TAX LAW (BLR 310)

EXAMINATION
Question 1.

Introduction

Legal Question
The legal question in this case is the tax implications imposed by the two transactions
that took place in the 2022/2023 year of assessment, herein the R20 000 for the
dividends, as well as the R10 000 income from the sale of her shares.

Applicable Law
The applicable law in this scenario, is section 1, definition of gross income.
Paragraph (a), definition of a “resident” and paragraph (b), definition of “non-resident”,
and provisio 1.1
Interpretation Note 6 in consistency with Article 4 of the Model Tax Convention.2
Section 9(2)(a) and Section 10(1)(k)(i).3
Paragraph 53(2) of the Eighth Schedule.4
The Double Tax Treaty between South Africa and Kenya, specifically Article 2 and
Article 13.5

Application
Section 1, the definition of “"gross income", in relation to any year or period of
assessment, means –(i) in the case of any resident, the total amount, in cash or
otherwise, received by or accrued to or in favour of such resident; or (ii) in the case of
any person other than a resident, the total amount, in cash or otherwise, received by
or accrued to or in favour of such person from a source within the Republic, during
such year or period of assessment, excluding receipts or accruals of a capital nature.”
6
According to the set of facts, it has been established that Irene is an ordinary resident
of Kenya, which eliminates the need for us to determine her residency using the
ordinarily residence test and the physical presence test, as both of them are not met
according to the principles of both the tests. However, according to paragraph (a),

1
Income Tax Act 58 of 1962 par 1(a): par(b)
2
Interpretation Note 6: Article 4 of the Model Tax Convention.
3
Income Tax Act (n1) sec 9(2)(a): sec 10(1)(k)(i).
4
Income Tax Act (n1) par 53(2) of Eighth Schedule.
5
Double Tax Agreement No. 1158 Article 12 and 13.
6
Income Tax Act (n1) sec 1.
““resident” means any -- (a) natural person who is –(i) ordinarily resident in the
Republic; or (ii) not at any time during the relevant year of assessment ordinarily
resident in the Republic, if that person was physically present in the Republic –
(aa) for a period or periods exceeding 91 days in aggregate during the relevant year
of assessment, as well as for a period or periods exceeding 91 days in aggregate
during each of the five years of assessment preceding such year of assessment; and
(bb) for a period or periods exceeding 915 days in aggregate during those five
preceding years of assessment, in which case that person will be a resident with effect
from the first day of that relevant year of assessment.”7 With this definition of
residency, Irene does not meet and satisfy the definition. If we apply the definition of
“non-resident” with the regards to paragraph (b) that states, “(b) person (other than a
natural person) which is incorporated, established or formed in the Republic or which
has its place of effective management in the Republic, but does not include any person
who is deemed to be exclusively a resident of another country for purposes of the
application of any agreement entered into between the governments of the Republic
and that other country for the avoidance of double taxation.”8 Therefore, we have
determined that Irene is non-resident according to the Income Tax Act. The tax
implications of such is that she will be taxed on income from a South African source.
The proceeds of R20 000 from the dividends paid out by Irenica, were sourced from
the South African resident company. This is established because the company was in
incorporated in South Africa. The Place of Effective Management and incorporation,
in accordance with the abovementioned paragraph (b) definition of a residence of a
person other than a natural person, is a resident of South Africa, because of the
incorporation in the country as well as the place of effective management.
Interpretation note 6, even though not binding, states that place of effective
management is where all key management decisions are made, which is consistent
with the OECD commentary on Article 4 Model Tax Convention.9

According to section 9(2)(a) of the Income Tax Act, “(2) An amount is received by or
accrues to a person from a source within the Republic if that amount –

