Silke: South African Income Tax 3.

Page

3 Gross income 3.6.18

3.6.19
Interest ...............................................................................................................
Restraint of trade ...............................................................................................
55
55
3.6.20 Share transactions............................................................................................. 56
Jolani Wilcocks 3.6.21 Subsidies ........................................................................................................... 57
Assisted by Alicia Heyns

3.1 Overview (the definition of (s 1))

Outcomes of this chapter The basic framework for calculating a pe taxable income is:
After studying this chapter, you should be able to: Gross income Rx
demonstrate an in- Less: Exempt income (x)
Income Rx
determine whether a natural person or a person other than a natural person is a Less: Deductions and allowances (x)
resident for income tax purposes Taxable income Rx
apply the principles of relevant case law in order to illustrate the meaning of the The starting point for calculating a taxable income, is to determine the ss

demonstrate an in-depth knowledge of the criteria to be applied in order to distinguish in relation to any year or period of assessment, means
between capital and income for purposes of the defin (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
Contents 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
Page
3.1 Overview (the definition of (s 1))................................................................ 26 as specific inclusions and are discussed in chapter 4.
3.2 Resident and non-resident................................................................................................. 27 amount to qualify
3.2.1 Residence of natural persons (par (a) of the definition of in s 1) .......... 27 as gross income. In summary, these requirements are
3.2.2 Residence of persons other than natural persons (par (b) of the definition in the case of a resident:
of in s 1) ................................................................................................. 31
there must be an amount, in cash or otherwise
3.2.3 Change of residence, ceasing to be a controlled foreign company or
becoming a headquarter company (s 9H) .......................................................... 33 that is received by or accrued to or in favour of such resident
3.3 Amount in cash or otherwise.............................................................................................. 37 during a year or period of assessment
3.4 Received by or accrued to................................................................................................. 38 excluding receipts or accruals that are of a capital nature.
3.4.1 Meaning of ................................................................... 38 in the case of a non-resident:
3.4.2 Meaning of ........................................................................................ 41 there must be an amount, in cash or otherwise
3.4.3 Valuation of receipt or accrual .............................................................................. 42
3.4.4 Unquantified amounts (s 24M).............................................................................. 42 that is received by or accrued to or in favour of such non-resident
3.4.5 Accrual rules with the disposal of certain equity shares (s 24N) ......................... 43 during a year or period of assessment
3.4.6 Blocked foreign funds (s 9A) ................................................................................ 43 from a source within South Africa
3.4.7 Disposal of income after receipt or accrual (without prior cession) versus excluding receipts or accruals that are of a capital nature.
disposal of a right to future income (prior cession) .............................................. 43
3.4.8 Time of accrual of interest payable by SARS (s 7E)............................................. 45 The worldwide receipts and accruals derived by a as defined in s 1 are included in his or
her gross income. Residents are therefore taxed on a residence-based tax system. For non-residents
3.5 Year or period of assessment (ss 1(1), 5, 66(13A) (13C)) ............................................... 46
3.6 Receipts and accruals of a capital nature ......................................................................... 46 the Republic are subject to tax in South Africa, with certain exceptions. Non-residents are therefore
3.6.1 Nature of an asset................................................................................................. 47 taxed on a source-based tax system. Liability for South African normal tax is therefore dependent
3.6.2 Intention of a company ......................................................................................... 48 either upon the place of residence of a person (in the case of a resident) or, in the case of a non-
3.6.3 Business conducted with a profit-making purpose.............................................. 48 resident, upon the source of the income. The principles that should be applied when determining the
3.6.4 Selling an asset to best advantage ...................................................................... 49 source of a non-
3.6.5 Realisation of a capital asset ................................................................................ 49
3.6.6 Change of intention............................................................................................... 50
3.6.7 Mixed purpose ...................................................................................................... 51 general definition, certain receipts and accruals will be included as specific inclusions (listed in para-
3.6.8 Secondary purpose .............................................................................................. 51 graphs (a) to (n) of the gross income definition in s 1(1) even though they may be of a capital nature
3.6.9 Realisation company ............................................................................................ 52 (see chapter 4). If capital receipts and accruals are not included in gross income, a portion of these
3.6.10 Damages and compensation ............................................................................... 53 amounts may still be subject to income tax by the inclusion of taxable capital gains in taxable
3.6.11 Isolated transactions............................................................................................. 54 income. This is referred to as capital gains tax and is discussed in chapter 17.
3.6.12 Closure of a business and goodwill ..................................................................... 54
3.6.13 Copyrights, inventions, patents, trademarks, formulae and secret processes ... 54 most of these terms have been the subject of various court cases. These terms and their interpre-
3.6.14 Debts and loans.................................................................................................... 54 tations from the most relevant court cases are discussed below.
3.6.15 Gambling .............................................................................................................. 55
3.6.16 Horse-racing ......................................................................................................... 55
3.6.17 Gifts, donations and inheritances ......................................................................... 55

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 3.2 Chapter 3: Gross income
3.2 Resident and non-resident
the residence-based system of taxation. The residence
distinguishes between natural persons and persons other than natural persons.
The definition of specifically provides that a person is not a resident if that person is
deemed to be exclusively a resident of another country in terms of a double tax agreement (DTA).
This means that if a DTA between South Africa and another country is in place, one should first
consider whether the taxpayer is deemed to be exclusively a resident of the other country under the
3.2.1 Residence of natural persons (par (a) of the definition of in s 1)
requirements of the physical presence test.
Ordinarily resident
be followed.
In the case Cohen v CIR (13 SATC 362) (1946 AD 174), the taxpayer, who was a South African
resident at the time, was requested by his employer to work in the USA. The taxpayer and his family
lived in New York for a period of 20 months. During this period neither the taxpayer nor his family
returned to South Africa. The court had to consider whether the taxpayer ordinarily resided in South
Africa during this time. In ruling that the taxpayer ordinarily resided in South Africa at the time, the
court established three important principles:
and as a matter of course return from his wanderings. When compared to other countries in
-
ns during the year of assess-
life outside the year of assessment under consideration should also be considered.
The third is that physical absence during the full year of assessment is not decisive. A person
could be absent from a country for the entire year and still qualify as ordinarily resident in that
country.
In CIR v Kuttel (54 SATC 298) (1992 (3) SA 242 (A)), the taxpayer held a majority interest in a South
African company. The taxpayer agreed with his fellow shareholders to move to New York to open an
granted a permanent residence permit in the USA, the taxpayer emigrated from South Africa to the
USA with his family. The taxpayer rented a house in the USA, established church membership,
opened banking accounts, acquired an office, bought a car and registered with social security.
Following his move, apart from visits to South Africa and other countries, the taxpayer lived and
worked in the USA. During the 31-month period under consideration, the taxpayer made nine visits to
South Africa, staying for up to two months at a time. The visits were to attend to his business interests
and family matters. The taxpayer on average spent just over one-third of the time in South Africa.
During his visits to South Africa, the taxpayer stayed in a house owned by a company in which he
and his wife were the sole shareholders. The house was not let and was available whenever the
taxpayer wanted to live in it. In applying the principle formulated in Cohen v CIR, that a person is
ordinarily resident where he has his usual or principle residence, that is what may be described as
his real home, the court held that the taxpayer was not ordinarily resident in South Africa. The court
held that there was no evidence which indicated that the taxpayer did not set up his usual or
principle residence in the USA. The court also held that the fact that the taxpayer kept his house in
South Africa was in no way inconsistent with his usual or principal residence or home having been in
the USA. He could not take all his assets to the USA because of exchange control regulations and,
by investing in a house, the taxpayer made the most advantageous arrangement in the circum-
stances for the substantial assets he retained in South Africa. This, however, did not mean that the
taxpayer ordinarily resided in South Africa.
27
Silke: South African Income Tax 3.2
SARS published Interpretation No
According to SARS, the question of whether a natural person is ordinarily resident in a country is one
of fact and each case must be decided on its own merits, taking into consideration principles
established by case law. It is not possible to lay down any clearly defined rule or period to determine
ordinary residence. The circumstances of the natural person must be examined as a whole, taking
and considered as part of all the facts to determine whether the taxpayer is ordinarily resident.
According to SARS, the following factors, although not exhaustive, will be considered as a guideline:
an intention to be ordinarily resident in the Republic
most fixed and settled place of residence
habitual abode, meaning place where the person stays most often, and his present habits and
mode of life
place of business and personal interests of the person and his family
employment and economic factors
status of individual in the Republic and in other countries, meaning whether he or she is an immi-
grant, work permit periods and conditions, etc.
location of personal belongings
nationality
family and social relations (schools, places of worship, sports or social clubs, etc.)
political, cultural or other activities
application for permanent residence or citizenship
period abroad, purpose and nature of visits, and
frequency of and reasons for visits.
Beginning and ending of being
A natural person who became ordinarily resident will be a resident from a specific date. A taxpayer
the day on which he becomes ordinarily resident in the Republic and not for the full year of assess-
ment in which he becomes ordinarily resident. For the period from the beginning of the year until the
day before he becomes ordinarily resident, he will be seen as a non-resident for tax purposes.
Interpretation Note No. 3 determines that a natural person who emigrates from the Republic to
another country will cease to be a resident from the date that he emigrates. This means that the day
on which the natural person flies to the other country (leaves the Republic) is the first day that he will
be regarded as a non-resident.
person that is a resident ceases to be a resident during a year of assessment, that person must be
regarded as not being a resident from the day on which that person ceases to be a resident. A tax-
payer emigrating from the Republic will therefore, for example, be taxed as a resident in the Republic
from the beginning of the year until the day before he ceases to be ordinarily resident in the Republic
(emigrates), and will be taxed as a non-resident from the day he ceases to be ordinarily resident in
the Republic (emigrates) till the end of the year of assessment. A person therefore ceases to be
ordinarily resident on the day he or she emigrates, meaning on the day he or she boards the aircraft.
In terms of s 9H(2)(b), the year of assessment of a resident who ceases to be a resident is deemed to
have ended on the date immediately before the day on which he or she ceases to be a resident, and
in terms of s 9H(2)(c), the next succeeding year of assessment is deemed to have started on the day
on which the resident ceases to be a resident. This means, for example, that if a natural person
emigrates on 1 October 2021, his 2022 year of assessment as resident will be from 1 March 2021 to
30 September 2021, and his 2022 year of assessment as non-resident will be from 1 October 2021 to
28 February 2022.
Physical presence
A natural person who is not at any time during
requirements of the so-called test. This test therefore only applies to a person
who is not ordinarily resident in the Republic at any time during the year of assessment (referred to
28
 3.2 Chapter 3: Gross income Silke: South African Income Tax 3.2

