Taxation Lecture Notes

 Get Williams 4th Edition (try 5th edition.) and the case book by Emsley. SILKE is available
electronically.

 In terms of section 5 of the Income Tax Act, you pay normal tax based on your taxable
income. So it is important to determine how you calculate the taxable income of the tax-
payer.
o The formula is as follows:

STEP 1 GROSS INCOME (exclude receipts and accruals of a capital nature)

Less Certain Exceptions from gross income (set out in section 10)* –
INCOME (half-way there)

STEP 2 INCOME
Less Deductions** –
TAXABLE INCOME

KEY: * Uniform from employer, dividends from companies, but this will change. At the moment you
do not pay for dividends because the company has to pay secondary tax on companies when
they declare dividends.
** We will focus on the general deduction formula in section 11(1) read with sections 23 (a) &
(b)

Topic 2: GROSS INCOME

2.1. The Definition of Gross Income
 Section 1 of the Income Tax Act defines ‘gross income’ as follows:
o In relation to any year or period of assessment, means –
(i) in the case of any resident, the total amount, in cash or otherwise, received by
or accrued to or in favour of such resident; or
(ii) in the case of any person other than a resident, the total amount, in cash or
otherwise, received by or accrued to or in favour of such person from a source
within or deemed to be within the Republic,
during such year or period of assessment, excluding receipts or accruals of a capital
nature, but including, without in any way limiting the scope of this definition, such
amounts (whether of a capital nature or not) so received or accrued as are described
hereunder…

2.2. Brief Explanation of Key Terms

 In relation to gross income, we will look at the following elements of gross income:
1. what is meant by a year or period of assessment;
2. the definition of a person;
3. what is meant by the term ‘total amount in cash or otherwise’
4. received by or accrued in favour of a person
5. receipt and accruals of a capital nature
6. what is meant by a ‘resident’;

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7. how a non-resident is taxed, e.g. if you are taxed in the UK, will you also be taxed in
SA.
 What is meant by a period / year of assessment?
o INDIVIDUALS and TRUSTS  The tax year is from 1 March of one year, to the last
day of February of the following tax year.
 For Example: 1 March 2008 to 28 February 2009  We will refer to this as say
the 2009 Tax Year.
o A COMPANY, a tax year will coincide with the financial year.
o If you die, then you will only have a period of assessment, and therefore not a year of
assessment.
 Section 1 of the Income Tax Act defines a ‘Person’ as:
o Including an insolvent estate, the estate of a deceased person and any trust;
 It will therefore also include a legal person such as a company or juristic persons
and natural persons.
 ‘Income’ is defined as: The amount remaining of the gross income of any person for any
year or period of assessment after deducting therefrom any amounts exempt from normal
tax.

2.3. ‘Amount, In Cash or Otherwise, Received By or Accrued To’

 The Definition of ‘total amount, in cash or otherwise’ is as follows:
o Prior to the Lategan v CIR, the definition of read: ‘total amount’.
 ‘Cash or otherwise’ was not there. Cash is easy: the amount (e.g. salary) that you
would receive is included in your gross income.
 For Example: John makes cupboards and his company is called Crafty Cupboards
CC. for a June 2009 yearend, he must include receipts and accruals from 01 July
2008 to 30 June 2009. He makes the cupboards and Southern Sun goes to him on
20 June 2009 and takes his entire supply of cupboards and says that they will pay
John 1.5 Million. But they pay him R1 Million by the end of June. Then R100 000
each month from July.
 What must John include in his tax return for June 2009 because there are
some amounts that he will receive after June 2009.
 The definition says ‘during any yearend or period of assessment’  the 1 Million
is included because it is cash that he had received, what about the R 500 000…

 Lategan v CIR 1926 CPD 203

 FACTS: Lategan was a wine-farmer, and he had a June year-end. un
 On appeal in 1926 in the CPD, the court was asked to identify whether the amounts the
farmer received after June 1920 be added to his gross income, and if so at what value.
 Was it included at the full value, or at the market value?
 HELD: the court said that you can postulate the situation that an accrual can take place
in year 1 and a receipt of the same amount in year 2, the intention of the legislature uis
not to tax you twice.
 The court said that income is something you receive by your work, your wits, or
the employment of your capital (i.e. a manufacturer employs his machines to make
stuff) and the rewards that you get can be in cash, or in some form of corporeal
property or rights.
 IMPORTANT: The most important part of the decision is the following: the definition
only read ‘amount’ not ‘cash or otherwise’.
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 The judge said that an amount must be given a wider meaning and must not only
include money, but the value of every form of property earned by the tax-payer,
whether corporeal or incorporeal, where it has a money value.
 The judge said that you include debts as well as rights of action.
 So at the end of June, Lategan had a right of action against the association to which he
belonged.
 The second part the court had to decide was at which value: the court held that you
have to deduct something form the face value of the amount because it was not
immediately enforceable.

 Prior to the Lategan v CIR decision the definition of gross income read only ‘total amount’
and did not include ‘without cash or otherwise’; however, Lategan v CIR changed this to
include income that was not only cash.
o The principle is as follows: If at the year end there are amounts outstanding (such as a right
of action) then that right of action (i.e. Debts owed) must be included in the tax return,
even though the right of action is not immediately enforceable
o For example: Revolving credit:
 December 2008 R12 000 spent
January 2009 R2 000 paid back
February 2009 R2 000 paid back
 Edgars has a year end in February. The R4 000 paid back is included in the return
as it is cash received, however what occurs with the R8 000?
 R8 000 is a right of action and therefore ought to be included in the return.
Lategan v CIR judgement read that at the financial year end any form of
property that is earned, provided it has a money value, ought to be included.
o Something cannot be excluded even though it is not immediately
enforceable

 CIR v People’s Stores (Walvis Bay) (Pty) Ltd 1990 (2) SA 353 (A)
 FACTS: People’s Store was a subsidiary of Edgars and in 1983, it sold goods to the
value of R1.3 Million; however, at the financial year-end, there was R300 000 still
outstanding.
 ISSUE: The R1 Million was included because it was an amount already received,
however the issue for the court to decide was whether the R300 000 should be
included.
 HELD: It is not only cash that should be included but any property as long as a
monetary value can be attached. The court recognized that in commercial
transactions, it is not only cash that changes hands as there are also shares that could
be exchanged, or a company could be paying rent instead of a portion of salary, etc.
 These things are also included in gross income as there is a value of the property
which has a monetary value. Therefore, money is not the only medium in
commercial transactions
 Income in a form other than money must be of such a nature that a value can be
attached to it.
 Although it is sometimes difficult to determine that amount it does not mean that it
will not be included; that will depend on the nature of the transaction.
 IMPORTANT DICTUM: Any right acquired by the taxpayer to which the monetary
value can be attached forms part of income irrespective of whether it is immediately
enforceable or not, but the value is affected if it is not immediately enforceable.

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 The outstanding instalments constitute a right of action and if that right of action
cannot be turned into money it is not regarded as income.

 The People’s Stores judgement and the provision that enforceability of the debt should be
taken into account did not favour SARS and so the Act was amended and a proviso was
inserted in the definition of gross income.
o This proviso read as follows: ‘If during a year of assessment a taxpayer becomes
entitled to an amount, he/she/it must include that amount.’
 I.e. Any amount received or accrued to by the taxpayer will be deemed to have
accrued to him (included at full value not at face value) which falls after the year
of assessment.
 Both Lategan and People’s Stores are authority for the fact that you will include the thing
if you can attach a value to it.

 CIR v Butcher Brothers (Pty) Ltd 1945 (AD) 301

 Facts: Butcher Brothers was a partnership that entered into a lease with LSC in 1926
for certain property in Durban. In terms of the lease, the lessee had to demolish an
existing building on the property valued at £15 000 and erect a movie theatre, but that
it could not cost less than £55 000.
 This was carried out and the movie theatre was completed in 1936, amounting to a
value of £55 000.
 Butcher Brothers sold the rights it had in the lease to Butcher Brothers Company.
Butcher Brothers wanted to include the value of the building in the gross income of the
company but there was a lease for 50 years still in existence and Butcher Brothers
would only become owner of the property after such time.
 The only income that Butcher Brothers received during that time was from rent.
 ISSUE: Should the £55 000 be included in the tax return?
 Even though the building had a monetary value there is no right of action to it
because Butcher Brothers could not even use the building.
 HELD: The court said it was impossible to ascertain the value of the building in 50
years time and therefore it could not be included in gross income.

