Unit 2c: Gross Income

In favour of a person
Source principle
Capital receipts

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
In favour of a person

A person refers to corporeal and incorporeal persons, that includes a natural

person, trust, company, cooperative or other body corporate.
Year or period of assessment

This refers to the relevant year or period in which income is received or accrued.
For individuals, their year of assessment is from 1 March to 28 February.
From a source within Namibia

Either source or deemed source

The source principle is not defined in the ITA
Case law has set precedence, and the following bases are provided:
i) Dominant activity
ii) Originating cause of income/ accrual
iii) Where the capital is employed
Dominant activity

According to the case of CIR v Black 1957 (3) SA 536 (A), 21 SATC 226 source should
be:

a) the real (where the activities took place)

b) the dominant
c) the substantial source of the amount
Discuss each of the bases for determining the
source principle according to caselaw
Base
Originating cause of income/
accrual
Dominant activity
Where the capital is employed
Determinants Caselaw
Two factors determine the originating CIR Vs Lever Bros and Unilever Ltd
cause: (1946) 14 SATC 1
What gives rise to the income; and
The location of that originating cause.
a) the real (where the activities took CIR v Black 1957 (3) SA 536 (A), 21
place) SATC 226
b) the dominant
c) the substantial source of the amount
This refers to the place where the capital
to generate income was employed.
This could mean the location of the
business, capital or service which
produces profit.
Originating cause

❑ Two factors determine the originating cause:

▪ What gives rise to the income; and

▪ The location of that originating cause.

CASE: CIR Vs Lever Bros and
Unilever Ltd (1946) 14 SATC 1
• . “… the source of receipts, received as income , is not
the quarter where they came, but the originating
cause of their being received as income and that this
originating cause is the work which the tax payer does
to earn them, the quick pro quo which he gives in
return for which he receives them”……. “The work
which he does may be a business which he carries on
or an enterprise which he undertakes, or an activity in
which he engages and it may take the form of
personal exertion, mental or physical or it may take
the form of employment of capital either by using it
to earn income or by letting it to someone else or a
combination of these”.
• Take away: Source is the cause of the income and its
location
Where the capital is employed

• This refers to the place where the capital to generate income was employed.

• This could mean the location of the business, capital or service which produces
profit.

• NB: Source is based on origin than location, and the capital to earn income was
located where it was employed.
Source examples

• Income types are split into two, deemed and specific.

• Deemed include the sale of goods, royalties, imparting knowledge, ships & aircraft
services rendered as part of trade in Namibia, services rendered by Namibians
outside Namibia e.g pensions, services on behalf of government, insurance policies,
purchased annuities etc

• Specific area where the deemed principle does not apply include annuities, directors’
fees, royalties, interest, rent, dividends, services rendered and the sale of immovable
property.
Real vs Deemed

Item Real Source Rule Deemed Source Rule

Annuities Where contract or will was entered For purchased annuities: If ordinarily resident it is Namibian
source, regardless where contract was concluded or where
annuity is payable.

Royalties Where labour and wits are employed If right of use was granted in Namibia, it is deemed Namibian
source, irrespective of where produced.

Services Place where service rendered If income from services rendered, work done, or labour done in
Rendered NAM, seen as NAM source, irrespective by whom or where
payments are made.
REAL SOURCE
Annuities

• Cause – contract or will

• Where – Place where the contract was entered into

• E.g.: The source of an annuity payable by a trust created by a will executed in Namibia
by a Namibian resident, (even if trust derives its income partly from foreign sources).

• Place where an author’s labour and wits are employed.

E.g.: book written in Namibia.
INTEREST

• Originating cause is NOT the debt, but rather the service of lending.
• Lever Brothers and Unilever v CIR.
• The place where the ‘service is rendered’ is source of interest
• E.g.: Place where loan contract was concluded = source
• (Irrespective where capital is employed)
Rent

Two things to consider

Assets that produce the rent
Business activities to administer rent-producing operations.
= MUST consider the MORE MATERIAL of the two
If the asset is more material than the business operations – source is the location of asset
(immovable).
If the business operation is more material - the business location = source. (E.g. Car hire)
Dividends & Services rendered

Dividends
• In the country where the shares are registered.
• Where the register is kept
• Boyd V CIR

Services rendered
• Place where the service is rendered = source.
• Doesn’t matter where the contract is concluded OR payment is made.
• Namibian resident temporarily performing service in Kenya? ---- Seen as ‘deemed
source’: Section 15(1)(f).
Sale of movable & immovable property

• Liquidator Rhodesian Metals Ltd V CIR – source is the location of

the property irrespective of the residence of the owner.
• Trading stock or other movable property????
• No clear rules, must consider case-by-case basis
 Example 1

A leather shoe company established managed and controlled in South Africa

manufactures and distributes leather shoes to a distributing company in South Africa.
The sale of the shoes is stipulated in a contract concluded in South Africa between the
shoe company and the distributing company in South Africa.
Some of the income is generated from the distribution of shoes in Namibia.

