Question 1 – Part A

● The sale of the cattle will give rise to proceeds of R160 000. (1)
● The income tax consequences will depend on whether or not the proceeds are
gross income or not (ie capital). It is therefore important to determine whether
or not the proceeds are included in gross income. (1)
Gross income is a defined term. In terms of the definition all of the following criteria
must be fulfilled: (1)

a) There must be an amount. (R 60 000) (½)

b) The amount must be in cash or otherwise. Presumably be paid in cash (½)
c) The amount will only be included in gross income when it is received by or
accrued to him. (½)
d) The amount must not be of a capital nature. (½)
Clearly requirements (a) to (c) will be met and the only issue is the question of the
capital or revenue nature of the proceeds. (1)
The onus rests on the taxpayer to prove that an amount is capital in nature (s102 of
TAA). (1)
Whether Kanye’s Cattle is capital or revenue asset will depend on the
purpose/intention for which he holds the asset (ie investment/ produce income with
or scheme of profit-making). (1)
If the taxpayer’s intention was one of a scheme of profit making, this indicates that
the amount is revenue in nature. (1)
The courts have held that it is necessary to establish the intention of the taxpayer at
the time of acquisition. If intention at the time of acquisition is capital and there is no
subsequent changes of intention the proceeds are capital. (1)
The courts have held that every person is entitled to realise their capital asset to the
best advantage. (1)
Furthermore it has been held that the mere decision to sell does not in itself intimate (1)
a change of intention (John Bell) (1)
Kanye's intention at the time of the acquisition of the Cattle is established by asking
him what his intention was. (SARS will ask him) his answer to the question is his
ipse dixit (ie what he says). The courts have held that the taxpayer's ipse dixit must (1)
not be taken lightly.
Sale of cattle constitutes the sale of an income generating capital asset (Visser–
Tree VS Fruit) (1)
The veracity of the taxpayers ipse dixit will be tested by taking into account the
surrounding facts. The factors that will be taken into account are: (1)
(a) Taxpayers normal business activities - he farms with Cattle to sell their milk.
The Cattle is the income producing asset. (½ + ½)
(b) frequency of sale of Cattle. This was the only transaction of this nature for this
year. (½ + ½)
(c) the flow of income. Kanye receives income from the sale of milk. (½ + ½)
(d) the reason for the sale. Sale to obtain capital to repair fence because Kanye
has cashflow problems. (½ + ½)
All indications are that Kanye's original intention was one of a capital nature and in
the absence of a change in intention the proceeds will be of a capital nature. (1)
A change of intention occurs when the taxpayer does something more than merely
realise an asset to his best advantage. The taxpayer must cross the Rubicon and go (1)
over to a business of property dealing. (Natal Estates). (1)
CONCLUSION:
The Cattle is sold with the intention to obtain money to rebuild a fence. (1)
The method used to sell the Cattle indicates that Kanye wanted to obtain the best
possible price for his Cattle. (1)
By marketing his Cattle Kanye is merely disposing of his capital asset in the most
appropriate way. (1)
Thus the expenditure to sell the Cattle is incurred merely to accommodate the sale
of the Cattle, and the sale of the Cattle will constitute a capital receipt for the gross
income definition. (1)
General comment: The First schedule of the income tax act contains certain
special provisions relating to life stock and farmers and how it must be accounted
for, for income tax purposes. This would have an impact on the answer. However,
the purpose of the question was to test the principle of capital and revenue in the
context of gross income, not farming activities that will only be covered in Tax 300.
(27)
Max (15)