Gross income - Damages and compensation

Question 1

Facts:
A CC leased premises from which it operated as a hotel. It had been paid compensation for the loss of a contract it had with another entity to provide meals and accommodation to students.

Answer 1

WJ Fourie Beleggings

Issue:
Is the compensation revenue or capital in nature?

Principle:
-Compensation for damages of capital assets is capital in nature (Proceeds filling a hole in the income earning structure).
-Compensation for loss of profit/income is revenue in nature (Proceeds filling a hole in the income pocket).

Question 2

Facts:
The TP was a wholesaler that imported and distributed Bells Whiskey in SA. It concluded a 10 year agreement which was then prematurely cancelled more than 3 years before it could be terminated. As a result, the TP received a sum of R67m from the distillers in the UK which they had concluded the agreement with.

Answer 2

Stellenbosch Farmers Winery

Issue:
Is the payment capital in nature?

Principle:
Compensation for cancellation of a contract to an income-earning right will be considered capital in nature.