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GROSS INCOME SUMMARY

The following are the requirements of the gross income definition
 in relation to the year or period of assessment;
 the total amount;
 in cash or otherwise;
 received by or accrued to or in favour of such resident;
 excluding receipts or accruals of a capital nature;
 Including all special inclusions (a) to (n) per section 1 gross income definition.

All of the above requirements need to be met for an item of income to be classified as gross income.

During the year of assessment

The date of the transaction is …… and will be included in the ….. year of assessment.

The total amount

Total Amount means the value of any form of property that has a monetary value (Lategan case)

In cash or otherwise

If the sale is in monetary terms, use the amount there-in. (Note that goods sold way below fair market value
may lead to a donations tax or tax avoidance implications)

If the consideration is not in the form of money, value at fair market value (Lace Proprietary Mines case)

If an interest free or low interest loan is given, the amount is calculated by applying the average outstanding
amount X (Prime rate – rate paid) – Brummeria case

Received by or accrued to

An amount is only “received” by a taxpayer if it is received by him “on his own behalf and for his own benefit”
– Geldenhuys case

Accrued means to become unconditionally entitled to – Peoples Stores case

The Receiver has to include the amount received or accrued at the earliest time, not when he wishes to –
Silverglen case

In determining whether an amount is “income” or not, no account must be taken of the fact that the activity
involved was illegal, immoral or ultra vires (– Delagoa Bay Cigarette company)
Amounts paid to the illegal scheme were accepted by the operators of the scheme with the intention of
retaining them for their own benefit and notwithstanding that in law, they were immediately repayable
(because they were illegal), they constituted receipts within the meaning of the Income Tax Act. (MP finance
case)

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ONE PAGE SUMMARY OF CAPITAL VS REVENUE LOOK AT

OBJECTIVE FACTORS SUBJECTIVE FACTORS

* Manner of acquisition i.e. inheritance of an asset will Court cases have said that a judge
probably be capital, buying an asset on credit where you should look at the following:
cannot pay repayments will probably be revenue
* Frequency of the transaction i.e. the more often a taxpayer
What is the intention of the taxpayer?
buys or sells an asset, the more likely it is to be revenue in
nature. (Stott case)
* Income flow i.e. did you acquire the tree to produce fruit
or did you acquire the fruit with the intention of resale. Tree vs fruit considerations. The tree is
* Finance i.e. an asset acquired with your own funds is more capital and the fruit is revenue i.e. gross
likely to be capital than an asset acquired with loan funds. income
* Manner of disposal i.e. fortuitous sale will be capital, (Visser case)
extensive advertising before sale will possible be revenue.
* Length of time the asset sold was held i.e. the longer the
asset is held, the more likely it will be that the asset is of a Is the intention a scheme of profit
capital nature. making? If it is, it will be revenue i.e.
* Continuity i.e. the more often a taxpayer buys and sells a gross income
particular asset, the more likely he is involved in a scheme (Pick n Pay case)
of profit-making.
* The nature of the taxpayer’s business will be influential as
A taxpayer may realize the asset to
if the sale is outside of his ordinary business, the sale may
his/her/its best advantage and it will still
be of a capital nature.
* Activities of the taxpayer as regards the asset up to the be capital (Stott case, Brea West case)
time the asset is sold.
* Nature of the asset disposed of i.e. if the asset is acquired Intention at acquisition, during holding
as a source of income, the asset may be considered to be and at sale must be considered to
capital in nature. determine whether a taxpayer has
* Reason for the sale.
changed intention (Natal Estates)
* Legal nature of the transaction i.e. if an amount is received
for allowing someone to use an asset, this will be gross
income but sale of a capital asset will not be gross income. If the taxpayer has dual motives
* Accounting treatment of the sale (Revenue and capital) and neither is

