITAL NATURE
Subjective Tests

2.) CHANGE in INTENTION of Taxpayer

• CIR v Richmond Estates (Pty) Ltd 20 SATC 355
– TP can change his intention. The mere fact that TP
sells his capital asset does not necessarily result in
profit being of an income nature.

• CIR v Stott 3 SATC 253

– Decision to realise an asset to your best advantage
does not necessarily indicate a change in intention
 CAPITAL NATURE
Subjective Tests

2.) CHANGE in INTENTION of Taxpayer (…continued)

Natal Estates Ltd v SIR:

A change in intention implies something more than the
mere decision to sell an asset of capital nature. Consider
all the facts (e.g. way of realisation) and determine whether
(or not) the ‘Rubicon’ was crossed. Did the asset now
become part of a scheme of profit making
CAPITAL NATURE
Subjective Tests

3.) MIXED INTENTIONS

– An asset could be acquired with mixed
intentions

• COT v Levy 18 SATC 127

• Look for the main or dominant purpose

 CAPITAL NATURE
Subjective Tests

4.) INTENTIONS OF COMPANIES

• CIR v Richmond Estates (Pty) Ltd 20 SATC 355

• Intention of Company = intention of directors

• Determined by formal actions – recorded noted decisions
especially
CAPITAL NATURE
Objective Tests

• Objective Tests – by courts p.155

– Manner of acquisition
– Manner of disposal
– Period for which asset is held
– Continuity
– Taxpayer’s occupation
– No change in ownership
– Nature of the asset sold
– Reason for the receipt
– Legal nature of the transaction
– Accounting treatment of transaction etc ….
 CAPITAL NATURE
Specific Transactions

• Compensation for damages

– Trading losses – income nature
– Capital losses – capital of nature

• Gambling, lotteries and prizes

» Element of luck – capital of nature
» Journalists wins a literary prize – income nature
- Close connection between prize and
income-earning operations

• Gifts and Inheritances

– Fortuitous receipts – no relation to business
activities  capital of nature
SUMMARY

Framework for the calculation of Taxable Income =

NB!

Definition of Gross Income – section 1

Components = NB!

Residents and non-residents

Characteristics / requirements = NB!

Capital nature: Subjective tests and Objective

tests
 How to approach GI questions

• Gross income questions are mostly discussion questions with application. It has
to be addressed in a step-like manner.

• STEP 1 – Identify the issues

– Which components or part of Gross Income definition is applicable?
• Is it resident / non-resident issue?
• Is it a received or accrued?
• Is it capital nature?
• Is it year of assessment? Etc.

• STEP 2 – Court cases / income tax provisions

– State the requirement within the GI definition
– Refer to different court cases within the components or parts that were identified as
issues

• STEP 3 – Application while doing step 2

– Apply the theory mentioned in step 2 to the facts given in question.

• STEP 4 – Conclusion
– Conclude on whether amount in question is part of GI or not and any other provisions
that may apply that year of assessment in which it is taxable if e.g. certificate of
completion is only issued in the next period.
Discussion questions

1. Identify • Give subject

2. List legislation ie • Give act ie definition of
Income Tax Act sec 1 gross income (entire
definition)
3. Decide ie Capital • Discuss of a capital
nature
• Discuss court case(s)
4. Give court case(s)
• Apply to circumstances
5. Apply to question
of question and give
6. Conclusion
conclusion