Gross income: Not of a capital nature Flashcards
Scheme of Profit making or realization of capital asset?
CIR v Pick n Pay Employee Purchase Trust
Facts: A trust was created to benefit qualifying employees
ROR: said income was of a revenue nature and that it should be taxed as PNP was conducting a profit-making scheme
Court:
1. Scheme of profit making means the income was worked for and sought for - i.e. it was NOT fortuitous
2. Trust didn’t conduct a business in selling shares at a profit
3. Trusts profits were not intended or worked for but purely fortuitous
Factors used to determine TP intention?
- TP ipse dixit (own defense)
* Danger: Subjective and self-interest
*if there’s no reason to disbelieve the the TP and there’s no objective evidence to the contrary then the TP’s own evidence will suffice
*All comes down to credibility - Length of time period TP held asset
* Long period: capital
*Short period: revenue - Frequency of transaction
* The more frequent the same type of transaction = revenue - Nature of TP business
- Existence of an income flow from the holding of the asset
* If asset produces income (e.g rent) proceeds from disposal of asset could be capital - The mode of acquisition or disposal
* fortuitous accruals (didn’t work for it) - capital nature
* if TP took active steps to dispose of property = may indicate profit-making scheme - Mixed intention at time of acquisition?
* The dominant intention must be sought
*Change of intention requires more than merely deciding to ell capital assets at a profit
With what intention did the TP acquire the assets?
if the intention was to resell at a profit = proceeds are revenue in nature
if the intention was to purchase income or as an investment = proceeds are of a capital nature
Strathmore exploration and management
Mother gave immovable property to company so that son could dispose of the property in the business to make an operation
Inheritance by company was not fortuitous = considered to be scheme of profit-making
CIR v Stott
Facts: bought seaside land and farm land. Subdivided both properties into parts and sold it.
Commissioner: included the sale of all these subdivided properties in Mr S GI.
Court:
1. it depends if Mr S was a land jobber
2. On the facts, Mr S intention didn’t change he was merely realizes his asset to the best of his advantage
Natal Estates Ltd v SIR
Facts: TP = Grower and Miller of sugar. Was aware of accommodation shortage and examined possibility of property development which later happened and sold land to the public and later in bulk.
Commissioner: intention changed from holding property as capital asset to scheme of profit making.
Court:
1. TP was not merely realizing asset to its advantage
2. Scale of township development activities meant that TP crossed the Rubicon and was carrying on business of selling land at a profit
3. Used land as stock in trade = proceeds revenue in nature
Richmond Estates (Pty) Ltd
Facts: TP carried on business as a speculator in land (buying and selling land at a profit)
* Decided certain properties weren’t selling so they rebuild it and let it - due to imminent changes in tax legislation TP made decisions to hastily sell plots
Court:
1. mere intention yo sell doesn’t per se make profit part of GI
2. Profit was of a capital nature
General rule re companies intention
BOD intention = companies intention
Shareholders intention is not companies intention unless shareholder is also a director
Elandsheuwel Farming BPK
Facts:
* TP = company formed in 1964 and purchased a farm
*Kropman family were shareholders and TP leased some of the land to this family to farm on it. Family ceased to farm and sold its shares to Devillers group who were speculators in land.
* Devilliers sold property to municipality
*ROR = included the profit on the sale of the property in the TP company’s gross income
3 Judgements - all judgements agree that farm was held as capital asset
LQ: Did the nature of the asset change because of the diviliers group?
Majority by Wessels:
1. TP company argued that a company has its own ID and legal personality that is different from its shareholders therefore the company didn’t change its intention only its shareholders
* Court: The actions of a juristic person are controlled by living beings and they are the brain and ten fingers thereof
- Tp argued that the property was initially held as a capital asset therefore TP had to do something more than sell the asset
*Court: De Villiers group was in the business of scheme of profit making when they took control therefore it was the company’s intention as well (trade-in property)
Minority judgement by Corbit
1. You have to distinguish between the new intention of the new shareholders in acquiring their shares in the company and their intentions as directors of the TP company
2. Shareholders = wanted to speculate but never sold anything
3. Company = sold property and got a profit not new shareholders
*mere decision to sell asset doesn’t turn capital to revenue
* Facts don’t indicate level of activity needed to conduct business
CIR v Guardian Asurance SA
Only if shares are held without any change will it be of a capital nature
CIR v Wussbaum
Facts:
*TP inherited a portfolio of shares and regularly sold and purchased shares
*CSARS = proceeds on sale = capital nature but second intention
was to trade in shares to make a profit = revenue
Court:
TP worked for profit.
Rules re damages and compensation?
- Damages/compensation for loss/ surrender or sterilization of a capital asset = is a receipt of a capital nature
- Damages or compensation paid for loss of profits = revenue in nature
KBI v Hogan
Firefighter who got injured on the job and could no longer work - received damages for compensation
Court: If compensation is paid for the loss of TP ABILITY to earn income = capital nature
Tauber and Corssen Pty Ltd (Sterilization)
Tp worked as an agent who sold products
Restraint of trade implemented for 2 years
Principal would pay compensation based on commission previously earned
Purpose: To compensate TP for closure of part of business = capital in nature
WJ Fourie
Compensation for repudiation of a contract (accommodation)
Compensation = capital in nature