Principles of other cases

o Profits from a business are inherently revenue in
nature
o Intention of a company can be determined from
the company’s formal and informal acts
o A transaction that has a primary capital purpose,
but has a secondary revenue purpose could find
the secondary purpose taints the primary purpose
o Subdivision of land before selling an asset will not
be revenue in nature without other actions.
o Purchasing an asset and then disposing of an
unneeded portion will be capital in nature
o New shareholders can change the intention of a
company as regards intention to an asset
o Assets bought with intention of immediate resale
Sions
are treated as revenue
o
o To determine capital or revenue when
compensation is paid, determine which hole is
being filled (lose an arm is capital, lose profits is
revenue)
o Kruger rands generate no return (such as rental for
a property) and unless held for capital purposes
such as a hedge against inflation will be treated as
revenue items when sold.
o Regular sales of an asset are revenue in nature
o Lump sums must be broken down into component
parts where a business is bought
o Amounts payable out of the profits for a business
are revenue in nature
o Regular gambling is revenue in nature
o Restraint payments are capital in nature

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FULL SOLUTION GROSS INCOME EXAMPLE

Mrs A inherited a holiday home valued at R700,000 from her late husband in 2003 when died from colon
cancer. The house had been used as a holiday home by the family since her husband purchased it in 1998 for
R400,000.

Mrs A was a school teacher and decided to keep the holiday home. The holiday home was rented out by a
letting agent to holidaymakers and Mrs A received approximately R50,000 income a year in rentals.

In the current year, her son was diagnosed with early onset colon cancer and Mrs A wanted to her son to see
the best oncologist available.

Medical aid did not cover all costs of his treatment and Mrs A placed the holiday home on the market as she
could not afford the extra medical cost with her savings and her salary..

She hired a local real estate agent and on the advice of the real estate agent, she painted the whole holiday
home to enhance its value.

The real estate agent presented 2 offers at R1,800,000 and at R1,850,000 which were rejected in the first
month that the property was on sale. An offer of R1,500,000 cash plus a holiday flat worth R500,000 was
accepted for the holiday home some 7 weeks after giving it to the estate agent to sell. The sale was subject to
a bond of R800,000 being raised on the property. R700,000 was paid to the estate agent for the remainder of
the cash on 10 January 2015.

The bond was approved on 15 January.

The R1,500,000 was received on 20 January, but the flat was only transferred into her name on 18 March. This
was the 1st time she had sold a property in her life.

The holiday flats value had increased from R500,000 to R600,000 at year end as there was surge in property
prices due to a new airport having opened close to the flat.

Will the proceeds received on the sale of the house constitute “gross income” as defined for the 2015 tax year.

SUGGESTED SOLUTION TO DETAILED EXAMPLE

An amount will constitute gross income if

 there is a total amount in cash or otherwise
o there needs to be property received that has an ascertainable money value (Lategan case)
o In the case of cash not being paid, the property needs to be valued at market value on the
date of the transaction (Lace Proprietary mines case)
o In this case, R1,500,000 cash is received plus a flat worth R500,000 on the date of the
transaction. The amount is R2,000,000.
 During the year of period of assessment
o In this case, the transaction took place on 15 January. This is in the current tax year for Mrs A
which runs from 1 March 2014 till the end of February 2015
 Received by or accrued to
o Received by means received by the taxpayer for own benefit (Geldenhuys case)
o Accrued to means to become unconditionally entitled to (Peoples Stores case)

