Gross income - Nature of the asset

Question 1

Facts:
The TP acquired mining options for a period of 2 years over certain farm properties. The options, however, lapsed - at which time he still did not start with any search for mineral deposits. Later, a third party negotiated with and offered the TP an interest in a company to be formed if he would assist him to acquire the previously lapsed options from the farmers again.
The TP agreed to the proposal. The arrangement was confirmed in a letter, which stated that the TP had been promised shares “in consideration of the services you have already rendered and will be rendering to me and my associates in the venture that we are undertaking”.

Answer 1

Visser

Issue:
Was the value of the shares that the TP received capital or revenue in nature?

Principle:
Tree vs fruit
Income may be described as the product of a person’s wits and energy.
Income is what capital produces.

Question 2

Facts:
The TP company carried on a business as timber merchants and sawyers. It acquired about 600 morgen of natural forest for the purpose of its business. The nature of the trees in the forest was such that they did not renew themselves, and for practical purposes the value of the land without the timber was negligible. In the course of its business the company felled a quantity of = timber each year which was sawn up in the mill and sold as part of its trading stock.

Answer 2

George Forest Timber

Issue:
Was the income received from the sale of the natural forest capital or revenue in nature?

Principle:
Fixed vs floating capital
Sale of fixed capital gives rise to capital proceeds, whilst the sale of floating capital gives rise to revenue.

Question 3

Facts:
The TP had bought numerous Kruggerands between 1976 and 1978. His avowed intention was to hold them as an inflation hedge and as an inheritance for his children. From 1978 to 1989 he had neither bought nor sold any coins, despite there having been many opportunities to do so. He states in evidence that the thought of selling them had never entered his mind.
In 1989 he was obliged to buy a car for his wife. The need was urgent and he did not have the necessary funds available. His auditor advised him to exchange some Kruggerands for the car, and in fact assisted in the transaction.

Answer 3

Nel

Issue:
Did the sale of the Kruggerands represent capital or revenue profits?

Principle:
The sale of Kruggerands is capital unless it is your trade to buy and sell them.
Kruggerands are a unique asset where the only income earned is through a sale.