7
Income Tax Act (n6) sec 1(a).
8
Income Tax Act (n6) sec 1(b)
9
Interpretation Note (n6)
(a) constitutes a dividend received by or accrued to that person.”10 However,
according to section 10(1)(k)(i), exemptions “(i) dividends (other than dividends paid
or declared by a headquarter company) received by or accrued to any person.”11
Because Irene received dividends to a value of R20 000 from a South African resident,
he amount is subject to withholding tax, thus, the dividends will be subject to dividends
tax withholding tax at 20%. Withholding tax is a percentage that a company withholds
a certain percentage on behalf of the taxpayer, and transfers it to SARS on the
taxpayer’s behalf. Withholding tax thus applies to dividends paid by a company to its
beneficiaries. However, there are exceptions. Since Irene is not a resident of South
Africa, and there is a Double Taxation Agreement between South Africa and Kenya,
the Double Tax Agreement, in accordance to Article 13, will reduce the dividends tax
to 10%, which would amount to R2 000.

According to the shares that were disposed by Irene to the value of R10 000, this
disposal triggers capital gains tax. Capital Gains Tax is triggered by the disposal of a
capital asset. This is triggered when the sale of an asset, is sold for a gain. In this
case, the shares were sold at R10 000 for a gain by Irene. How the gain is calculated,
it is calculated by subtracting proceeds from the base cost, which would total to the
capital gain or loss. Since the shares are personal use, which do not trigger the capital
gain, there is an exclusion with shares. A disposal of share triggers the capital gains
tax, which is in accordance to paragraph 53(2) of the Eighth Schedule of the Income
Tax Act. Therefore, her disposal of the shares would be subject to capital gains tax.

Conclusion
Irene is not a resident of South Africa and therefore liable for tax from proceeds from
a South African source. The sale of shares and the receipt of dividends, are both
subject to withholding tax, dividends tax and capital gains tax. She would be liable tax
implications imposed by these taxes.

10
Income Tax Act (n3)
11
Income Tax Act (n3)
Question 2.

Introduction

Legal Question
The legal question in this scenario is whether the monthly deductions Queenie was
making as “black tax” to the value of R20 000 can be deducted from her gross income.
The subsequent legal question in casu is how the transaction of R100 000 will be
handled for tax purposes.

Applicable Law
The applicable law in this case is, section 1, definition of “gross income”.12
Section 11(a) and 23(g) of the Income Tax Act, general deductions formula.13
Section 24(f) of the Income Tax Act.14
Port Elizabeth Electric Tramway Co Ltd v CIR (1936 CPD).15
CSARS v Labat, Edgars Stores Ltd v CIR.
ITC 489
Concentra (Pty) Ltd v CIR.

Application
1. Section 1 definition of “gross income” states, "gross income", in relation to any
year or period of assessment, means – (i) in the case of any resident, the total amount,
in cash or otherwise, received by or accrued to or in favour of such resident; or (ii) in
the case of any person other than a resident, the total amount, in cash or otherwise,
received by or accrued to or in favour of such person from a source within the Republic,
during such year or period of assessment, excluding receipts or accruals of a capital
nature.”16 According to the general deductions formula, section 11(a) and section
23(g) stipulates that, “General deductions allowed in determination of taxable income
For the purpose of determining the taxable income derived by any person from
carrying on any trade, there shall be allowed as deductions from the income of such

