Capital Vs Revenue Flashcards
Pyott Ltd v CIR
Summary
The company was a biscuit manufacturer who sold biscuits in tins and charged a deposit on the tins which it would refund to customers when they returned the tins. The taxpayer wanted to exclude a sum of money received from the sale of tins from its gross income by creating a provision for allowances on returnable tins.
Outcome
The taxpayer company had to included the amounts received on the sale of tins in its gross income.
Principle
An amount is either revenue or capital for there is no halfway house between the two.
CIR v Visser
Summary
The taxpayer who held influence over farmers in the Bethal District agreed to assist two individuals in obtaining mining rights in the area and to refrain from entering into competition with them. In return he was awarded shares in the Company newly formed for the purpose of the acquisition of these mining rights. The taxpayer alleged that these shares were a Capital receipt.
Outcome
The receipt was revenue as a ‘product of a mans wits and energy is revenue’.
Important Principle
The tree and fruit principle. The tree is capital and the fruit is revenue.
Burgess v CIR
Summary
The taxpayer entered into a partnership established for the purpose of investing money in shares with the purpose of making a profit. The partnership would borrow money for this purpose and re-invest it hoping to earn a greater return than the interest it would have to pay on the borrowed funds. This was done by means of an insurance policy. The market fell and the taxpayer incurred a loss.
Outcome
The taxpayer was carrying on a trade. He entered into a venture for the purpose of making a profit. The loss was deductible.
Principles
If a taxpayer carries on a trade, it is irrelevant whether one of his purposes or even his main purpose for doing so is to obtain a tax advantage.
Cot (SR) v Levy
Summary
A taxpayer acquired shares in a company formed for the purposes of acquiring stands in an area thought likely to develop. There were rent producing buildings on the stands. Less than two years later, all the shares in the company was sold and the taxpayer earned a profit.
Outcome
The sale of the shares was capital in nature. The taxpayer was not a dealer in land and he held his shares as an investment.
Principles
When a taxpayer has mixed intentions, effect must be given to his dominant intention. A taxpayer is not required to exclude from his mind any contemplation of a profitable resale.
Overseas Trust Corporation Ltd v CIR
Summary
The taxpayer company was formed for the purpose of taking over the shares of an individual in certain mining companies. Some of these companies had already gone into liquidation at the time the shares were purchased by the taxpayer and there were undistributed dividends due to the shareholders. The taxpayer company tried to contend that the profits made in this way were capital in nature.
Outcome
The gains were revenue. They were not fortuitous but were foreseen and known. It was part of the taxpayers business to acquire shares.
Principles
a Gain will be revenue in nature if it is a gain ‘made by an operation of business in carrying out a scheme of profit making (quoted with approval from Californian Copper Syndicate).
CIR v Pick n Pay Employee Share Purchase Trust
Summary
A Trust was formed by the Pick n Pay group of companies to administer a share purchase scheme on behalf of employees. Shares were sold to employees and held in Trust for at least 5 years. Employees forfeited their shares if they resigned before the expiry of the 5 years or if they were dismissed for dishonest conduct and the trust would repurchase their shares. The trust sometimes made a profit.
Outcome
The profits were capital in nature as the transactions that lead to the profits were not entered into as part of a profit making scheme. They were not designedly worked for.
Principles
Receipts that flow from carrying on a business will only be revenue if the business was carried on with a profit making purpose. It is not enough that a business is carried on. It must be carried on as part of a profit making scheme.
African Life Investment Corporation (Pty) Ltd v SIR
Summary
The taxpayer company was formed as an investment holding company for the purpose of taking over all the shares in a certain insurance company called Talas. As part of its investment activities, the company actively sold and purchased shares and made profits on the sales of shares.
Outcome
The profits were revenue in nature. The company had a definite intention to earn profits and the active investment policy of the company was evidence of that.
Principles
A purpose may be a main purpose without being dominant. If a secondary or subsidiary purpose is not merely incidental to a dominant purpose, but is part of the taxpayer’s business, the profits will be revenue in nature.
CIR v Stott
Summary
The taxpayer was an Architect and Surveyor who had on a number of occasions earned profits on the sale of some properties.
Outcome
The proceeds were capital as there was no evidence of a profit making scheme.
Principles
The intention of the taxpayer at the time of acquiring an asset is conclusive unless there is an intervening change of intention. a Taxpayer is entitled to realise his asset to best advantage and to accommodate such asset to the exigencies of the market and the mere fact that he does so cannot alter what is an investment of capital into a trade or business for earning profits.
John Bell and Co (Pty) Ltd v SIR
A mere change of intention to dispose of an asset hitherto held as capital does not per se subject the resulting profits to tax. Something more is required.
Natal Estates Ltd v SIR
Summary
The company owned land which it held as a capital asset for over 40 years and on which it carried on the business as a grower and miller of sugar, Subsequent to the take over of the company, it started developing and selling large portions of this land.
Outcome
The profits were revenue in nature. The company had changed its intention in relation to the land. It crossed the rubicon and embarked on a scheme of profit-making.
Principles
In order for land to change its character from capital to revenue, the taxpayer must use the land as its stock in trade.
Smith v SIR
The word ‘Capital’ has to be given its ordinary meaning. Broadly speaking…., it may be said to connote money and every form of property used or capable of being used in the production of income or wealth.
