2.1 Gross Income – Definitions (16)

Question 1

Amounts can be included in gross income in two ways

Answer 1

• Either through the definition of gross income
• Or through a specific inclusion

Question 2

Income can be of a

Answer 2

Revenue (included) or capital (excluded) nature.

Question 3

Section 1 of the Act defines gross income as follows:

Answer 3

• In the case of any resident, the total amount, in cash or otherwise, received by or accrued to or in favour of such a resident, or
• 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 or deemed to be within the Republic, during such a year or period of assessment, excluding receipts or accruals of a capital nature.

Question 4

Gross income is any amount that meets the following conditions:

Answer 4

• The taxpayer must be a resident, or if non-resident, income must be deemed from SA source
• The income must be measurable in money.
• The amount must be received in cash or in kind.
• The income must be received by or accrued to or in favour of the taxpayer.
• The income must be received by or accrued to in the year of assessment.
• Income must not be of a capital nature

Question 5

Year or period of assessment

Answer 5

An amount is only included in gross income for a particular year of assessment if it is either received or accrued in the particular year of assessment

Question 6

The total amount

Answer 6

There must be an actual measurable amount which can be expressed in money value

Question 7

In cash or otherwise

Answer 7

This implies that it is not only monetary receipts and accruals. As long as receipt has a monetary value or is of a value that can be converted into money. Market value of asset on day received will be included.

Question 8

Received by or accrued to

Answer 8

This component relates to time. There are two ways in which income may arise, it may actually be received by them or it may accrue to them. Must use earlier date between receipt and accrual for tax purposes.

Question 9

Accrue to implies that the

Answer 9

Payment was unconditionally due but was not actually received (entitled to). If payment is only to be made on the occurrence of future uncertain events, no accrual occurs until the fulfilment of those conditions.

Question 10

In favour of

Answer 10

This means that income received by another person on behalf of the taxpayer will be included in the taxpayer’s gross income. Irrespective of how taxpayer applies it after it accrues to them. (Other person only receiving on behalf of the taxpayer)

Question 11

Resident

Answer 11

Where a person is a resident of SA, required to include worldwide income in gross income. Non-residents only income from a source within SA.

Question 12

It must not be of a capital nature

Answer 12

Under normal circumstances, any sale of property which was not purchased with the intention of making a profit from the sale thereof will be considered income of a capital nature. Income received in this manner will not form part of gross income, but will be dealt with as a capital gain.

Question 13

The most important test of whether or not income is of a capital nature is to determine what the

Answer 13

Intention of taxpayer was at time of purchase, during the holding of the asset and at disposal.
Taxpayer could have mixed (dual) intentions in which case predominant one will be looked at.
Or there may be a possible change of intention.

Question 14

The test of intention is subjective in nature and open to interpretation.
The court will take following factors into consideration:

Answer 14

• The taxpayers ipse dixit (word) on what intention was. Taxpayer must state whether it was bought for personal use or to sell at a profit.
• Length of time held . An asset held for a longer period is more likely to be capital than one of a short period.
• Frequency. If the asset is one that the taxpayer regularly buys and sells, it is likely income will not be considered of a capital nature.
• Nature of taxpayers business. If the taxpayer deals in items of the same type as the one sold, will be harder to prove that it was not sold with intent to make profit.
• Reason for sale. It will be a problem for a taxpayer who acquired an asset as an investment to prove that the sale thereof at a profit within a short time was not to make a revenue profit.
• Finance. When an asset that is financed by the taxpayers own money is sold, it is more likely to be considered to be of a capital nature than if it is financed with short-term borrowed funds
• The nature of the asset. Some items are normally used for investment, such as houses, land, stocks and shares. If sold in a single transaction on the arrival of a suitable time or circumstance then these items will generally be regarded as capital items.

Question 15

Objective test of nature of capital includes:

Answer 15

• Conduct of taxpayer in relation to the transaction
• Nature of business or occupation
• Frequency of similar transactions
• Continuity of activities
• Length of time asset was held
• Documentary evidence
• History of taxpayers holding of asset
• Circumstances of realisation
• Accounting treatment of proceeds
• Ability of taxpayer’s financial resources to support his professed intention.

Question 16

Some examples of situations where the income received will be considered to be capital receipts are:

Answer 16

• Damages and compensation. If payment is received for compensation for the loss of a taxpayers capital asset, it will be of a capital nature. If the payment is received as compensation for the loss of profits, it is of a revenue nature.
• Fortuitous gains. These are amounts received through very little effort from the taxpayer and may not be linked to occupation (gifts, inheritance, prizes, donations)
• Gambling. Sporadic successes from gambling activities are considered to be of a capital nature (nonprofessional).