Required:
Determine whether the income is from a source within Namibia.
 Example 2

Beon, a Namibian resident carries on business as a Registered Public Accountant in

Namibia. During the current year of assessment, he performed accounting work in
Botswana for his clients in that country and was paid a fee of N$3 600.

Required:

Explain the taxability of the above amount in Namibia.

DEEMED SOURCE [Sec 15]

Section 15 overrules the normal source rules with respect of certain types of income!!!

Sale of goods – s15(1)(a)

Where the contract of sale is concluded.
Lesotho and Swaziland sign contract in Windhoek for goods to be delivered in
Zambia????
What is the source?
Royalties – s15(1)(b)

• Income derived from granting the use of any patent, trademark, etc., i.e. right of use
is granted to USE IN NAMIBIA = is Namibian source income.
• Irrespective of where produced
• Payments to non-residents in respect of copyright on printed material are exempt.
 Imparting of knowledge – s15(1)(c)
• Any scientific, technical, industrial or commercial knowledge or info for use in
Namibia.
• Or the assistance in applying such knowledge.
• Irrespective of where the knowledge is imparted from or where the assistance or
service is rendered.

Ships and aircraft – s(15)(1)(d)

• Income derived by Namibian residents as owners of ships or aircraft is deemed to be
from a Namibian source.
Services – s15(1)(e-f)

Services rendered – s15(1)(e)

Work or labour done by any person carrying on of a Namibian trade.
Irrespective from where payments are made.

Services rendered during temporary absence – s15(1)(f)

Service by Namibian resident
Performed outside Namibia on behalf of a Namibian employer = Namibian source
Irrespective of who pays the employee or where payment is made.
ONLY for employees.
Services – s15(g-h)

Services rendered on behalf of the Government – s15(1)(g)

Services rendered outside Namibia
On behalf of government, council, local authority

Services rendered as crew members of ships and aircraft – s15(1)(h)

Ordinary Namibian resident
Service rendered inside and outside Namibia
Irrespective of where payment is made.
 Example 3

Mr Mars retires and is paid a pension on retirement of N$ 15 000 per month from a GIPF
(Government Institutions Pension Fund). He has spent the last 7 years of his 21 years of
service in Namibia. The amount of deemed Namibian source income for a specific year of
assessment is calculated as follows:

Solution

Amount = 7 x 15 000/21 = N$ 5 000 x 12months = N$ 60 000

Pensions – s15(1)(i)

Pensions granted by:

- Namibian government, regional council or local authority
(Municipalities, Town councils, Villages)
- the South African government including the railway administration if
any services were rendered in Namibia
Relating to:
- any person residing in Namibia / carrying on a business in Namibia, if
services were performed in Namibia for at least 2 years during the
preceding 10 years before pension was due.
 Example 4

Mr Nikolas a resident received a pension of N$15,000 per month from his

employers, a Swiss firm, for whom he had worked for 15 years. Mr Nikolas
has only worked in Namibia for his last 3 years of employment. How much
money is taxable in Namibia?

Solution
Amount = 3 x 15 000/15 = N$3 000 x 12months = N$ 36 000
 Interest and building society dividends – s15(2)
Any interest (loan, deposit, advance, debenture, bond)
Dividend from a building society
Received by domestic company or person ordinarily resident in Namibia
Is from a Namibian source irrespective of where interest or dividend was
received.

Purchased annuities – s15(3)

By ordinary resident in Namibia
Irrespective of where contract is concluded or annuity is payable.
 Refund relating to Pension contributions – s15(4)
Any refund of pension contributions to employee
Previously allowed as a deduction
Namibian source income

Insurance policies – s15(6)

The surrender or disposal of an insurance policy is NAMIBIAN SOURCE, if:
Ordinarily resident in Namibia or domestic company
Previously allowed as a deduction (section 17)
2 types of policies (education & life insurance)
 Sale of Mineral licence
Any amount received on the sale of mineral licence OR the right to mine or shares in a
Company that holds mineral licence deemed to be from NAMIBIAN SOURCE
Irrespective where transaction concluded or place where payment made or funds held

Education policies & Life insurance policies (Employer takes out policy on the life of an
employee)
Namibian source income if:
person (can include Company), receiving the amount is a resident or a domestic company
AND
Premiums were previously allowed as a tax deduction
Even if contract was concluded outside Namibia
 Example 5

Kresh (Pty) Ltd, with a year-end of 28 February 2020, has taken out a life insurance policy
of N$100 000 on the life of Mr Zed who is the technical director of the company. Mr Zed
has specialised technical knowledge of the company’s manufacturing process and should
he fall away the profits could be affected negatively. The premium on the policy amounts
to N$200 per month.

Mr Zed dies on 30 April 2019 and the amount of the N$100 000 is received on 30
September 2019. What are the tax implications for the company?

Solution
28 February 2020
Included in Gross Income (Sec. 15(6)):
Insurance pay-out: N$ 100 000
Premiums deductible (Sec. 17(1)(a)
March & April (N$ 200 *2) N$ 400
Capital Receipts

The ITA does not define amounts of a capital nature, and

caselaw provides the test of intention as a guide.