 The Income Tax Act was then amended to include paragraph (h) in the definition of
Gross Income: ‘If you are entitled to lease-hold improvements, then they must be included
in that value.
o Here they would have included the £55 000.
o IMPORTANT: If there is no ascertainable monetary value it is not included in gross
income.
 In terms of section 82 of the Income Tax Act, the taxpayer has the onus of showing an
amount should not be included or that he is entitled to a deduction, but from Butcher
Brothers we see that if we are uncertain as to what the amount is, SARS bears the onus of
showing that amount accrued to the taxpayer.
 In terms of section 11(h), the lessor will get an allowance based on the value of the
improvements. (FROM 22 JULY)
o The car will take into account the length of the lease, must the property be handed
back in a reasonable condition.
 We will know look at whether you take an objective or subjective approach in determining
the amount.
NOTE: When a taxpayer receives shares: this is also included as gross income

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 Ochberg v CIR 1931 AD

 Here the court was divided as follows: 3 judges:2 judges.
 FACTS: Ochberg held almost all the shares in a company, except for 6 shares that
were issued to family companies that were related to him.
 The court disregarded these shares because of their small number and held that
Ochberg would basically hold all the shares in the company.
 Ochberg then rendered services to the company, but instead of the company paying
Ochberg in cash, they decided to rather give him additional shares.
 In other words, if the company had issued 5 000 shares (with Ochberg holding 4 994
shares) but it had a capacity to issue 10 000, it simply issued the other 5 000 shares.
 As a result he held almost all the share capital. Prior to the rendering f the
services, held all the shares; and hen after rendering the services, he still held all
the chares.
 ISSUE: The court had to decide whether the additional shares should be included in
the gross income: Lategan and People’s Stores says that as long as the receipt or
accrual can be ascertained in a monetary value, it will be included in gross income.
 So did Ochberg receive an amount in terms of ‘cash or otherwise’ in the act?
 HELD: the court said that the in light of the fact that he held all the shares prior and
after the service he rendered, to include anything would be a fictitious.
 The court did concede that if the shares were given to someone else, then they
would have been included in that person’s income.
 The court then said that these are not the facts; Ochberg held the shares and he
continued to hold all the shares.
 The important test used by the minority was: did the transaction add a penny to his
MINORITY

estate?
 The minority said that he did not receive any benefit; the additional shares did not
add anything to the tax-payer’s estate.
 They therefore took a SUBJECTIVE APPROACH.
 The majority said that Ochberg took the shares in return for services rendered. These
MAJORITY

shares would have a monetary value in the hands of an independent tax-payer, s the
individual taxpayer is irrelevant.
 The majority judges took an OBJECTIVE APPROACH in determining whether there
was an amount, and therefore the facts and circumstances particular to the taxpayer are
irrelevant
 De Velliers JA: I am by no means satisfied that there is no benefit to Ochberg,
because if there was no benefit, then why would he have entered into the
agreement; and then why should he escape income tax merely because a
mathematical computation shows that before and after the rendering of services,
he held the same amount of shares.
 SUMMARY: this case is authority for the principle that you take an OBJECTIVE
APPROACH in determining a value, and the identity of the taxpayer does not change
the identity of the receipt.

 Stander v CIR 1997 (3) SA 617 (C)

 Stander was a bookkeeper that worked for Frank Voss. F was a franchise dealer who
was part of the Delta Motor Corporation. Every month S had to repair management
accounts for D in relating to F. D was so impressed with S and the manner that he did
his work that they gave S a holiday: they also gave this same type of holiday for some
of the employees who also worked for D.

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 So for several days they could travel through England, France and Switzerland
without paying anything.
 If S did not go on the holiday, he would lose it; he could not exchange the prize
for cash either. He was not given vouchers; but when the time came to go on the
holiday, they were met by a manager from D.
 Also, when he went on the holiday, he had to take leave from F as well.
 In 1998 the holiday was worth R14 000.00, the commissioner included the value of
this holiday in S’s gross income because he said that S had received a holiday worth
R14 000.
 S said that he did not receive an amount because he could not exchange it for
money.
 Latergaan, and People’s Stores say that ‘the amount’ must be ascertainable in
money.
 ISSUE: Should the holiday be included in his gross income?
 The court found that in S’s case that he did not receive anything that can be turned into
money.
 The majority said that the amount that he received was of a capital nature, so you will
not be taxed, but section 1 paragraph (c) says that some things may be included in the
gross income even if they are of a capital nature: but this paragraph also says that there
must be an ‘amount’.
 Paragraph (c) defines ‘gross income’ as including ‘any amount, including any
voluntary award, received or accrued in respect of services rendered or to be
rendered or any amount … received or accrued in respect of or by virtue of any
employment or the holding of any office  subject to certain exceptions.
 The court confirmed that Latergaan and People’s Stores were authority for the idea
that receipts of a capital nature must have a monetary worth, and here S did not receive
an amount.
 The CPD said that because he was not able to exchange it as it was not something
that could be turned into money. The CPD rejected the special court’s argument
which said that you would include it in the gross income because it is something
available in the market place.
 The CPD also said that just because Delta paid R14 000 for the trip, you cannot just
include this as the amount.
 THEREFORE: the CPD took a SUBJECTIVE APPROACH and looked at S’s
particular circumstances.
 Also remember that paragraph (c) says that if there was an amount that was received
from your employment it is taxed: S worked for Frank Voss and not for Delta and
Delta was the one who gave him the prize.
 The commissioner did not mention the Ochberg decision at all, but it should have.

 CSARS v Brummeria Renaissance (Pty) Ltd (2007) 69 SATC 43 (A) (says that the Stander v CIR
decision was incorrect)
 PRINCIPLE: This case settled the position. Here the court took a subjective
approach, and the court criticised Stander v CIR.
 In this case B was a developer who built retirement villages but needed cash to build
these villages. It therefore raised funds in the following way: they told the potential
occupants to give them an interest-free loan in exchange for a life-long right to that
unit. The loan would then be repaid by B when that person died, or they would pay it
to their estate.

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 The total amount that they got in the end was about R100 Million. B was also not
able to cede the loan t someone else, and thus earn the interest of say 13% r
whatever the rate would be
 SARS was not happy about this and then attacked B on the basis that B would be taxed
not on the value of the interest-free loan, but rather on the value that B would have aid
a bank it B had gone to a bank and taken out a loan on R100 Million; as B was getting
the benefit of an interest free loan and so will be taxed n the value of a R100 Million
loan.
 B said that they could not turn the loan into money because f the clause that prevented
them from ceding the loan.
 SARS did not tax the taxpayer n the R100 Million: the case CIR v Genn says that
a loan of money will not be included in gross income because there is an
immediate obligation to repay that.
 The court then said that B had the right to use that loan, and therefore you could put a
value on that loan, and this would be interest-free. The fact hat you can turn it into
money is not the test, it is indicative of the value of the benefit.
 The court sassy that there is an AD decision saying that you must take an objective
approach in determining whether there is an amount.
 The taxpayer said that this is notional income, and Ochberg’s minority said that you do
not tax fictitious income: the court said that B has the benefit of using the loan interest-
free.
 CRITICISM: Did this mean that all interest free loans are taxable??
 What the court actually said is this was not the intention of the court: B would
receive interest-free loan in exchange for something, it was not just an plain
interest-free loan for something such as getting a loan for education from youth
parents.
 All the court had to decide was whether there was an amount. In terms of the rules, the
valuation of the amount was not attacked (the basis of the valuation).
 Here the taxpayer did not object to the fact that B would be taxed on that amount
every year.
 Based on the facts before the court, CSARS v Brummeria Renaissance was a correct
judgement. It is not authority for the fact that every loan that is made interest free is
taxable.
 Download from sars.gov.za – there is a legal and policy link, open draft interpretation
notes and click on 2008, SARS issued a draft interpretation note putting this case
(Brummeria) in perspective. It sets out a formula but you do not need to know this for the
exam.

 When looking at an agreement, if I render services to you and the agreement says that the
value is R 10 000, but this value must be used to subscribe to the company for shares
 CIR v Hersov (1952) SATC 20 (A)
 FACTS: There were to directors that waived their right to permanent directorship and
the company said they would pay them £6 500. The directors bound themselves in an
agreement that they would use the money to subscribe for shares.
 ISSUE: The court had too decided whether to include the value of the shares or the
value of £6 500? What will the directors be able to sue for shares or the £6 500?
 HELD: The intention of the parties was that no money would pass. Only the share
certificates would pass and therefore the shares were valued at market value.
 The court however found that the receipt of the shares was of a capital nature.

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 Lace Proprietary Mines Ltd v CIR 1938 AD 267

 FACTS: The taxpayer disposed of mineral rights to a company. The company then
stated that they would pay them R 500 000 for these rights but instead of giving cash
the company said they would have to subscribe for 1 million shares of 50c each. They
entered into the agreement on 29 November 1933. at the time of subscription the
shares increased in value and they were now R 1.20.
 ISSUE: What should be include the agreed amount of R 500 000, 1 million shares at
50c or the shares valued at R 1.20?
 HELD: The court held that neither the purchaser nor the seller could not elected to
discharge the obligation by giving the R 500 000 in cash. The seller could also not
demand cash. The purchaser was entitled and obliged to deliver the shares in terms of
the sale agreement.
 The consideration must be valued (shares) and the termination of the consideration
cannot affected by reference to the R 500 000 or the nominal value of the shares,
you must look at what the actual value of the shares are because that is what the
seller receives.
 The court took cognizance of the fact that one could not flood the market with 1
million shares thus SARS took the average price of the shares one month after the
agreement and attached that value to the shares.
 PRINCIPLE: When consideration is given by way of shares, those shares must be
valued. The method of valuation must be reasonable, the value would be the amount
that could be obtained on the market if the shares were sold on an arm lengthens basis
(willing buyer and seller).
 Mooi v CIR 1972 (1) SA 675 (A)
 FACTS: M was an individual taxpayer and he was a mine secretary. On 25 July 1963
he entered in an option with his employer that as soon as the mining company had
completed the mine in the district, then 6 months later M could acquire 500 shares at
R1.25 each provided he was still an employee or is contributing to the working of
the mine.
 In 1 March 1966 the mine is completed. 6 months later 1 September 1966 he
acquires the 500 shares @ R1.25 each. 3 years later these shares are valued at
R6.40 each. He made a profit of R 2575.00 which SARS wanted to include in his
gross income.
 Importantly the mine was a listed company.
 The taxpayer said that SARS had the right to include the right he had to subscribe to
the shares in 1963 in his gross income. the court held that this is wrong all that
happened in 1963 was that he out up the machinery to create a benefit later on. In 1963
the right you had could not have a value attached to it, because there is nothing that
binds you to stay in the employment of the company and thus the option had no value
due to the conditions attach to it. In 1966, they included the R 2575 profit in his gross
income due to paragraph (c) in the Income Tax Act. Paragraph c – office of
employment.
 NOTE: After this case SARS amended the Income Tax Act, by inserting paragraph
h(a), which states that if you have a right to an option that you can exercise in the
future and when you exercise this option if the shares have increased in value, you will
be taxed on the difference in the value between the price in the option and the value
when it is exercised.
What would impact the value of shares in a private company?