Example 3.1. Temporary secondment to the Republic

periods
Craig, a civil engineer and ordinarily resident outside the Republic, was temporarily seconded to
exceeding 91 days in aggregate during the current year of assessment, and the Republic by his employer on 1 November 2015 to oversee a major contract that was
exceeding 91 days in aggregate during each of the five years of assessment preceding the expected to last for two years. Due to unforeseen problems on the contract, Craig eventually left
current year of assessment, and the Republic and returned home only on 30 November 2021. He was physically present in the
Republic throughout the seven-year period except for returning home for his annual leave
exceeding 915 days in aggregate during the five years of assessment preceding the current year (35 days) each calendar year from 2017 to 2021.
of assessment (par (a Is Craig resident in the Republic during the years of assessment ending 29 February 2016 to
28 February 2022?
Republic can, in terms of the physical presence test, only become a resident for tax purposes in the
current year of assessment after a period of five consecutive years of assessment during which the
person was physically present in the Republic for the qualifying periods.
SOLUTION
The following rules apply to the presence As Craig was not ordinarily resident in the Republic at any time during his secondment, he will
for the purposes of determining the number of days during which a person is physically present be resident only if he meets the requirements of the physical presence test.
in the Republic, a part of a day is included as a day
Year of Number
a day spent in transit through the Republic is not included as a day, provided that the person Period physically present
assessment of days
does not formally enter the Republic through a port of entry
2016 1 November 2015 to 29 February 2016 (no annual leave taken).... 122
2017 Entire year of assessment except for 35 days annual leave........... 330
need not be continuous. If a person is present for several periods which in aggregate exceed 91 2018 Entire year of assessment except for 35 days annual leave........... 330
or 915 days, the requirement will be met. 2019 Entire year of assessment except for 35 days annual leave........... 330
2020 Entire year of assessment except for 35 days annual leave........... 331
2021 Entire year of assessment except for 35 days annual leave........... 330
A person who is deemed to be exclusively a resident of another country for the 2022 1 March to 30 November 2021 ....................................................... 275
purposes of a double taxation agreement between the governments of the
Republic and that other country will not be a resident of the Republic, even 2016 year of assessment
Please note! though he meets the qualifying requirements of being a resident (par (a) of the Craig is present in the Republic for more than 91 days in this year of assessment but not in each
- of the five prior years of assessment. He is therefore not resident in terms of the physical pres-
ence test irrelevant since the rules in double taxation agreements are more
ence test.
similar to the ordinarily resident test.
2017 year of assessment
Beginning and ending of being a resident in terms of the physical presence test Craig is present in the Republic for more than 91 days in this year of assessment and in the prior
year but not in each of the four years prior to that. He is therefore not resident in terms of the
A person will be a resident with effect from the first day of the relevant year of assessment (that is, the physical presence test.
sixth year) during which all the requirements of the physical presence test are met.
2018 year of assessment
A person who is a resident in terms of the physical presence test will cease to be a resident from the Craig is present in the Republic for more than 91 days in this year of assessment and in the two
day that he or she ceases to be physically present in South Africa if the person remains physically immediately prior years, but not in the three years prior to that. He is therefore not resident in
outside South Africa for a continuous period of 330 full days immediately after this date. terms of the physical presence test.
2019 year of assessment
and meeting this proviso will therefore stretch over two years of assessment. The at-least-330-days Craig is present in the Republic for more than 91 days in this year of assessment, for more than
exception only applies if a person is already a resident in terms of the physical presence test, which 91 days in each of the three prior years, but not in the two years prior to that. He is therefore not
means he must have been physically present in the Republic for more than 91 days in the year that resident in terms of the physical presence test.
he ceases to be physically present. The at-least-330-continuous days of absence will commence only
on the day after the period of more than 91 days has been met, and he then ceases to be physically 2020 year of assessment
present. Craig is present in the Republic for more than 91 days in this year of assessment and in the four
immediately prior years, but not in the year prior to that. He is therefore not resident in terms of
Paragraph 4.4 of Interpretation Note No. 4 (Issue 5) (August 2018) confirms that a natural person, the physical presence test.
who is a resident by virtue of the physical presence test, ceases to be a resident from the day when
the person leaves the Republic. The 330 days of absence therefore starts on the day after the person 2021 year of assessment
leaves the Republic. Craig is present in the Republic for more than 91 days in this year of assessment, for more than
91 days in each of the five prior years and in aggregate for more than 915 days in the five prior
years. He is therefore resident in terms of the physical presence test from 1 March 2020, the first
If a person, who is ordinarily resident in the Republic, is physically absent for a day of the year of assessment.
continuous period of at least 330 days, for example in order to study in a foreign
Please note! 2022 year of assessment
country, he will not cease to be a resident, as the physical presence test does
not apply to a person who is ordinarily resident in the Republic. Craig also met the requirements of the physical presence test during the 2022 year of assess-
ment. He will remain a resident for South African tax purposes until he is no longer physically
present in the Republic for more than 330 consecutive days that commence immediately after
30 November 2021. Since Craig leaves the Republic on 30 November, he will, in terms of Inter-
pretation Note No. 4, cease to be a resident from the day that he leaves the Republic. He there-
fore ceases to be a resident on 30 November 2021. His 2022 year of assessment as a resident
will therefore, in terms of s 9H(2)(b), end on 29 November 2021 and he will be taxed in the
Republic as a resident for the period 1 March 2021 to 29 November 2021. Craig will be taxed as
a non-resident in the next succeeding year of assessment, that is, from 30 November 2021 to
28 February 2022.

29 30
 3.2 Chapter 3: Gross income
Example 3.2. Emigration
Thabiso was born in the Republic. He emigrated to Argentina on 1 July 2015. The periods that he
was inside and outside of the Republic were as follows:
In the Republic Outside the Republic
2016 year of assessment................................................. 101*
2017 year of assessment................................................. 280
2018 year of assessment................................................. 258
2019 year of assessment................................................. 243
2020 year of assessment................................................. 246
2021 year of assessment................................................. 98
2022 year of assessment................................................. 122
Assume that the 101 days spend in the Republic in 2016 were before Thabiso emigrated.
Calculate and explain whether Thabiso is a resident or a non-resident for each of the 2016, 2021
and 2022 years of assessment, respectively.
SOLUTION
2016
Thabiso is ordinarily resident in the Republic until 30 June 2015. He is therefore a resident from
1 March 2015 to 30 June 2015 and his 2016 year of assessment as resident ends on 30 June
2016 (in terms of s 9H(2)(b)). Thabiso becomes a non-resident on 1 July 2015 and his 2016 year
of assessment as non-resident is from 1 July 2016 (in terms of s 9H(2)(c)) to 29 February 2016.
2021
The requirements of the physical presence test must be met:
1 Thabiso is in the Republic for >91 days in the 2021 year of assessment.
2 Thabiso is in the Republic for >91 days in the 2020, 2019, 2018 and 2017 years of assess-
ment but not during the 2016 year of assessment after becoming a non-resident. Thus the
>91 days requirement is only met for four years.
3 The third requirement that Thabiso must be in the Republic for >915 days in total during the
five years of assessment preceding the current year of assessment is therefore not
considered, as the second requirement has not been met.
Therefore, Thabiso is a non-resident.
2022
The requirements of the physical presence test must be met:
1 Thabiso is in the Republic for >91 days in the 2022 year of assessment.
2 Thabiso is in the Republic for >91 days in the 2021, 2020, 2019, 2018 and 2017 years of
assessment.
3 Thabiso is in the Republic for >915 days in total during the 2017 to 2021 years of assess-
ment.
Therefore, Thabiso is a resident.
Interpretation Note No. 25 (Issue 3) (issued on 12 March 2014) clarifies, with the
use of examples, the application of the physical presence test in the year of
Please note!
assessment that a natural person, who is not ordinarily resident on the Republic,
dies or becomes insolvent.
3.2.2 Residence of persons other than natural persons (par (b) of the definition of
in s 1)
A person other than a natural person (for example a company, close corporation or trust) is defined
is incorporated, established or formed in the Republic, or
has its place of effective management in the Republic (par (b) of the definition of
Where a company is incorporated, established or formed
There is no definition in the Act of the terms or A company that
is formed and incorporated in South Africa in terms of s 13 of the Companies Act 71 of 2008 is clearly
a resident because of its formation and incorporation in the Republic, irrespective of where it is man-
aged or where it carries out its business. As a result of being a resident, the company is liable for tax
in South Africa on its worldwide receipts.
31
Silke: South African Income Tax 3.2
Remember
A person who is deemed to be exclusively a resident of another country for the purposes of a
double taxation agreement between the governments of the Republic and that other country will
not be a resident of the Republic, even though he meets the qualifying requirements of being a
resident (par (b
265 incorporation irrelevant since the rules in double taxation agreements usually refer to the place
85 of effective management.
107
122 Where a company is effectively managed
120
267
Note No. 6 (Issue 2) (issued on 3 November 2015), SARS regards the place of effective management
243
as the place where key management and commercial decisions that are necessary for the conduct of
-
mentary on Article 4 of the Model Tax Convention regarding the term effective
All relevant facts and circumstances must be examined to determine the place of effective manage-
ment. A company may have more than one place of management, but it can only have one place of
effective management a
affecting its business as a whole are made at a single location, that location will be its place of
effective management. However, if those decisions are made at more than one location, the com-
-
dominantly made.
Certain activities of foreign investment entities should be disregarded when
determining whether their place of effective management is in South Africa (2nd
proviso to the definition of Certain foreign investment funds make
use of local fund managers when investing in South African assets or in other
African assets. The South African fund manager is usually given an investment
fund mandate (or a sub-mandate for a certain portion of the fund). The foreign
investment fund typically pays the South African fund manager a management
fee. The purpose of disregarding certain activities of a foreign investment entity
when determining whether its place of effective management is in South Africa,
is to ensure that the activities of the local fund manager do not cause the entire
entity to be subject to income tax in South Africa. The management fees and
performance fees earned by the local fund manager will remain subject to tax in
South Africa.
A foreign investment entity is a person other than a natural person that complies
with all of the following requirements (definition of investment in
s 1):
it should not be incorporated, established or formed in South Africa
its assets should consist solely of a portfolio of one or more of the following
that are held for investment purposes:
amounts in cash or that constitute cash equivalents
financial instruments that are issued by a listed company or by the South
Please note!
African Government
if the financial instruments are not issued by a listed company or by the
South African Government, they must be traded by members of the
general public and a market for that trade exists
financial instruments which values are determined with reference to the
financial instruments mentioned above
rights to receive any of the above assets
are directly or indirectly held by persons that are residents; and
the entity should have no employees, directors or trustees that are engaged
in managing the entity on a full-time basis.
The activities of a foreign investment entity that should be disregarded when
determining whether its place of effective management is in South Africa, are
the following activities carried on by a financial service provider as defined in
s 1 of the Financial Advisory and Intermediary Services Act in terms of a licence
s 1). issued to that financial service provider under s 8 of that Act:
a financial service as defined in s 1 of the Financial Advisory and Inter-
mediary Services Act, or
any service that is incidental to a financial service contemplated above
where the incidental service is in respect of a financial product that is
exempted from the provisions of the Financial Advisory and Intermediary
Services Act as contemplated in s 1(2) of that Act.
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 3.2 Chapter 3: Gross income Silke: South African Income Tax 3.2

Residence of estates, trusts, clubs and associations Event Persons other than companies cease to Company ceases to be resident or becomes
Estates, trusts and other entities are resident in the Republic if they are incorporated, established or be resident a headquarter company (otherwise than by
formed or have their place of effective management in South Africa. The place of incorporation, way of becoming a resident)
establishment or formation is a matter of fact, and each case must be decided on its own merits. If Deemed disposal All assets except those in s 9H(4) All assets except those in s 9H(4)
the executors, administrators or trustees are resident in South Africa or if the entity is administered At market value At market value
from South Africa, the entity is resident in South Africa. For example, if the trustees of a trust meet to To a person who is a resident on To a person who is a resident on the
attend to the affairs of the trust in South Africa, the trust is resident in South Africa. The place where the date immediately before the date immediately before the day on
the assets of the entity are effectively managed is crucial. day on which he or she ceases to which the company ceases to be a resi-
be a resident (s 9H(2)(a)(i)) dent or becomes a headquarter com-
pany (s 9H(3)(a)(i))
3.2.3 Change of residence, ceasing to be a controlled foreign company or becoming a
headquarter company (s 9H) Deemed Reacquisition of all assets except Reacquisition of all assets except those
reacquisition those in s 9H(4) in s 9H(4)
Section 9H triggers an exit charge through either a capital gain or an income gain when a person At market value At market value
(other than a company) who is a resident ceases to be a resident during any year of assessment. A On the day on which he or On the day on which the company
deemed disposal at market value of all the assets that this section provides for, arises. she ceases to be a resident ceases to be a resident or becomes a
(s 9H(2)(a)(ii)) headquarter company (s 9H(3)(a)(ii))
Market value means the price which could be obtained upon a sale of that asset
s length in an open End of year of On the date immediately before the On the date immediately before the day on
Please note! market (s 9H(1)). assessment day on which he or she ceases to be a which the company ceases to be a resident
resident (s 9H(2)(b)) or becomes a headquarter company
For purposes of this section, the market value of any asset must be determined (s 9H(3)(c)(i))
in the currency of the expenditure incurred to acquire the asset (s 9H(7)).
Commencement of On the day he or she ceases to be a On the day on which the company ceases
next succeeding resident (s 9H(2)(c)) to be a resident or becomes a headquarter
In the case of a company that is a resident that ceases to be resident, or becomes a headquarter
year of assessment company (s 9H(3)(c)(ii))
company during any year of assessment, or if a controlled foreign company (CFC) ceases to be a
CFC in relation to any resident during any foreign tax year of the CFC (see chapter 21 where the
provisions of s 9H that relate to CFCs will be discussed), similar capital or income gains will arise due For the purposes of Companies that cease to be resident or
to the deemed disposal at market value of all the assets and shares this section provides for. A s 64EA(b) a become headquarter companies are deem-
dividend in specie for the purposes of dividends tax (s 64EA(b)) is also deemed to have been dividend is deemed ed to have declared and paid a dividend
declared in the case of a company that is a resident that ceases to be resident or becomes a head- to have been that consists solely of a distribution of an
declared to the asset in specie of the difference between
quarter company. persons holding the market value of all the shares in that
shares in the company on the day immediately before
An asset for the purposes of this section means an asset as defined in par 1 of company in the day on which the company ceases to
the Eighth Schedule (s accordance with be a resident or becomes a headquarter
their effective in- company, and
the consequence that s 9H is applicable to both capital assets and income terest in the shares
assets. Certain assets are excluded from the deeming provisions of s 9H (s 9H(3)(c)(iii)) the sum of the contributed tax capital of
(s 9H(4)), namely: all the classes of shares in the company
on the same date
immovable property situated in the Republic that is held by the person
any assets which will, after the person ceases to be a resident or a CFC, Capital gain dis- If a capital gain on the disposal of equity
Please note! be attributable to a permanent establishment of that person in the Republic regarded in terms shares was disregarded in terms of par 64B
any s 8B qualifying equity shares that were granted to that person less of par 64B of the of the Eighth Schedule (see chapter 17)
than five years before the date on which that person ceased to be a resi- Eighth Schedule in within three years before a company ceases
dent respect of the to be a resident, that capital gain is deemed
disposal of equity to be a net capital gain derived by the
any s 8C equity instruments which had not yet vested at the time that the shares company from that capital gain during the
person ceased to be a resident, or year of assessment that the company
any right of that person to acquire any marketable security contemplated in ceases to be a resident (s 9H(3)(e))
s 8A.
Foreign dividend If any foreign dividend was exempt in terms
There is no deemed disposal of these assets under s 9H. exempt in terms of of s 10B(2)(a) from normal tax within three
s 10B(2)(a) years before a company ceases to be a
resident, that foreign dividend is deemed to
be received or accrued by the company
during the year of assessment that the
company ceases to be a resident and such
foreign dividend is not exempt in terms of
s 10B(2) (s 9H(3)(f))
continued

