Unit 2b: Gross Income

Received by or Accrued

ATP3781 Taxation 1A

Bachelor of Accounting [NQF Level 7]

By

Dr Eukeria Wealth
Department of Auditing & Tax
School of Accounting
LEARNING OUTCOMES

Define Define Identify Determine

Define gross Define received Identify relevant Determine the
income by or accrued case law amount that
constitutes gross
income
 Scope

Received
The Total From a
by or During such
definition amount, in source Capital
accrued in year of
of gross cash or within receipts
favour of a assessment
income otherwise Namibia
person
Received by or Accrued to

Tax principles are based on receipt or accrual whichever comes first

RECEIVED BY

Taxpayers should include amounts that they actually received in their gross income.
These amounts should be for their own benefit.

For example, if a salesman sells goods for his employer and receives N$2 400. The
N$2 400 he received is not for his benefit but on the employer’s behalf and so does
not constitute gross income in his hands but in the hands of the employer.
 Example 1

A shopkeeper sells doughnuts worth N$800 for his employer.

Question:
In whose hands should this money be taxed?
CASE: Geldenhuys v CIR (14 SATC 419) (1947(3)

The taxpayer had a usufruct interest in a flock of sheep where

she was entitled to the fruits and income of the flock which was
owned by her children. (A ‘usufructuary interest’ is where a
person is allowed to use an asset which he does not own. The
person who actually owns the asset and, which he is not
allowed to use is called the “bare dominium holder”). The court
held that the taxpayer only had a right to use the asset, and the
proceeds from the sale were not received by her for her own
benefit and were therefore not her gross income. The amount
was received for the ultimate benefit of the bare dominium
holders. It is in terms of this “benefit” principle that amounts
received by an agent on behalf of a third party do not fall into
the agent’s gross income.

Take away: An amount received by an agent on behalf of the

principal is not for his benefit but for the principal, and is
therefore not part of his gross income.
BORROWINGS

The court has held that amounts borrowed are not receipts, as the borrower has an
obligation to repay the amount. This means that the borrowed amount does not
become his and so is not included in gross income.
This was established in CIR v Genn & Co (Pty) Ltd (1955 AD) where the court held
that obtaining of physical control over money or money’s worth does not constitute
a receipt and therefore does not meet the definition of gross income.
This means that an amount received where there is an obligation to repay the full
amount does not amount to a receipt and is therefore excluded from gross income.
ILLEGAL RECEIPTS

There have been contentions regarding whether amounts received from fraudulent
activities or any activities outside the legal framework should be taxed. The
recipients of illegal income always feel that their income should not be subjected to
the prescriptions of law since the activities that generated the income are outside
the confines of legislation.
However, it is not always the case as illegal income can have fiscal consequences.
There is so much controversy regarding the inclusion of income from theft, robbery,
illegal tradings and the so called ponzi/pyramid schemes popular in this day.
CASE: MP Finance Group CC (In liquidation) v CSARS (69 SATC 141)
(2007 SCA)

The taxpayer operated such an illegal investment ponzi scheme.

Some of the investors were repaid their money and the profits
while the majority received nothing as the taxpayer took some
of the money for their own benefit. The taxpayer became
insolvent and when the court was asked to judge whether the
amount constituted gross income, it ruled that the amount was
received within the definition of gross income since the
taxpayer accepted the deposits with the intention to benefit
from them.

Take away: Illegal receipts constitute gross income if it was the

taxpayer’s intention to receive the amounts for his own benefit.
ITC 54 SATC 464

In another case ITC 54 SATC 464, the court ruled that the
money received by the taxpayer from stolen diamonds
constituted gross income.
This was because the proceeds from the sales of these
diamonds amounted to a receipt to the taxpayer on his own
behalf and for his own benefit despite the legality of the
transactions.
In certain instances, the legality or illegality of transactions may
be irrelevant in determining the amount that constitutes gross
income.
COT vs G (1981) 43SATC 159

In the case COT vs G (1981) 43SATC 159, the judgement reveals

that money stolen by a thief does not meet the definition of
gross income since the amount is taken by the taxpayer, and
thus does not amount to a receipt.
This is due to the fact that according to the court ruling the
taxpayer concerned who had misappropriated funds in his care
had not received money on his own behalf and for his own
benefit, but had rather unilaterally taken the money which
does not confer a right upon the taker.
ITC 1624 59 SATC 373

In another case ITC 1624 59 SATC 373, the court held that an amount received from
overcharging a customer amounts to a receipt by the taxpayer which was from the
contract between the two parties.
 Example 2