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 You would have to look at the balance sheet to determine the value of the shares. shares
are not freely transferable and often they have to be offered to other members /
shareholders in the company. You can look at the value of other shares recently disposed
of. You would have to determine if those shares are CUM or EX dividend.
 SILKE says if it is impossible to value shares the court and SARS can look at the nominal
amount (price they were issued for). Read ITC 932.
SUMMARY: WHEN TO YOU DETERMINE THE VALUATION?
 Ochberg, Mooi, Lace and Hersov says that you must look at the date of the agreement.
(Group A)
 People store’s and Lategan looked that the year-end value.
 The main distinction between the 2 is that in Group A, when receipts or accruals are by
way of shares you look at the date of agreement and if it by way of a right of action then
you look to the year end.
o What is meant by received or accrued: last week and Monday.
 The tax year for an individual: The tax year will be from 01 March 2008, to 28 February
2009. A company’s tax year coincides with their financial year.

2.3.2. WHAT IS MEANT BY THE PHRASE ‘RECEIVED BY…’:

 Latergan v CIR lays done the principle that you do not pay tax on the same amount twice.
 Receipts must be received on your own behalf and for your own benefit: See Geldenhuys v CIR
1947 (3) SA 256 (C),
 Geldenhuys v CIR 1947 (3) SA 256 (C)
 FACTS: Mr G executed a will and in terms of the will Mr G received a usufruct on a
flock of sheep.
 This meant that Mrs G would have the use and enjoyment of the flock of sheep,
when her husband passes away. She, in turn, must ensure that there are the same
number of sheep to pass on to her children. She would not be allowed to dispose
of the asset
 In the late 1920’s there was a great depression and a big drought and this caused some
of the sheep to die as did her son. So Mrs G decided to give up farming. Her children
agreed to allow her to sell the sheep and the money went into her back account and she
enjoyed interest in it.
 The money did not belong to her, it belonged to her children she was entitled to
the fruits of the sheep, and then these were sold, the children owned the money,
but she got the fruits of the money.
 SARS wanted to tax her on the proceeds.
 HELD: The court that because the number of sheep were less when she got the sheep
from when she sold it, she did not earn a thing,
 The proceeds of the sale were for the benefit of the bare dominium holders and
had not been received by the tax-payer (Mrs G) even thought the proceeds were
paid into a bank account.
 What the court said the tax payer would have received for her own benefit would be an
increase in the flock of sheep, in that the fruits legally belong to the usufructory.
 IMPORTANT: Received in terms of the gross income definition means ‘received
by the tax payer for his own behalf and for his own benefit.’
 Holley v CIR 1947 (3) SA 119 (A)

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 H was very poor and his uncle and father were in a farming partnership, but his uncle
passed away and because he did not have children he left everything to H. This uncle
also had a wife and told H to pay his wife an annual annuity a fixed amount of £700
and a yearly amount worked out on a sliding scale according to the profits from the
partnership.
 SARS taxed H on all the proceeds on the partnership and H raised an objection that
there was a fideicommissum, where he did not get all the profits of the farm, as part of
the profits were paid to H’s aunt.
 The court looked at H’s background and said that before the bequest of his uncle, H
actually did not have anything and his life was insured for such a small amount that he
only paid £24 per annum.
 The court then said that his H did not have the money to pay his aunt and therefore
H had to pay this aunt from his inheritance and not his private means.
 HELD: The court held that amounts received subject to a fideicommissum, in favour
of a third party do not constitute ‘receipt’ for tax purposes of the tax payer because
they are not received in his personal capacity and is the income of another.
 Receipts and accruals must be in his personal capacity.
 A fideicommissum is a legal institution in terms of which a person (the fideicommittens)
transfers a benefit to a particular beneficiary (fiduciary) subject to the provision that, after
a certain time has elapsed or a certain condition (usually death) has been fulfilled, the benefit
goes over to a further beneficiary (the fideicommissary).
o I.e. a fideicommissum is a legal Institution where a person (A) leaves or transfers a
benefit to a beneficiary (B), subject to the provision that after a certain period of time
or after a certain condition is fulfilled the benefit would go to a further beneficiary (C).

 CIR v Genn and Co (Pty) Ltd 1955 (3) SA 293 (A)

 FACTS: The taxpayer was a hardware and timber merchant. He bought some of his
stock locally and some of it internationally. He got financing for some of the stock who
charged his about 18% interest.
 He decided to try and raise the funds locally through short-term loans. He told a
company to go and get the loans and he would pay them 10% (this was in terms of a
raising fee). As a result of the short-term loans, he even got discounts locally.
 ISSUE: The case dealt with whether Genn was entitled to this deduction of 10%. The
court had to decide whether the loans should be included in his gross income.
 IMPORTANT PRINCIPLE: Not every obtaining of physical control over money or
moneysworth constitutes receipt for the purposes of gross income.
 HELD: The court said that where money is banked by someone as agent or trustee for
another, then the agent has not received it as his income.
 Borrowed money is not relieved by the borrower within the meaning of gross
income, since at the same moment that the borrower is given possession; he falls
under an obligation to repay.
 The court said that even for the purposes of the wide interpretation of gross income,
money borrowed cannot be regards as income received in cash or otherwise, than a
farmer who borrows a tractor to plough a field.
 PRINCIPLE: When you receive a loan and have an immediate obligation to
repay, then the amount will not be included in gross income.
 Greasers (SA) Ltd v CIR 1951 (3) SA 518 (A)

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 The tax-payer (G) sold grease and prior to 1942 he did not charge his customers for the
price of the drums, it was included in the purchase price. There was a problem with the
supply and he began charging £1 per drum as a deposit and then increased it to £2.
 The drums always belonged to G and the customers never gained ownership of the
drums.
 All this deposit money was used by Geasers in his normal business, so SARS taxed G
on the deposits.
 The deposits were not paid into a trust account,
 ISSUE: The issue before the court was whether the deposits should be included in his
gross income?
 HELD: The court held that the deposits were not received by G as trustee for the
customers. The tax-payer received the deposits for his own benefit. The TP used the
deposits in its own business, and the fact that the money was not deposited into a trust
account influenced the court into saying that the deposit money should be included in
gross income.
 The court also said that the tax-payer also mixed the deposits with his own money
and used it for any purposes that he saw fit.
 When the customer came back with the empty drum, he would have had to repay
the deposit, but SARS would have allowed him the deduction.
 PRINCIPLE: When you use money / funds for your own benefit, then it is
included in gross income.
 COT v “G” 1981 (4) SA 167 (ZAD) (Zimbabwean Case)
 FACTS: G was a tax payer who held a responsible government position in Zimbabwe,
and he received money from the government that had to be used for specific purposes
that were outlined to him.
 Sometimes he received more money than was necessary, and in the words of the court
he ‘appropriated the excess’ for himself (i.e. steal it) and he was convicted of theft.
 COT (their CIR) included the stolen money in his gross income
 ISSUE: Should the proceeds from theft be included in a person’s gross income?
 Principles: Did the thief receive the money for his own benefit?
 HELD: Here the court said no, he had received it on behalf of the government. The
court said that you must look at both the intention of the person receiving the
money, but also the intention of the person paying the money over.
 The court looked at the ordinary dictionary meaning and said that a thief does not
receive, he takes.
 MP Finance Group CC (In Liquidation) v C:SARS 69 SATC 141
 FACTS: M ran an illegal pyramid scheme, people deposited money with her and she
would make them promises of huge returns. This worked for a while but then the
scheme collapsed, and was then liquidated.
 There were a lot of pensioners who lost everything. They did receive some of their
money back, but SARS still wanted to tax the company on the proceeds at 30%
 ISSUE: The court had to decide whether the deposits included by the investors should
be included in the gross income of MP.
 HELD: The court held that an illegal contract can have not only illegal consequences,
but it also has fiscal consequences as well.
 The court said that at the time that the deposits were made, MP knew that the
scheme was insolvent, that it was fraudulent, and that it would be impossible to
pay all the investors what they had been promised.
 The tax-payer took the view from COT v “G” saying that she had received it, but that
she was under an immediate obligation to repay it.

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 The court said that even if this was the case, those amounts were received by the
operators of the scheme with the intention to retain them for their own benefit; and that
they never intended to repay anything.
 From Insolvency law, SARS have a prevent claim over other creditors.
2.3.3. WHAT IS MEANT BY THE PHRASE ‘ACCRUED TO…’:
 Latergan v CIR 1926 CPD 203:
 FACTS: L was a wine farmer who disposed of his whole stock of wine He had a
contract with the association with which he belonged to dispose of all his wine he
made up until June 1920. He received an amount before June 1920 and he received the
balance after June 1920.
 SARS said that he had to include the balance he would receive after June 1920.
The Special Court Held that Lategan had to include the amount that he received
after June 1920. Lategan was not happy so he appealed.
 ISSUE: Should the instalments payable after the year-end be included for the income
of the previous year of assessment
 The question was whether the instalments outstanding at year end accrued to the
tax-payer at the year end.
 Remember that the definition says ‘received by’ or ‘accrued to’.
 Case of SIR v Silverglen Investments says that what happens first will be included
in the amount of the gross income
 HELD: The court said that accrual takes place when a tax–payer is entitled to an
amount. One becomes entitled when he acquires a right to it (when the income
becomes due to him, even though it is not yet payable)
 In this case, what had accrued was not the amount and but rather the right to claim
payment in the future.
 You would take something away from the face value if you say that it is not
immediately enforceable.
 As long as there is something due to you, then there is an accrual.
 NOTE: The court concluded that the present value of the right must be included in the
gross income  this would be a lesser amount that the face value of the debt in order
to take into account the fact that the debt was not yet payable
 WILLIAMS (an academic): he says that there is an accrual once it is due to you!

