Module 2: Gross Income Flashcards
What is the starting point for calculating a taxpayer’s taxable income?
Determine their gross income.
Section 1 of the Gross Income definition provides that…
A resident is required to declare worldwide receipts.
What does it mean when ‘Only Interest Related to Earning Interest Can Be Deducted’
If you borrowed money to invest and earn interest, you can deduct the interest you paid on that loan.
True or false: you cannot use the interest expense deduction to reduce your total taxable income amount below zero.
True
If some of your interest income is tax-free, you must…
split the interest expense between taxable and non-taxable income
What are the 6 components of gross income as defined?
. Period/year of assessment
. Total amount in cash/other, AND
. Accrued to, OR
. Received by, AND
. Capital nature, AND
. Resident vs Non-resident
What is a secondary source of information when determining gross income?
Case law.
when does the year of assessment commence and end?
first day of March and end of last day of Febuary the following year.
YOA:When must an amount be included in gross income?
If it is incurred in the year of assessment at the earlier of receipt or accrual.
Where the value of an asset cannot be determined…
No inclusion in gross income can occur
If money is received in the form of another asset, what is the “amount” determined as?
The market value of the asset on date of receipt.
Which section of which act specifies that the taxpayer has the right to object against SARS estimated value of an asset?
Section 102 of the Tax Admin Act
What does CIR stand for?
Commissioner of Inland Revenue
True or false: if you receive an amount for your own behalf and benefit, that amount must be included in gross income.
True.
Mrs. Geldenhuys, a widow, inherited her husband’s estate, with the will stating she could use the estate’s resources while the children were the legal heirs. She sold a flock of sheep with the children’s consent to buy a house. What 2 principles were established in this case?
. An amount is only received by a taxpayer if it is received on their own behalf and benefit
. Any amount received by a taxpayer acting in capacity does not form part of the Gross income
The taxpayer ran an illegal business selling cigarettes at inflated prices and distributed the price difference to lucky coupon holders. What 2 principles are established in this case? Delagoa
. Whether an amount is derived through illegal or immoral activities doesn’t impact whether it is gross income or not
. Unnecessary/elegant expenses do not prevent it from being gross income
The taxpayer, a wine farmer and retailer, allowed customers to pay in instalments. He received some payments in cash in the current year, with others due the following year. What principle is established in this case? Lategan
. If an amount accrued is received in a subsequent year of assessment, it must be included in the current year of assessment at face value.
The taxpayer, a retailer, sold goods both in cash and on a six-month credit scheme. What 2 principles are established in this People Stores case?
. Accrual occurs when a taxpayer is unconditionally entitled to an amount.
. Amounts should be at face value, not present or discounted value.
What 3 principles are established in the Brummeria Renaissance case law?
. ‘Amount’ in the definition of ‘gross income’ is to be interpreted widely.
. The right to use loan capital interest-free has a monetary value
. The rights of a non-capital nature and can be valued in money are included in gross income
What 2 principles are established in Butchers Brothers case law?
. ‘Amount’ means an amount ‘having an ascertainable money value’, and
. The onus is on SARS to prove an amount has accrued to the taxpayer. Once SARS does this, a taxpayer has to probe it isn’t taxable.
What are the 3 steps for determining whether an amount is capital in nature?
- Determining the taxpayer’s intention at acquisition,
- determining whether there was a change of intention,
- Determining intention at date of sale
True or false: both objective and subjective factors must be considered to determine if an amount is capital in nature.
True.
What does it mean to ‘cross the Rubicon’?
To change the nature of an asset drastically.
What 5 principles should be consider when determing if an amount is capital?
. Taxpayer intention
. Scheme of profit-making
. Mixed or dual intention
. Change in intention
. Nature of the asset
True or false: the decision to realise an asset does not prove a change in intention.
True. A taxpayer has the right to realise an asset to their best advantage.
Where the asset is purchased with a dual motive, one motive not being substantially
dominant over the other motive…
the revenue motive prevails.
The general principles with regards to the nature of the asset is:
if the asset is a fixed asset it
would be a capital asset.
What is the difference between floating capital and fixed capital?
Floating capital = capital that keeps changing between cash and goods regularly. It’s used in the daily operations of a business.
Fixed capital = capital used to buy long-term assets like buildings, machines, or equipment. These assets help the business run but don’t get used up quickly.
What is a useful test to determine whether an amount is revenue or capital in nature?
Revenue = filled a hole/gap in receiver’s pocket
Capital = filled a hole/gap in the receiver’s assets
You can test the taxpayer’s ipse dixit (evidence) by referring to:
o The length of time that the asset was held
o The frequency that the taxpayer enters into similar transactions
o The nature of the taxpayer’s business
o The flow of income
o The reason for the sale
o The method of financing the acquisition of the asset
o The nature of the asset
A taxpayer is a physically present resident when…
They are present in SA for:
. More than 91 days in current tax year
. More than 91 days in each of the last 5 years
. At least 915 days total over those 5 years
Exemptions exist due to:
. Taxpayer being exempt from tax or;
. the specific income being exempt from tax
True or false: exempt income is still part of gross income.
True. It just gets taken out afterwards
Full exemption is granted…
Due to the nature of the entity
Partial exemption is granted…
Due to the nature of the receipt/accrual
Name some of the special inclusions described in the Gross Income definition.
. Annuities
. Alimony
. Services rendered
. Restraint of trade
. Services: commutation of amounts due
. Lease premiums
. Know-how
. Leasehold improvements
. Fringe benefits
. Proceeds from the disposal of certain assets
. Dividends
. Subsidies and grants
. Amounts received by or accrued to s11e sporting bodies
. Government grants
. Key-man insurance policies
True or false: recovered money resulting from a deduction will still be taxable.
True and wtf.
Which section in the ITA describes exemptions?
Section 10
True or false: all South African interest received by non-resident will be fully exempt from tax.
True, unless the debt relates to a permanent establishment here or if the non-resident is a natural person physically present for > 183 days during 12 months prior to receipt/accrual.
What is the difference between an exemption and a deduction?
An exemption = amount included in gross income that is not taxable
A deduction = can be claimed if income is taxable and a cost associated with that income can be claimed as a deduction
Are dividends received by individuals taxable?
No, dividends from South African companies are generally tax-exempt under Section 10
How does Section 10 apply to foreign employment income?
Income earned by South African residents for services rendered abroad may be exempt if specific conditions are met.
True or false: Compensation received under the Compensation for Occupational Injuries and Diseases Act is exempt from tax.
True.
True or false: war pensions related to disability from service in the armed forces are exempt.
True.
How does Section 10(1)(e) apply to bodies corporate?
Levy income received by a body corporate from its members is fully tax-exempt, and other income is exempt up to R50,000.
