Gross income - Change of intention

Question 1

Facts:
The TP operated a textile business from premises, that it owned. After the business relocated to other premises, the directors of the company decided to sell the original premises. In view of the fact that the property market was not performing well at that point in time, the directors decided to wait until the market had improved. In the meantime, the property was rented out (for a period of 11 years) and thereafter, once the market had improved, the property was realized at a profit.

Answer 1

John Bell

Issue:
Was there a change in the intended use of the asset? Did the property become trading stock?

Principle:
The mere decision to sell an asset does not change an intention. A capital asset may be realized at its best advantage. Waiting for market conditions to change was not an indication for a change in intention.

Question 2

The TP held a piece of land for many years as a capital asset. Before selling the land, town planners, consulting engineers and professional advisors were approached to develop and sub-divide the land.

Answer 2

Natal Estates Ltd

Issue:
Was the sub division a change of intention from capital to revenue?

Principle:
A person may realise his capital asset to his best advantage yet must be careful not to “cross the Rubicon” and embark on a scheme of profit making. This indicate a change of intention and the proceeds being revenue in nature.

Question 3

A TP held shares during his lifetime for investment purposes. After retirement he sold the shares over a 3 year period. Some shares were held for a long time period and others for a shorter period. The TP sold shares each time the dividend yield dropped.

Answer 3

Nussbaum

Issue:
Does the large number of purchase and sale of shares during the three year period constitute a scheme of profit making? Is there a dual/secondary intention?

Principle:
The secondary purpose could taint the primary purpose of a TP, if a TP’s actions become too frequent.

This may result in profits that are initially seen as capital, to be revenue. An investor with a dual intention should keep 2 separate accounts, one capital and one revenue.

Question 4

AECI Ltd set up Founders Hill (Pty) Ltd as its wholly-owned subsidiary to sell off land surplus to AECI’s needs. AECI therefore transferred this land to Founders Hill, which proceeded to realize the property to its best advantage.

Answer 4

Founders Hill (Pty) Ltd

Issue:
Are the receipts of selling the land capital or revenue in nature in the realization company, Founders Hill?

Principle:
By merely selling an asset through a realisation company does not make the proceeds capital in nature.

There has to be a real justification for the realisation company to be formed.
Naming of “Realisation” does not constitute a realisation company.