 CIR v Delfos 1933 AD 242

 FACTS: Here there was a Managing Director who worked for a company and the
company did not have enough money to pay him. So for 5 years the company put the
amount due to him down on its books and did not pay him. But then the company paid
him the total amount due to him.
 The CIR wanted to tax the TP on the full amount after the 5 years.4
 One judge agreed with the first part of Latergan v CIR: that ‘accrued to’ meant that the
person had become entitled to the amount, that he had acquired a right to it.
 Two judges said that there is an accrual only when a debt is both DUE and PAYABLE.
 PRINCIPLE: Thus the ‘Delfos Principle’ is that a debt accrues when it is not merely
due, but when it is due AND payable.

 For Example: If I say that I will pay you R23 000 on 30 September 2010:
o According to Latergan: You take it at present value, so there is an accrual.

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o According to Delfos, There is only an accrual in 30 Sept 2010 (when the amount is due and
payable).

 CIR v People’s Store 1990 (2) SA 353 (A) (this clarified the issue)
 This says that for an accrual, no more is required than the person has become entitled
to the amount in question. I.e. an amount does not have to be ‘due and payable’: we
must look at whether the taxpayer is entitled to it.
 This affirmed both legs of the Latergan Principle: therefore only when the amount
is due.
 As long as you have a right in that year of assessment to which you can attach a
monetary value, there will be an accrual.
 You must be able to attach a monetary value to it (from Butcher Brothers).
 The right acquired by the taxpayer during the year of assessment and to which a
money value can be attached forms part of the gross income irrespective of whether it
is immediately enforceable or not, and it must be included at face value.

 Cactus Investments (Pty) Ltd v CIR 61 SATC 43 (A): (Important Case)

 FACTS: C was a company within a group of companies and it made certain
investments and loans. It was therefore entitled to interest from these loans, so it
devised a scheme because within the group of companies there was a non-taxpaying
entity (B).
 Note that a pension fund is a non-taxpaying entity.
 C said that they would cede the right to claim interest to that interest free company,
and then they would cross-cede the right to pay interest to C.
 If you receive dividends, you do not pay tax on it. This falls under except income.
But note that Cactus would have had to have paid tax on interest.
 But it entered into this agreement with company B after it had already made the
investments and the loans.
 SARS said that they were already entitled to the interest when they entered into the
agreements, but C said that every year there was a right to receive interest until the
amount was paid to them.
 ISSUE: Was C entitled to the interest when they made the investment, or were they
entitled to the interest each year?
 When does the accrual of the interest take place?  If it was before the cession,
then there would not have been a problem.
 HELD: C lent a fixed sum of money to the borrower for a fixed period at a fixed rate
of interest and the borrower undertook to repay the capital amount plus interest on a
fixed day.
 The court then said that C only had one obligation: to make the money available to
the borrower. It does not have a continuing obligation in each year of assessment
to make the money available. As such, the taxpayer had an immediate,
unconditional right to claim payment in the capital amount plus interest.
 I.e. the minute that you transfer the loan to the debtor, then there is accrual.
 The court said that you can cede the right to interest, but if the accrual has taken place,
then you can be taxed on it as it will remain in your gross income.
 IMPORTANT: A lender of money becomes entitled to the right to receive interest on
a stipulated future date as soon as he had made the funds available
 Contrast with Brummeria Renaissance: where SARS taxed the investment for every year
of assessment. While Cactus tells that there is accrual the moment that you make the loan
available.

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o So Brummeria Renaissance should have been taxed at year one.

 PRINCIPLE: The minute there is a receipt or an accrual ,and you then divest yourself by
way of a cession or transfer, then it will remain in your gross income if it have divested in
your gross income

 GUD Holdings (Pty) Ltd v C:SARS (1999) 69 SATC 115 (N)

 FACTS: G was a manufacturer and distributor of motor car parts and most of his
customers were wholesalers. He had an agreement with all his customers that if they
paid him before the 25th of every month, then they could take a 10% discount.
 The court looked at the fact that nearly all the wholesalers would pay before the
date and pay the discounted amount. The wholesaler would pay the discounted
amount
 G had a June year-end and at the end of June, it took R4 Million, and G knew that the
wholesalers would pay less 10%. SARS said that what they were entitled to was the
full R4 Million and not the amount minus the discounted amount.
 ISSUE: The court had to decide what had accrued to the taxpayer in its June year end.
 HELD: This discount was an incentive and G would only be entitled to the full
amount if his customers paid after the 25th, and therefore not in time to claim the
discount.
 The court looked at the agreement and said that the agreement that G entered into
with the wholesalers was not really a discount scheme. The court said that it was
more of a ‘penalty payment’ that would be added to the amount.
 For Example: G could say that if his clients were late, he would then charge
interest as a penalty.
 Here G would not be entitled to interest if the client paid in time.
 What had accrued was the amount on the invoices, minus the discounted amount
because he was not entitled to that amount.

 NOTE: If your agreement or entitlement is conditional, then there is no accrual. So

entitlement must be unconditional for accrual to take place (Mooi v CIR 1972 (AD))
o In Mooi, shares had to be acquired when the mine was completed and on condition that
he was still an employee. M had the right in 1933 that he would be entitled to certain
shares only when certain conditions were fulfilled.
 If there is a condition attached to something, then it would not have accrued. Once
the condition has been fulfilled, then you will be taxed on it the following year.

 Ochberg v CIR 1933 CPD 256

 FACTS: The Taxpayer sold properties, and he took a deposit and amounts had to be
paid to him in instalments. At the year-end, he said that he was not entitled to the
instalments.
 HELD: The court NO, this was because there was no condition attached so there is an
unconditional right.
 For Example: Transfer will take place provided you get a bond

2.3.5. MORE ASPECTS OF ACCRUAL:

a) DISPUTED CLAIMS:
What happens if there is a disputed claim between two people?

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 BC v COT 21 SATC 353

 FACTS: Here the taxpayer and his brother were in business together, the taxpayer was
entitled to a portion of there profits as well as a salary.
 The court said that the brothers quarrelled continuously. In August 1953, the brother
asked the taxpayer to vacate the premises.
 The agreement between the brothers was that if there was a disagreement between
them then they must go to arbitration. Pending the outcome of the arbitration, the
brother received his salary, but this was paid into a separate account, an auditor was
appointed but he was too scared to sign because he did not know who to pay
 The arbitrator found in favour of the brother and told the taxpayer to vacate and that he
was not entitled to his shares of the profits. Then in April l954, the profits were paid to
the brother.
 The tax year was in March, and the COT, said that the amount that had been paid
into the suspense account had accrued to the brother and he would be taxed on it.
 HELD: The definition of gross income says receipts or accrual, it was clear that it was
not received by the taxpayer, and if there is a dispute as to whether the taxpayer is
entitled to an amount, an accrual will only take place once the dispute had been
resolved.
 PRINCIPLE: If there is a dispute between as to whether the taxpayer is entitled
to an amount, an accrual only takes place when the dispute has been resolved.
 Pending the resolution of the dispute, no accrual takes place.
 Golden Dumps 1993 (4) SA 110 (A)
 Here the court said that when the dispute is settled there is an accrual, but the dispute
must be bona fide, and not frivolous or vexatious only aimed at delaying.
b) DIVESTMENT OF ACCRUALS AND RECEIPTS:
 Once income has accrued or has been received, its subsequent disposal or application by
the taxpayer cannot effect the receipt or accrual or alter the incidence of tax thereon.
o WILLIAMS: The critical question for income tax purposes is whether the taxpayer
ceded the right to the income in question before the income accrued to him or after the
income has already accrued to him.
 If BEFORE: The income does not accrue to him, but to the cessionary.
 If AFTER: The income forms part of his gross income and is taxable.
 For Example: I sell my house on 01 Feb and say that transfer will take place provided you
get a bond, at the end if February there is no accrual.
 When does a dividend accrue to you? 
o It accrues to a shareholder when a resolution is passed that declares the dividend.
o Listed companies have a proviso saying that they declare a dividend on say 01 August,
and say that it is payable to the shareholder on its book on 25 August 2009, then that
later date will be the date of accrual.

 CIR v Witwatersrand Association of Racing Clubs 1960 (3) SA 291 (A)

 FACTS: The tax payer held a race meeting for two charities and the way that the tax-
payer went about this was clumsy: it held the race in its own name and it advertised the
name in its own name
 It received the proceeds in its own bank account. In its tax-return, it said that they did
not receive the proceeds on its own behalf, it was on behalf of the charities. The court
said that although it was contemplated throughout that no proportion of the prospective

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profited would remain with the taxpayer, and that all the profits should go that the two
charities, it does not relieve them of the obligation to pay tax
 HELD: The court said that it merely had a moral obligation to hand over the proceeds,
but because they received the proceeds from the race as a beneficiary for itself, it was
taxed on the proceeds, even thought they were subsequently handed over.
 This illustrates Cactus  the minute that you have received it, it is in your gross
income.
 SIR v Smant 1973 (1) SA 754 (A)
 FACTS: Smant was a shareholder of M Company in Natal. M company, in turn held
the shares in N Company. M Co was in financial difficulties but the court did not say
how many shares Smant held in M Co.
 M Co could not pay a dividend to its shareholders, but the whole transaction that gave
rise to Smant holding shares in M Co, was that M Co would pay Smant a return on the
shares to Smant valued at R1 000 per month. Smant was also a director in M Co and so
received a director’s fees.
 Smant then sold this M Co shares to a person called ‘Plank’. M Co’s articles of
association stated that the directors had to agree to the sale of the shareholders shares
(i.e. it had a veto right on who a shareholder would be), but M Co’s directors did not
agree to Plank buying the shares.
 In the agreement between Smant and Plank, Smant anticipated that the board
would not agree, so he said that should the directors not agree, he (Smant) would
remain as the registered shareholder, but that Plank would be the beneficial
shareholder.
 Remember that these shares sold to Plank are subject to Smant’s entitlement to a
return on the investments, not dividends.
 M Co was under an obligation to pay this return in the shares to Smant, all that Smant
had to do was to pay this amount over to Plank.
 SARS said that within a year of assessment, there was R12 000 that Smant had
received, which he had ceded.
 ISSUE: did the money accrue to Smant, or did he divest himself of the amount?
 HELD: this return on the shares is similar to the fruits of an investment (which is
was), and therefore held that the investment on Smant’s shares did not accrue to him
after the sale of the shares to Plank, and therefore Plank as the beneficial shareholder
was entitled to the return on that investment.
 The minute that you divest your self of an income prior to an accrual then the
recipient will be taxed on it.