A minister of health was given funds amounting to USD2million for the acquisition of
Covid 19 vaccines. He solicited for very cheap vaccines from Asia and purchased vaccines
to the tune of USD800 000 only. The rest of the money he used to import some goods
that were in short supply in the economy and smuggled them into the country. He used
his political muscle to quickly sell the whole consignment to one of the parastatals and
received a total of USD2 500 000 which was deposited in his personal bank account. The
matter was revealed by a whistle-blower within the government structures, and the
matter was taken to court by the tax authority before he could replace the money that he
had taken back into the ministry account.
Required: Determine which amounts constitute gross income in the hands of the
minister. Motivate your answer with caselaw.
DEPOSITS

Deposits are generally regarded as revenue emanating from trade and thus amounting to
receipts of a revenue nature.
CASE: Poytt Ltd v CIR (13 SATC 121) (1945 AD 128)

The taxpayer was making biscuits and selling them in containers

for a price that included the fee charged for the containers
which would be reimbursed to the customer once the container
is returned. Poytt Ltd was excluding the value of the containers
on the pretext that the customers would return the containers.
Asked to judge, the court ruled that the amounts constituted a
receipt to the taxpayer for his own benefit and would
constitute gross income.

Takeaway: As long as income is received by the taxpayer and

for his own benefit it amounts to a receipt.
ITC 675 (1949) 16 SATC 238

In another case, ITC 675 (1949) 16 SATC 238, the judge ruled that deposits received from
potential buyers of day-old chicks are to be delivered at a future date, and are non-
refundable, amounts to gross income in the hands of the seller.
 Example 3

ABC Pty (Ltd) received N10,800.00 from customers for the purchase of special textile
material and N3,250.00 in deposit to secure the purchase as there was high demand for
this special material imported from Nigeria. The deposit was non-refundable.
Determine which amounts constitute gross income in the hands of ABC Pty (Ltd).
Motivate your answer with caselaw.
 Example 4

Mariana operates a bed and breakfast establishment in Swakopmund. She received a

non-refundable deposit of N$24 000 on 1 May 2022 to reserve accommodation for a
group of British tourists who will visit Swakopmund during Easter in April 2023.

Required: Determine whether Mariana will include the N$24 000 in her gross income for
the 2023 year of assessment. (2 marks)
SOLUTION

Mariana will include the deposit of N$24 000 in the year of receipt (2023 year of
assessment). Even though the services will only be rendered in the 2024 year of
assessment, she has received the amount for her own benefit. It will not be included in
her gross income again in the 2024 year of assessment.
ACCRUED TO
CASE: Mooi v SIR (34 SATC 1) (1972 (1) SA 675 (A))

An employee was granted an option to subscribe to shares in the company

where he was working at a specific price. The option had conditions that
required to be fulfilled before it could be exercised. The employee exercised
the option three years later when the value of the shares were now more
than the option price. The issue was whether the gains on this transaction
should be included in the taxpayer’s gross income. The court held that the
taxpayer had a right, but which was only exercisable after consummation of
the conditions, and in this instance the taxpayer had a right to the money
upon exercising the option. The court held that despite the amount being of
a capital nature as the taxpayer was not in the shares business, the amount
constituted gross income since it was a receipt in terms of services rendered
to the employer.

Takeaway: An amount accrues to a taxpayer when his entitlement or right is

unconditional.
ACCRUED TO
 Example 5

1. Ms Joana rendered services to Webna (Pty) Ltd on 16 March 2023. Webna (Pty) Ltd agrees to pay
N$16 000 for the services rendered but the amount is only payable in five years’ time. Assume that
the present value of N$16 000 in five years’ time is N$11 400.

Required:
Determine the amount that will be included in Joana’s gross income in 2024.

2. Helena works at ABC (Pty) Ltd as a tax consultant. On 28 February 2023, Helena invoices a total of
N$120000 to ABC for the work done to date. According to the contract, the payment would only be made
45 days after the invoice is issued.

Required:
Determine the year of assessment that the N$120000 is taxable.
SOLUTION

1. The total value of the accrual is N$16 000 and she will include the N$16 000 in her
gross income for the 2024 year of assessment

2. Even though the invoice is not yet due to be paid, Helena is entitled to the money for his
services rendered to date and the income is taxable in the current YOA.
 Example 6

a) Pieter Rocks, an electric engineer provided installed electricity cables to a newly

constructed school during the year of assessment for N$13 500. A sum of N$9 500 was
deposited into his bank account, and the outstanding balance was still owing at the end
of the year.
Required:
Determine the amount that should be included in Pieter Rocks’ gross income.
b) Pieter Rocks was stressed about delays of the receipt of his outstanding money from
the school, so he decided to refresh his mind by gambling. He gambled at a nearby casino
and received a net of N$6 000.
Required: Determine if his income from gambling constitute gross income.