33 34
 3.2 Chapter 3: Gross income Silke: South African Income Tax 3.2

Event Persons other than companies cease to Company ceases to be resident or becomes Notes
be resident a headquarter company (otherwise than by
way of becoming a resident) 1. Mrs Loots invested in a fixed deposit from ABC Bank for an amount of R500 000 on the birth
of her first grandchild in 2012. She would like to contribute to the future tuition fees of her
Deemed dividend If a person holds at least 10% of the equity grandchildren and invested in the fixed deposit for this reason. The interest earned on the
in specie in terms shares and voting rights in a company that fixed deposit is paid to Mrs Loots monthly and is therefore not reinvested. Section 24J is also
of s 9H(3)(c)(iii) that ceases to be a resident, and not applicable to the fixed deposit.
is exempt in terms the dividend in specie, deemed to have 2. Mrs Loots is an avid investor and enjoys reading up on the local stock exchange in her spare
of s 64FA been declared by the company in time. Her investment philosophy entails investing in high-quality companies over the long
s 9H(3)(c)(iii), is exempt from dividends term. She is not a follower of speculation and is therefore not considered to be a share
tax (in terms of s 64FA), dealer.
that person must be deemed to have The following information pertains to the listed shares:
disposed of those shares to a resident Valuation date value: Market value:
at their market value on the day before Purchase date Purchase price
1 October 2001 31 May 2021
the company ceases to be a resident
and 5 January 2001 R150 000 R180 000 R800 000
reacquired the shares at market value
Mrs Loots did not incur any further cost relating to the listed shares since the acquisition
on the day that the company ceases to
be a resident (s 9H(3A)) date.
This deemed disposal aims to ensure that 3. The investment in listed shares consists of an investment in Holdco Limited
the person (shareholder) does not subse- Mrs Loots owns a 10% interest in the equity shares of Holdco. She acquired this interest for a
quently enjoy the participation exemption
(s 10B(2)(a) see chapter 5) in respect of 10% interest in the equity shares of Holdco during 2018. Holdco is a holding company and a
value that accumulated while the company
was a resident Current bank account in the amount of R1,2 million
80% equity interest in Propco Ltd, a property company of which the only asset is com-
The effect of s 9H(2)(b) and (c) (if it is a natural person) and s 9H(3)(c)(i) and (ii) (if it is a company) is mercial fixed property situated in South Africa. The commercial fixed property had a
that a taxpayer should submit two income tax returns in the year a natural person emigrates or a market value of R10 million on 31 May 2021.
company ceases to be a resident or becomes a headquarter company (one as a resident and one as 4. Mrs Loots is a collector of old coins. To add to her collection, she obtained Krugerrands for
a non-resident or as a headquarter company, in the case of a company that becomes a headquarter an amount of R200 000 during 2008. She is not a trader in old coins.
company). The operational procedures that need to be followed with regard to the two years of Advise Mrs Loots on the capital gains tax consequences in the RSA that her emigration to
assessment in s 9H(2)(b) and (c) (and s 9H(3)(c)(i) and (ii) in the case of a company) are, however, Australia might have.
You can assume that Mrs Loots did not make any other capital disposals for the 2022 year of
assessment within the year of emigration. It is suggested that if a natural person emigrates (or a assessment.
company with a February year-end ceases to be a resident or becomes a headquarter company) on
1 October 2021, the 2022 year of assessment as resident will be from 1 March 2021 to 30 September
2021 and the 2022 year of assessment as non-resident will be from 1 October 2021 to 28 February SOLUTION
2022.
Deemed disposal
Since the SARS eFiling system currently does not allow for two tax returns to be In terms of s 9H(2)(a), Mrs Loots is deemed to have disposed of all her assets (except s 9H(4)
submitted, in practice, two taxation schedules (calculations) will be completed, assets) at market value on the day immediately before she emigrates (31 May 2021), and to have
one for the period pre-emigration (using the residence-based tax system reacquired all of those assets (except s 9H(4) assets) on the date of emigration (1 June 2021) at
(meaning being taxed on worldwide income) and one for the period from market value.
Please note! emigration (as a non-resident using the source-based tax system). However, one
The deemed disposal provision will therefore result in the following capital gains for Mrs Loots:
tax return will have to be completed on the SARS system (using the residence-
based principles and the source-based principles). As a result, in practice, it will Fixed deposit:
not be possible for the rebates to be apportioned and the full rebate will be
allowed in the case of natural persons in the year covering the period of emi- Schedule. Mrs Loots is therefore deemed to have disposed of the fixed deposit on 31 May 2021.
gration. The deemed disposal resulted in the following capital gain:
Proceeds (market value on 31 May 2021) ........................................................................R500 000
Example 3.3. Section 9H Less: Base cost ................................................................................................................. (500 000)

ic. Her husband Capital gain.................................................................................................................. Rnil

passed away recently. All of her children reside in Australia and they suggested that she Listed shares:
relocates to Australia for them to take care of her. Mrs Loots decided to emigrate to Sydney, -
Australia, on 1 June 2021. She was, however, informed that she requires a tax clearance certifi- asset. Hence only capital growth realised after 1 October 2001 is subject to capital gains tax.
cate for her emigration request to be approved. She contacted you for advice to ensure that all The base cost of the listed shares is the valuation date value of R180 000 on 1 October 2001.
her tax affairs in South Africa are in order and informed you that she has an assessed capital
The deemed disposal of the listed shares on 31 May 2021 resulted in the following
loss of R250 000 relating to the previous year of assessment. Mrs Loots owned the following
capital gains:
assets on 31 May 2021:
Proceeds (market value on 31 May 2021) ........................................................................R800 000
Asset description Market value on 31 May 2021 Note Base cost (value on 1 Oct 2001)........................................................................................ (180 000)
Fixed deposit R500 000 1 Capital gain.......................................................................................................................R620 000
Listed shares R800 000 2
Unlisted shares R1 000 000 3
continued
Krugerrands R300 000 4