 Moodie v CIR Transkei 55 SATC 164

 There was a company called JALC that entered into a contract with the then
Government of Transkei to build houses, and was values at R80 Million. This was in
1983. There was a dispute between the taxpayer the government of Transkei as to
whether it was entitled to payment /
 They entered into a settlement agreement and then in 1990, it was agrees that the
government would pay JALC R5 Million.
 The agreement said that the amount is paid to JALC and the Government must
deduct sales tax (now called VAT) and income taxed owed by the company to the
revenue authorities.
 JALC subsequently ceded the right that it had in the contract to Moodie, who was the
taxpayer in question. The government then deducted R1.75 Million from the
R5 Million as tax owed by JALC to the government.

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 ISSUE: When was JALC entitled to that settlement amount

 If you are entitled to something, then it accrues and so it would not help if you
cede it.
 When the settlement agreement was ceded, the fact that it was ceded did not
change the fact that JALC was entitled to the R5 Million.
 Quote from Page 172: “The effect of a cession is to divest the cedent of the right or
claims which he cedes to the cessionary. The cedent’s liability for income tax in
respect of any income of which he divests himself depends on whether or not such
income formed part of his gross income. ‘Gross income’ consists of the ‘total amounts
in cash or otherwise received by or accrued to or in favour of the taxpayer during the
year of assessment’. Receipt and accrual may occur in different tax years. Thus income
can accrue in one tax year and be received or become enforceable in a subsequent year.
For an accrual in terms of the definition of ‘gross income’ it is only necessary that the
taxpayer has become entitled to the amount.”

 Rishworth v SIR 1964 (4) SA 493 (A)

 Here there was an agreement that the taxpayer had to pay certain rental money to his
son. The court said that he had already received it and so it is only on receipt of the
rental income that you can cede it.
 The court said that the rent accrued to her (the appellant’s wife), and as such it was
included in her gross income.
 If you divest yourself prior to the accrual, then it will form part of the gross income of
the recipient.
 HELD: The court said that reading the cession as a whole, the rent had accrued to the
appellant's wife each month; accordingly, the Commissioner's assessment had rightly
been upheld by the court.

2.4. ‘RESIDENT’
The Definition of ‘resident’ in section 1 of the Income Tax Act:
 It is important to determine whether a tax payer was a resident or not.
 On 1 January 2001, SA changed from a source-based system of taxation, to a resident-
based source of taxation.
o This means that if you are a resident, you will be taxed on your would-wide income.
o If you are a non-resident, you are only going to be taxed on a source within the
Republic, or deemed to be within the republic.
 Section 9 of the Income Tax Act, postulates an accrual from a source within the republic.
You do not really need to know this section.
 Section 1 divides the definition into various categories: natural persons and person other
than natural personas.
o In relation to a natural person, you will be a resident for tax purposes if you are
ordinarily resident in the republic, or if you are not ordinarily resident, but they fulfil
the physical presence test.
o In relation to a non-natural person: if it is incorporated, established or formed in the
Republic or which has its place of effective management in the Republic.

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 There are so-called ‘double taxation treaties’  The idea here is that because you are
resident in South Africa you have to pay tax on your foreign investments; however, it
would be unfair to expect someone to pay tax on an investment located in the UK to the
UK Government and then to also pay tax on that same investment to the South African
Government. This is where the ‘double taxation treaties’ come it: in terms of these, you
might not have to pay double tax if you have already paid tax in a treaty country.
o So this will always be subject to these treaties.

ORDINARY RESIDENT (Download SARS interpretation note number 3 of 04 February

2003)
 SARS INTERPRETATION NOTE 3 – Issued 4 February 2002:
This discusses the meaning of an ‘ordinary resident’:
o Courts have interpreted ‘ordinary resident’ to mean the country to which a person
would naturally and as a matter of course return from his wonderings. It might
therefore be called a person’s usual or principal residence and it would be described
more aptly as the person’s home (from Cohen v CIR 13 SATC 362).
 This defines ‘ordinarily resident’ as living in a country.
 Physical Presence Test:
o This is a mechanical test: you are deemed to be resident in South Africa if you are
physically present in South Africa for a period or periods:
a) exceeding 91 days in aggregate during the relevant year of assessment under
consideration;
b) exceeding 91 days in aggregate during each of the five years of assessment
preceding such year of assessment; and
c) exceeding 915 (new requirement) days or 495 days (old requirement) in aggregate
during those five preceding years of assessment:
o Therefore only in year 6 will you become a resident if you have been in South Africa
for a period exceeding 915 days.
o SARS INTERPRETATION NOTE 4 – issued 8 February 2006: this gives examples
of how to determine the number of days to see if you are resident.

 If a company is formed in SA, or a trust is formed ion SA, then it will be deemed to be
resident in SA. BUT: If the place of effective management of a company is in SA, then it
will be a resident (See SARS Interpretation Note 6 of 26 March 2002).
o You will be taxed if the income is from a source within South Africa.

LEGAL ENTITIES:
a) PLACE OF INCORPORATION, ESTABLISHMENT, OR FORMATION:
 A non-natural person (such as a company, trust, close corporation or juristic person) will
be regarded as a resident if it is incorporated, established or formed in South Africa, or if it
has its effective place of management in South Africa.
o SILKE: To determine whether a fictitious or artificial person is incorporated,
established or formed in South Africa is a matter of facts and must be decided on its
own merits.
 NOTE: Although a legal entity might have been incorporated, established or formed in
South Africa, the entity might not be regarded as a resident by virtue of a double taxation
treaty between South Africa and another country. the provisions of that double taxation
treaty will overrule the Income Tax Act.

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b) PLACE OF EFFECTIVE MANAGEMENT:

 If a legal entity is not established, incorporated or formed in South Africa, it will be
regarded as a resident only if it is effectively managed in South Africa.
 The term ‘effective management’ is not defined in the Income Tax Act, but SARS regards
the place of effective management as the place where the day-to-day activates of the
business takes place, i.e. where the executive directors and management transact the
company’s business (see SARS INTERPRETATION NOTE 6 – issue March 2002).
NON-RESIDENTS:
 In relation to non-residents; receipts and accruals deemed to be from a source within the
republic are deemed to be included in the gross income.
 The rationale for including this is that a country produces wealth by the virtue of its
natural resources or the activities of its inhabitants and so should be included.
o The problem is that the cases are too specific to determine what is meant by ‘deemed
to be in the Republic’, so we need to look at the considerations that were taken into
account.
2.5. ‘FROM A SOURCE WITHIN OR DEEMED TO BE WITHIN THE REPUBLIC’:
INTRODUCTION:
 The Income Tax Act does not contain a definition of the phrase ‘from any source within
the Republic’. A ‘source’ in the sense of originating cause has also not been defined by the
courts, because it is too fact specific.
o CIR v Black 1957 (3) SA 536 (A): You should look at case law to determine what kinds
of tests, factors or considerations should be borne in mind to determine where the
source of income is located.
o Transvaal Associated hide & Skin Merchants v COT 29 SATC 97: It is also very
difficult to determine exactly where the income is derived from. In some issues where
income could be derived in two countries; here you need to see the dominant or real
cause responsible for the profits with which we are concerned.
o Overseas Trust Corporation Ltd v CIR 1926 AD 444: This says that ‘source’ denotes
origin of the income and not the location of the income.

 Essential Sterolin Products (Pty) Ltd v CIR 1993 (4) SA 859 (A):
 FACTS: Here the taxpayer would manufacture an active ingredient that would be
exported to Germany to be put in medicine. Here this medicine was registered in
Germany and it was very successful.
 In the late 1980’s there was a lot of restructuring of all the companies, and ESP entered
into an agreement with one of its subsidiaries that the product that was sub-licensed to
the German Company. This was an ‘inability agreement’ that said that to the extent that
the SA taxpayer is unable to manufacture the ingredients for the medicine, then the
German company would make it: the subleased the patent.
 ESP received an amount and received a payment, but SARS wanted to tax this.
 In SA, the restructuring did not have an effect.
 HELD the originating cause of the receipt of the inability consideration and therefore
the source thereof was not in South Africa.
 CIR v Lever Brothers & Unilever Ltd 1946 AD 441:

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 There were two foreign companies registered in the UK, A and B, who received
interest from Company C which was a South African incorporated company. The
Reserve Bank told C not to user any capital or income earned in South Africa to pay
the interest. SARS wanted to tax A and B by virtue of the fact that C was incorporated
in South Africa.
 ISSUE: Must Co C be taxed on the interests paid to Co A to it in the UK?
 What is the originating cause of there interest payable to company A from Co C?
 HELD: The source of receipt is not the quarter where they come from: the court said
that this is not the test: RATHER you must look at the originating cause of the income
 Here the originating cause is work that the taxpayer does to earn the income, quid
pro quo which he gives in return for the interest.
 The court said that it was incorrect to say that when money is lend at interest, that the
source of the interest is the debt resulting from there loan of the money: you do not
look at where the debt is situated.
 The provision of credit by company C is the originating cause of that interest. You
will therefore look at the taxpayer’s business, etc.
 The originating case was the provision of credit that took place outside the RSA and
therefore the taxpayer was not taxed.
 PRINCIPLE: The source of the receipt is not where it comes from but rather the
originating cause.
 Although C was incorporated in SA, A and B did not receive the interest from a
source within SA.
2.5.2. DETERMINING THE SOURCE OF DIFFERENT TYPES OF INCOME:
Practical Illustrations of this…
a) SHAREDEALING:
 CIR v Black 1957 (3) SA 536 (A)
 FACTS: B was a stockbroker on the JSE; he carried on business with certain London
based stockbrokers. As he was registered in the JSE he could not be registered on the
London Stock Exchange. He therefore sent £7 000 to a London stock-brokering firm to
deal on his behalf.
 B made a profit on the shares in the UK and SARS wanted to tax it in SA arguing
that the originating cause of the income was in South Africa.
 NOTE: This case was before 1 January 2001 when SA changed to a resident
based tax system.
 HELD: The AD held that one should enquire where the business was carried on that
brought in the profit.
 The basic and real gains that the taxpayer got as income was because of the
purchase and sale of the shares and there was a distancing business of buying and
reasonable person would reasonably have reached the conclusion that there was
distinct business of buying and selling shares in London, and that B was a
Johannesburg-based stockbroker in a similar business in Johannesburg was at
most a factor that facilitated the carrying on of the London business.
 The main, real, dominant source of the income that the taxpayer received was the
use of his capital in London and the making and executing of the relevant
contracts in London.
 Therefore the originating cause of the profits of the sale of the shares in London was in
the UK.