12
Income Tax Act (n6)
13
Income Tax Act sec 11(a) and 23(g)
14
Income Tax Act sec 23(f)
15
Port Elizabeth Tramway Co Ltd v CIR (1936 CPD)
16
Income Tax Act (n6)
person so derived - (a) expenditure and losses actually incurred in the production of
the income, provided such expenditure and losses are not of a capital nature.”17
Section 23(g) is a negative term of the general deductions formula and it goes further
to stipulate that, “(g) any moneys, claimed as a deduction from income derived from
trade, to the extent to which such moneys were not laid out or expended for the
purposes of trade.”18 For a clear and concise understanding of the general deductions
formula and its application thereof, it is important for a deduction to meet the
requirements of the formula, and not be susceptible to the negative term as stipulated
in section 23(g). Case law according to the Labat case gives us an explanation of an
expenditure as explaining that an expenditure will be an expenditure if there is an
impoverishment or diminution, even if it is temporary, or a movement of assets.19 In
this particular case, there was an impoverishment in regards to the monthly payment
Queenie was making to her mom in a form of “Black Tax”. However, in order for an
expenditure to rightfully qualify as an expenditure if it meets the ‘in the production of
income’ requirement, as well as the ‘not of capital nature’ requirement. The ‘in the
production of income’ requirement, it was expanded in the Port Elizabeth case,
wherein a two stage test was used in order to determine if an expenditure qualified as
in the production of income.20 There were 2 questions, “(1) What action gave rise to
the expenditure? What is the purpose for the expenditure why was it incurred? And,
(2) Is this action so closely connected with (or is it a necessary concomitant of) the
income-earning activities of the business from which the expenditure arose that it
forms part of the cost of performing that income-earning activity?”21 In our scenario, it
is evident that the expenditure of the R20 000 did not satisfy the first and the second
question of the test. The expenditure arose as an obligation on behalf of the community
to give back as a result of her successful business. The action which was also not a
direct concomitant of the income earning activities of the business and did not form
part of the income-earning expenditure. With the relevant distinction and findings
made, it is evident that the expenditure and the action that the expenditure arose from,
did not meet the ‘in the production of income’ requirement. However, yes it did incur
in the relevant year of assessment as this expenditure was in a matter of fact done in

17
Income Tax Act (n1) sec 11(a)
18
Income Tax Act (n13)
19
CSARS v Labat (2011 SCA)
20
Port Elizabeth Tramway (n15)
21
Port Elizabeth Tramway (n15)
the business year of assessment of 2022/2023, after the establishment of the
business. Confirmed in the Concentra case, an expenditure can only be deducted in
the year of assessment it was incurred.22 This expenditure is however subject to
section 23(g), the negative term. The expenditure does not relate to the trade portion
thus cannot be deductible as it was not expanded for trade purposes, and could be
classified as a non-trade, private and personal expenditure, which could be a donation.

According to the ITC 489 case, the expenditure arose because of a moral obligation,
and therefore, is not deductible.23 This is because there is no business purpose in the
fulfilment of a payment of “black tax”, and the expenditure is not to the production of
income on the part of the taxpayer. Therefore, the amount of R20 000 will not be
deductible and will not be deductible for the 2022/2023 year of assessment.

b. The transaction of R100 000 as an “exclusivity fee” will be subject to section 11(a)
and 23(g), the general deductions formula. However, before we apply the general
deductions formula, there is a deceased estate, and there are certain provisions that
are put in place to deal with such estates. The executor in a case of deceased estates,
has to deal with three taxpayers first, the deceased taxpayer themselves, in the final
period of assessment before her death, the deceased estate and the beneficiaries of
the deceased. Just because the taxpayer dies, does not mean the deceased is
absolved from his/her tax liabilities, therefore they must be liable for tax. In casu, the
R100 000 can be classified as a business expenditure. An expenditure as
contemplated in section 11(a) of the definition of a general deduction, which is capital
in nature. However, it is important we look at the intention behind the payment of the
R100 000 and reasoning in the first place. Queenie entered into a rental agreement of
a machine that was going to manufacture her candles. She had to pay the R100 000
for setting up and manufacturing of the jars into her specific and special designs.
Queenie’s line of business is manufacturing and selling of candles in jam jars. This
further shows that the expenditure is capital in nature. According to the principles laid
down in the Cir v George Forest Timber Company case, the machine was used as
capital to produce fresh wealth.24 The machine was necessary for the manufacturing

22
Concentra (Pty) Ltd v CIR; Sub-Nigel Ltd v Cir (1948 A)
23
ITC 469
24
Cir v George Forest Timber Company
of the candles. Also, according to the Visser case, using the tree and fruit and tree
analogy, the machine was the tree, producing fresh produce of the candles.25 The CIR
Nussbaum case also applicable because the machine in the long run was going to
create substantial wealth for the company by the manufacturing of the unique
candles.26 Section 102 of the Tax Administration Act imposes a burden of proof to the
taxpayer to prove that the acquiring of the asset, was for purposes of an investment,
to produce income from it.27
Thus, the acquiring of a fixed capital asset of the machine, is not deductible. Fixed
assets are acquired to produce income, which is linked to the income earning structure
of the company. It has a long enduring benefit which is likely to endure for a long
period of time, making it capital in nature. Therefore, the expenditure is capital in
nature, therefore not deductible from the gross income of the deceased.

