Case Law

Question 1

General case law

Answer 1

• is there a special deduction or inclusion?
• s11(a) read with 23(g)
• start with onus of proof in terms of s102 of TAA
• Are you trading?
• purpose of the income or deduction?
• IPAC

Question 2

Gross Income (Residency)

1. Cohen
2. Kuttle

Answer 2

1. -Return from all your wandering
   - Country you regard as real home
2. Person’s principle residence is where a person habitually and normally resides

Question 3

Source

Lever Brothers

Answer 3

What is the originating cause?

Where is the cause situated?

Question 4

Total amount in cash or otherwise

1. Lategan
2. Butcher Bros
3. Brummeria

Answer 4

1. The word amount includes any form of property with an ascertainable monetary value
2. The onus is on SARS to determine the amount
3. Whether the receipt or accrual has a money value is the primary question
   - The test is objective not subjective
   - Arms length principles must be applied

If a taxpayer has a right to an interest free loan such a right has a value. There is a tax benefit for the “amount”

Question 5

Accrual

1. People’s stores
2. Witwatersrand association of racing
3. Mooi

Answer 5

1. Accrued to = entitled to
   Accrual = face value not the discounted value
2. No legal obligation exists to pay amount over to taxpayer
3. Accrues to means unconditionally entitled to amount

Question 6

Receipt

1. Geldenhuys
2. MP Finance
3. Pyott

Answer 6

1. Received by taxpayer for own benefit
2. A bilateral receipt received by taxpayer (deposit)
   - unilateral receipt doesn’t mean it has been received
3. Deposits are still received and form part of gross income
   - A deposit is only treated as not being received if the money is kept separately in a trust account for benefit if customer

Question 7

Fringe Benefit

BMW SA

Answer 7

1. Whether an advantage or benefit was granted by an employer to an employee
2. Whether it was for the latters private or domestic purpose

Question 8

Nature of the asset

1. Visser
2. George forest timber
3. Nel

Answer 8

1. Tree vs. fruit
   Tree is a capital structure and the fruit is the income earning activities.

Receipts for selling the tree is capital in nature and receipt of selling fruit is revenue in nature

2. Assets are either fixed or floating capital
3. Krugerrand normally seen as capital in nature unless you buy and trade them

Question 9

Intention of taxpayer

1. Richmond Estates
2. Levy
3. Elandsheuwel

Answer 9

1. Actions of directors, type of business and the MOI
2. If mixed intentions, determine dominant intention
3. Intention of the shareholders

Question 10

Scheme of profit making

1. Pick ‘n pay employee share trust
2. Stott
3. Nel

Answer 10

1. Scheme of profit making is essential to classify proceeds as revenue in nature
2. Consider the taxpayers dominant intention
3. Krugerrand is seen as capital in nature. Consider taxpayers reason for selling Kruger rands

Question 11

Change of intention

1. John Bell
2. Natal Estate
3. Nussbaum
4. Berea west estate
5. Founders hill

Answer 11

1. The mere decision to sell an asset does not change the intention. Capital asset may be realized to the best of its advantage
2. Careful to not cross the rubicon
3. The secondary purpose could taint the primary purpose of the taxpayer consider frequency
4. The receipt of the realization company are capital in nature
5. There has to be a real justification for the realization company to be formed

Question 12

Damages and compensation

1. Fourie Beleggings
2. Stellenbosch farmers winery

Answer 12

1. Compensation for damages of a capital asset is capital
   Compensation for loss of profit or income =income

• If proceeds relate to filling a hole in the income earning structure, it is capital in nature.
• Filling a hole in the income pocket is revenue

2. Cancellation of a contract to an income earning right will be capital in nature

Question 13

Cryptocurrency

Answer 13

• mining of cryptocurrency any gain or loss will be revenue nature
• If taxpayer acquired
• cryptocurrency. Ask if purchased in a scheme of profit making if yes gain or losses are revenue in nature
• If acquired for means of payments gains and losses are capital in nature

Question 14

Legality or otherwise of the business production of income

1. Delagoa Bay cigarettes
2. MP finance

Answer 14

1. The legality of income is irrelevant

2. Even though the receipts are illegal they are still received

Question 15

Special inclusion

(Annuity)

1. Hogan

(Services rendered)
2. Stevens

Answer 15

1. An annuity constitutes gross income. The characteristics are….
2. par (c) gross income inclusion
   If there is a casual relationship between the payment and employment, it will be gross income

Question 16

Deduction cases

(During the year of assessment)
1. Sub-Nigel

(Carrying on a trade)
1. Burgess

(Actually incurred)

1. Nasionale pets bpk
2. Edgars stores
3. Golden dumps
4. Labat

(In production of income)

1. PE Tramway
2. Joffe
3. BP South Africa
4. Provider
5. Mobile telephone networks

(Dual purpose)
1. Nemojin

Answer 16

(During the year of assessment)