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o Mrs A became unconditionally entitled to the amount on 15 January 2015 when all
formalities (bond being granted) were complied with.
o Mrs A received the amounts for her own benefit on 20 January 2015 (the cash) and 18 March
2015 (the flat).
o In accordance with the Silverglen case, gross income is calculated at the earlier of receipt or
accrual which is 15 January 2015.
 Not of capital nature
o Particular regard is given to court cases
o In the Stott case, the principle of intention of the taxpayer was introduced. If a transaction
had a capital intention, it would not be gross income and if there was a revenue intention,
there would be gross income.
o But what is a revenue intention?
o Particular regard is to be had of whether the taxpayer was involved in a scheme of profit
making thus having a revenue intention(Pick n Pay case) or whether a taxpayer was realising
an asset to the best advantage (Stott case).
o In the Visser case, the principle of tree (capital asset) vs fruit (revenue item) was introduced
when an asset is sold. In this case, the tree is the holiday home and the fruit is the rentals
received.
o In the Natal Estates case, intention on acquisition, on holding and on sale was considered to
determine whether a taxpayer had changed intention (so called crossed the Rubicon from
capital to revenue intention)
o Considerations should be made to all objective factors
o Manner of acquisition objective factor
 The holiday flat was acquired via inheritance. This indicates a capital intention
o Frequency of the transaction
 This was the first time she had sold a property. This indicates capital intention
o Reason for the sale
 She needed some cash to pay the amounts not paid by medical aid for the
treatment of her son. This is a capital intention.
o Length the asset was owned for
 The asset has been owned by her for many years and for many years before that by
her late husband. This indicates capital intention.
o Utilisation of proceeds
 She kept some of the proceeds as a new holiday flat the company could use. This
indicates capital intent.
o Marketing the sale
 She hired a real estate agent to sell the holiday home. She did not do anything more
which is indicative of a capital intention.
o Owners activities prior to selling the asset
 She painted the holiday home. This was on the advice of the real estate agent. This
is merely realising the house at its best price, and does not constitute “crossing the
Rubicon” with a change of intention.
o Refusal of 2 offers
 She was realising the asset to her best advantage. She is not obliged to accept the
1st offer made. This still indicates capital intention.
o Business of the taxpayer
 She is a teacher and is not involved in the sale of property. This indicates a capital
intention.

Based on the above, the sale is capital in nature.

The amount received of R2,000,000 will not be included in gross income as not all components of the gross
income definition apply. The transaction is capital in nature.

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LOWER MARK GROSS INCOME QUESTION

Persons should modify their solutions to the marks available. As a minimum the following format should be
followed for a 6-8 mark question

POINT 1 – PUT DOWN THE GROSS INCOME DEFINITION

Gross income includes THE TOTAL AMOUNT IN CASH OR OTHERWISE RECEIVED BY OR

ACCRUED TO EXCLUDING RECEIPTS OR ACCRUALS OF A CAPITAL NATURE

POINT 2 – DISCUSS EACH BASIC ELEMENT

TOTAL AMOUNT THERE IS A TOTAL AMOUNT EQUAL TO

IN CASH OR OTHERWISE THE AMOUNT WAS RECEIVED IN CASH/ASSET VALUED AT XXX

RECEIVED BY OR ACCRUED THERE WAS ACCRUAL ON XXXXXX DATE, THERE WAS A RECEIPT ON XXX
DATE (INCLUDE AT EARLIER OF THE TWO DATES

EXCLUDING CAPITAL ITEMS THE AMOUNT IS REVENUE (OR CAPITAL)

POINT 3 – CONSIDER WHICH ITEM/S MENTIONED IN THE QUESTION IS THE ITEM THAT NEEDS TO BE DEBATED
FURTHER

ADDRESS THIS ITEM IN MORE DETAIL

POINT 4 CONCLUDE

ILLUSTRATION - 7 MARK QUESTION

A real estate agent collects R10,000 rent from a customer on 2 January for the month of January. The agent
pays R9,000 to the owner after retaining R1,000 as a management commission.

What are the gross income implications for the real estate agent as regards the above case?

SUGGESTED SOLUTION

Looking at the illustration, the only component of the gross income definition that needs to be discussed in
further detail is the received by/accrued to component. All other components are clearly complied with. Note
how the solution is drafted.

STEP 1
The gross income definition includes the
 total amount,
 in cash or otherwise,
 received by or accrued to
 a resident,
 excluding receipts or accruals of a capital nature
into gross income.

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STEP 2
The total amount received by the real estate agent is R10,000 for the whole rental and R1,000 retained as an
agency fee.
The amount has been received in cash.
The date the cash is collected is 2 January.
The amount is not capital in nature as the real estate agent runs a business that is involved in a scheme of
profit making Collecting agency fees for managing properties.

