SCHOOL OF ACCOUNTANCY

TAXATION 388
2023

SILKE: CHAPTER 3

GROSS INCOME

Lecturer: Prof Linda van Heerden

 Gross income
SILKE: Chapter 3
Learning Outcomes
After studying this chapter, you should be able to:
• Demonstrate an in-depth knowledge of each requirement of the definition of ‘gross
income’;
• Determine whether a natural person or a person other than a natural person is a resident for
income tax purposes;
• Apply the principles of relevant case law in order to illustrate the meaning of the terms used
in the definition of ‘gross income’; and
• Demonstrate an in-depth knowledge of the criteria to be applied in order to distinguish
between capital and income for the purposes of the definition of ‘gross income’.

Class Preparation
• Read Chapter 3 of SILKE
• Create your own summaries
• Download the following interpretation notes from: https://www.sars.gov.za/legal-counsel/legal-
advisory/interpretation-notes/
o Interpretation note 3 (issue 2) – Ordinarily resident
o Interpretation note 4 (issue 5) – Physical presence test

The lecturer will lead and facilitate the class discussion of the prescribed material. The lecturer will
assume that students have worked through the relevant chapter prior to the lecture and the class
discussion will proceed from this basis.
 Caveat
This PowerPoint presentation is the lecturer’s teaching aid and is made available to better
facilitate classroom activities, it does not replace your prescribed course material (textbook
and the Act). This presentation must not be treated as a summary of the prescribed work.

Note that: all section references in these class notes refer to the Income Tax Act, unless
specifically stated otherwise.
Marks will only be awarded for principles from cases when
relevant to a discussion (context).

No marks will be awarded for case names.

ONLY for Chapter 3:

Only know the points in Silke and the case law

discussed on the slides
3.1 Basic framework to calculate a person’s taxable income

Gross income xxx

Less: Exempt income (xxx)
Income xxx
Less: Deductions & allowances (xxx)
Taxable income xxx
Section 1 – Gross income definition

Focus on general
definition
3.1 The definition of ‘gross income’ [s1(1)]
• Starting point for calculating taxable income of a person
• Defined in section 1(1) of the Act
• Included in gross income = General definition + special inclusions (see Chapter 4)
• Different for (i) “residents” and (ii) “non-residents”

(i) Resident (ii) Non-resident

1. Total amount, in cash or otherwise
2. Received by; accrued to; or in favour
of the resident
3. During the YoA
4. Excluding amounts of a capital
nature
1. Total amount, in cash or otherwise
2. Received by; accrued to; or in favour
of a non-resident
3. During the YoA
4. From a source within / deemed to be
within RSA
5. Excluding amounts of a capital
nature

Every single one of these requirements must be met before an amount will qualify
as ‘gross income’
3.2 Determine if taxpayer is a resident or non-resident
• s 1(1) definition of ‘resident’
• Different for natural persons and persons other than natural persons

DTA

Non-resident Resident

Incorporated, Place of
Ordinarily Physical
established, effective
resident test presence test
formed management
 Section 1 – Resident definition

NB!!

Definition analysis:
• Paragraph (a) & (b)
• Par (a) → Subparagraph (i) or (ii)
• Subparagraph (ii) → item (aa) & (bb)
• “Provided” / Proviso: Provide further
Par (a)(ii) ONLY if explanation & possible changing of the rules
Read & not at ANY time in • 1st proviso applicable to subparagraph (ii)
understand YOA meet par (a)(i) • 2nd proviso applicable to whole definition
3.2.1 Residence of natural persons [par (a)(i) of the definition of ‘resident’ in s1(1)]
Case Principle
Cohen v CIR 1. Country to which a person will naturally and
as a matter of course return to = ‘usual’ or
‘principal’ residence
Taxpayer’s employer requests 2. Focus not only on the current YoA = look at
Ordi that taxpayer work for 20 person’s life outside the current YoA as well
naril months in New York 3. Physical absence is not decisive
y
resi
dent
CIR v Kuttel • Place where person normally resides apart
Taxpayer moves to New York to from occasional or temporary absences
open office. Receives permanent (‘real home’)
residence permit and builds life
there.
What factors does SARS consider in determining whether a taxpayer is ordinarily resident or
not?
-Refer to Interpretation Note No. 3 (issue 2)
-Examples:
Most fixed and settled place of residence, habitual abode, place of business and personal
interest, status in country, location of personal belongings, nationality, family and social
relations, political and cultural activities, period aboard, purpose and nature of visits aboard,
frequency and reasons for visits.
NB!!