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b) INTERNET TRADE
 ITC 1779 66 SATC 353 (not 1799)
 FACTS: This was a taxpayer (T) who was in the full time employment of a South
African company and was a natural person who was resident in Cape Town. In his
spare time he carried on the trade of a foreign exchange dealer.
 To facilitate this trade, he used a facility called ‘Global Forex Trading’ in the USA and
he transmitted $3 000 to the USA to be able to use this facility. They then provided all
the software necessary.
 T had to put a lot of effort in this because he had to keep up-to-date on daily
events that might influence the foreign-exchange rate.
 T made a loss and typically you can set this off against your income, but he had to
show that that loss that the trade was carrying on in SA.
 HELD: The court looked at Millin v CIR and held that the trade was conducted within
the Republic because that was where the taxpayer had exercised his wits and labour as
to which transactions he entered into.
 The court used the same idea in Millin v CIR.
 SILKE: Income from all inventions has the same source, i.e. where the skill, wits and
labour are employed.
c) BUYING AND SELLING (Including Partnership Activities):
 CIR v Epstein 1954 (3) SA 689 (A) (Partnership activities)
 PRINCIPLE: It is irrelevant where the general taxpayer’s business is carried on, or
where his principle place of business is. What is relevant is where the taxpayer’s
income is derived and where by the profit is made.
 FACTS: E was a natural person who resident in the Republic. He was an agent who
facilitated imports and exports for South African importers and exporters. He entered
into an agreement with H partnership in Argentina that he would only use H for
imports and exports to and from Argentina.
 It transpired that H was only involved in exports from South Africa to Argentina.
 E would enter into the contract with X company for the importation of asbestos, H
company then entered into a contract with Y Company that it would acquire the
asbestos.
 The court said that what had been entered into was like a partnership because they
were entitled to share the profits.
 ISSUE: The court had to decide where the source of the profits was: South Africa or
Argentina?
 HELD: All E’s activities in connection with his dealings with asbestos were carried
out in South Africa.
 We must look at the activities of E. He was paid for the exports in SA and the
dealings were carried on in SA. The result of these activities was that he received
profits.
 It is irrelevant in a partnership what your partner does in the partnership.
d) DIVIDENDS:
 Boyd v CIR 1951 (3) SA 525 (A)
 FACTS: B received dividends on shares from a company incorporated in South Africa
from Consolidated Diamond Mines of SW Africa Ltd. CDM was incorporated in South

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Africa, it had its head office in Kimberley and the principal share register of CDM was
also kept in Kimberly.
 The central management and control of the company was also in Kimberly.
 CDM received income mainly from diamond mining operations in South West Africa
(now Namibia). (NOTE: At the time taxpayers were still taxed on dividends).
 SARS tried to tax the dividends but the taxpayer tried to prove that he should not
be taxed because the income was derived from operations in Namibia.
 ISSUE: The issue before the court was where the source of the dividend was.
 HELD: The court held that the source of the dividends was the shares giving rise to
the dividends. You can take two approaches to determine the source of the dividends:
a) The location of the share register which provides title to the shares; OR
b) Where the dividends are declared (this is because this is the location of a debt).
 Here the principal Share Register was held to be in Kimberly and the directors had
declared the dividends in South Africa.
 So a South African company is obliged to keep its share register in SA in terms of
the Companies Act.
e) ROYALTIES:
 Millin v CIR 1928 AD 207
 FACTS: M wrote novels in SA and she concluded a contract with publishers based in
London that gave them the right to print and publish the novel in book-form in the UK
and elsewhere. She would then receive a percentage of the publish price as royalties.
 I.e.: She wrote the books in SA but the contract was concluded in London.
 ISSUE: Were the royalties received from within a source within the Republic?
 HELD: The court held that the source of the income that flowed to the novelist was
not the conclusion of the contract with the publisher, but rather the use of her wits and
labour in South Africa.
 JUTA’ INCOME TAX COMMETARY: it would therefore be clear that income form all
sorts of IP would be sourced where the skill, labour and wits of the inventor / author
were employed.
f) MANUFACTURING ACTIVITIES:
 Transvaal Associated Hide & Skin Merchants v COT 29 SATC 97:
 FACTS: T was incorporated in South Africa and the management and control were
situated in Johannesburg. The company bought so-called ‘greenhides’ (i.e. raw,
untreated hides) from abattoirs in Botswana. Once in SA, these were converted into
leather, but the initial processing of the hides was in Botswana.
 The Botswana court said that these hides should be taxed on the sale of the hides, even
though they were sold in SA.
 HELD: The court held that what was more important was the preparation of the hides,
rather than the sale of the hides. The curing of the greenhides was more truly essential
to the gaining of profits than the sale of the wet, salted hides.
 The court said that once the greenhides were cured, then could then be sold or
turned into account.
 The court said ‘if the hides had not been cured, then they immediately disappear from
the world of commerce like snow disappearing in the desert: I.e. the curing is
dominant over the sale.’

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 The preparation of the hides was an essential factor rather than the sale. The curing
was dominant over the selling and was the main, real and dominant cause of the
accrual of the income.

2.4.3. MULTIPLE SOURCES AND APPORTIONMENT:

 It might become problematic to locate the source of income if the activities that result in
the income being received are performed in South Africa and in one or more other
countries.
o This might result that all, part, or no part of the receipt be regarded as constituting
income from a source within the Republic.
o SILKE says that the Income Tax Act as it stands now, does not allow for the
apportionment of a source of income.
 There can be multiple sources of income, but the court will rather look at the real,
dominant, main, or substantial source of the income: The source may therefore lie in the
country in which the main activates may have taken place (see: CIR v Black, Transvaal
Associated Hide & Skin Merchants v COT, Essential Sterolin Products (Pty) Ltd v CIR )

 Section 9 and section 9D are the main sections of the Income Tax Act that deem amounts
to have accrued from a source within the Republic.
2.4.4. DOUBLE TAXATION TREATIES:
 The situation may arise where it is difficult to say exactly where the income was derives,
such as in the Transvaal Associated Hide & Skin Merchants v COT case. You would think
that you should be able to apportion the income but the Act does not allow for this so you
use the dominant / main source of the income.
o For example: You are a SA resident and therefore are taxed on your worldwide income,
but if you receive dividends and the company that you received the dividends is
registered in the LSE (i.e. in the UK): the situation may arise that you may well be
taxed twice.
 This is not the intention and SARS is busy facilitating double taxation agreements to
prevent double taxation.
o Look at section 108 of the Income Tax Act that sets out Double Taxation Agreements.
 Also, if you are deemed to be a resident in more than one country, then there are certain
tie-breaker rules that will apply: if you are ordinarily resident in the USA, but comply with
the physical presence test, then you apply the tie-breaker rules.
o If you are deemed to be resident in both countries, you will look at whether you have a
permanent home in one state and not the other.
 If you have a personal home in both, then you are deemed to be resident where
you personal and economic interests are closer (the so-called ‘centre of vital
interests’).
o If you do not have a permanent home or centre of vital interests, then you look at your
habitual abode, and will be deemed to be resident where you stay.
o If you have a habitual abode in both states or neither, then you will be determined to be
resident in the country in which you are a national.
o If you are a national or both, then it will be by mutual agreement.

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2.6. ‘EXCLUDING RECEIPTS AND ACCRUALS OF A CAPITAL NATURE’:

INTRODUCTION:
 GROSS INCOME is
1. in relation to any year or period of assessment
2. the total amount, in cash or otherwise
3. received by or accrued to or in favour of a resident;
4. or in the case of any person other than a resident, the total amount, in cash or
otherwise, received by or accrued to or in favour of such person from a source within
or deemed to be within the Republic
5. excluding receipts or accruals of a capital nature
6. but including receipts and accruals listed in paragraphs (a) to (n) to the gross income
definition even though those receipts and accruals might be of a capital nature.
What is meant by ‘receipts and accruals of a capital nature’?
 A House of Lords Case: incomes tax is basically a tax on income: i.e. if a receipt or an
accrual is income in nature then you will be taxed on it. It is not a tax on capital.
o Your receipt will either be income or capital, there is no middle ground.
o For example: You have a holiday house and you derive income from it by renting it
out: Is the rental income included it your gross income?
 Income derived from something (an asset) without chain ownership will generally
be income in nature.
 But what if you sell that house: will the receipt and accrual be of a capital nature
or of income.
 Remember the formula in determining taxable income: ADD (gross income) minus
(exemptions) == income; (Income) minus (deductions)  Taxable Income
 NOTE: you can be taxed on CAPITAL GAINS TAX: the only reason that this is included
is for the sake of convince: EXAMPLE: you bought a house last year for R10 Million and
then sell it for R15 Million: you capital gains will be R5 million.
o This R5 Million will NOT be included in gross income, but it will be added to your
taxable income; therefore you will pay capital gains tax.
 You will pay income tax on that amount.  Individual in taxed at a rate of 25%.
o It is still important to determine if the receipt or accrual is of an income of capital
nature: you would prefer it to be of a capital nature.
 Unfortunately, the Income Tax Act does not have a definition of what is meant by a
receipt or accrual of a capital nature: it has therefore been left up to the courts to determine
the meaning of a ‘capital nature’…
How do you determine where capital proceeds are of a capital or revenue nature?