STEP 3
Received by means received by a taxpayer for his own benefit (Geldenhuys case)

Although R10,000 is received by the real estate agent, R1,000 is for his own benefit.

Accrued to means to become unconditionally entitled. (Peoples Stores case)

The real estate agent is only unconditionally entitled to R1,000.

STEP 4
Thus R1,000 will be included into the gross income of the real estate agent on 2 January.

HOW DO SPECIAL INCLUSIONS IMPACT ON GROSS INCOME

It is important to remember that when one of the special inclusions applies to a question, this should also be
taken into account. Look at the illustration below.

ILLUSTRATION - SPECIAL INCLUSIONS DISCUSSION

You received the following query from one of your client’s sons, Ronnie Black, who is getting ready to do his
tax return

Contents of the email

Hi dude
My dad asked me to tune you what happened and how I got my Ferrari.

On 19 February this year, I was going to take my girlfriend out for a night of intense making out when I arrived
at her house the exact same time a security car pulled up outside.

An ADT oke got out the car and I knew something bad was happening. I asked him what was going on and he
told me there was a silent alarm he was investigating.

I just knew something kak was happening as the gate was open. My girlfriend’s father is an anal oke who
always makes sure the gate is closed and has installed this radical alarm system in his Houghton house.

I took out my gun and went in with the security guard. It reminded me of when my mom got held up.

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We saw that there were some shady okes with guns threatening my girlfriend and her family.

My girlfriends father had been shot in the leg and he was lying on the floor bleeding.

My girlfriend was half dressed and this doos had his hands over her half naked body with a gun to her head. I
flipped and ran into the house with my gun and blew the motherfucker away. His friends, none of which had
guns, ran away and were stopped by the ADT guard outside.

My girlfriends father after getting discharged from hospital in March took me to Investment Cars and I was
totally blown away when he gave me this Ferrari I liked. It cost him a cool R1,200,000 to buy it for me. But hey,
he is a gazillionaire.

He also gave the ADT security guard a new 47 inch led TV that cost R12,000.

So, do I need to pay any tax on the Ferrari I got from him? He actually gave me the invoice for guarantee and
warranty purposes, and the car is registered in my name.

You are required to comment on whether the Ferrari received will be included in gross income and what
amount, if applicable should be included in gross income.

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SUGGESTED SOLUTION

For an amount to be taxed in South Africa, the amounts needs to be gross income as defined.

The following is treated as gross income:

 The total amount,
 in cash or otherwise
 received by or accrued to you
 during the year of assessment
 not of a capital nature
 including various items that are specifically included

Total amount means the value of any property received that has a money value as per the Lategan case.

The Ferrari has a money value of R1,200,000.

The items have been

 received by both of you
 in cash or otherwise.

It was received by you during the next year of assessment. Despite the fact that your act of bravery occurred in
the current tax year, you only became entitled to the Ferrari in the next tax year.
However the amount received is capital in nature.

Amounts are taxed if there is an intention on the part of the recipient to act in a scheme of profit making.

This has been confirmed by the cases of Stott and Pick n Pay.

However amounts can still be taxed if such amounts are specifically included in gross income.

Looking at the special inclusions, the fringe benefits legislation should be considered. However neither
relationship is of an employer/employee nature and such this special inclusion is not applicable.

The other possibility is to be taxed, can be found in paragraph (c) of the definition of “gross income”.

The following requirements should be met before par (c) is applicable:

Was a service rendered
Was payment by reason of/virtue of the service rendered

No doubt, a service was rendered by Ronnie and the security guard, namely the act of saving the family and
apprehending the criminals.

This is dealt with in the cases of Stander v CIR.

But was the receipt “by reason of/virtue of” the service rendered?

In regard to Ronnie Black, the receipt was not “in respect of or by virtue of” the service rendered. It was a gift
from the father for a brave deed done.

Ronnie had no obligation to perform the brave act and he even put himself in considerable danger in doing so.

The reward to Ronnie is therefore not taxable.

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