Case laws

Question 1

Gross Income definition

Answer 1

Gross Income in relation to any year of assessment, means
* The total amount in cash or otherwise
* Received by, accrued to or in favour of such a resident
* During such year or period of assessment
* Excluding receipts and accruals of a capital nature

Question 2

Cohen v CIR (Residence)

Answer 2

A person is ordinarily resident in the country which he/she would naturally and as a matter of course return to from their wanderings.

Question 3

CIR v Kuttel (Residence)

Answer 3

A person is ordinarily resident where he has his usual or principal place of residence, which may be described as his real home. A person is ordinarily resident where he habitually and normally resides, apart from temporary or occasional absences.

Question 4

CSARS V BRUMMERIA RENAISSANCE (Gross Income - Amount)

Answer 4

The taxpayer’s right to utilise loan capital interest-free (that is, the benefit for the taxpayer of using the
money of another person without paying interest on it) is an ‘amount’, as this right or benefit has an
ascertainable monetary value (that is, debatably the interest that would have been payable had such interest been levied (notional interest))

Question 5

CIR V BUTCHER BROS (Gross Income - Amount)

Answer 5

A non-cash item that has an ascertainable monetary value in the year of assessment that it is to be
included, will be included in gross income (assuming all other requirements of the gross income definition
are met). Furthermore, the onus rests upon SARS to determine an amount; that is, prove an ‘amount’
was received by or accrued to the taxpayer.

Question 6

LATEGAN V CIR (Gross Income - Amount)

Answer 6

When a taxpayer ‘becomes entitled to’ the amount, it accrues to the taxpayer.

Question 7

Mooi v SIR (Accrued to)

Answer 7

When a taxpayer’s entitlement is unconditional, an amount ‘accrues’ to the taxpayer.

Question 8

CIR V LATEGAN V CIR 2 (Accrued to)

Answer 8

When the taxpayer ‘becomes entitled to’ the amount, an amount accrues to the taxpayer (Lategan and People’s Store case), but only when entitlement is unconditional (Mooi).

Question 9

CIR V WITWATERSRAND ASSOCIATION OF RACING CLUBS (Accrued to)

Answer 9

Any amount received by (or accrued to) a taxpayer for their own benefit will be included in the gross income
of the taxpayer despite a moral obligation on the taxpayer to pay such amount to another person.

OR

A moral obligation does not destroy the beneficial character of a receipt/accrual

Question 10

CIR V PEOPLE’S STORES (Accrued to)

Answer 10

When the taxpayer ‘becomes entitled to’ an amount, the amount ‘accrues’ to a taxpayer. The amount need
not be both due and payable.

Question 11

CIR V DELAGOA BAY CIGARETTE CO LTD ( The legality or otherwise of the business productive of income)

Answer 11

The source of the income, legal or illegal, is immaterial/irrelevant in determining if an amount constitutes income. Thus, receipts (from an illegal business) will be included in gross income

Question 12

MP FINANCE GROUP CC (IN LIQUIDATION) V CSARS (Received by) & ( The legality or otherwise of the business productive of income)

Answer 12

Thus, an amount is ‘received by’ a taxpayer if the taxpayer intended to receive the amount for the taxpayer’s own benefit (irrespective of the fact that such amounts are illegal in nature).

Question 13

PYOTT LTD V CIR (Received by)

Answer 13

If a deposit is kept in a separate trust account, there is no receipt for purposes of the gross income
definition. If a deposit is not kept in a separate trust account, but received for the taxpayer’s own benefit
and own behalf (‘beneficial receipt’), the deposit is a receipt for purposes of the gross income definition
(Pyott case)

Question 14

GELDENHUYS V CIR (Received by)

Answer 14

For an amount to be received by the taxpayer for the purposes of the gross income definition, the amount
must be received by the taxpayer for their own benefit and on their own behalf.