continued

35 36
 3.2 3.3 Chapter 3: Gross income
Unlisted shares:
The deemed disposal of the unlisted shares resulted in the following capital gain:
Proceeds (market value on 31 May 2021) ......................................................................R1 000 000
Less: Base cost .................................................................................................................. (800 000)
Capital gain .......................................................................................................................R200 000
Krugerrands:
Krugerrands represent coins of gold and platinum and are therefore an for purposes of
the Eighth Schedule. As a result there is a disposal of the Krugerrands on 31 May 2021 in terms
of s 9H.
The deemed disposal resulted in the following capital gain:
Proceeds (market value on 31 May 2021) ........................................................................R300 000
Less: Base cost ................................................................................................................. (200 000)
Capital gain ......................................................................................................................R100 000
Taxable capital gain:
ation resulted in the following taxable capital gain for the 2022 year of assess-
ment:
Sum of capital gains (R620 000 + R200 000 + R100 000)................................................ R920 000
Less: Annual exclusion ........................................................................................................ (40 000)
Total capital gain ..............................................................................................................R880 000
Less: Assessed capital loss .............................................................................................. (250 000)
Net capital gain................................................................................................................. R630 000
Taxable capital gain (R630 000 × 40%)............................................................................R252 000
Mrs emigration to Australia will result in a taxable capital gain of R252 000 to be included in
her taxable income for her 2022 year of assessment as a resident ending on 31 May 2021 in
terms of s 26A.
3.3 Amount in cash or otherwise
It is not only the receipt or accrual of an amount of cash
income. The value of non-cash items should also be included.
In Lategan v CIR (2 SATC 16) (1926 CPD 2013) the taxpayer, a wine farmer, sold wine that he made
during the year of assessment for a specific amount. Part of this amount was paid in cash to him
before the end of the year of assessment and the balance was paid in instalments during the follow-
of the definition of gross income, or only the part that he received in cash. The court held that the
value of every form of property earned by the taxpayer, whether corporeal or incorporeal, which has
a money value.
Remember
In the Lategan case the court ruled that where a taxpayer acquired a right during a year of
assessment to receive instalments of an amount during subsequent years, the present value of
that right at the end o
becomes entitled to any amount during a year of assessment, which is payable on a date falling
after the last day of such year, the amount is deemed to have accrued to the person during the
not the present value as what was decided in the Lategan case.
In CIR v Butcher Bros (Pty) Ltd (13 SATC 21) (1945 AD 301) the taxpayer owned a building that was
leased to a tenant for a period of 50 years, which the tenant could renew for a further period of
49 years. In terms of the lease agreement the tenant was required to demolish the existing buildings
and build a new theatre which was worth substantially more than the original buildings. Upon termin-
ation of the lease, the buildings and improvements would revert to the taxpayer without com-
pensating the tenant for the costs incurred relating to the buildings and improvements. The court was
accrued to the taxpayer for purpose of the definition of The court held that no amount
37
Silke: South African Income Tax 3.3 3.4
was received by or accrued to the taxpayer by the end of the year of assessment, because the
improvements did not have an ascertainable money value at the time.
Remember
The Act was amended after the Butcher Bros case by including par (h
property should be included in the gross income of a lessor. This paragraph also specifies how
the amount should be determined see chapter 4.
In CSARS v Brummeria Renaissance (Pty) Ltd (2007 (SCA) the investors in a retirement village did
not compensate the taxpayer (the developer) in cash for the construction and supply of the
residential units. Instead, the investors granted interest-free loans to the taxpayer as consideration for
the acquisition of the life-interests in the units. The court held that the right to use the loan capital
interest-free was a right that had an ascertainable monetary value. Even though this right could not
be transferred or actually turned into money, the court held that this does not mean that the right
does not have a monetary value. The test that should be applied to determine whether a right has a
monetary value is therefore an objective test and not a subjective test.
Remember
Interpretation Note No. 58 (Issue 2) explains the principles that the court applied in the
Brummeria Renaissance case.
The Interpretation Note confirms that the principles applied in this case would only apply in
instances where an interest-free loan is granted in exchange (quid pro quo) for goods sup-
plied, services rendered or any other benefit granted.
The court in the Brummeria Renaissance case did not decide on how the right to an interest-
free loan should be valued. SARS applied the weighted-average prime overdraft rate of
banks to the average amount of interest-free loans in possession of the taxpayer in the
relevant year of assessment. Since the valuation of the right was not in dispute, the court
neither accepted nor rejected this approach.
Binding General Ruling 8 (Issue 2) sets out the formula for calculating the monetary value of
the right of use of the interest-free loan to be included
monetary value of the right to use the interest-free loan in the year in which it is granted and
paid is determined by multiplying the loan amount by the present value of R1 per year for the
lifetime of the life-right holder and the weighted-average prime overdraft rate determined for
the relevant year of assessment. The amount so calculated is then reduced by 93,1%. This is
a once-off calculation of the amount to be included in the gross income of the borrower in the
3.4 Received
yearbyoforassessment
accruedintowhich the borrower becomes entitled to the right to use the loan.
An amount must either be received by or it must accrue to a taxpayer during a year of assessment to
t or if
an amount did not accrue to the taxpayer, the amount is not gross income and therefore not subject
to income tax.
The fact that the value of an asset increased over time does not mean that the value should be
he increased value might have an ascertainable monetary
value, but until the asset is sold, the increased value is not received by and has not accrued to the
owner.
Similarly, the interest that a person would have received had he invested an amount of money in an
interest-
income because the person did not receive the interest and neither did it accrue to him.
the Act. The most relevant court cases
wherein the meaning of these terms were considered are discussed below.
3.4.1 Meaning of
In Geldenhuys v CIR (14 SATC 419) (1947 (3) SA 256 (C)) the taxpayer and her husband, who
carried on business as farmers, executed a mutual will under which the surviving spouse was to
enjoy the fruits and income of the joint estate for his or her lifetime and their children to be the heirs of
decided to sell a flock of sheep which was included in her and her late joint estate. The
38
 3.4 Chapter 3: Gross income
invested the proceeds from the sale in a bond in her favour. The court was required to rule on
whether the amount received from the sale of the flock should be included in her gross income. The
court held that the taxpayer only had the right of use of the flock (that is, she was the usufructuary of
the flock), and since the number of sheep at the date of sale was smaller than at the date when her
usufruct commenced, there was no surplus offspring to which she was entitled. The whole of the
proceeds realised belonged to the heirs. Although the taxpayer received the proceeds from the sale
of the flock, she did not become entitled to the money, and it should therefore not be included in her
An amount received by a taxpayer on behalf of another person is therefore not gross income for the
taxpayer.
Deposits
The taxpayer in Pyott Ltd v CIR (13 SATC 121) (1945 AD 128) was a biscuit manufacturer. Their
biscuits were sold in tin containers for which the taxpayer charged a fee. The fee was refunded to a
customer if the tin container was returned in good condition. At the end of the relevant year of
assessment, the taxpayer deducted an amount from its gross income as a provision for containers
still to be returned. The court was asked to rule on whether the amount that the taxpayer deducted
should have been included in its gross income. The court ruled that the amount that the taxpayer
received for the sale of the containers should be included in its gross income at its face value
because it was an amount of cash received by the taxpayer. The taxpayer was not entitled to exclude
the amount it was still going to refund customers from its gross income. The court also made an
important observation that the taxpayer, according to the court, correctly conceded that the
Brooks Lemos Ltd v
CIR (1947 AD) and Greases (SA) Ltd v CIR (1951 AD) (the so-
The principle from the Pyott case is that a deposit received qualifies as gross income if the taxpayer
receives the amount on its own behalf and for its own benefit. If an amount is received as trust money
and the taxpayer is not the beneficial owner, but merely the trustee, the amount does not qualify as
gross income because the taxpayer does not receive it on its own behalf and for its own benefit.
Interpretation Note No. 117 (issued on 17 May 2021) that sets out the types of deposits and their tax
treatment, highlights further that the substance of each transaction must be considered when
deciding if a deposit qualifies as gross income.
A deposit is not a loan. Rental deposits (distinguishable from up-front rental payments and lease
premiums) and security deposits, usually held in trust and refundable at the end of the contract, are
- cigarettes and the difference was distributed to the holder of a lucky coupon. The relevance of this
able from other types of deposits like returnable container deposits that are usually received by the
The use of a separate bank account is not sufficient to indicate the true nature of a deposit, if a
taxpayer keeps a deposit in a separate bank account but with no intention of refunding the deposit; it
in trust in a separate bank account by the taxpayer, acting as trustee, the deposit is not
him and not gross income.
If the provisions of the Consumer Protection Act (68 of 2008) apply to a deposit,
the tax implications must be calculated taking into account the requirements of
Please note!
Example 3.4. Advance payments
1. A man lets his house and in terms of the contract of lease receives the rent in advance for two
years.
2. A hotelier receives a non-refundable deposit in terms of a contract to reserve accommodation
for a later date.
Indicate when these amounts will be taxable.
39
Silke: South African Income Tax 3.4
SOLUTION
1. The total amount of rent (for the two years) constitutes gross income for the year in which it is
received.
2. The deposit is taxable in the year of receipt.
Gift cards
In ITC 1918 (2019) (81 SATC 267) the taxpayer, a high street retailer of clothes and other
merchandise, offered gift cards to customers. The court had to decide when the revenue from the
redeemed, or if not redeemed, upon expiry of the gift card. Prior to the 2013 year of assessment, the
taxpayer included the amounts received for the issuing of gift cards as gross income and claimed an
allowance for future expenditure against the income (s 24C allowance (see chapter 14). Amounts
received for gift cards were also kept in a separate account.
After the promulgation of the Consumer Protection Act, the taxpayer changed its tax treatment for
amounts received from the issuing of gift cards. The taxpayer now excluded the amounts received in
respect of the issuing of gift cards from gross income.
amounts were not received for its own benefit, but for the benefit of the gift card holder who would
Protection Act, the consideration paid for a gift card was the property of the bearer until the supplier
redeemed the card in exchange for goods or services or the card expired (which would be after
three years unless the card reflected a longer period).
The court rejected
unredeemed gift cards in a separate identifiable bank account did not mean that the retailer
(taxpayer) did not hold the money on its own behalf and for its own benefit. However, the position
changed as a result of the introduction of the Consumer Protection Act. This Act provided the
and to refrain from applying the receipts as if they were its own property. Accordingly, the gift card
receipts were the taxpayer, not for its own benefit, but to be held for the card bearer.
redeemed or,
if not redeemed, when the gift card expires.
Illegal income
In CIR v Delagoa Bay Cigarette Co Ltd (32 SATC 47) (1918 TPD 391) the taxpayer operated an illegal
lottery. The taxpayer sold cigarettes at an amount much higher than the normal selling price of the
case is that the court found that whether the business carried on by the taxpayer was legal or illegal
is not material for the purpose of determining whether its income should be subject to tax. The
income.
In MP Finance Group CC (in liquidation) v CSARS (69 SATC 141) (2007 (SCA) the taxpayer operated
an illegal investment pyramid scheme. It promised significant returns on investors' money. Some
investors received repayment of their investments plus returns, but the majority received less or
nothing and the operators of the scheme used some of the money for their own benefit. Throughout
the tax years in question, the operators of the scheme knew that it was insolvent, that it was
fraudulent and that it would be impossible to pay all investors what they had been promised.
The court had to rule on whether the amounts invested in the scheme qualified as gross income for
the taxpayer. The taxpayer argued that it never received the funds within the meaning of the definition
the investors.
In ruling that the deposits qualified as gross income for the taxpayer, the court made the following
important findings:
An illegal contract is not without all legal consequences; it can, indeed, have fiscal conse-
quences.
Notwithstanding the fact that the taxpayer was legally obliged to refund the deposits to the invest-
ors, and therefore not entitled to retain the amounts, the taxpayer deposits within
accepted with the
40
 3.4 Chapter 3: Gross income
Interpretation Note No. 80 confirms the application of the principles of the
MP Finance case to the receipt of money stolen through robbery, burglary or
Please note!
other criminal means. The issue is not whether the victim intended to part with
the money, but rather whether the thief intended to benefit from it.
3.4.2 Meaning of
luded in gross income, but also amounts
other words, at the time that a taxpayer obtains a vested right to a future payment, the amount
accrues to the taxpayer.
In (52 SATC 9) (1990 (2) SA 353 (A)) the taxpayer was a
retailer that sold goods to its customers for cash and on credit. The credit sales were made under the
-months-to-pay revolving credit scheme. The court had to decide whether the
instalments not yet payable and outstanding at the end of a particular year of assessment, accrued to
the taxpayer and should be included in its gross income.
The court, in applying the principles that were established in the Lategan case (see 3.3), held that an
amount does not have to be due and payable to the taxpayer for it to accrue to the taxpayer. The tax-
payer acquired a right during the year of assessment to claim payment of an amount in the future.
Since the right vested in the taxpayer in the year of assessment, it accrued to the taxpayer in that
year. And since the right can be turned into money (that is, it has an ascertainable monetary value),
Remember
Similarly to the Lategan case, the court in the case said that since it is the right to
receive payment in the future that accrued to the taxpayer (and not the amount itself), it is that
right that has to be valued. The court said that the right to receive future payments does not
necessarily have the same value as the cash amount, since it is affected by its lack of immediate
enforceability. The court held that the right should be valued at its present value. However, a
becomes entitled to any amount during a year of assessment, which is payable on a date falling
after the last day of such year, the amount is deemed to have accrued to the person during the
income despite the decisions in the Lategan and cases.
The taxpayer in CIR v Witwatersrand Association of Racing Clubs (23 SATC 380) (1960 (3) SA 291 (A))
was an association formed by a number of horse racing clubs. The taxpayer decided to hold a horse
racing event for the benefit of two charities. The court had to consider whether the proceeds from the
race should be included in the taxpayer's gross income.
The taxpayer argued that in organising the event, it entered into a number of contracts on behalf of
the charities. However, the court found, based on the facts presented, that it was the taxpayer, and
no one else, that was liable to pay the expenses incurred in holding the event; and that the race was
conducted by the taxpayer itself as principal, and not as an agent for the clubs or for the charities.
The court held that the proceeds from the race were gross income for the taxpayer because it was
the taxpayer, and no one else, who became entitled to the proceeds of the race. The court also said
that although the taxpayer was not going to keep the proceeds from the race for itself, but pay it to
the two charities, the taxpayer was not thereby relieved from liability for tax. A moral obligation to
hand over the proceeds to the charities did not destroy the beneficial character of the receipt of those
proceeds by the taxpayer.
The court in the Witwatersrand Association of Racing Clubs case found that the
taxpayer did not act as agent on behalf of the charities. If the taxpayer had, in
Please note! fact, acted as agent on behalf of the charities, the proceeds from the event
would have accrued to the charities, because the association would not have
been entitled to the amounts.
In Mooi v SIR
acquire shares in the company at a specific price. The option was, however, subject to certain condi-
tions, including th
taxpayer should still be an employee at the time the option is exercised. The taxpayer accepted the
option during a specific year and exercised the option more than three years later. When the option
41
Silke: South African Income Tax 3.4
was exercised, the value of the shares was more than the option price. The court was required to
consider whether the difference between the price of the shares when the option was exercised and
the option price should be included in the taxpayer's gross income. The court made the following
important findings:
In applying the principle established in the Lategan case (see 3.3), the court said that to deter-
right.
The taxpayer argued that the right accrued to him when the option was granted and the value of
the right at that time should be included in his gross income. However, the court found that the
right granted to the taxpayer was a contingent right, as it was subject to the conditions mentioned
above. The right only accrued to the taxpayer when the conditions were fulfilled and the right
became exercisable.
Since the taxpayer was not a share-dealer, the amount was of a capital nature. However, par (c)