Read &
understand
Beginning and ending of residency under ordinarily resident test

Section 9H

Act?
Practice?
See slide
14
 3.2.3 What happens when a taxpayer emigrates from RSA?

Emigrates

Resident Non-Resident

1 March 2022 1 June 2022 – 28 Feb 2023

flies to foreign
country (date of
emigration)

S 9H(2)(b): S 9H(2)(c) and IN 3:

YoA (as a resident) is deemed to Next YoA (as a non-resident) is
end on the day immediately deemed to commence on the day
before the day on which the on which the person ceases to be
taxpayer ceases to be resident resident
The treatment of the year of assessment for a person in the year of
emigration (with reference to chapter 3.2.3, p.35 and chapter 7.2.1,
p.161)
• Even though s 9H(2)(b) and (c) states that a YOA ends on the date
immediately before the day on which a person ceases to be resident
and a new YOA starts on the day which the person ceases to be
resident, the person can only submit one tax return and the
person will only have one 2023 YOA (partly as resident and partly
as non-resident)
• The TP is entitled to the full s 6 rebates (i.e. not apportioned)
• ONE calculation of the taxable income of the taxpayer will be done,
and one return submitted, taking into account:
• The dates on which any amounts are received and
• The principles of the residence-based tax system (for income
received during the period as resident) and the principles for the
source-based tax system (for income received during the period
as non-resident)
Act vs Practical application
 3.2.3 What happens when a taxpayer (non-resident) immigrates to RSA?

Immigrates

Non-resident Resident

1 March 2022 1 June 2022 – 28 Feb 2023

flies to RSA
(date of
immigration)

Seen as a non-resident from Seen as a resident from the

beginning of YOA until the day day on which he becomes
before he becomes ordinarily ordinarily resident (IN 3)
resident (IN 3)
Lecture 2
 3.2.1 Residence of natural persons [par (a)(ii) of the definition of ‘resident’ in s1(1)]

Physical presence test (slide 11) – person is not at any time ordinarily resident
in current YOA

3 Requirements:
Physically present in RSA for a period or periods
1. Exceeding 91 days in aggregate during the current YoA (thus 2023 YoA)
2. Exceeding 91 days in aggregate during each of the 5 preceding YoA (thus 2022
– 2018 YoA)
3. Exceeding 915 days in aggregate during the 5 preceding YoA (thus 2022 – 2018
YoA > 915 days)
Provisos:
• Part of a day = whole day
• Day in transit through RSA = not included, provided that person does not enter
through customs point
• >91 and >915 days need not be continuous
• If a person is a resident i.t.o. the PP test, but is then outside RSA for ≥ 330 full
continuous days, the person is deemed not to be a resident

Beginning and ending of residency under physical presence test?

Example: Physical Presence Test
YOA Days physically present in RSA
Do examples 3.1 2018 301
and 3.2 (see
amended solution) 2019 95
to practice 2020 109
principles 2021 215
2022 203
2023 92
Assume that the taxpayer is not ‘ordinarily resident’ + No DTA. Is the taxpayer a
resident for RSA income tax purposes for the 2023 YoA?

What would the implications for residency be if the taxpayer flew from RSA to Croatia
on 1 June 2022, and remained physically outside South Africa up to and including 15
May 2023?
3.2.2 Residence of persons other than natural persons [par(b) of the definition of
‘resident’ in s1(1)]

• Companies, close corporations or trusts

• Resident if:
o Incorporated, established or formed in the RSA,
o Place of effective management in the RSA.

What does incorporated, established or formed mean?

 Not defined in the Act.

 Company formed and incorporated in RSA w.r.t. s13 of Companies Act is a
resident, irrespective of where effective management is
 DTA’s have priority

What does place of effective management mean?

 Not defined in the Act.