Conclusion
The expenditure of the R20 000 as black tax to her mother, as well as the R100 000
expenditure as an exclusivity fee, are both not deductible. The R20 000 is a result of
a moral obligation, which is not a concomitant of the business. The R100 000 is also
not deductible on the basis of the fact that it is used to acquire machinery, a fixed
asset, that will be used to produce wealth for the company, therefore will not be
deductible.

25
CIR v Visser
26
CIR Nussbaum
27
Tax Administration Act 28 of 2011 sec 102
Question 3.

Introduction

Legal Question
The legal question in this case is advising Mrs Naidoo on whether she can get a
Voluntary Disclosure Program as a viable and valid option, and whether her
application has a high chance of being accepted by SARS for the program.

Applicable Law
The applicable law in this case is section 227 of the Tax Administration Act, the
requirements for a voluntary disclosure programme.28
Section 226 of the Tax Administration with regards to a default not disclosed.29
Section 230 of the Tax Administration Act 28 of 2011.30
Section 231 of the Tax Administration Act 28 of 2011.31
Section 232 of the Tax Administration Act 28 of 2011.32
The Purveyors South Africa Mine Services (Pty) Ltd v CSARS case also applies in our
scenario.33

Application
The Voluntary Disclosure Programme is a programme that was established to ensure
that taxpayers are voluntary compliant in case of an omission or a non-compliance or
a they had made in their returns, and which not identified by SARS. In this case, a
taxpayer can make an application for a Voluntary Disclosure Programme with SARS,
subject to the fulfilment of certain requirements expanded in the Tax Administration
Act. According to section 227 of the Tax Administration Act, there are requirements
that the taxpayer must comply with in order for the application to be successful. The
requirements as stated by the Act are as follows, “The requirements for a valid
voluntary disclosure are that the disclosure must—(a) be voluntary;(b) involve a
‘default’ which has not previously been disclosed by the applicant or a person referred

28
Tax Administration Act (n27) sec 227
29
Tax Administration Act (n27) sec 226
30
Tax Administration Act (n27) sec 230
31
Tax Administration Act (n27) sec 231
32
Tax Administration Act (n27) sec 232
33
Purveyors South Africa Mine Services (Pty) Ltd v CSARS
to in section 226(3); (c) be full and complete in all material respects; (d) involve the
potential imposition of an understatement penalty in respect of the ‘default’; (e) not
result in a refund due by SARS; and (f) be made in the prescribed form and manner.”34
After the successful fulfilment of the requirements with accordance with section 227
by Mrs Naidoo, SARS will approve the application and the parties will enter into an
agreement in terms of section 230 of the Tax Administration Act that states, “The
approval by a senior SARS official of a voluntary disclosure application and relief
granted under section 229, must be evidenced by a written agreement between SARS
and the qualifying person who is liable for the outstanding tax in the prescribed format
and must include details on—(a) the material facts of the ‘default’ on which the
voluntary disclosure relief is based; (b) the amount payable by the person, which
amount must separately reflect the understatement penalty payable; (c) the
arrangements and dates for payment; and (d) relevant undertakings by the parties.” 35
Thereafter, in accordance with the agreement, SARS may issue an assessment to
Mrs Naidoo, of which she can’t object once issued by SARS. However, it is important
for Mrs Naidoo to take note of the fact that SARS may withdraw the Voluntary
Disclosure Programme, subject to, “(1) In the event that, subsequent to the conclusion
of a voluntary disclosure agreement under section 230, it is established that the
applicant failed to disclose a matter that was material for purposes of making a valid
voluntary disclosure under section 227, a senior SARS official may—(a) withdraw any
relief granted under section 229; (b) regard an amount paid in terms of the voluntary
disclosure agreement to constitute part payment of any further outstanding tax in
respect of the relevant ‘default’; and (c) pursue criminal prosecution for a statutory
offence under a tax Act or a related common law offence. (2) Any decision by the
senior SARS official under subsection (1) is subject to objection and appeal.”36