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 The court in Elandsheuwel Farming (Pty) Ltd v SBI 1978 (1) SA 101 (A) held that:
1. You have a regard to the totality of the proven facts;
 For example: Your uncle dies and leaves you shares and the minute that the
executor pays you out you buy a car:
 Generally the courts say that if you hold capital proceeds for a short period of
time it will typically be capital in nature.
2. You should then have regard to the guidelines taken from case law; and
 For example: Guidelines could be whether it is the realisation of a capital asset
that gave rise to the receipt.
3. Lastly, you must bear in mind that the onus is in the taxpayer (Section 82 of the Income Tax
Act) to show that the amount is of a capital nature and therefore should not be included
in gross income.
 The taxpayer bears the onus to show non-liability or exception from tax.
 That onus must be discharged on a balance if probability, and not beyond
reasonable doubt: you have a lesser onus on you.

2.6.1. THE ‘TESTS’ FOR DETERMINING CAPITAL AND REVENUE:

2.6.1.1. GENERAL:
 The General Principle: Fortuitous receipts and accruals are of a capital nature and are
therefore excluded:
o These include donations, gifts, and if you win the lottery, etc.
o You also do not pay tax on the 1st R100 000 you pay for a donation, the rest will be
taxed at 20%; but certain public benefit organisations will not be taxed.
 Stander v CIR (1997) 59 SATC 212 (C):
 HELD: The award that S won was of a fortuitous nature like a donation and as such it
was an award of a capital nature.
 The gross income definition of receipts and accruals says that certain things that are of
a capital nature are excluded.
 The court held that this was not an amount in cash or otherwise.
 The court said that it was not an amount in cash or otherwise because it was for
services and that it could not be exchanged for cash to otherwise.
 SIR v Watermeyer 1965 (4) SA 431 (A)
 W was a professor at a university who had died. The university gave money to his
widow as a gift on a yearly basis and SARS wanted to tax her
 HELD: The court held that she did not have a right to receive the amount: each receipt
was an individual gift and therefore was of a capital nature.

Are the proceeds ‘capital in nature’?

 Proceeds from the sale of ordinary income-producing assets are generally of a capital
nature.
o For example: The proceeds from the sale of a holiday home, from which income was
derived, will be capital in nature.
 Proceeds derived from the sale of assets by a person who does not trade are generally of a
capital nature.

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o For example: CIR v Visser 8 SATC 271 (T) says that law books in the hands of a
lawyer are a capital asset, while books in the hands of the book-seller are stock-in-
trade. A farm owned by a farmer is a capital asset, in the hands of a landjobber it
becomes stock-in-trade.
 Interest that you receive from a fixed deposit will be revenue in nature:
o CIR v Pick ‘n Pay Employee Share Purchase Trust 1992 (4) SA 39 (A) says that What
is revenue in nature will often just be of ‘common sense’.
 COT v Booysens’s Estate Ltd 1918 AD 576 says that income without the change of
ownership is revenue in nature
 Barnato Holdings Ltd v CIR 1978 (2) 440 (A) says that the usual badge of fixed capital is
that the asset should be acquired for keeps (i.e. for better or for worse), and only be
disposed of in some special, unusual or unforeseen circumstances.
 C:SARS v Wyner (2004) 66 SATC 1 (SCA): There is not one single all-embracing test that
will always be applicable.
 CIR v Pick ‘n Pay Employee Share Purchase Trust 1992 (4) SA 39 (A): There are various
tests for determining whether or not a particular receipt is of a revenue or capital nature.
They are laid down as guidelines only as there is no single infallible test of universal
application. The answer should not be contrary to sound commercial and good sense.
 Elandsheuwel Farming (Pty) Ltd v SBI 1978 (1) SA 101 (A): You look at the totality of the
proven facts.

2.6.1.3. THE TRADE V SCHEME OF PROFIT-MAKING TEST:

The 1st test: Are you embarking on a scheme in profit-making versus realising an asset at best
value:
 COT v Booysens’s Estate Ltd 1918 AD 576
 Is the sale or realisation of an asset of the sale of an investment, in which event it will
be capital; OR is the sale, in reality, the carrying on or carrying out the business of the
tax payer? Or is the capital being used to deduce a profit?
 Californian Copper Syndicate Case:
 This says that if the profit is a gain made by the operation of business in carrying out a
scheme of profit making, then it is revenue derived from capital productively
employed and thus must be income.
 MEYEROWITZ says that the phrase ‘operation of business in carrying out a scheme of
profit-making’ is clumsy and really means that receipts or accruals bear the imprint of
revenue if they are not fortuitous, but designedly sought and worked for (confirmed by
CIR v Pick ‘n Pay).
o This is why lottery wins are excluded from gross income – wins are fortuitous and not
designedly sought and worked for.
o I.e. if it just a by-product, then if you make a profit, it is fortuitous and will not be of a
revenue nature, and is not worked for.

 Elandsheuwel Farming (Pty) Ltd v SBI 1978 (1) SA 101 (A)

 Here the shareholder (Michael Cropman – an attorney) bought a piece of land near
Krugersdorp. From company law, an individual may by a piece of property for a
company still to be formed. The company then adopted the contract entered into by
Cropman.

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 E Company’s shareholders were Cropman and his father, and Cropman was an
attorney. The company then rented the property to the father and he farmed the land for
7 years, and the company derived a rental income. The company then rented the farm
to a partnership who continued farming on the land, and then on 11 November 1969,
the Cropmans sold their shares in E Company to Mr and Mrs De Villers.
 De Villers and his wife had to get a loan to buy the shares and they received the loan
from a company that had an auctioneering of cattle and estate agency businesses. Mr
De Villers was one of the majority shareholders of the company that they received the
loan from. Then two weeks latter, De Villers and his wife sold 80% of their share to
the other shareholders.
 The shares were also sold to Mr M who was a property speculator, another
shareholder who was a land surveyor; and a garage owner. A year before this
whole issue, all the parties had embarked on a similar scheme where profit was a
derived from selling property.
 A year later, E Company sold the land to the Krugersdorp municipality and made
200% profit.
 SARS wanted to tax the company on the profit they made from the sale to the
Krugersdorp municipality.
 SARS wanted to tax them because they said that the company had gone into a
business venture.
 The shareholders said that their intention was to farm, but the court looked at their
profession.
 ISSUE: Court asked was the sale of there asset in the course of a business in
pursuance of a profit making scheme?
 HELD: The court held that a profit-making scheme in its normal and most straight
forward form was the acquisition of an asset to make a profit, the profit is the result of
the productive turnover of the capital represented by the asset and thus falls within the
category of income.
 The asset, in effect, constitutes the taxpayers ‘stock-in-trade’ or floating capital.
 The court then said that contrary to this is the capital realisation which is contract to a
profit making scheme: this is the sale of an asset with a view to holding in either in its
non-productive state or in order to derive an income form the productive use thereof
and you then hold it like that.
 The court then said that when a capital asset is realised, the profits are generally
regarded as capital, UNLESS some other factor intervenes that shows that when the
articles was sold, it was sold in pursuance of profit-making.
 This is exactly what happened
 The court said that the other factor that intervened was the introduction of the new
shareholder who were well versed in the realm of property development.
 So if E Company had disposed of the farm when the father was farming, it would
still be capital in nature.
 Once the new shareholder were introduced, this showed that the company had
embarked on a shame of profit making and the land could be considered as
becoming ‘stick-in-trade’ of the taxpayer.
 PRINCIPLE: You look at the totality of the proven facts. The court will look at the
intention of the taxpayer both at the time it acquired the asset and at the time of the
sale of the asset.
 There may have been a change of intention.

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 CIR v Pick ‘n Pay Employee Share Purchase Trust 1992 (4) SA 39 (A) (still part of the
first test)
 FACTS: P company had a share trust that was for the benefit of its employees.
Depending on your rank within the company, you would get a certain number of shares
(multiples of 100 shares): what would happen was that not more than 7% of the shares
were acquired by the trust for the benefit of the employees.
 The employee would have to acquire the shares at the market value of the shares.
Then after 5 years you would acquire the share at the acquisition price at year 1
plus a bit of interest that was earned (Price was: R500 at year one; and R1 000 at year 5).
 If an employee was dismissed, then the trust would get the shares back, but it would
pay the price that the employee would have paid in year one
 ISSUE: The trust made a profit; although, it was not the intention of the trust to make
a profit. The court had to decide whether the profits that the trust made were of a
capital or revenue nature.
 Smalberger JA: There are a variety of tests and the results should not be against
sound commercial and good sense.
 HELD: The court held that it would look at whether the profits were derived with the
intention of profit making. Here there was no intention on the part of the trust to
conduct a business in shares.
 The trust was there to operate primarily as a conduit for the acquisition of the
shares by the employees.
 In any event, the trust did not operate according to accepted business lines: A trader in
shares would buy the shares and then resell then as soon as possible in order to make a
profit, and that trader would buy and sell at the most advantageous times and prices
according to the dictate of the market: Therefore a trader doing business in shares can
be expected to engage freely in the market.
 This was not what he trust did. The Pick ‘n Pay Employee’s Trust only bought
shares when it was obliged to and sold them when it was required to.
 MAJORITY HELD: The trust did not carry on the business as a scheme of profit
making, even if it can be said that the trust was a trader in shares in a broad sense.
 The trustees never intended or designedly set out to make a profit – it was not
their purpose to do so. Any receipts or profits to the trust were not intended or
worked for, but were purely fortuitous in the sense that they were an incidental by-
product and therefore capital in nature.
 MINORITY: The minority said that you do not really have to look at a profit-motive;
you ask if the shares in the hands of the trustees of the trust were fixed capital or
floating capital; the minority said that it was revenue in nature. (will do this section latter)

a) REALISATION TO BEST ADVANTAGE:

 Elandsheuwel Farming (Pty) Ltd v SBI 1978 (1) SA 101 (A) says that ordinarily when a
capital asset is realised, its profits are regarded as capital receipt or accrual and not gross
income UNLESS some other factor intervenes to show that when an article was sold it
was in pursuance of a scheme of profit making.