 IN 6 (issue 2) provides more guidance for the purposes of establishing the place of
effective management – ‘the place where key management and commercial
decisions that are necessary for the conduct of its business as a whole are in
substance made’.
 May have more than one place of management but only ONE place of EFFECTIVE
management = place where primary decisions are made
 DTA’s have priority.
 Concepts of the ‘gross income’
definition in s 1(1)
(i) Resident (ii) Non-resident
1. Total amount, in cash or otherwise 1. Total amount, in cash or otherwise
2. Received by; accrued to; or in favour 2. Received by; accrued to; or in favour
of the resident of a non-resident
3. During the YoA 3. During the YoA
4. Excluding amounts of a capital 4. From a source within / deemed to be
nature within RSA Chap 21
5. Excluding amounts of a capital
nature

Every single one of these requirements must be met before an amount will qualify
as ‘gross income’
3.3 Meaning of ‘total amount in cash or otherwise’
Case Principle

Lategan • ‘Amount’ includes not only money,

• but also the value of every form of property earned
Wine farmer sells wine. Part of
money received in current
by the taxpayer which has money value,
YoA, balance received in • even the right to receive a future payment
installments in following YoA

Butcher Bros • ‘Amounts’ must have an ascertainable money value

on the end of the YOA
Long-term lessee must
demolish current building and
build a new one as per the
contract

Brummeria Renaissance • The right to an interest free loan is an ‘amount’ and

(Also see IN 58 (Issue 2)) this right has an ascertainable monetary value.
Leave for Tax 388
• Irrelevant if the right can be converted into money
• There is an ‘amount’ if what is received or accrued is
objectively capable of being valued in money terms
 Concepts of the ‘gross income’
definition in s 1(1)
(i) Resident (ii) Non-resident
1. Total amount, in cash or otherwise 1. Total amount, in cash or otherwise
2. Received by; accrued to; or in favour 2. Received by; accrued to; or in favour
of the resident of a non-resident
3. During the YoA 3. During the YoA
4. Excluding amounts of a capital 4. From a source within / deemed to be
nature within RSA Chap 21
5. Excluding amounts of a capital
nature

Every single one of these requirements must be met before an amount will qualify
as ‘gross income’
3.4.1 Meaning of ‘received by’
Case
Geldenhuys
Wife only has usufruct, sells sheep
of heirs. Wife not entitled to
proceeds, the heirs are.
Pyott
Biscuits sold in tins = GI
Tin returned = Repayment
ITC 1918 (2019) (81 SATC 267)
Retailer in clothes and other
merchandise ‘sells’ gift cards
Leave for Tax 388
When is it GI?
Principle
An amount is only ‘received’ by the taxpayer, if it is
received
• on his own behalf and
• for his own benefit
• Deposits are amounts received and should be
included in gross income
• unless they are deposited into a separate trust
account specifically opened for deposits
received
• Gift card receipts are not for taxpayer’s own
benefit, but for the gift card holder’s
• Included in taxpayer’s GI on the earliest of:
1. Redeemed by the gift card holder
2. Date on which gift card expires
3.4.1 Meaning of ‘received by’ - Illegal income

Self study
Case
Delagoa Bay Cigarette
Taxpayer ran an illegal lottery.
Cigarettes sold at higher price,
difference was prize money
(given to holder of a lucky
coupon)
MP Finance Group
Illegal pyramid scheme =
taxpayer’s intention was to use
deposits for own benefit.
Principle
• Illegal receipts may also constitute ‘gross
income’
• For income tax purposes it does not matter if a
transaction is legal or not.
• Illegal receipts may also constitute ‘gross
income’ if the taxpayer intended to receive the
amount for his or her own benefit.
• The issue is not whether the victim intended to
part with the money, but rather whether the thief
intended to benefit from it

If an amount meets the requirements of the ‘gross income’ definition – even if

the amount that is received, is received in an illegal manner = gross income
3.4.2 Meaning of ‘accrued to’

Case Principle

People’s Stores ‘Accrued’ means ’entitled to’ payment (obtains a vested

right) ; does not have to be ’due and payable’.
Credit sales paid in installments over 6 months.