Mrs Naidoo willingly and voluntarily applied for a voluntary disclosure, as she was able
to identify that she made an incorrect deduction in her tax return, and she wanted to
fix her error. This shows intention to resolve her error and her being tax compliant. The
disclosure was voluntary, as she did not do out of fear of penalties, coercion or other
means that would deter it from being voluntary. This is contrary to the Purveyors case

34
Tax Administration Act (n29) par (3)
35
Tax Administration Act (n30)
36
Tax Administration Act (n31)
where it was decided that the disclosure was not voluntary.37 She tendered the
disclosure in full and in material, because she disclosed all her deductions that she
made and the fact that they were indeed private, thus there was no element of
concealment from her. The voluntary disclosure involved a default with regards to her
submitting the incorrect and incomplete information with regards to her returns
because she made deductions for her private and personal expenses because they
were not expended for the purposes of the carrying of a trade, thus non-deductible,
therefore there is a default. According to this default, it will result in an understatement
in that regard. It is also evident that Mrs Naidoo did not commit a similar default 5
years preceding the current year of assessment, thus her satisfying the default
requirement. Also, according to the set of facts, it is not evident that Mrs Naidoo was
expecting any refund from SARS with regards to the institution of the voluntary
disclosure, she just wanted to fix her tax affairs so that she is tax compliant rather than
obtaining a refund. Her action contemplated the section 223(1)(ii) behaviour that states
that reasonable care was not taken in completing the return. And in conclusion, she
made it in a prescribed manner and form as she did her due diligence and applied on
the SARS website for an application of the voluntary disclosure programme, wherein
thereafter, she had then consulted with a relevant tax professional with the possible
implications.

With all the relevant abovementioned information, it is evident that she met all the
requirements substantially, and therefore there is a high chance for her application to
be successful and accepted by SARS because of these. If SARS is satisfied, they
would enter into an agreement according to section 230 of the Tax Administration Act,
where SARS would institute an assessment that she would not be able to object to.
However, had Mrs Naidoo concealed material aspects and matters, SARS would
withdraw the agreement according to section 231, as this would’ve constituted an
offence.

Conclusion
Therefore, I submit that the voluntary disclosure programme is a valid and viable
option for Mrs Naidoo. A voluntary disclosure programme offers her other benefits like

37
Purveyors South Africa Mine Services (n33)
a reduction in the penalties imposed by SARS, amongst others. She met all the
relevant requirements for the programme, which would grant her a high chance in
SARS accepting her application and the parties being in agreement with each other.
Therefore, yes, her application would have a high chance of success.
Question 4.

Introduction

Legal Question
The legal question in this case is according to the capital gains implications on the
transactions Mrs. Naidoo had done in the 2022/2023 year of assessment regarding
her personal taxable capital gain.

Applicable Law
The applicable law is in this case is:
Section 9HB(1)(b)(i) of the Income Tax Act 58 of 1962.38
Paragraphs 1-10 of the Eighth Schedule of the Income Tax Act 58 of 1962.39
Paragraph 20(1)(e) of the Eighth Schedule of the Income Tax Act 58 of 1962.40
Paragraph 53(2) of the Eighth Schedule of the Income Tax Act 58 of 1962.41
Paragraph 53(3)(d) of the Eighth Schedule of the Income Tax Act 58 of 1962.42
Paragraph 60 of the Eighth Schedule of the Income Tax Act 58 of 1962.43

Application
For capital gains tax purposes, it is important to establish the residency of the taxpayer
whom is being taxed. According to paragraph 2, “(1) Subject to paragraph 97, this
Schedule applies to the disposal on or after valuation date of – (a) any asset of a
resident”, which stipulates that residents are taxed on their worldwide income, and that
they are reliable for capital gains tax on disposals of any of their worldwide disposals.44
According to the facts, Mrs Naidoo is stated to be a resident, and thus will be reliable
for capital gains tax.

a. Sale the Bryanston House.