NB: Namibia does not levy capital gains tax except for
companies owning mining/petroleum licenses.
Test of intention- Subjective tests

Investment intention [Stephen v CIR 1919 WLD 1]

Speculation intention [Overseas Trust Corporation Ltd v

CIR, 1926 AD, 442, 2 SATC 71]

Change of Intention [CIR v Stott 3 SATC 253]

Mixed intentions [COT v Levy 18 SATC 127]

Intention
Main test is the taxpayer’s intention
Why did he acquire the assets???
Hold as an investment = income is tax free
Sell to make a profit = income taxable

Change of intention
Case: Natal Estates v CIR
Test of intention- Objective tests

Intention alone is not the deciding factor in determining whether receipts

from the sale assets will be capital or revenue in nature. Objective tests incl:

Manner of acquisition- inheritance or borrowing

Manner of disposal-advertising or no intentions to sale
Period asset was held- long (capital), short (profit motive)
Frequency of similar transactions- (No of times indicate profit scheme)
Occupation of taxpayer- e.g real estate agent or car dealer
Nature of asset- asset bought to produce income is capital while asset with
no income but to sell for a profit e.g trading stock is revenue
 Example 6

Shilumba John has been letting a block of flats in Rocky Crest for the
past ten years. Shilumba acquired the flats with savings from his full-
time employment income.
He does not have a history of property dealing – he has been a full-time
government employee for the past 20 years. Due to crime in the area,
he struggles to let the flats to tenants. He is aware that he can sell the
flats individually and make a substantial profit.
Determine whether the amount received by Shilumba constitute gross
income if he decides to dispose the flats.
Solution

Subjective tests
Intention- he bought the flats for investment, he has been
letting for the past 10 years
Change of intention- due to change of circumstances,
Shilumba decided to dispose the flats individually. IRD
allows a taxpayer to try to get the best price without
undertaking a profit scheme
Mixed intention- does not apply
Solution Continued…

• Objective tests
• Manner of acquisition- he purchased as an investment using his savings thus capital
• Manner of disposal- He sold the flats to get the best possible price, and not profit as he
struggled to get tenants thus capital
• Period asset was held- It was held for 10 years indicating that he did not intent to
dispose it shortly for a profit, thus capital
• Frequency- he does not have a history of property dealings, thus capital
• Occupation of the taxpayer- He was a full-time govt employee not a property dealer
therefore not into profit
• Based on this, the proceeds are indicative of a capital asset and thus shld be excluded
from gross income
Court Cases

In Pyott ltd v CIR (1945 AD 128) (SATC 121)

❖the court held that an amount cannot be both ‘non-capital’ and
‘capital’

In CIR v Visser (1937 TPD),

❖which held that ‘income’ is what ‘capital’ produces, or is
something in the nature of interest or fruit as opposed to
principal or tree.
Key Points

In general, if the asset was acquired with the intention to sell at a profit (e.g.
in a profit- making scheme) the sale of the asset will be considered to be
revenue in nature and thus taxable in the hands of the taxpayer,
unlike if the asset was acquired with the intention to keep as a capital asset
(Visser law). That is to produce income (investment) the proceeds on the
sale of the assets will they be considered to be capital in nature.
Examples
 Example 7

Rian, a sales agent in the Windhoek North received N$2 000

as the best sales agent of the year in the motor car industry
sector. In addition, Rian was afforded a holiday in Swakop
valued at N$6 000. During his stay at Shinga Hotel, Rian
bought a lotto ticket which won him N$10 000.

Required
Discuss with reason, which amounts must be included in
Rian’s gross income.
Solution

Normally, fortuitous receipts and accruals are of a capital nature and would not be
subject to income tax. However, the amount won by Rian for being the best sales agent in
the region is closely related to his employment as a voluntary award by the employer in
respect of services rendered.
The amount to be included in gross income according to the general definition of gross
income and according to CIR vs Butcher Brothers (Pty) includes money and money’s
worth.
Therefore for Rian, the gross income is a total of N$8000, being $2 000 (prize money) and
$6 000 (the value of the holiday given by the employer). However, the lottery money is a
fortuitous accretion which is not related to services rendered and is therefore of a capital
nature and above that Rian is not a professional gambler.
Self Review Question

Mr Unono is a Namibian resident. He has provided you with the following details for the year
ended 28 February 2023.

Details N$
Gross income
Profit from vegetable market 25 000
Rent received 32 000
Dividends 2 200
Bet win from soccer match results 1 200
Profit on sale of shares held as trading stock 15 800
Insurance claim 85 000
Interest received 4 200
Restraint of trade 78 500
Gross income 243 900

Required:
Compute Mr Unono’s gross income for the year ended 28 February 2023.
Solution

Mr Unono

Computation of Gross Income for the year ended 28 February 2023

Details N$ Reason
Gross income
Profit from vegetable market 25 000 From business
Rent received 32 000 GI
Dividends 2 200 SI
Bet win from soccer match results - Prize money - capital
Profit on sale of shares held as trading 15 800 Revenue nature
stock
Insurance claim - Insurance premiums non-
deductible
Interest received 4 200 GI
Restraint of trade 78 500 taxable
Gross income 157 700