Witwatersrand Association • Disposal of income after becoming entitled to it has

of Racing Clubs no effect on gross income
• A moral obligation to pay money over does not destroy
Horseracing for charity
organisation = didn’t act as beneficial character of the receipt
agent

Mooi Contingent right ≠ entitled to. Meaning of ‘accrued’ is

extended to ‘unconditionally entitled to’ payment.
Option to buy shares subject to conditions = accrues when
conditions are met, and rights are exercisable
3.4.2 Meaning of ‘accrued to’
Case & Principle
Lategan & People’s Stores = entitled to the payment (vested right)

Mooi = unconditionally entitled to payment (conditions fulfilled and right is exercisable)

Received by OR accrued to: GENERAL RULE

• Inclusion in gross income: earliest of receipt or accrual

• Which ever takes place 1st
• Can be on the same date or on different dates
3.4.3 Valuation of receipt or accrual

• Value of receipt = amount actually received in current YoA

• Value of amount that has accrued, but has not been received at YE
• Face value vs present value?

3.4.4 Unquantified amounts [s24M]

• If an asset is disposed of for a consideration that cannot be quantified in that YoA,

it is deemed not to have accrued to that person in that YoA.
• The unquantified amount accrues to that person only when it can be quantified
(s 24M(1)).
3.4.7 Disposal of income
Self
Amount accrues PRIOR to disposal vs amount accrues POST disposal? study

• Donation to charity organisations (Witwatersrand Association of Racing Clubs).

ragentr Horse racing organisation carries tax liability on gain donated
aagentaCharity organisation deemed to receive the gains donated
• Disposal of business
Sells business with right to profit – seller still carries tax
liability for period that business belonged to him
• Securities sold cum or ex income rights
Sell shares, debentures, government shares with right to dividend / interest = did
whole amount accrue before or after sale? Determine if buyer or seller is taxed
• Disposal & cession of right that will only accrue in future
Cede before accrual = gross income accrues to cessionary

3.4.8 Time of accrual of interest payable by the SARS [s7E]

• Interest payable by the SARS included in gross income of taxpayer on day it was
paid to the person.
• Therefore date of accrual ignored. Self study
3.5 Requirement 3: During Year of assessment [s 1(1), a 5]
• Year or period i.r.o.which tax is chargeable but normally 12 months
• Natural persons and trusts: 1 March until the last day of February
• Company: Financial year
 Does not
Total only include
money
amount,
in cash or
Any form of
otherwise property that
has a money
value

Must have an
ascertainable
money value
 On his own
Received behalf and for
his own
by benefit

Deposits are GI
unless deposited
in separate trust
account

Illegal income is
gross income
 Accrued Entitled to
payment
to

Unconditionally
entitled to
payment

Disposal of
income: does
accrual
• Inclusion in gross income: earliest of receipt or happens before
accrual or after
• Which ever takes place 1st disposal?
• Can be on the same date or on different dates
Lecture 3
 Concepts of the ‘gross income’
definition in s 1(1)
(i) Resident (ii) Non-resident
1. Total amount, in cash or otherwise 1. Total amount, in cash or otherwise
2. Received by; accrued to; or in favour 2. Received by; accrued to; or in favour
of the resident of a non-resident
3. During the YoA 3. During the YoA
4. From a source within / deemed to be
within RSA Chap 21
4. Excluding amounts of a capital 5. Excluding amounts of a capital
nature nature

Every single one of these requirements must be met before an amount will qualify
as ‘gross income’
3.6 Receipts and accruals of a capital nature

• Definition of ‘gross income’ excludes receipts or accruals of a capital nature

(except for special inclusions, see Chapter 4).

• What does capital in nature mean? Difficult: what is capital in nature in the hands of
one taxpayer may be income in nature in the hands of another taxpayer
• Not defined in the Act (case law provide guidelines). No single or all-embracing test
exists
A portion of receipts of a capital in nature may possibly be taxed as taxable capital
gain – Chapter 17

• S102 of the Tax Administration Act (burden of proof = taxpayer)

• Question of fact but each case to be considered on its own merits
• Intention is the most important test in deciding whether an amount is income or
capital in nature
• TP’s own evidence about intention and his credibility will be considered
• All receipts or accruals must be classified as either capital or income in
nature (but a single payment may be apportioned).
3.6.1 & 3.6.5 Receipts and accruals of a capital nature (continued)
Nature of the asset and Intention
Case Principle
Visser • “Capital” is the “tree” which is the income-
producing asset.
Mining options on farms – option
lapses before taxpayer starts searching
• “Income” is the “fruit” produced by “capital” (the
for minerals. Taxpayer has agreement “tree”).
with another person to help him to • Income = a product of a person’s wits & energy
obtain the options again in return for
shares
George Forest Timber • Fixed capital produces new wealth but remains
intact. The sale of fixed capital assets is
capital in nature
Trees on land with natural forest are
felled annually and wood is sold as • Floating capital is consumed or disappears in the
trade inventory process of production. The sale of
current/floating assets (like trading stock) is
income in nature.
3.6.1 & 3.6.5 Receipts and accruals of a capital nature (continued)

