to have known that the waived commission did form part of or must be deemed to form part of MCC’s gross

income. As a consequence, the accused persons were acquitted of the charges against them. Although this case
illustrates the basic principles (and especially the importance of the terms of the underlying contract), it should be
borne in mind that SARS may in principle attack any scheme entered into for purposes of tax avoidance under
the provisions of s 80A–80L. [81]

4.5 Receipts of capital nature

4.5.1 Introduction
The general definition of gross income excludes receipts and accruals of a capital nature. [82] However, this does
not mean that all capital receipts/accruals are excluded from constituting gross income, in that certain receipts
(whether of a capital nature or not) are specifically included in the concept of gross income, such as an amount
received by a natural person as compensation for the imposition of a restraint of trade (see para 4.6.4 below).
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Although capital accruals have been subjected to income tax since 2001 (albeit under the provisions of the
Eighth Schedule to the Income Tax Act, which provides for the levying of capital gains tax), the distinction
between income and capital is still of significance because capital gains are taxed at a lower effective rate. Also,
the capital gains tax provisions are only applicable on the disposal of certain specific assets, and certain receipts
of a capital nature will therefore fall outside the scope of the Eighth Schedule.
Generally speaking, when an amount qualifies as a receipt or an accrual of a capital nature (and is therefore
excluded from the gross income of the taxpayer), then the next step would be to establish whether any capital
gains tax implications would ensue. Should the amount, however, fall within the

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taxpayer’s gross income (and therefore be classified as an amount of a revenue nature), then capital gains tax
would not also be payable in respect thereof.

4.5.2 Income versus capital

The definition of ‘gross income’ excludes receipts and accruals ‘of a capital nature’, which concept is not defined
in the Act. As a consequence, the judiciary has developed certain guidelines over the years in an attempt to
provide clarity as to the distinction between what constitutes an amount of an ‘income’ (or ‘revenue’) nature on
the one hand, and an amount of a ‘capital’ nature on the other. There is, unfortunately, no single infallible test to
apply. [83]
A guideline often used to illustrate the difference between income and capital was eloquently captured by
Maritz J in the judgment handed down in 1937 in CIR v Visser, [84] where the learned judge said that ‘income is
what “capital” produces, or is something in the nature of fruit as opposed to principal or tree’. According to this
approach, income is produced as a result of the employment of capital such as interest (income) derived from
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money in the bank (capital). This tree-and-fruit test, however, cannot always be used to characterise an amount
as revenue or capital.
Nevertheless, the following receipts/accruals are generally regarded as being of an income nature:
• compensation received for services rendered (such as a salary); [85]
• an amount received or accrued for the employment of capital (such as interest or royalties);
• the proceeds derived from the sale of trading stock; and
• damages that relate to the loss of revenue.
On the other hand, the following receipts/accruals are generally of a capital nature:
• an inheritance;

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• gambling or betting profits (unless systematically undertaken); [86]

• an amount received or accrued in terms of a restraint of trade; [87]
• the proceeds derived from the sale of an investment; and
• damages that relate to the loss of capital.
In general, an amount should be classified as either income or capital in nature (there being no ‘half-way house’
in between). [88] Apportionment is, however, possible where one amount (having regard to its quid pro quo)
contains both an income element and an element of a capital nature. In Tuck v CIR [89] the taxpayer was the
managing director of a pharmaceutical company who had received certain shares in terms of a management
incentive plan. The court held that the shares were partly attributable to a restraint of trade term (and therefore
capital in nature) and partly attributable to services rendered (and therefore income in nature). In delivering the
judgment, Corbett JA remarked that ‘[i]t could hardly have been the intention of the legislature that in such
circumstances the receipt be regarded wholly as an income receipt, to the disadvantage of the taxpayer, or wholly
as a capital receipt, to the detriment of the fiscus.’ As to the basis of apportionment, the court considered (in the
absence of any other basis) that a 50/50 apportionment would be fair and reasonable in the circumstances. [90]
What needs to be emphasised is that, should a capital/revenue dispute between a taxpayer and SARS end up
in court, the taxpayer bears the onus to prove on a balance of probabilities that the amount is not of an income
nature (see s 102 of the Tax Administration Act 28 of 2011, previously s 82 of the Act). [91] The principles of the
law of evidence are therefore of vital importance.

4.5.3 Proceeds received on the disposal of assets

4.5.3.1 General
When a taxpayer disposes of an asset, two possibilities arise. The first is where such a taxpayer is merely
realising an asset that is held in an unproductive form or as an investment (for purposes of deriving income
therefrom). The proceeds of such a sale would constitute a receipt or an accrual of a capital nature. The
alternative possibility is where a taxpayer realises an asset as part of a scheme of profit-making. A scheme of
profit-making basically entails

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a project where the taxpayer acquires an asset with the idea to resell it, at an opportune time, at a profit, which is
then the result of the productive turnover of capital represented by the asset. Under such a scenario, the asset
disposed of constitutes trading stock and the proceeds thereof would be of a revenue nature. [92] In some
instances (and especially in the context of a business), the courts have referred to the distinction between ‘fixed
capital’ and ‘floating capital’. [93] Floating capital constitutes assets that are frequently disposed of and basically
comprises trading stock.
The issue whether the proceeds constitute a receipt of a revenue or a capital nature is especially problematic
because the mere realisation of a profit by the taxpayer does not cause the proceeds to be classified as revenue
in nature. The principle is that a taxpayer has the right to realise a capital asset to his or her best advantage. [94]
The test employed by the judiciary to establish whether the proceeds are revenue or capital in nature is the
test of ‘intention’. What has to be established is whether the taxpayer intended to resell the asset at a profit
through a scheme of profit-making or whether he or she merely intended to realise an investment.

Examples
1. X (Pty) Ltd, a property developing company, sold a unit in a residential sectional title scheme
developed by it to Y for R1,5 million. The sectional title unit constitutes trading stock for X and
the proceeds of R1,5 million would have to be included in X’s gross income. Y (who used the
property for residential purposes and who required a larger house) sold it five years later to Z for
R2 million. The proceeds of R2 million are of a capital nature in Y’s hands and do not constitute
gross income. The mere fact that Y derived a profit from the sale does not cause the proceeds
to be classified as revenue in nature.

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