of the definition of included including any voluntary
gross income, despite being of a capital nature.
An amount accrues to a taxpayer when the taxpayer becomes entitled to the
Please note! amount (Lategan and cases), but only when that entitlement is
unconditional (Mooi case).
3.4.3 Valuation of receipt or accrual
Valuing an amount received presents little difficulty, since the value of the receipt is the amount that
has been received during the year of assessment. The difficulty lies with the valuation of amounts that
have accrued to a taxpayer in a year of assessment, but which are still outstanding at the end of the
year of assessment.
In CIR v People Stores (Walvis Bay) (Pty) Ltd (1990 (A), the court had to decide how the outstanding
amounts should be valued at year-end. The court was asked to consider whether the amounts should be
included at their face value (as they appeared in the records), or whether the amounts had to be
discounted by the inclusion of their present value (remember that the value of money decreases over
time). The court held that the present (discounted) value of the outstanding amounts had to be included.
However, the legal position was changed shortly after this decision by virtue of an amendment to the Act,
which introduced a proviso to the definition of in s 1.
The proviso provides that when
a person has become entitled to an amount during the year of assessment, and
that amount is payable on a date or dates falling after the last day of that year,
the face value (and not the present value) of that amount shall be deemed to have accrued to the
person during such year.
Example 3.5. Value of accrual
A taxpayer sold and delivered goods on 26 February 2022 for R30 000. Payment is only due two
years later. Assume that the present value of the R30 000 receivable at the end of the year of
assessment during which the taxpayer sold the goods (28 February 2022) is R18 000 after two
years. Calculate the amount to be included in gross income in the 2022 year of assessment.
SOLUTION
An amount of R30 000 (and not the discounted present value of R18 000) will be included in the
gross income of the taxpayer in the year of assessment in which the sale was concluded (2022
year of assessment), as he became entitled to the amount of R30 000, even though the physical
receipt thereof will only occur later.
3.4.4 Unquantified amounts (s 24M)
If an asset is disposed of for a consideration that consists of or includes an amount that cannot be
quantified in that year of assessment, the unquantified amount is deemed not to have accrued to that
person in that year of assessment. The unquantified amount accrues to that person in the year when
it becomes quantifiable (s 24M(1)).
42
 3.4 Chapter 3: Gross income
Example 3.6. Unquantified amount
A farmer sells his mealie crop to a co-operative for R2 000 per ton on 15 February 2022 (in terms
of a contract with no suspensive conditions). Assume that the farmer delivers the crop to the co-
operative on 27 February 2022, but that the actual quantity thereof is only established on
3 March 2022. Indicate when the selling price will be included in gross income.
SOLUTION
In view of the fact that the amount, which has already accrued to the farmer according to the
general principles, is an unquantified amount at year-end (28 February 2022), it will be deemed
not to have accrued to the farmer in the 2022 year of assessment. The amount of the mealie crop
quantified.
3.4.5 Accrual rules with the disposal of certain equity shares (s 24N)
A special accrual rule applies to profit participation sales of equity shares. This applies where the
consideration for the shares is determined with reference to the future profits of the company. The
become due and payable (s 24N(1)). This rule essentially allows profit participation sales of equity
shares to be subject to normal tax only to the extent that the consideration becomes due and
payable. Similar rules apply to the purchaser (s 24N(2)).
These rules apply when all of the following features are present (s 24N(2)):
More than 25% of the amount payable for the shares in a company becomes due and payable
The amount payable for the shares must be based on the future profits of that company (the so-
called
The value of the equity shares, that have in aggregate been disposed of during the year to which
s 24N applies, exceeds 25% of the total value of equity shares in the company.
The purchaser and seller are not connected persons after the disposal.
The purchaser is obliged to return the equity shares to the seller in the event of his failure to pay
any amount when due.
The amount is not payable by the purchaser to the seller in terms of a financial instrument (see
chapter 16) that is payable on demand and is readily tradable in the open market.
3.4.6 Blocked foreign funds (s 9A)
A special rule applies where a income includes an amount that accrued to him from a
foreign country, where that country imposes currency or other restrictions which prevent the amounts
from being remitted to South Africa during the year of assessment. These amounts are referred to as
that year of
assessment (s 9A(1)), and are deemed to be amounts received by or accrued to the person in the
following year of assessment (s 9A(2)). See also Interpretation Note No. 63 (Issue 2)). The effect of
this section is that the taxation of blocked foreign funds is delayed to the year of assessment in which
the restrictions are lifted.
3.4.7 Disposal of income after receipt or accrual (without prior cession) versus disposal
of a right to future income (prior cession)
Once income has been received by a person for his own benefit or it has accrued to him in terms of
affect his liability for taxation in respect of such receipt or accrual.
that it has been received. The subsequent loss thereof does not mean that it is no longer gross
The same principle applied in the Witwatersrand Association of Racing Clubs case (see 3.4.2). The
taxpayer undertook to hand over the net proceeds of a race meeting to two charitable organisations
but had to pay tax in respect of the profits that were received. The horse-racing association donated
43
Silke: South African Income Tax 3.4
the proceeds only after they were received by it for its own benefit. The accrual of the income and the
resulting tax liability (in the hands of the association) would have been avoided if the race meeting
had been arranged in terms of a contract which stated that all of the proceeds would be for the
account of the charitable organisations and that the association would only act as an agent of the
charitable organisations. The amounts would then have been received in favour of and on behalf of
the charitable organisations.
The question of the disposal of profits frequently arises when a business is sold during a year of
assessment, and where a seller disposes of all the benefits of the profits earned for the current year
amounts that have already accrued to him.
Example 3.7. Disposal of income after accrual
The owner of a business disposes of his business on 29 December 2022 (together with the right
to the profits as from 1 March 2022). Indicate whether the original owner (seller) will be liable for
tax on the profits for the period 1 March 2022 to 29 December 2022.
SOLUTION
The profits for the period 1 March 2022 to 29 December 2022 will still accrue to the original
tax liability in respect thereof. The new owner will, however, be liable for tax in respect of the
profits from 30 December 2022.
There is, however, a significant difference between the disposal of income after it has accrued to a
person, and the disposal and cession by him of a right under which income will accrue only in the
future. When income is disposed of after it has already accrued to the party who is disposing of it, it
remains taxable in his hands. Alternatively, when a right to future income is disposed of, the income
will in future accrue to the recipient of the right, provided that the right to such income has been
properly ceded to such recipient (Van der Merwe v SBI (1977 A)). Cession simply means that one
person (the transferor, or cedent) transfers his rights to another person (the cessionary). Delivery of
rights occurs through cession. It should, however, operate in such a way that the transferor divests
himself totally of any right to claim the income when that income accrues in the future (ITC 265 (1932)).
The cession of income in respect of an asset of which the cedent retains ownership will in terms of
the definition of gross income accrue to the cessionary, although the ownership has been reserved
(ITC 1378 (1983)). For example, the rental income of a property may be ceded without transferring
the ownership of the property. Section 7(7) of the Act is, however, specifically designed to deem the
income received by the cessionary in such cases to be included in the gross income of the cedent
(owner of the property).
Confusion is sometimes created if a cedent, after he has properly ceded his right to future income to
a cessionary, still physically received the income, where after he duly paid it over to the cessionary. It
is important to note that the cedent, in such a case, received the income on behalf and for the benefit
of the cessionary. The mere fact that the cedent received the money physically does not mean that
he received it for his own benefit or that the amount had accrued to him (SIR v Smant (1973 A),
CSARS v Cape Consumers (1999 C)).
Example 3.8. Disposal of income before accrual
Lesedi wrote a book. He sold the book, including all the potential future rights to royalties, to
Faith. The rights were properly ceded to Faith. Indicate the tax implications of the receipt of the
royalties for Faith.
SOLUTION
Faith will be subject to tax on all future royalties (given that the amount in the hands of Faith
complies with all the other requirements of gross income).
If the publishers paid the royalties to Lesedi (subsequent to the valid cession), where after
44
 3.4 Chapter 3: Gross income
It is, however, possible to cede a right to future income in an attempt to avoid a potential tax liability.
There are certain anti-avoidance provisions in the Act which are specifically designed to counteract
such avoidance. For example, par (c - the
tion that a person receives for services rendered by such person will be included in his gross
income, although it may have been received by or accrued to another person. The person who per-
forms services can therefore not evade his tax liability by ceding his right to future income in respect
of such services to another person. Section 7 also contains specific provisions that direct that income
disposed of to a spouse or minor child would still be taxable in the hands of the disposing spouse or
parent (see chapter 7 for further discussion). Furthermore, the application of the general anti-
avoidance measures could result in the cession being ignored for tax purposes (see chapter 32). A
cession of income in order to achieve a tax advantage will therefore not always be successful.
Securities sold cum or ex income rights
Securities, such as shares, debentures or government stocks, are often sold together with a right to a
dividend or interest: the purchaser would then be entitled to receive any forthcoming dividend or in-
terest. The general principles, as discussed above, would be applicable to assess which party
should be liable for the taxation in respect of such dividends or interest.
If the income has already accrued to the seller prior to the sale, it is taxable in his hands. The mere
fact that the purchaser will receive the income is irrelevant. If the income accrues only after the sale,
when the buyer is already the owner of the securi
no question of apportioning the income relating to the period up to the date of sale to the seller and
the income relating to the period after the date of the sale to the buyer. The full income is taxable in
the hands of either the seller or buyer, whichever one of them is entitled to it. This general principle
may, however, be regulated by specific anti-avoidance provisions within the Act, for example, s 24J
may deem interest to accrue on a day-to-day basis, irrespective of the fact that the actual interest is
received in other specified periods (see chapter 16). In such a case the interest should be appor-
tioned between the seller and the buyer.
Example 3.9. Cum and ex income rights
Assume that on 10 June 2021 Lethabo sold shares to Amahle on which a dividend had been
declared on 15 May 2021, payable on 9 June 2021 to holders of shares registered on 1 June
2021. Accept that Lethabo had not yet received the dividend. Discuss whether the dividend
received will be gross income in the hands of Lethabo.
SOLUTION
It is submitted that the dividend is gross income in the hands of Lethabo, since it accrued to him
on 1 June. Even if the shares were sold cum dividend (in other words inclusive of the dividend),
that is, it was agreed on in the contract that Amahle was to receive the dividend, Lethabo is the
party to whose gross income the dividend would be added. He merely disposed of the dividend
after it had accrued to him.
The position would have been different if Lethabo sold the shares prior to the date of accrual of
the dividend and if it was agreed between the parties that Amahle would be entitled to the forth-
coming dividend. The dividend would then have to be included in the gross income of Amahle.
3.4.8 Time of accrual of interest payable by SARS (s 7E)
Where a person becomes entitled to an amount of interest that is payable by SARS in terms of any
tax Act, the amount is deemed to accrue to the person on the date on which the amount is paid
(s 7E). This rule, which applies from 1 March 2018, overrides the general rule that an amount is
this rule is that
paid and not when the person becomes entitled to it. The circumstances under which a person
becomes entitled to interest payable by SARS are discussed in chapter 33.
If, at the time when this section became effective (from 1 March 2018), interest
Please note! gross income on the accrual basis, only that portion not previously taxed will be
taxable under s 7E. The taxpayer bears the onus of proving that the interest, or a
portion thereof, has previously been included in gross income (Binding General
Ruling No. 53 (issued on 22 June 2020)).
45
Silke: South African Income Tax 3.4 3.6
Interest that was previously received from SARS (under s 7E) and that is later repaid to SARS by the
taxpayer will, to the extent that it was previously included in his taxable income, be deductible from
income in the year of assessment that it is repaid by the taxpayer (s 7F see chap-
ter 6).
The accrual of other amounts of interest is provided for in s 24J (see chapter 16).
Please note!
3.5 Year or period of assessment (ss 1(1), 5, 66(13A) (13C))
year or other period in respect of which any tax or duty
leviable under the Act is chargeable. An amount is only income and subject to taxation in a relevant
year if it has been received by or accrued to a taxpayer during that year of assessment. Each year of
assessment stands on its own. When rates of tax or special provisions change from one year to the
next it becomes important from the point of view of both the taxpayer and SARS to ensure that all
amounts received or accrued during a particular year of assessment are included in the assessment
for that year.
Remember
For income tax purposes, a year of assessment of a person differs from a calendar year.
The 2022 year of assessment of a natural person and a trust generally extends from
1 March 2021 until 28 February 2022. The 2022 year of assessment of a company is its financial
year ending during the 2022 calendar year.
March of one year to
the last day of February of the following year (s 5(1)(c)). The Commissioner may accept accounts to a
date other than the last day of February, if satisfied that the whole or some portion of the natural
66(13A)).
Interpretation Note No. 19 (Issue 5) (issued 18 November 2020) provides guidance on the Commis-
Commissioner are not subject to objection and appeal (s 66(13A) read together with s 3(4)(b)).
assessment is its financial year (s 1(1)). If a company does not close its financial
accounts on the last day of its financial year, the Commissioner may accept financial accounts for a
cial year (s 66(13C)). Inter-
pretation Note No. 90 (Issue 2 (issued 18 November 2020)) provides guidance on the Commis-
3.6 Receipts and accruals of a capital nature
The g
This, however, does not mean that receipts and accruals of a capital nature are entirely free from
income tax. Certain receipts and accruals are included in the specific inclusions (listed in paras (a) to
(n)) of the gross income definition in s 1(1) even though they may be of a capital nature (see chap-
ter 4). If capital receipts and accruals are not included in gross income, a portion of these amounts
may still be subject to income tax by the inclusion of taxable capital gains in taxable income. This is
referred to as capital gains tax and is discussed in chapter 17.
WJ Fourie Beleggings v
C:SARS
number of guidelines that should be considered when determining whether an amount is of a capital
nature or not. But, as the court said in the WJ Fourie Beleggings
devise a definite or all-embracing test to determine whether a receipt or accrual is of a capital nature,
despite the regularity with which the issue has arisen. At the same time, and although common sense
s not exist, the following important principles
have been established over the years:
The burden of proof that an amount is of a capital nature is on the taxpayer (s 102 of the Tax
Administration Act). The taxpayer must, for example, prove that an asset was acquired for the
purpose of investment and not for the purpose of resale at a profit, if the proceeds are to be
regarded as being capital in nature.
46
 3.6 Chapter 3: Gross income
The inquiry as to whether an amount is of an income or a capital nature is a question of fact, which
has to be decided on the merits of each case. Although the court will consider the guidelines
which have been laid down in earlier decisions, it will have regard to the totality of all the relevant
facts and circumstances of each case.
The most important test used by the courts in deciding whether a receipt in respect of the disposal
of an asset is income or capital in nature is the intention of the taxpayer. Generally, the proceeds
will be income in nature if the asset was acquired with the purpose of selling it at a profit.
However, if the asset itself was acquired and held, not for the purpose of resale at a profit, but to
produce income from that asset such as rent, interest or dividends, then the proceeds on the
disposal of the asset will be capital in nature. Another person could acquire the same asset, but
with the intention to sell it at a profit. The proceeds on sale of the asset by such person will then
be income in nature (CIR v Visser (1937 TPD)).
ipse dixit of the taxpayer) about his intention and his credibility
will be considered by a court. Due to subjectivity, self-interest, the uncertainties of recollection
and the possibility of mere reconstruction, the evidence given by the taxpayer will not be
decisive. The court will test that evidence against the surrounding facts and circumstances (in
CIR v Nussbaum
(1996 (A)).
All receipts and accruals must be categorised as being either of a capital or of an income nature.
An amount cannot be both - and - (Pyott Ltd v CIR (1945 AD)), but a
single receipt may be apportioned between its capital and income elements (Tuck v CIR
(1988 A)).
The intention of a shareholders could be attributed to the company itself (Elandsheuwel
Farming (Edms) Bpk v SIB (1978 (A)).
Amounts received will be revenue if they qualify as receipts made by an operation of business in
carrying out a scheme for profit-making. For a receipt to be of a revenue nature, it is not sufficient
for the taxpayer to be carrying on a business. The business should be conducted with a profit-
making purpose as well (CIR v Pick 'n Pay Employee Share Purchase Trust (1992 (A)).
A person is entitled to realise an asset to the best advantage and to accommodate the asset to