Nature of the asset and Intention

Case Principle
• The mere decision to sell an asset held as an
Nel investment at a profit, doesn’t necessarily
make it income in nature, something more is
needed
Taxpayer buys Krugerrands with • Asset was acquired with the intention to keep it
intention to keep it LT. Sell some of as an investment and not to make a profit. It will
them years later remain capital in nature where the disposal
Capital in nature occurs due to unusual/special circumstances.
3.6.3 Receipts and accruals of a capital nature (continued)

Business conducted with a Profit-making purpose

Case Principle

Pick ‘n Pay Employee • If the taxpayer operates a business in carrying on a

share purchase trust scheme of profit-making the pro­ceeds will be
deemed to be income in nature
• Scheme of profit-making = income is designedly
sought and worked for (profit-making purpose)
• Look at the purpose the company / trust was
founded for

Trust administer share purchase scheme to the benefit of PnP employees. Trust buys shares
to sell them to employees. Is the sale of shares to employees’ capital or income of nature?
 Capital in nature?
Nature of Asset
Capital

• Income producing asset (tree)

• Fixed capital assets
• Investment

Income

• Produced by capital (fruit)

• Current assets / Floating capital assets
• Speculation / Scheme of profit-making
3.6.4 & 3.6.5 & 3.6.7 Receipts and accruals of a capital nature (continued)

Mixed or double intention

Case
Stott
Taxpayer is a surveyor &
architect that sometimes buys
land if he has funds to invest.
Subdivides big piece of land
into plots -> sells plots
Principle
• The intention of the taxpayer at date of
acquisition is important, unless intention
changed prior to sale and factors indicate that it
was sold in a scheme of profit making.
• A taxpayer is entitled to realise an asset to his
best advantage without it being considered a
change in intention.

Levy
Taxpayer sells shares in a • If TP has mixed intentions seek and give effect
company that would have to main or dominant intention
developed land. Only wanted to
receive a good income from
selling the shares.
3.6.8 Receipts and accruals of a capital nature (continued)

Secondary / alternative purpose

Case Principle

Nussbaum • If a TP invest in an asset as an investment but has a

secondary profit-making intention when the asset
is purchased and sold, income from sale will be
income in nature

• The secondary intention would affect the primary

intention and result in profits being taxed as income
in nature.

• Taxpayer inherits listed shares and expands portfolio with surplus funds = Purpose was
dividend income = Capital in nature
• Sells some shares to invest in interest-bearing investment to have cash resources = change
to trading stock = Income in nature
• Income from sale > dividend income
3.6.6 Receipts and accruals of a capital nature (continued)
Case
John Bell
Self study – repetition
of principles which
we already discussed
Textile business moves from
premises -> decides to sell old
premises. Rents out premises until
property market improves
Natal Estates
Taxpayer in sugar industry is aware
that land (held as capital asset)
could be expropriated for public
development. Taxpayer develops
land as residential property & sell
to public as trading stock
Change in intention
Principle
• The mere fact that a taxpayer sells his capital
asset at a profit does not per se make the profit
income in nature, something more is needed
• Taxpayer is entitled to realise asset to his best
advantage without it being considered a change in
intention.
• Taxpayer must enter into scheme to sell assets for
a profit and use the assets as trading stock for the
intention to change
• If a taxpayer had gone over to the business of
using land as trading stock or started a scheme of
profit making, the proceeds will be revenue in
nature.
3.6.10 Receipts and accruals of a capital nature (continued)
Damages and compensation

Case Principle

WJ Fourie Distinction drawn between two types of contracts:

Beleggings
• a contract that is part of business activities = income in nature
(normal lease agreement) (Part of normal business activities,
therefore part of income earning activities)
• a contract that establishes the income-producing structure in
order to produce income = capital in nature (franchise-contract)

