Gross income: Introduction, residence and source

Question 1

What powers does section 5 of the ITA give and to whom?

Answer 1

Gives the state authority to collect income tax - it is the empowering provision

Question 2

What are residents and non-residents taxed on?

Answer 2

1. Residents are taxed on their income no matter where it comes from “world-wide income”
2. Non-residents are only taxed on amounts from a source within SA

Question 3

What are the two types of connections justifying income tax?

Answer 3

1. personal connection
2. economic connection

Question 4

What type of connection falls under residence?

Answer 4

1. Personal connection and taxed on world-wide income
   Rationale: You contribute so that the state can provide services

Question 5

What type of connection falls under source?

Answer 5

1. Economic connection and you are only taxed if the income comes from a source within SA
   Rationale: Payment for the use of infrastructure

Question 6

What is the qualification for the definition of resident in section1 of the ITA?

Answer 6

The definition makes a distinction between individuals and other persons.
In regards to other persons - if a person is deemed to be exclusively a resident of a foreign country in terms of a Double Taxation Agreement - that person will be deemed not to be a SA resident

Question 7

What are the steps you need to do to figure out if you’re a resident?

Answer 7

1. Check the ITA - does it say if the person is a resident or not?
2. If they are a resident - tax their world-wide income. If they’re not a resident check if there’s income from a SA source - if there is, this fulfills the resident requirement i.t.o. ITA but first check if they’re subject to a double taxation agreement
3. If there’s no double taxation agreement - enquiry stops there and the person is a SA resident
4. If there is an DTA check the rules
5. If it states person is a resident of SA i.t.o the agreement = qualification doesn’t apply
6. But if the DTA says the person is a resident of the other state = qualification applies
7. Then you go back to SA domestic law = that person is not an SA resident anymore for tax purposes

REMEMBER: if there is a SA source of income - the non-resident will still be taxed but just as a non-resident.

Question 8

When will individuals be regarded as resident in SA?

Answer 8

when they are:
1. Ordinarily resident
2. Not ordinarily resident but physically present for a certain period

Question 9

Ordinarily resident and Cohen v CIR

Answer 9

Note: You can be resident in many states but you can only be ordinarily resident in ONE state.

Cohen left SA by boat to New York - he was supposed to stay for 9 months but extended the trip.
LQ: Can a person be ordinarily resident in SA when the person was outside of SA for the whole of the tax year?

The court emphasized this is always a question of fact. It doesn’t matter whether someone was physically present during the tax year the real issue is determining where Cohen’s real home is.

In this case, Cohen was always going to return to SA therefore he was resident in SA because he was ordinarily resident.

Question 10

Ordinarily resident and CIR v Kuttel

Answer 10

Kuttel went to New York but returned to SA often. However from the facts it seemed like he had built a home in NY.

The court conveyed that he returned often to SA, never gave up his residency and never sold his shares in a company. However court found that his real home was in NY.

Therefore, remember that its always a question of fact

Question 11

Define the physical presence test

Answer 11

A person will be resident in SA in the current YOA if he is physically present in SA:
1. In the current YOA for more than 91 days in aggregate
2. For more than 91 days in aggregate in each of the 5 years preceding the current YOA
3. For more than 915 days in aggregate during the 5 preceding YOA

You can only be a resident from year 6 and continuous presence is not required

If a person remains physically outside SA for a continuous period of at lease 330 full days = that person is deemed not to be a resident from the day on which the person ceased to be physically present in SA.

Question 12

When will a company be resident in SA?

Answer 12

They will be resident if:
1. Its incorporated, established or formed in SA or
2. Has its place of effective management in SA

unless DTA applies and is deemed a non-resident

Question 13

incorporated: External Companies

Answer 13

External Companies are companies that are not incorporated in SA but does business in SA and satisfies certain requirements.

Question 14

Place of effective management: What are the key factors from the Smallwood case

Answer 14

POEM will ordinarily be the place where most senior group person (BOD) makes its decisions, where the actions to be taken by the entity as a whole are determined
There can be more than 1 place of management but only 1 POEM

Question 15

Residual Rule

Answer 15

CIR v Lever Bros and Unilever:
Questions to be asked:
1. WHAT give rise to the income? Only when this has been established does one look at:
2. WHERE is that source situated?

Originating cause can either be:
1. Work TP does to earn income
2. Quid pro quo - favor or advantage granted in return for something

Question 16

What is a Controlled Foreign Company?

Answer 16

Non-resident companies “controlled” by SA residents
Income of “CFC” is included in income of controlling residents.