Question 15

CIR V RICHMOND ESTATES (OF A CAPITAL NATURE – INTENTION)

Answer 15

The mere decision to dispose of a capital asset at a profit does not per se mean that the profit is
revenue in nature

Question 16

COMMISSIONER OF TAXES SOUTHERN RHODESIA V LEVY (OF A CAPITAL NATURE – INTENTION)

Answer 16

Determine the main or dominant intention of the taxpayer at acquisition, should the taxpayer have mixed intentions in respect of an asset (dominant test)

Question 17

CIR V PICK ’N PAY EMPLOYEE SHARE PURCHASE TRUST (OF A CAPITAL NATURE – SCHEME OF PROFIT-MAKING)

Answer 17

Receipts or accruals are of a revenue nature if the receipts or accruals are generated ‘by an operation of
business in carrying out a scheme of profit-making’

Question 18

CIR V STOTT (OF A CAPITAL NATURE – MIXED OR DUAL INTENTION)

Answer 18

The taxpayer’s intention at acquisition is important and conclusive, unless a change in the taxpayer’s
intention occurred thereafter; that is, if the taxpayer’s intention at acquisition is capital in nature and no
change in intention from capital to revenue in nature (scheme of profit-making) has taken place since
acquisition, the receipt or accrual will be of a capital nature

Question 19

CIR V NEL (OF A CAPITAL NATURE – MIXED OR DUAL INTENTION)

Answer 19

A capital asset (Krugerrands held for ‘keeps’) was realised to purchase another capital asset (motor
vehicle). Krugerrands were bought for ‘keeps’ and was sold due to unusual or special circumstances that
occurred. The receipt or accrual from the sale of the Krugerrands was thus capital in nature. Thus, when the taxpayer disposed of the Krugerrands, there was no change intention and no scheme of profit-
making.

Question 20

CIR V NUSSBAUM (OF A CAPITAL NATURE – CHANGE IN INTENTION)

Answer 20

If the taxpayer has a primary purpose that is capital in nature (held for investment) and a secondary
purpose that is revenue in nature, the secondary purpose may cause the receipt or accrual to be
revenue in nature as the taxpayer pursue the 2 purposes simultaneously (that is, the taxpayer has no
dominate purpose)

Question 21

NATAL ESTATES LTD V SIR (OF A CAPITAL NATURE – CHANGE IN INTENTION)

Answer 21

The nature, degree and extent of the taxpayer’s activities must be evaluated to determine whether the taxpayer has ‘crossed the Rubicon’ and has embarked on a scheme of profit-making indicating a change in intention from investment (capital) to scheme of profit-making (revenue). Something more (Natal Estates
case)

Question 22

CSARS V FOUNDER’S HILL (OF A CAPITAL NATURE – CHANGE IN INTENTION)

Answer 22

If special circumstances (real justification) exist for forming a realisation company, the realisation
company will stand in the shoes of the entity transferring the assets to it and in turn hold them as capital assets.
If no special circumstances (no real justification) exist for forming a ‘realisation company’, the ‘realisation company’ will not stand in the shoes of the entity transferring the assets to it (not merely alter ego); that is, the asset is acquired for purposes of resale by the ‘realisation campany’.

Question 23

JOHN BELL & CO (PTY) LTD V SIR (OF A CAPITAL NATURE – CHANGE IN INTENTION)

Answer 23

The mere decision by a taxpayer to dispose of a capital asset does not per se constitute a change in
intention

Question 24

CIR V VISSER (OF A CAPITAL NATURE – CHANGE IN INTENTION)

Answer 24

‘Fruit’ is the income produced by an income-producing asset (capital asset) and the ‘Tree’ is the
income-producing asset. Fruit is revenue in nature, while the sale of the tree
is capital in nature.

Question 25

CIR V GEORGE FOREST TIMBER COMPANY (OF A CAPITAL NATURE – CHANGE IN INTENTION)

Answer 25

Floating capital (trading stock) is considered to be consumed and disappears in the production process. Fixed capital, however, does not do so; it produces fresh wealth and remains intact.

Question 26

WJ FOURIE BELEGGINGS V CSARS ( Damages and Compensation)

Answer 26

A contract directed by its performance towards making a profit in which case the compensation received for the cancellation of the contract will be income in nature; and A contract which was a means of producing income (that is, a contract that provides an income producing capital structure/asset) in which case the compensation received for the cancellation of the contract will be capital in nature.