Before applying the capital gains tax calculation, it is important that the four building
blocks be identified. There must be and asset according to section 1 definition of an

38
Income Tax Act (n1) sec 9HB(1)(b)(i).
39
Income Tax Act (n1) par 1-10 of Eighth Schedule.
40
Income Tax Act (n1) par 20(1)(e).
41
Income Tax Act (n1) par 53(2).
42
Income Tax Act (n1) par 53(3)(d).
43
Income Tax Act (n1) par 60.
44
Income Tax Act (n39) par 2
“asset”, there must a disposal according to paragraph 11(1), proceeds according to
paragraph 35, and a “base cost” as contemplated in paragraph 20 of the eighth
schedule. The house in Bryanston qualifies as an asset because it satisfied the
definition in paragraph 1 as being “property”, which is immovable and corporeal.
According to paragraph to 35 of the Eighth Schedule which states, “Subject to
subparagraphs (2), (3) and (4), the proceeds from the disposal of an asset by a person
are equal to the amount received by or accrued to, or which is treated as having been
received by, or accrued to or in favour of, that person in respect of that disposal”, the
property was sold for R4 500 000 which is proceeds which were derived from the sale
of the house.45 Paragraph 20 of the Eighth Schedule explains a base cost as, “(1)
Despite section 23(b) and (f), but subject to paragraphs 24, 25 and 32 and
subparagraphs (2) and (3), the base cost of an asset acquired by a person is the sum
of - (a) the expenditure actually incurred in respect of the cost of acquisition or creation
of that asset, which is in the accordance with of the R1 900 000 that was spent on
acquiring the house back in 2007.46 However, according to section 20(1)(e) of the
eighth schedule, “Despite section 23(b) and (f), but subject to paragraphs 24, 25 and
32 and subparagraphs (2) and (3), the base cost of an asset acquired by a person is
the sum of – the expenditure actually incurred in effecting an improvement to or
enhancement of the value of that asset.”47 There were improvements that amounted
to R450 000 that were done to the house, therefore it must be added to the base cost
of the house, which will increase the base cost to R2 350 000 for the house. Also, it is
evident in the facts that Mrs Naidoo lived at the property for a subsequent time thus it
would fall under the definition of residence, would then trigger the primary residence
exclusion rule on the total taxable capital gain. Therefore, because all the four building
blocks have been satisfied, capital gains tax can be triggered. When calculating the
taxable capital gain of the property, it must be done in the following manner:

1. Proceeds(para 35) – Base Cost(para 20) = Capital gain.

R4 700 000 – R2 350 000 = R2 350 000

2. Proceeds – Exclusions = Total Capital Gain

45
Income Tax Act (n39) par 35
46
Income Tax Act (n1) par 20
47
Income Tax Act (n40)
R2 350 000 – R2 000 000 (para 45(1)(a)), Primary residence exclusion as the house
was sold for more than R2 000 000, therefore must be disregarded = R350 000 total
capital gain.

3. Totalled Capital Gain(para 3&4) – Annual Exclusion of R40 000 per annum
against the totalled capital gain = Aggregate capital gain according to paragraph
6 and 7.
R350 000 – R40 000 = R310 000 aggregate capital gain.

4. Aggregate Capital Gain – Capital Loss = Net capital gain in accordance to

paragraph 8 and 9.
R310 000 – nil because there was no capital loss that was reported according to the
facts = R310 000 Net capital Gain.