the exigencies of the market in which he was selling. The fact that he did so could not alter what
was an investment of capital into a trade or business for earning profits (CIR v Stott (1928 AD)).
The mere decision to sell an asset originally held as an investment is not necessarily to be
regarded as a transformation of the profits from a capital nature into a revenue nature. Something
more than the mere disposal is required for the proceeds to be of a revenue nature (CIR v Nel
(1997 (T)); CIR v Richmond Estates (Pty) Ltd (1956 (A)); John Bell & Co (Pty) Ltd v SIR (1976 A);
Natal Estates Ltd v CIR (1975 (A)).
From the totality of the facts, one should enquire whether it can be said that the taxpayer had
crossed the Rubicon and gone over to the business of, or embarked upon a scheme for profit,
using the asset as his stock-in-trade (Natal Estates Ltd v CIR (1975 (A)).
Where the purposes of a taxpayer regarding an asset are mixed, one should seek and give effect
to the dominant factor that induced the taxpayer to acquire the asset (COT v Levy (1952 (A)).
Where a taxpayer who intends to invest in an asset, has a secondary, profit-making purpose when
the asset is purchased and sold, the proceeds will be of an income nature (CIR v Nussbaum
(1996 (A)).
Where a taxpayer received an amount as compensation for the cancellation of a contract, the
court held that one should distinguish between a contract, which is a means of producing
income, and a contract directed by its performance towards making a profit. Compensation for
cancelling the first would be of a capital nature and the latter of a revenue nature (WJ Fourie
Beleggings v C:SARS (2009 SCA)).
The above principles and court cases are discussed in more detail below.
3.6.1 Nature of an asset
In CIR v George Forest Timber Company Limited (1 SATC 20) (1934 AD 516) the taxpayer was a
company that acquired land with a natural forest for business purposes. The taxpayer felled a
quantity of trees each year which were sawn up in its mill and sold as stock-in-trade. The court had to
consider whether the receipts from the sale of the timber were of a revenue or capital nature. The
court found that in selling the timber the company did not realise a capital asset but created and sold
a new product. The court said that, as a general rule, capital, as opposed to income might be said to
47
Silke: South African Income Tax 3.6
be wealth used for the purpose of producing fresh wealth. The court distinguished between fixed and
floating capital, with the substantial difference being that floating capital was consumed and
disappeared in the very process of production, while fixed capital did not. Fixed capital produced
fresh wealth but remained intact. The receipts from selling the timber were found to be from the sale
of floating capital and not of a capital nature.
In CIR v Visser (1937 TPD) the taxpayer acquired mining options on certain farm properties. The
options, however, lapsed before the taxpayer could start searching for mineral deposits on the farms.
Although the options lapsed, the taxpayer had persuasive influence over the farmers in the area and
was convinced that he could acquire the options again if he wished to do so. The taxpayer then
entered into an agreement with another person whereby the taxpayer agreed to assist the other per-
had to decide whether the shares that the taxpayer received were of a capital nature and therefore
excluded from his gross income. The court came to the following conclusions:
should be considered.
transaction, although not necessarily con-
clusive, is always of the utmost importance in deciding whether the profit made on the sale of an
asset is income or merely the enhanced value of a capital asset.
ined by what he says his intention was, but by
the inference as to the intention to be drawn from the facts of the case.
mething in the nature of interest or fruit as opposed to
principal or tree. This economic distinction is a useful guide, but its application is often difficult, for
other.
received by the taxpayer was a product of his wits and energy and therefore of an income nature.
3.6.2 Intention of a company
In Elandsheuwel Farming (Edms) Bpk v SIB (1978 (A)) the taxpayer was a company that acquired a
property that was used for farming purposes. One of its shareholders carried on farming activities on
the property for about four years. The farm was then leased to other tenants who used the property
for farming purposes. About six years after the company acquired the property, its shareholders sold
property as agricultural land. The new shareholders were property developers. At that time another
developer was purchasing land in the area at a price significantly more than what the new share-
holders paid for their shares in the company. A year later, the company sold the property to a local
municipality at a significant profit. The court had to rule on whether the proceeds on the sale of the
property were of a capital nature and therefore excluded from the gross income. The
court came to the following conclusions:
The new shareholders derived a scheme to make a substantial profit by acquiring the shares in
the company at a price based on the agricultural value of the land and then to sell the land to the
municipality for township development.
The intentions should be attributed to the company itself.
After the new shareholders acquired control of the company, the purpose with
regards to the land changed to that of trading stock.
The profit realised on sale of the land was of a revenue nature and should be included in the
3.6.3 Business conducted with a profit-making purpose
In (1992 (A)) the taxpayer was a trust established
p of companies to administer a share purchase scheme for the benefit of
employees of the group. The trust was created and maintained to enable employees to purchase
shares in Pick purchased shares in order to make them available
to employees entitled to them. In terms of its constitution, it was compelled to repurchase shares from
employees who were required to forfeit their holdings. The court had to consider whether the
proceeds on the sale of shares were of a capital nature for the trust. The court held that:
Although there are a variety of tests the courts have laid down for determining whether or not a
receipt is of a revenue or capital nature, they are guidelines only. There is no single infallible test
of invariable application.
48
 3.6 Chapter 3: Gross income
The amounts received by the trust will be revenue if they qualify as receipts made by an
operation of business in carrying out a scheme for profit-making.
For a receipt to be of a revenue nature, it is not sufficient for the taxpayer to be carrying on a
business. The business should be conducted with a profit-making purpose as well.
Transactions involving shares are no different from any other transaction and the capital or
revenue nature of a receipt should be determined in the same way as other assets.
While the trustees might have contemplated the possibility of profits, it was not the purpose of
either the company in founding the trust, or of the trustees, to carry on a profit-making scheme.
Any receipts accruing to the trust were not intended or worked for but purely fortuitous in the
sense of being an incidental by-product.
The receipts were of a capital nature.
3.6.4 Selling an asset to best advantage
In CIR v Stott (1928 AD) the taxpayer was a surveyor and architect. On a number of occasions, he
purchased land when he had funds to invest. During a particular year he derived profit from the sale
of plots of land which were subdivided from two properties. The taxpayer acquired the first property
as a seaside residence. The property was larger than what he required, but was only for sale as a
whole. After building a cottage on the land, the taxpayer subdivided half the property into small plots
and sold it. The second property was a small fruit farm which was subject to a long-term lease when
acquired. After the tenant defaulted, the taxpayer subdivided the property into plots and sold it.
According to SARS, the taxpayer embarked on a scheme of profit-making when he subdivided the
land into plots and sold it. In considering whether the receipts from the sale of land were of a revenue
or capital nature, the court held that:
The intention with which a taxpayer acquired an article is an important factor to consider and
unless some other factor intervened to show that when the article was sold it was sold in
pursuance of a scheme of profit-making, it was conclusive in determining whether the receipts
were capital or gross income.
The taxpayer acquired each of the properties as an ordinary investment using surplus funds.
There was no evidence to show that the taxpayer, at any time after purchasing the properties,
considered dealing with them as a part of a business of buying and selling land.
The mere fact that the land was subdivided into plots rather than sold as a whole could not by
itself alter the character of the proceeds derived from the land from capital to revenue.
The fact that the taxpayer, as a surveyor, knew somewhat more than the ordinary public about the
value of land made no difference.
Every person who invested his surplus funds in land or stock or any other asset was entitled to
realise such asset to the best advantage and to accommodate the asset to the exigencies of the
market in which he was selling. The fact that he did so could not alter what was an investment of
capital into a trade or business for earning profits.
The receipts were of a capital nature.
3.6.5 Realisation of a capital asset
Proceeds from the sale of capital assets should be subjected to the same tests applicable to other
assets when being classified as of either an income or a capital nature.
In CIR v Nel (1997 (T)) the taxpayer had purchased Krugerrands with the intention of holding them as
a long-term investment as a hedge against inflation. Although the Krugerrands steadily escalated in
value over the years and, despite the fact that he had many opportunities to sell them, he never did
so. Urgently and unexpectedly needing to purchase a motor car for his wife, he reluctantly realised
one third of the coins to pay for the vehicle. The taxpayer made a gain on the disposal of the Kruger-
rands, which he considered as being of a capital nature. The court held that
The mere decision to sell an asset originally held as an investment is not necessarily to be
regarded as a transformation of the profits from a capital nature into a revenue nature. Something
more than the mere disposal is required for the proceeds to be of a revenue nature.
as not to
make a profit, but to realise a capital asset.
The court therefore accepted the capital nature of the proceeds on the basis that the Krugerrands
unusual or special circumstances.
49
Silke: South African Income Tax 3.6
In CIR v Richmond Estates (Pty) Ltd (1956 (A)) the taxpayer was a company that was formed to
control the investments and savings of its sole shareholder and director. The company's memoran-
dum of association empowered it to trade with and invest in land. For some time, the company made
profits from trading in land and from receiving rent from properties that were let. Due to legislative
changes, it became difficult for the company to purchase land in the particular area in which it traded
in land, and the shareholder decided that the company would cease trading in land and develop the
properties to receive rental income. This decision was not recorded in a formal resolution of the com-
pany. Two years later the shareholder became aware of further legislative changes that, according to
the shareholder, would have had a negative impact on the value of the properties. Due to this, the
company sold the properties and realised a substantial profit. In considering whether the profit
realised from the sale of the properties was of a capital or income nature, the court concluded as
follows:
decided to develop the properties to receive rental income.
The fact that the change of intention from trading stock to capital was not recorded as a formal
was no reason for concluding that the taxpayer's intention did not change.
The capital assets were sold due to the pending legislative changes that would negatively impact
the value of the properties. The mere decision to sell a capital asset at a profit does not per se
mean that the profit is of an income nature.
The proceeds from the sale of the properties were of a capital nature.
3.6.6 Change of intention
In John Bell & Co (Pty) Ltd v SIR (1976 A) the taxpayer, a company, operated a textile business from
premises that it owned. After the business relocated to other premises, the directors of the company
decided in principle to sell the original premises. Considering the property market was not perform-
ing well at that point in time, the directors decided to wait until the market had improved. In the mean-
time, the property was rented out (for a period of 11 years) and thereafter, once the market had
improved, the property was realised at a profit. The court emphasised the principle that a taxpayer is
entitled to realise his property to his best advantage, and therefore decided that there was no factual
evidence that indicated that the taxpayer had had a change of intention to use the property as
trading stock. The court held that something more than merely selling the asset is required in order to
metamorphose the character of the asset and so render its proceeds gross income. The taxpayer
must embark on some scheme for selling such assets for profit and use the assets as his stock-in-
trade.
In Natal Estates Ltd v CIR (1975 (A)) the taxpayer, a company, owned a large piece of land north of
Durban. It carried on business as a grower and miller of sugar cane and a manufacturer of sugar.
Throughout the years the directors of the company were aware of the possibility that the local author-
ities could expropriate the property for public development. The directors of the company appointed
town planners and surveyors to investigate possible residential development on the land. It was
decided to wait until the market was better developed and the project was temporarily suspended. A
newly elected board of directors decided to proceed with the project. Consulting engineers and
architects, as well as financial advisors and marketers, were appointed to the project. The taxpayer
proceeded with the development bit by bit and started to sell developed land directly to the public
nature. The court held that:
Although the original intention with which a taxpayer acquired an asset is an important factor, it is
The mere decision to sell an asset at a profit is not an indication that a taxpayer that acquired an
asset with an investment purpose changed its intention. Something more is required.
From the totality of the facts, one should enquire whether it can be said that the taxpayer had
crossed the Rubicon and gone over to the business of using the land as his stock-in-trade or
embarked upon a scheme of selling the land for profit.
A change of intention implies something more than the mere decision to sell an asset of a capital
nature.
The court considered the fact that the taxpayer had gone over to the business of township
development on a grand scale and held that the company changed its intention to sell the land at
were subject to normal tax.
50
 3.6 Chapter 3: Gross income
The following paragraph from C:SARS v Founders Hill (Pty) Ltd (2011 SCA)
Natal Estates
case:
a small river dividing Cisal-
pine Gaul (a province of Rome) from Italy committing an act of treason in so
Please note! doing (for no Roman general was allowed to enter Italy with his army without the
consent of the Roman Senate), he intended to defy the Senate and in effect to
declare civil war in Rome. Little did he foresee (I suspect) that his act would
come to be a symbol of passing a point of no return in the general sense, and
that it has, in South Africa, become a tax mantra in cases that attempt to discern
the distinction between capital gains and taxable income upon a disposal of
3.6.7 Mixed purpose
In COT v Levy (1952 (A)) the taxpayer argued that the proceeds realised on the sale of shares in a
company were of a capital nature. The taxpayer acquired 25% of the shares in the company and was
also one of its four directors. The company was formed to acquire and develop land in an area that
was thought likely to develop. The taxpayer had an open mind when he bought the shares as to what
would be the best thing to do with the property. Although he hoped that the property and therefore
the shares would appreciate in value, he was really interested in obtaining a good revenue from the
property and agreed with the other shareholders to develop the property to obtain a better return
from it. Three years after the taxpayer acquired the shares another person purchased all the shares
from the four shareholders. The taxpayer made a substantial profit from the sale. The court had to
consider whether the taxpayer correctly treated the proceeds from the sale of the shares as being of
a capital nature. The court found that:
Where the purposes of a taxpayer regarding an asset are mixed, one should seek and give effect
to the dominant factor that induced the taxpayer to acquire the asset.
Based on the evidence before th
acquiring the shares was to hold the shares as an income-earning investment. The taxpayer
never at any time attempted to sell the shares and only sold the shares when someone made him
an offer. The taxpayer accepted the offer with a view to realise his investment.
The proceeds from the disposal of the shares were of a capital nature.
3.6.8 Secondary purpose
In CIR v Nussbaum (58 SATC 283) (1996 (4) SA 1156 (A)), a case considered by the Appellate
Division of the High Court, the taxpayer inherited listed shares. With active and careful investment, he
built a substantial portfolio of listed shares over a number of years. For the three years of assessment
under consideration, SARS assessed the taxpayer's profits from the sale of shares as being of a
revenue nature. The taxpayer testified that over the years he used surplus income to consistently add
shares to the portfolio he inherited. When he purchased shares, he did so with an intention to
produce dividend income and to protect his capital from inflation. He never purchased shares for a
profitable resale. He would only sell a share if a better dividend yield could be achieved with other
shares, or where his shares in a specific company distorted the balance he aimed to achieve in his
portfolio.
For the three years under consideration, the taxpayer testified that his approach was decidedly
different. He turned 60 and decided to build up readily available cash resources to meet expected
invest the proceeds in fixed interest investments. His criteria for deciding which shares to sell were
the same as in prior years. He only sold shares with a poor dividend yield, regardless of whether he
would realise a profit or loss on the sale.
SARS argued that, for the years under consideration, the taxpayer changed his intention towards his
shares and had gone over to holding them, if not also buying them, with a dual purpose. Although his
main aim was still investment, his secondary purpose was to use his portfolio as stock-in-trade and to
sell shares for profit whenever he felt it appropriate to do so.
In considering whether the receipts from the disposal of shares were revenue or capital in nature, the
court held that:
It had to consider whether the sale of shares amounted to the realisation of capital assets or the
disposal of trading stock in the course of carrying on a business.
51
Silke: South African Income Tax 3.6
Although the scale and frequency of the taxpayer's share transactions are not conclusive, they
are of major importance. In this case, the taxpayer entered into a significant number of share
transactions, which were almost, without exception, profitable. His annual profits from selling
shares substantially exceeded his annual dividend income.
-
ability of sales, especially of short-term shares.
Although the taxpayer testified that his intention with buying and selling shares was to invest in
shares, the court held that if one looks beyond the taxpayer's version of his intention to all the