Question 27

STELLENBOSCH FARMERS’ WINERY LTD V CSARS ( Damages and Compensation)

Answer 27

Loss/termination of a capital asset OR the sterilisation/impairment of a substantial part of the income-producing structure is capital in nature.

Question 28

CSARS V CAPSTONE (OF A CAPITAL NATURE – INTENTION OF A COMPANY)

Answer 28

Where there is a purchase of shares NOT as trading stock for resale at a profit, the proceeds from the sale will be held to be of a capital nature.

Question 29

SUB-NIGEL LTD V CIR (Must income be earned in the same year/ During year of assessment)

Answer 29

An expense actually incurred would meet the requirement of ‘in the production of income’ if the expense was incurred for the purpose of producing (or earning) income. It then is irrelevant if no income was, in actual fact, produced in the year incurred, or ever.

Question 30

BURGESS V CIR (Carrying on a Trade)

Answer 30

A taxpayer carrying on what, standing on its own, amounts to the carrying on of a trade does not cease to carry on a trade simply because one of his purposes or even his main purpose is to enjoy a tax advantage. If he carries on a trade, his motive for doing so is irrelevant. The definition is not necessarily exhaustive, and the term trade was intended to embrace every profitable activity.

Question 31

CSARS V BP SOUTH AFRICA (In the production of income)

Answer 31

Expenditure incurred for the purposes of acquiring a capital asset of the business (which creates an enduring benefit that endures like fixed capital) is capital expenditure whereas expenditure incurred for the use of an asset or expenditure that does NOT create an enduring benefit is revenue in nature

Question 32

EDGARS STORES LTD V CIR (Expenditure actually incurred)

Answer 32

An amount is actually incurred when there is an unconditional legal obligation to pay the amount.

Question 33

NASIONALE PERS BPK V KOMMISSARIS VAN BINNELANDSE INKOMSTE (Expenditure actually incurred)

Answer 33

An amount is actually incurred when there is a definite and absolute liability to pay the amount (Nasionale Pers Bpk case)

Question 34

CIR V GOLDEN DUMPS (Expenditure actually incurred)

Answer 34

A liability to pay a claim is not unconditional where the validity of a claim is genuinely disputed and, if at the end of the relevant tax year the dispute is unresolved. Disputed expenditure can therefore not be said to be actually incurred when the outcome of a dispute is unresolved. (Golden Dumps (Pty) Ltd case)

Question 35

CSARS V LABAT AFRICA LTD (Expenditure actually incurred)

Answer 35

The ordinary meaning of ‘expenditure’ refers to the action of spending funds, disbursements or consumption; and hence, the amount of money spent. In the context of the Act, it would also include the disbursement of other assets with a monetary value. Expenditure, accordingly, requires a diminution OR at the very least movement of assets of the person who expends (CSARS v Labat)

Question 36

NEW STATE AREAS LTD V CIR (Not of a capital nature)

Answer 36

Expenditure incurred to establish, improve or add to the income earning structure is capital in nature. Expenditure incurred to perform the income-earning operations is income in nature.

Question 37

RAND MINES (MINING & SERVICES) LTD V CIR (Not of a capital nature)

Answer 37

Expenditure that is more closely related to the cost of adding to or enhancing the income-earning structure of a business than to the cost of performing its income-earning operations is capital in nature

Question 38

BP SOUTHERN AFRICA (PTY) LTD V CSARS (Not of a capital nature)

Answer 38

BP Southern Africa [2007] Expenditure incurred for the purposes of acquiring a capital asset of the business (which creates an enduring benefit that endures like fixed capital) is capital expenditure whereas expenditure incurred for the use of an asset or expenditure that does NOT create an enduring benefit is revenue in nature

Question 39

CALTEX OIL (SA) LIMITED V SECRETARY FOR INLAND REVENUE (Deduction of expenditure-other)

Answer 39

Expenditure actually incurred does not mean expenditure actually paid during the year of assessment. It means all expenditure for which a liability has been incurred during the year, whether the liability has been discharged or not (Caltex Oil (SA) Ltd case)