Taxpayer is a hotelier. Accommodation contract cancelled and receives a

settlement. Settlement amount = Income in nature

Stellenbosch Compensation received by taxpayer for premature termination of an

Farmers’ agreement was for the impairment of the taxpayer’s business by
Winery the loss of exclusive distribution rights = capital in nature
Exclusive right to distribute whiskey is cancelled. Receives settlement amount for
cancellation. Right was a capital asset. Settlement amount = Capital in nature
 Extra CONSIDERATIONS TO TAKE INTO ACCOUNT:
Capital vs Income in nature (consider actual facts of the
scenario and all case law principles, not only one factor)
Nature of asset:
• Shares with low dividend yield = unlikely to be capital. Reason for purchase is to
resale at profit = likely income in nature .(proceeds higher than income
generated by asset)
• Undeveloped land – cannot earn income – strong inference that proceeds =
revenue in nature (vs land already develop and let as a farm / erecting property
per contract, then capital in nature)
• Perishable goods - normally trading stock = revenue in nature (milk)

Nature of taxpayer:
• If TP’s business or profession is a corollary of the nature of the asset (real estate
developer sells land)
• Personal factors: knowledge, expertise or lack thereof, age, health (mine options
acquired (Visser case) / selling shares when taxpayer turns 60 (Nussbaum
case))

Period of ownership:
• Long period – inference: capital in nature – unless indication of change in intention.
• Short period – inference: income in nature (trading stock) – unless convincing
reason for sale
 Extra CONSIDERATIONS TO TAKE INTO ACCOUNT:
Capital vs Income in nature (consider actual facts of the
scenario and all case law principles, not only one factor)
Financing method:
• Larger amount borrowed – possible inference: capital in nature (mortgage on property
– use rental income to finance interest and installment on mortgage)

Activities prior to realisation:

• Significant activity – inference = scheme of profitmaking (Engineers / marketers /
financing / architects / surveyors (Natal Estates case))
• Refusal of offers = capital in nature but in certain circumstances can indicate scheme of
profitmaking (Kruger rands (Nel case))

Reason for realisation:

• Asset no longer useful to trade activities ((John Bell case) textile business building)
• Adverse changes (unusual circumstances) ((Nel case) Kruger rands)

Frequency of similar transactions:

• High = more likely that taxpayer is trading in asset. (Clothes retailer)
• Low = more likely to be capital asset BUT where a profit-making intent is clear, a lack of
frequency will not be of any assistance to taxpayer
 SPECIFIC INCOME OR CAPITAL?
TRANSACTIONS
3.6.11 Isolated transactions • taxpayer most probably trades in asset (I)
(Frequency) • probably (C) BUT if profit-motive is clear then frequency
won’t help taxpayer (I)

3.6.12 Closure of business & Sales contract for trading business should indicate (1) Trading
Goodwill stock (I), (2) Business assets (C), (3) Fixed amount GW (C)

3.6.13 Copyright, creations,

patents, trademarks, The same principles apply
formulas & secret • Income producing asset (C)
• Scheme of profit-making (I)
processes

3.6.14 Debts & • Buy debt with intention of collecting @ profit (I)
loans • Sell business with debtors book (C)
• Buy GC with debt and amount collected > than payment (C)

3.6.15 Gambling • Systematic sheme of profit making activities (I)

• Entertainment or hobby (C)
• Person closely related to betting activities? YES (I) NO (C)

3.6.16 Horse-racing Same principles for winning money of horse-racing owner:

• Hobby (C)
• Scheme of profit-making (I)
 SPECIFIC INCOME OR CAPITAL?
TRANSACTIONS
3.6.17 Gifts, donations & • Gifts, donations or inheritances (C)
inheritance • Sell inheritance (C), except if it is a scheme of
profit making or business (I)

3.6.18 Interest
Received from loan or investment (I)

3.6.19 Restraints of trade Can’t practice profession in certain area for a certain
time → can’t generate income (C)

3.6.20 Share transactions

Look at intention why shares are held?
• Employee share trust (PnP) profit a byproduct of trust activities → Capital
• Portfolio in collective investment scheme → intention?

3.6.21 Subsidies • Contribute to cost of fixed capital asset (C)

• Contribute to manufacturer’s cost of production (I)