facts, it is clear that the profits in question were not merely incidental to the taxpayer's investment
activities. The taxpayer had a secondary, profit-making purpose when he purchased and sold the
shares.
Since the taxpayer purchased shares for investment purposes, but contemplated dealing with the
shares for the purpose of making a profit, it cannot be argued that the profit from the sale of
shares is merely incidental. Since the taxpayer had no absolving dominant purpose, the profit
gained from his secondary purpose was of a revenue nature.
3.6.9 Realisation company
The taxpayer in Berea West Estates (Pty) Ltd v SIR (38 SATC 43) (1976 (2) SA 614(A)) was a com-
pany that was formed for the purpose of selling land. At the time of forming the company, the land
was held by a deceased estate and a trust. The administration of the deceased estate had been
running for 22 years and due to a number of reasons the estate could not be wound up. The
executors were pressed to finalise the estate and for this reason the deceased estate and the trust
transferred the land to a company so that the company could sell the land. The beneficiaries of the
deceased estate and the trust became the shareholders of the company and the proceeds from
selling the land were to be distributed to them. Prior to transferring the land to the company, the
executors of the deceased estate obtained approval to establish townships on the land. The town-
ships were only proclaimed after transferring the land to the company, but were subject to building
roads and a water supply before the individual plots could be sold. At the time the company was
formed, there were no obvious buyers for the land as a whole and the company decided to develop
the land so that it could be sold as individual plots. Over a period of 20 years the company devel-
oped a part of the land, sold the plots, and then used the money to develop a further area. The court
had to consider whether the receipts from selling the plots were of a capital nature. The court held
that:
Where a company is formed with the purpose to sell an asset (that is, a realisation company) and
does so at best advantage, it does not mean that the company traded for profit.
In deciding whether a company was merely acting as a realisation company or was carrying on
the business of trading for profit, one is
incorporation, and to its memorandum and articles, and to its subsequent conduct.
The court had to consider whether, on all the evidence, the taxpayer deviated from its original
intention and went over to trading for profit, and in that sense whether a change of intention had
taken place.
The fact that the taxpayer incurred a considerable amount of expenses in developing the
property over a period of 20 years was undoubtedly a factor to be taken into account, but should
not be considered in isolation. The taxpayer had to sell a very large piece of undeveloped land
and could only do so by subdividing the land and developing the property, which involved
spending a lot of money. But this does not in itself mean that the taxpayer was trading for profit.
The facts of this case should be distinguished from the Natal Estates case where the taxpayer,
with its elaborate and sustained scheme and expertise, did much more than merely realising a
capital asset to the best advantage. In the Natal Estates case, the taxpayer carried on a business
of selling land for profit on a grand scale, using the land as its stock-in-trade, which was not the
same in this case.
The taxpayer, a realisation company, merely sold the land at best advantage and did not change
its original intention to that of trading for profit. The receipts from selling the plots were of a capital
nature.
In CSARS v Founders Hill (Pty) Ltd (2011 SCA) the taxpayer was formed to acquire and realise sur-
plus land owned by AECI Ltd, which it held as a capital asset. The purpose of the taxpayer, as was
52
 3.6 Chapter 3: Gross income
evident from its memorandum of association, was to realise the land at best advantage. The court
had to consider whether the receipts from the sale of land were of a capital nature and held that:
It is an established principle in South African law that a taxpayer is entitled to realise an asset to
best advantage, and, in doing so, its receipts will be capital in nature. However, this principle
only applies to capital assets and the mere fact that a taxpayer refers to an asset as a capital
asset does not make it one.
The taxpayer was formed solely for the purpose of acquiring the property as stock-in-trade and
then conducted business in trading in the property.
activities in respect of the assets transferred to it) is not itself a magical act that inevitably makes
the profits derived from the sale of the assets of a capital nature. The court distinguished this
case from the Berea West case where it said that there was a real justification for the formation of
the realisation company (in addition to the purpose of realising the assets) without which the reali-
sation of the asset would have been difficult, if not impossible. Where a company was formed
solely for the purpose of facilitating the realisation of property that could not otherwise be dealt
with satisfactorily, the profit achieved on sale would be of a capital nature and would not be
taxable.
The taxpayer's profits were gains made by an operation of business in carrying out a scheme for
profit-making and was therefore revenue derived from capital productively employed and must
be taxable income.
3.6.10 Damages and compensation
In WJ Fourie Beleggings v C:SARS (2009 SCA) the taxpayer conducted business as a hotelier. The
taxpayer concluded an agreement whereby it would accommodate a substantial number of persons
over an extended period of time. For a number of reasons, this contract was cancelled and the tax-
payer received an amount of money in settlement of all claims it might have arising from the early
termination of the contract. The court had to consider whether the settlement amount received was of
a revenue or capital nature. The taxpayer argued that the contract itself amounted to an asset that
formed part of its income-producing structure and that the settlement amount had been paid for the
-earning asset and should be regarded as capital. The court held
that:
There is a fundamental distinction between a contract that is a means of producing income and a
contract directed by its performance towards making a profit.
Although the taxpayer stood to earn a great deal from the contract that was to form the major
source of its income during the period it lasted, this did not transform the contract into part of the
taxpayer's income-producing structure.
The taxpayer's income-producing structure was made up of its lease of the hotel and the use to
which the hotel was put. The contract under consideration was concluded as part of its business
of providing accommodation. It was therefore a product of the taxpayer's income-earning
activities, not the means by which it earned income.
The contract under consideration could not be construed as being an asset of a capital nature
forming part of the taxpayer's income-producing structure. That being so, the amount paid to the
taxpayer on termination of the contract was not capital in nature.
In Stellenbosch Farmers' Winery Ltd v CIR (2012 SCA) the taxpayer received compensation for the
premature termination of a distribution agreement. In terms of the distribution agreement, the
taxpayer had the exclusive right to distribute certain whiskeys in South Africa for a period of 10 years.
The sale of these products made a significant contribution to the profit during this time.
Due to a corporate structural change of the company that granted the distribution right, the taxpayer
agreed to receive a lump sum payment on early termination of the exclusive distribution agreement.
The court had to consider whether the amount received was of a capital nature. The court held that:
The exclusive distribution rights that the taxpayer had in terms of the distribution agreement were
a capital asset. As a result of the termination, the taxpayer therefore lost a capital asset.
Since the taxpayer did not carry on the business of the purchase and sale of rights to purchase
and sell liquor products, it did not embark on a scheme of profit-making. The compensation that
the taxpayer received for the impairment of the taxpayer's business by the loss of its exclusive
distribution right was a receipt of a capital nature.
The nature of a receipt for income tax purposes is not determined by the accounting treatment
thereof.
53
Silke: South African Income Tax 3.6
3.6.11 Isolated transactions
As mentioned above, the frequency of a particular transaction may provide a useful guide in dis-
tinguishing between income and capital. If the same type of transaction were concluded continu-
ously, it would be obvious that there was a scheme of profit-making and the proceeds would then be
income in nature and therefore subject to normal tax. Yet an isolated or once-off transaction is not
necessarily of a capital nature. The real test depends upon the intention behind the transaction and
on whether a scheme of profit-making is involved. A speculation in futures was held to be subject to
normal tax even though it was an isolated transaction. The court found that, although this transaction
(ITC 43
(1925)).
3.6.12 Closure of a business and goodwill
The proceeds derived from trading stock realised in the course of winding up a business are of an
-
y needs to be made as to whether the
proceeds were derived in the ordinary course of trade. Whatever amount is derived by the taxpayer
as a result of the disposal of the stock is in the nature of income and forms part of his gross income.
An amount received for the sale of the goodwill of a business is a receipt of a capital nature. This
will be the case if the seller originally bought the business in order to derive income from the carrying
on of that business, rather than for the purpose of reselling it at a profit. If the goodwill is a fixed
amount, it is capital in nature. It does not matter whether it is payable in one sum or in periodic instal-
ments.
The consideration for the sale of goodwill may, however, take the form of an annuity. In this instance
the annual payment is taxable in terms of par (a
The sales agreement should therefore contain a clear distinction in respect of the amount of the
purchase price representing the trading stock (income), the amount of the purchase price represent-
ing the business assets (capital), and the amount of the purchase price representing the goodwill
(capital, unless paid in the form of an annuity).
3.6.13 Copyrights, inventions, patents, trademarks, formulae and secret processes
The same tests as are applied to any other asset should be applied to determine whether a copy-
right, invention, patent, trademark, formula or secret process is of an income or a capital nature. The
outcome will depend upon the facts of each case.
Amounts received for the disposal of copyrights, patents, trademarks and similar assets by a person,
who originally acquired and has held such assets as an income-producing investment, are of a
capital nature. However, if the assets were acquired for the purposes of a profitable resale in a profit-
making scheme, their proceeds would be of an income nature.
3.6.14 Debts and loans
If debts are bought with the intention of collecting them at a profit, the receipt thereof is income in
nature. Some finance houses buy debts at a discount and then proceed to collect the outstanding
amount at a profit. This represents a profit-making scheme and the profit made on the collection of
the debts is therefore income in nature.
It may, however, happen that a profit made on the collection of debts is capital in nature. What often
occurs in practice is that a person buys a business as a going concern and, in terms of the agree-
ment, is required to buy the debts owing to the seller. If a greater amount is collected than what was
paid for the debts, the profit is capital in nature. Here the debts are not acquired with the intention of
deriving a profit therefrom. They are part and parcel of the business bought the intention is to gen-
erate a profit with the business, not to generate a profit from the collection of the debts.
When a taxpayer sells his business, inclusive of his debtors book, the amount received for the sale of
the debtors would generally be of a capital nature, notwithstanding the fact that a profit was derived
from the sale (of the debts).
54
 3.6 Chapter 3: Gross income
3.6.15 Gambling
If gambling activities are systematically undertaken, to the extent that they become a business or
scheme of profit-making, the proceeds are income in nature and therefore part of gross income
(Morrison v CIR (1950 A)).
If, however, the gambling activities are undertaken as a means of entertainment or hobby, the pro-
ceeds are capital in nature.
Remember
The intention of the gambler will again determine the capital or income nature of the proceeds.
Was his intention to entertain himself by gambling? If so, the proceeds will be capital in nature
and not part of his gross income. The gambler will, however, have to convince SARS that this
was indeed his true intention.
Amounts derived by racehorse owners and trainers are subject to normal tax where betting is a
regular practice.
It would be difficult for a professional punter and racehorse owner to distinguish his jackpot winnings
from his other betting activities. His winnings are subject to normal tax, because these activities are
so closely related to his business (ITC 214 (1931)).
In practice, SARS includes the results of betting transactions systematically carried on in gross
income. It is not the practice to tax ordinary punters on the proceeds of betting when they engage in
betting as a means of entertainment, but persons closely connected with racing and possessing
special knowledge, for example owners, trainers and jockeys, will usually be subject to normal tax on
the results of regular betting.
In terms of the practice of SARS, a bookmaker is liable to normal tax on his gambling activities if they
may be regarded as forming part and parcel of his business. His winnings from sweepstakes, lotte-
ries and racing jackpots would be included in his income.
3.6.16 Horse-racing
Racing stakes (prizes for the winners of the horse races) won by racehorse owners are subject to
normal tax in practice, if the activities carried on are undertaken for gain or in pursuance of a scheme
of profit-making, rather than a hobby.
3.6.17 Gifts, donations and inheritances
A lump sum or an asset received by way of a gift, donation or inheritance is capital in nature.
If the inherited asset is sold, that receipt is also capital in nature, unless the asset is sold in pursu-
ance of a profit-making scheme or as part of a business carried on.
Remember
Intention may change the recipient of an inherited asset may decide not to consider that asset
as part of his capital structure. He may decide to dispose of the asset in pursuance of a scheme
of profit-making.
3.6.18 Interest
Interest derived from a loan or investment of money is income in nature.
Remember
The capital investment is the and the interest is the thereof.
3.6.19 Restraint of trade
Payments received in respect of a restraint of trade are capital in nature.
In this instance, a person usually undertakes not to exercise a trade, profession or occupation in a
specified area for a defined period of time in return for some compensation. What he is selling is his
ability to generate further income; in other words, his capital structure. This represents the sterilisation
55
Silke: South African Income Tax 3.6
of a capital asset and is capital in nature (Taeuber and Corssen (Pty) Ltd v SIR (1975 A)). These pay-
ments are, however, expressly included in the gross income of certain taxpayers in certain circum-
stances in terms of par (cA) or par (c
It has been held that a consideration received by a garage proprietor from an oil company for under-
taking to become a one-brand petrol station, that is, to sell only the products of the oil company, is a
capital receipt. The court concluded that the garage owner in this case sold his right to also trade in
other products or brands. This represented a capital asset (ITC 772 (1953)).
3.6.20 Share transactions
Profits on share transactions are not only subject to normal tax if the frequency and volume of the
number of transactions are so great as to constitute the carrying on of a business. The intention with
regard to which shares are held will determine whether the proceeds on the sale thereof would be
classified as capital or income in nature. Like any other assets, shares may be trading stock. Profits
and losses resulting from share transactions are of an income nature if the shares were acquired for
the purpose of resale at a profit (Anglovaal Mining Limited v CSARS (2009 SCA)).
Conversely, shares may be held for a long period with the intention to derive dividend income. If
these shares were then disposed of, the proceeds would be capital in nature. Even where the
to
dispose of the shares at a profit if the dividend yield was unsatisfactory, the judiciary has taken the
view that the proceeds would be classified as income in nature (CIR v Nussbaum (1996 A)).
In the case, CSARS v Capstone 556 (Pty) Ltd (2016 SCA), the taxpayer disposed of shares in a
company that was acquired to rescue a major business in the retail sector. The court had to consider
intention at the time of acquisition of the shares was to make a strategic investment in a leading
company in the furniture industry as part of a large- -
whelmingly supported by the objective evidence). It was clear from the evidence that
decision to sell the shares was not foreseen (even though the shares were sold less than five months
after the acquisition date), as the circumstances that prevailed at the time of sale were materially
different from the circumstances prevailing when the obligation was incurred. The court held that it
was clear from the evidence that the first and primary purpose of the acquisition of the shares was to
rescue a major business in the retail furniture industry by a long-term investment of capital. The court
held that this involved commitment of capital for an indeterminate period involving considerable risk
and only a very uncertain prospect of a return and that this was consistent with an investment of a
capital nature that was realised sooner than initially expected because of skilled management and
favourable economic circumstances. It was not a purchase of shares as trading stock for resale at a
profit and the proceeds were therefore held to be of a capital nature.
For equity shares that are held by the taxpayer for at least three years, the receipt on the disposal of
the shares is deemed to be capital in nature (s 9C see chapter 14).
At times, it is difficult to establish the intention underlying certain share transactions, as illustrated by
the following discussion of specific cases:
share trusts
A controversial line of cases deals with the position of trusts created by employers as vehicles for
share purchase schemes designed to benefit their employees.
In loyee Share Purchase Trust (1992 A), the court held that the trust had no
intention of carrying on a business in shares, but operated as a conduit for the acquisition
d no profit motive and
did not act as a normal trader in shares would. Even if in a broad sense it was carrying on a busi-
ness, it was not a business carried on as part of a scheme of profit-making. While the trustees might
have contemplated the possibility of profits, it was neither their purpose to seek out profits, nor were
a by- refore capital in nature.
Portfolio in a collective investment scheme
There is no reason in principle why units held by a taxpayer in a portfolio of a collective investment
scheme should not be investigated for their income or capital characteristics in the same way as
shares. Therefore, if they are acquired and held for the purposes of a profitable resale in a scheme of
profit-making, any profits realised or losses suffered upon their disposal will be of an income nature.
56
 3.6 Chapter 3: Gross income

