Capital gains tax tutorialsDiscussionGross incomeResident

“Residence” means any:a) Natural person who is

i. Ordinarily resident in the Republic; orii. Not at any time during the relevant year of assessment ordinarily resident in

the Republic, if that person was physically present in the Republic:A. For a period exceeding 91 days in aggregate during the relevant year

of assessment, as well as for a period or periods exceeding 91 days in aggregate during each of the 5 years of assessment preceding such year of assessment; and

B. For a period or periods exceeding 915 days in aggregate exceeding those preceding years of assessment

In which case that person will be a resident with effect from the first day of that relevant year of assessment provided:

b) Person (other than a natural person) which is incorporated, established in the Republic or which has its place of effective management in the Republic

But does not include any person who is deemed to be exclusively a resident of another country for purpose of the application any agreement entered into between governments of the Republic and that of other country for the avoidance of double taxation.

All the requirements of the gross income definition must be satisfied before an amount constitutes gross income. If one of the requirements is not satisfied, the amount cannot be gross income and therefore not subject to normal tax.

Definition in relation to any year or period of assessment In case of any resident, the total amount, in cash or otherwise, received by or accrued to or in

favour of such resident In case of any person other than a resident, the total amount, in cash or otherwise, received by

or accrued to or in favour of such person from a source within the Republic,During such period or year of assessment, excluding receipts or accruals of capital in nature

Special inclusion discussion Paragraph (a) to (n)

Issue Whether amount has been received by or accrued to

Apply principlesThe other requirements of gross income definition have been metTotal amount, in cash or otherwise Words cash and otherwise are not defined in the Act, thus we must look at case laws

Amount The term “amount” is not only money, but also every form of property earned by the

taxpayer, whether corporeal or incorporeal – Lategan. The question is whether the non-cash item received

o Can be turned into money or

o Has money’s worthThen it is regarded as an income – Delfos

Will not be included in gross income if cannot be turned into money or has no money’s worth

The first question is whether a receipt or accrual in the form of other than money has a money value – Brummeria Renaissance (Pty) Ltd & others

Cash Represents a cash amount received, it will be included in gross income

Or otherwise The onus rests upon the Commissioner to establish monetary amount of the item –

Section 102 of the Tax Administration Act The support for this submission is found in Butcher Bros The market value of the item received or accrued should be included in gross income

as it represents an amount that can be turned into money or has money’s worth – Lace Proprietary Mines Limited

The market value of such item should be included in gross income of the taxpayer on the date the asset was transferred - Lace Proprietary Mines Limited

Therefore the total amount included in gross income is equal to cash of …. and market value of …. of the non-cash item

Received by or accrued toWords received and accrued are not defined in the Act, thus we must look at case lawsAn amount is included in gross income at the earliest of date of receipt or accrual – Delfos Case

Received by For an amount to be received, the amount must be received by the taxpayer for his

own benefit and on his own behalf – Geldenhuys Amount received for own benefit if there is no legal obligation to pay over the money

– Witwatersrand Association of Racing Clubs Illegal receipts and ill-gotten gains are taxable - MP Finance Group Deposit received on its own benefit, should be included in gross income – Pyott Ltd Source of income is immaterial – Delagoa Bay Cigarette Co Amounts borrowed are not gross income because there is an obligation to repay the

amount – Genn & Co (Pty) Ltd Accrued to

Means entitled to – People’s Stores The right must be unconditional - Ochberg To accrue means unconditionally entitled to – Mooi

Excluding receipts and accruals of a capital natureIssue

Whether proceeds will be revenue or capital in nature, if capital in nature is excluded from gross income

The word capital is not defined in the act We therefore need to look at court cases An amount will be capital in nature or revenue in nature. There is no half-way house – Pyott A single receipt may be apportioned between its capital and income element - Tuck

Onus Rests on the taxpayer to prove that the asset is capital in nature – Section 102 of the Tax

Administration Act Support for this submission is found in Malon case

Fruit tree principle

“Income” is what is produced by “capital” – Fruit of a tree principle – Visser Tree produces many years of benefits – George Forest Timber Therefore

Income is produced by income-producing asset and will be classified as proceeds of a revenue nature

Sale of an income producing-asset will be classified as receipt of a capital natureIntention

At acquisition Whether the intention is seen as profit making scheme or not – Pick n Pay Employee