5. Net Capital Gain x the inclusion rate of 40% for individuals, 80% for companies
= Total Capital Gain according to paragraph 10 of the eighth schedule.
R310 000 x 40% = R124 000

Therefore, the Total Capital Gains in accordance to paragraph 10 of the eighth

schedule, from the sale of the house is R124 000.

b. Transfer of shares.
According to the set of facts, Mrs Naidoo transferred 1000 shares to Mr Naidoo, her
spouse, with a value of R15 per share in 2019 when she bought them, and transferred
them to her spouse when they were R28 per share. In this scenario, section
9HB(1)(b)(i) would apply. According to the section, it states that, “(1) (b) The transferee
must be treated as having—(i) acquired the asset on the same date that such asset
was acquired by the transferor.”48 Even though Mr Naidoo acquired the shares when
the market value per share was R28, however, according to the abovementioned
section, it would be deemed that he acquired the shares on the same date that Mrs
Naidoo acquired them, for the same value that she acquired them, thus for R15 per
share and not the R28 per share (R28 x R1000 = R28 000), which would be in 2019,

48
Income Tax Act (n38)
and would then have to dispose them at the same value as Mrs Naidoo would.
Because of these provisions, a rollover would be triggered. Therefore, the capital gains
of R15 000(R15 x 1000 shares), would be rolled over to the preceding year of
assessment, 2023/2024, until Mr Naidoo dispossess of the assets. Therefore, Mrs
Naidoo must disregard the capital gain of the shares.

c. Gambling proceeds.
Mrs Naidoo after gambling in Sun City casino, was able to win R32 000 from a slot
machine. The tax implications on this transaction are expended in paragraph 60 of the
eighth schedule, which states, “(1) A person must disregard a capital gain or capital
loss determined in respect of a disposal relating to any form of gambling, game or
competition. (2) Notwithstanding subparagraph (1), a capital gain may not be
disregarded – (a) by any person other than a natural person; or (b) by any natural
person, unless that form of gambling, game or competition is authorised by, and
conducted in terms of, the laws of the Republic.”49 In casu, the capital gain with
regards to gambling R32 000 must be disregarded. This is on the basis of the
provisions of paragraph 60 which explains that any disposal relating to relating to any
form of gambling, must be disregarded by a natural person provided that that specific
gambling is from an authorised entity, regulated by South African laws. Sun City
Casino is a regulated entity, with the authority to dispose proceeds made from
gambling by people who visit and partake in gambling, therefore in accordance with
paragraph 60. Therefore, the capital gain of R32 000 that Mrs Naidoo had made, must
be disregarded.

d. Personal-use asset.
According to paragraph 53(2) of the eighth schedule of the Income Tax Act, it
stipulates that, “(2) A personal-use asset is an asset of a natural person or a special
trust that is used mainly for purposes other than the carrying on of a trade.”50 In this
scenario, Mrs Naidoo’s laptop is a personal use asset because she was using it for
other purposes either than the carrying of trade, for more than 50% of the time. Her
personal laptop was a mere short-term substitution for her work computer, since her
work laptop crashed. However, because there has been a change of use and intention

49
Income Tax Act (n43)
50
Income Tax Act (n41)
from a personal use asset to a non-personal use asset, it will be regarded as a deemed
disposal, “The person will be deemed to have disposed of it at its market value as at
the date before the asset becomes a non-personal-use asset and to have reacquired
it at cost equal to the same market value. The market value constitutes the base cost
on the subsequent disposal of the asset”, henceforth the R18 000 which her laptop
was valued at. Because provisions of paragraph 12, capital gains tax will not be
triggered.

e. Sale of the boat.