1. An expense must be deducted i the year it is incurred
   - it cannot be claimed in later years

(Carrying on a trade)
1. A wide interpretation

(Actually incurred)
1. If payment is contingent upon future event can only be incurred once conditions are met

2. Deduct when there is an unconditional legal obligation
3. Any amount in dispute, settled when dispute is settled
4. s40CA expenses to be incurred where it issues shares as consideration for acquiring an asset to be the market of the shares issued immediately after acquisition
   - if shares are issued in exchange for a service, will not be deducted

(In production of income)

1. What is the purpose of the expense?
   - How closely connected is the expense to production of income?
2. Inevitable concomitant
3. Recurring payments for maintaining income earning operations are deductible
   - Royalty payments are of a revenue nature
4. Amounts paid in terms of a service package are deductible
5. Audit fees:
   - is incurring fees attached to performance of the taxpayers income earning operations(In production of income)
   - fees are incurred for a dual purpose apportionment has to take place
   - look at facts of each case there has to be a reasonable apportionment

Training fees:
-I’d expense is necessary to trade effectively it will not be capital in nature

(Dual purpose)
1. Dividend stripping scheme
The apportionment is as follows (taxable amount/total distribution amount)*cost price
- consider closeness of connection to taxable income and exemption

Question 17

Not of a capital nature

1. New states area
2. Rand mines
3. BPSA

Answer 17

1. Fixed capital vs. floating capital
2. Expenditure incurred to obtain income earning right or structure will be capital in nature

Cost incurred to create capital structure is capital

Cost incurred to work capital structure is revenue

3. Legal categorization of a payment does not determine if it is capital or revenue
   - was an enduring benefit created?

Question 18

Repair

1. Flemming
2. African products manufacturing

Answer 18

1. Expenditure incurred must be as a result of damage. The cost must maintain the income earning ability of asset not improve it
2. Repair is restoration by replacement or renewal of subsidiary parts of the whole

Question 19

S23(g)

1. Warner Lambert SA
2. Scribanate construction

Answer 19

1. Ensuring that income is not lost(incurred in production of income)
   - If there is a link between the company’s ability to trade and the expenditure, it will be incurred fir purposes of trade
2. -If dividends are declared to shareholders on interest bearing loan accounts, interest are incurred in production of income by the company
   - Borrowing money and re-lending it at a higher rate of interest, thereby making a profit, constitutes carrying on a trade

Question 20

Trading stock and s22

1. Ernst Bester Trust
2. Eveready
3. Volkswagen

Answer 20

1. Sand only becomes trading stock when it is removed from the ground
   - If trading stock is acquired and disposed of in the same year of assessment, s22 is not applicable
2. Write down of closing trading stock, damage, deterioration, change in fashion or decrease in market value
   - based on events known at end of tax year
   - based on events known will occur in following year
   * Cannot use NRV tax is backward looking NRV is explicitly forward looking
   * Using NRV has effect that expenses that will only be incurred in a future tax year would become deductible in an earlier tax year
   - Consider trading stick as a whole not per item

Question 21

S20 (Assessed loss)

1. SA Bazaars
2. Robin consolidate industry

Answer 21

1. If a company does not carry on trade in a year, it loses the right to carry forward a balance of assessed loss beyond that year
2. In order to carry forward an assessed loss the company must be carrying on a trade. Transactions concluded by liquidators during the liquidation of a taxpayer does not constitute the carrying on of a trade by taxpayer

Question 22

VAT

1. British Airways
2. Respublica
3. Stellenbosch farmers winery
4. Master currency
5. XO African safaris
6. CSARS v De Beers

Answer 22

1. VAT is levied on a service by a vendor, and not merely upon receipts
2. Consider the legal characteristics of an agreement
   - commercial accommodation and according only needs to levy VAT at 60%
3. VAT is levied at 0% for service to a non resident if the services donor relate to any immovable property in SA
   - services that relates to an incorporeal right not situated in SA will be 0%
4. s11(2)(l)
   - services supplied by a vendor to a person who is not a resident of the Republic to be zero rates subject to certain conditions
   - meet 3 exclusion to be zero rated
   - not zero rated if non resident is in the republic at time the services are rendered
5. VAT is a destination based consumption tax. The services are consumed in SA, thus zero rating does not apply
6. Only costs that relate or contribute to the activities that form part of the vendors enterprise, could be seen as for the making of taxable supplies

Question 23

Trusts s25B

(s7: Donation, Settlement or Disposition)

1. CSARS v Woulidge
2. CIR v Berold

Answer 23

1. Selling that asset on an interest free loan account results in another party receiving a benefit-and that benefit is a form of “other disposition” and it indicates a gratuitous element
   - Notional interest is not subject to the in duplum rule
   - Attribution of income will continue indefinitely and will not be limited to the original capital amount
   - s7D basically provides that the in duplum rule, does not apply anti avoidance legislation
2. The effective cause was donation by the taxpayer
   - income accrued by reason of donation