Share Purchase Trust Case o This indicates a revenue or capital intention

If facts indicate that the taxpayer has mixed intentions or alternative intention, identify the dominant motive – Paul 167 acres

o The dominant intention is income or capital During period of use How he intends to use it

o This indicates a revenue or capital intention History of dealing – Frequency of similar transactions

o This indicates a revenue or capital intention Continuity of transactions

o This indicates a revenue or capital intention Alternative intention – Overseas Trust Case

o This indicates a revenue or capital intention Period of use

o This indicates a revenue or capital intention Manner in which the transaction is financed

o This indicates a revenue or capital intention Nature of the taxpayer’s business

o This indicates a revenue or capital intention Documentary evidence

o Only one transaction could still be revenue in nature – Stephan Case Disposal of the asset Reason for sale

o This indicates a revenue or capital intention Not a change of intention

o Decision to sell – John Bello To sell at a profit – John Bell and Richmond Estateso Sell at a best advantage/entitled to sell an asset at highest possible profit –

Stotto The use of a realisation company does not change capital to revenue – Berea

West Estates Change of intention

o Discontinuing operations and start to trade – Lydenburg Platinumo If the Rubicon was crossed – Natal Estate

Conclusion Difficulty in satisfying the onus Therefore it will be capital or revenue in nature

General deduction formulaGeneral deduction formula

Expenditure and losses Actually incurred During the year of assessment In the production of income Not of capital nature

All the requirements of the gross income definition must be satisfied before and amount constitutes a gross income. If one of the requirements is not satisfied, the amount cannot be gross income and therefore not subject to normal tax.

Section 23 Must not be applicable

Application of principleThe other requirements of general deduction formula have been metExpenditure and lossesActually incurred

The term “Actually incurred” does not only mean amount actually paid but includes amount for which the taxpayer is legally liable – Port Elizabeth Electric Tramway

For an amount to be actually incurred there must be an unconditional liability for the payment of the amount – Nasionale Pers Bpk

An amount has actually been incurred when the taxpayer has an unconditional liability to pay it – Edgars Stores Ltd

Disputed expenditure can only be deducted in the year of assessment in which that outcome is resolved – Golden Dumps (Pty) Ltd

Amount paid – Represents amount actually paid Accrued expenditure – Include as it represent amount legally liable

During the year of assessment Expenditure can be deducted only in the year of assessment in which it was incurred, it cannot

be carried forward to a subsequent year or carried back to a previous year – Concentra (Pty) Ltd

In the production of income The phrase “in the production of income” not only refers to expenditure that actually

produced income but also encompass expenses so closely connected with the taxpayer’s income earning operations – Port Elizabeth Electric Tramway (Pty) Ltd

Expense – Represents expenditure that actually produced income Expense – Represents expenditure closely related to the taxpayer’s earning operations

Is the expense a necessary concomitant of business operations – Joffe & Co (Pty) LtdNot of a capital nature

Acquire, improve (enhance income earning capacity) or add to the income producing asset – Capital expenditure

Expenditure incurred to acquire an enduring benefit is capital in nature – Rand Mines (Mining & Services) Ltd

Acquiring a source of income – capital in nature

Critically evaluateTaxable income

Represents a taxable income in terms of gross income definition If received in advance/ for previous

Must be taxed in the current or was taxed in the previous period Taxed on the earlier of receipt or accrual

The correct amount Section 24C allowance

Deductible expenses Represents a deductible expense in terms section 11(a) If paid in advance/ for previous

Must be deducted in the current or was deducted in the previous period Deducted on the earlier of receipt or accrual The correct amount Section 24C allowance

Refund Cannot be taxed since there is an obligation to make the refund Not unconditionally entitled to the amount

Provisions Not actually incurred Not deductible

Sale of asset with allowances The recoupment:

Selling priceLimited to costLess tax value (Cost less allowance)

The CGT consequences must also be considered as the sale constitutes a disposal for CGT purposesCapita gain or loss:Proceeds (Consideration less amounts included in gross income)Base cost (Costs less allowances)

A replacement asset for voluntary disposals When the old asset are replaced with new computers, the requirements of section 8 (4) (e) and

paragraph 66 of the Eight Schedule be applied to determine the deferral of the recoupments and capital gains will be applicable

Therefore the amount of recoupment and capital gain deferred based on the new allowance over cost