In the facts of the transaction, it was stated that the boat was used for recreational
purposes, therefore paragraph 53(2) of the eighth schedule applies. According to the
paragraph, it states that, “(2) A personal-use asset is an asset of a natural person or
a special trust that is used mainly for purposes other than the carrying on of a trade.”51
Because the boat exceeds 10m in length, and is a personal use asset because it is
used for recreational purposes, which in simple interpretation for pleasure and
personal use, even though it is a personal use asset, therefore will not be excluded for
capital gains tax purposes. This is an exception to the rule because the asset will
appreciate in value over time and SARS would want to tax and benefit from a disposal
of such disposal. Therefore, a capital gains tax calculation will be triggered and would
have to be calculated according to the following formula and manner:

1. Proceeds(para 35) – Base Cost(para 20) = Capital gain.

R1 400 000 – R950 000 = R450 000

2. Proceeds – Exclusions = Total Capital Gain

According to the facts, there are no rollovers from the previous year therefore are nil.
The amount of R450 000 will then be the total capital gain.

3. Totalled Capital Gain(para 3&4) – Annual Exclusion of R40 000 per annum
against the totalled capital gain = Aggregate capital gain according to paragraph
6 and 7.

51
Income Tax Act (n50)
The annual exclusion of R40 000 will not apply in this calculation because it is only
capped to R40 000 per year and it was already subtracted in the calculation of the total
taxable income in the disposal of the house. Therefore, the aggregate capital gain
according to paragraph 6 and 7 will equal to R450 000.

4. Aggregate Capital Gain – Assessed Capital Losses = Net capital gain in

accordance to paragraph 8 and 9.
R450 000 – nil because there were no capital loss that was reported according to the
facts = R450 000 Net capital gain.

5. Net Capital Gain x the inclusion rate of 40% for individuals, 80% for companies
= Total Capital Gain according to paragraph 10 of the eighth schedule.
R450 000 x 40% = R180 000

Therefore, the Total Capital Gains in accordance to paragraph 10 of the eighth

schedule, from the sale of the boat is R180 000.

f. Distribution of gains to Mrs Naidoo.

The Thaba Nchu is a trust and therefore is liable for the capital gains tax
it derives from disposals of assets. This means the R1 200 000 would
trigger the capital gain tax for the amount. The distribution to the Naidoo
Family Trust would be subject to income tax as the trust would have
received proceeds from the distribution of the proceeds. Thereafter, Mrs
Naidoo would only liable for dividends tax as she was a beneficiary of the
trust and thus receiving dividends tax at a percent of 20% as the dividends
were sourced from a South African trust.

Conclusion
Some of her transactions trigger capital gains tax and the necessary calculations to
determine the total capital gains per disposal of an asset. Mrs Naidoo total capital
gains amount to R304 000 (R124 000 + R180 000) capital gains for the 2022/2023
year of assessment. However, there are other transactions which do not trigger the
capital gains tax. These are a result of either exclusions, and others as results of
statute stating that these transactions and their capital gains/losses to be disregarded.
Other transactions trigger rollovers as a result of the nature of the transactions, just
like the transfer of the shares to Mr Naidoo.
Bibliography

Case law:

CIR Nussbaum
Cir v George Forest Timber Company
CIR v Visser
Concentra (Pty) Ltd v CIR.
CSARS v Labat, Edgars Stores Ltd v CIR.
ITC 489
Port Elizabeth Electric Tramway Co Ltd v CIR (1936 CPD).52
Purveyors South Africa Mine Services (Pty) Ltd v CSARS

Legislation:

Income tax Act 58 of 1962

Tax Administration Act 28 of 2011

Internet Source

Article 4 of Model Tax Convention

Double Taxation Agreement
Interpretation Note 6

52
Port Elizabeth Tramway Co Ltd v CIR (1936 CPD)
 Plagiarism declaration

Full names Mthobisi Thela

Student number 20758830
Topic of work BLR 310 EXAM

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regard.
2. I declare that this _____EXAMINATION_______________ (e.g. essay, report,
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3. I have not used another student’s past written work to hand in as my own.
4. I have not allowed, and will not allow, anyone to copy my work with the intention
of passing it off as his or her own work.

Signature _______________Mthobisi (MV) Thela___________________