3.6.21 Subsidies

commodity, it is submitted that it is of an income nature. The subsidy becomes part of the floating
capital of the producer.
If the subsidy is paid as a contribution towards the cost of fixed capital assets, it is capital in nature.
For example, the Government may contribute towards the cost of a new factory or plant and
machinery. This is a capital receipt that is not subject to normal tax, unless specifically stated other-
wise by the Act.
Certain Government grants are exempt from normal tax (see chapter 5).

57
 4 Specific inclusions in gross income
Linda van Heerden

Outcomes of this chapter

After studying this chapter, you should be able to:

even though they may be of a capital nature, and support your opinion with the rele-
vant authority
demonstrate your knowledge in a practical case study (both in a calculation question
and a theoretical advice question).

Contents
Page
4.1 Overview............................................................................................................................. 59
4.2 Annuities (paras (a) and (d)(ii) of the definition of (gA), 10A
and par 2(4) of the Fourth Schedule)................................................................................. 60
4.3 Maintenance payments (par (b
10(1)(u)).............................................................................................................................. 62
4.4 Services (paras (c) and (n) of the definition of ss 8B, 8C, 10(1)(gC),
(nA) to (nE), (o) and (q) and s 57B) ................................................................................... 64
4.5 Restraint of trade (paras (cA) and (cB) of the definition of ...................... 67
4.6 Services: Compensation for termination of employment (par (d) of the definition of
and s 10(1)(gG)) ........................................................................................ 68
4.7 Fund benefits (paras (e) and (e .............................. 70
4.8 Services: Commutation of amounts due (par (f) ........ 70
4.9 Lease premiums (par (g) of the definition of s 11(f) and (h)) ................... 70
4.10 Compensation for imparting knowledge and information (par (gA) of the definition of
s 9(2)(e) and (f))........................................................................................ 71
4.11 Leasehold improvements (par (h) of the definition of s 11(h)) ................. 71
4.12 Taxable (fringe) benefits (paras (c) and (i) of the definition of ................ 72
4.13 Proceeds from the disposal of certain assets (par (jA) of the definition of
a), 22(8) and 26A) ................................................................................... 73
4.14 Dividends (par (k) of the definition of ss 10(1)(k) and 10B) ..................... 73
4.15 Subsidies and grants (par (l) of the definition of and par 12(1) of the
First Schedule) ................................................................................................................... 73
4.16 Amounts received by or accrued to s 11E sporting bodies (par (lA) of the definition of
................................................................................................................... 73
4.17 Government grants (par (lC) of the definition of and s 12P) ..................... 73
4.18 Key-man insurance policy proceeds (par (m) of the definition of ........... 74
4.19 Amounts deemed to be receipts or accruals and s 8(4) recoupments (par (n) of the
definition of ss 7, 8C and 24I)................................................................... 74
4.20 Amounts received in terms of certain short-term insurance policies (s 23L(2))................ 74

4.1 Overview

ted in paras (a) to (n) of the definition

income even though they may be of a capital nature. The other elements of the general defin-
ition also apply to the specific inclusions, except where otherwise stated. It is specifically provided

59