 Natal Estates Ltd v SIR 1975 (4) SA 177 (A) (will cover facts later)
 The court gave some examples of realising a capital asset
a) A manufacturer sells a redundant warehouse:

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 This will be in the hands of the manufacturer: the warehouse will be a capital
asset, so it will be capital in nature if he sold it. Even if he takes the proceeds
and buys more stock, it will still be capital in nature.
b) A pensioner sells the family house to live in a flat
 It will be capital in nature because it is the realisation of an asset
c) A farmer has a huge piece of land and part of it is expropriated to build a railway
track. There is a small piece of land across the railway tracks that is cut off from
the rest of his farm.
 The sale of this portion of the land is capital
 But if he subdivides the land, advertises it and builds a show house to
advertise the house and plans to sell houses, then it will be revenue in nature.
 Totality of the proven facts.
d) BUT NOTE: A speculative builder buys a plot of land with the purposes of
developing land:
 This will be Revenue in nature.

 CIR v Stott 1928 AD 252

 S was a land surveyor and architect working in Pietermatizburg; he was also the son of
a missionary in the area. He decided that he wanted a holiday home on the south coast,
so he bought a piece of land with the intention of building a holiday home.
 He only wanted to build this house and he found the ideal piece of land. However,
he could only buy a huge piece of land because the owner was not interested in
selling a portion of the land.
 He decided he would build a cottage on half of the property, and the other half he
subdivided and made a profit from the sale of the lots.
 The second property he acquired was a small fruit farm which was close to Durban:
when he acquired the property, it was subject to a lease; i.e. there were already tenants
there.
 In terms of Elandsheuwel Farming: If you use a foreign asset to make an income
out of it, then it is capital in nature.
 The lease expired and he entered into a new lease (IMPORTANT: there was NO change of
intention because he still wanted to derive rental income) . He cancelled the leased because he was
fed up with the tenant and he then subdivided this land.
 The Commissioner and the special court held that by sub-dividing his property, the
tax-payer embarked upon a scheme of profit-making. There would not have been an
issue if he had just derived rental income.
 The moment that he embarked upon a scheme of profit-making, the proceeds will
be revenue in nature.
 HELD: Whether or not the business is carried on is an inference of facts, and that
inference is a matter of law.
 I.e. look at the facts, and then apply the law to the facts.
 The courts said that the primary intention that the tax-payer acquired the property for
is usually conclusive, UNLESS some other factors intervene which show that it was
sold in pursuance with a scheme of profit making.
 The court had regard to Stott’s activities, especially with regard to land holdings.
Although the court only had to decide if the proceeds from there sea-side property and
the fruit farm were revenue or capital in nature.
 There were natives in the area that S lived who were worried about being evicted
in the area, so S bought land, sub-divided it and sold it to the natives.

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 The court looked at all his activities in order to establish whether he was a land-
jobber: if he was, then the disposal of the two plots of land were in pursuit of a
profit making scheme and therefore be income in nature
 ISSUE: Because S sub-divided the property, was this in pursuit of a scheme of profit
making?
 The court looked at H’s occupation: he was a surveyor and an architect and
therefore knew something about property.
 HELD: The court held that his real business was that of a surveyor and architect and
not that of a landjobber
 The court said that it was not sufficient that the cutting-up of the land and the sale
should result in a scheme of profit making.
 The court held that it would be unfeasible to sell the land in bulk; and then mere
cutting up of the lots could not alter the proceeds of the revenue.
 IMPORTANT DICTA: Every person who invested his surplus funds in land or stock
or any other asset is entitled to realise such asset to best advantage and to
accommodate the assets to the exigencies / demands of the market in which he was
selling. The fact that you do so cannot alter what was an investment of capital into a
trade or business for earning profits.
 So if it is unfeasible to sell the large tract of land, the fact that you sub-divided the
land does not mean that you have embarked upon a scheme of profit making.

 Berea West Estates (Pty) Ltd v SIR 1976 (4) SA 415 (A)
 This case dealt with a lady that left land / an estate to her 13 children and her husband,
subject to usufruct: The Husband could live on the farm, but dominium remained in the
hands of the children. There was a dispute and a ‘Trust Deed’ was created whereby one
half of there property belonged to the father, and the other half to the 13 children. The
Husband soon died and then left his undivided tract to his 13 children.
 There was infighting for 20 years on who got what tract of land.
 After 20 years, some of the original children had passed away and now there were 23
beneficiaries. What they did was to establish a company (Berea West Estates) and they
transferred all the land to Berea West Estates because it proved easier if there was only
one owner of the land when they disposed of it ultimately.
 Before they transferred the land to Berea West Estates, they applied to subdivide
the property: they applied for the establishment of a township on the land.
 After they established the company, they got approval for the sub-division. Before
Berea West Estates could market the land, certain conditions of establishment had to
be complied with.
 When Berea West Estates was incorporated, there was a memorandum of
incorporation that limited what it could do (the realisation of the land to its best
value).
 The beneficiaries then became shareholders. The memorandum and articles of
association provided that as soon as all the assets of the company were disposed
of, it must be wound-up and all the assets must be distributed to the shareholders.
 This is what is known as a ‘Realisation Company’: the sole purpose is to
acquire and then dispose of the land.
 HELD: The court held that the company would be regarded as a realisation company,
not a company trading in profits, and therefore the surplus would be regarded as
capital receipt.
 After the land had been sub-divided, it increased in value, the court held that the
beneficiaries set up the company for the purposes of facilitating the realisation of the

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land and the company in which they became shareholders was merely the machinery
for realising their interest in the land.
 It is clear that they had the intention of disposing of the asset for the best value.
 NOTE: Here the court also said that you must look at all the facts.

 Natal Estates Ltd v SIR 1975 (4) SA 177 (A)

 FACTS: One of the properties in Natal Estates was in Effingham in Natal. As the City
of Durban expanded, it encroached upon Natal Estates’ land and Natal Estates was
aware that some of the land would be expropriated for an Indian community to be
established on the land.
 Natal Estates then subdivided the land, and the issue was whether NE embarked
upon a scheme of profit making?
 HELD: The court held that it was capital in nature, because the taxpayer was merely
adjusting his land to changing circumstances.

 John Dell & Co (Pty) Ltd v SIR 1976 (4) SA 415 (A)
 A company was established mainly for the acquisition of land and it conducted the
business of fruit merchants and it imported and exported the products. It therefore held
the property as an investment, and its main purpose was in fruit dealings.
 The company operated the same way for 30 years, then in 1924 it acquired a property,
and at the same time a new shareholder was introduced (Mr Fine) who bought out all
the original shareholders.
 NOTE: The intention of the company will be attributed to the person who is in
control of the company, so in the exam look at whether a new shareholder’s
introduction will change the intention of the company.
 Fine was in the clothing business but knew that the property that the company bought
would increase in value. Ultimately, he expanded his textile business, but moved to a
bigger premises and the property became redundant.
 At the time that he discontinued the flower business and moved, he did not
dispose of the property. He leased the property to Starlight Cinema on a month-by-
month lease for 11 years.
 Fine did not actively go looking for a buyer, but one of the shareholder’s in S Co
approached Fine and bought the property.
 ISSUE: Did John Bell and Co (the company) dispose of the asset to best value, or
derive on a scheme of profit making.
 Fine gave testimony that at the time that he acquired the property and shares, he
knew that the property would increase in value.
 HELD: You must also look at the taxpayer: the initial intention for the acquisition of
the property was because of its prime position.
 These tests are merely guidelines, and you must look at the facts of the specific
case.
 HELD: The court held that the change of the intention of the taxpayer will not be
enough, something more is required to change the character of the asset and to render
its proceeds taxable: the court said that something more is needed to ‘metamorphose
the asset’. The court said that the taxpayer:
a) Must already deal in such trade, or
b) Embark on a trade in these assets (i.e. taking up this land as part of the stock in
trade).

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 The court then said that sometimes the realisation of a capital asset to best value needs
the hand of time. So the mere fact that the taxpayer here deliberately delayed the
capital asset does not necessarily mean that it will be profit-making in nature.

b) “CROSSING THE RUBICON”:

 The Rubicon was a river at the time of Julius Caesar and the principle is that once you
have crossed the Rubicon River to attack your enemy, then there is no turning back. The
same principle can be said to apply for when you go from a realisation of a capital asset
for best values to a scheme of profit making.
o The moment you have changed your intention, then that is it.
 Barnato Holdings Ltd v CIR 1978 (2) 440 (A)
 FACTS: This was a wholly owned subsidiary of JCI (a mining company) that had
been established. JCI had a share portfolio, and it did not want to contaminate some of
its shares that were clearly capital in nature so it created BH.
 ISSUE: Should JCI be taxed?
 HELD: The court said that this is characteristic of a capital asset. If you hold those
shares from a capital perspective, then you must hold those shares for ‘better or for
worse’, relatively speaking for keeps. Only to be disposed of if some unusual,
unexpected or special circumstance inducing disposal occurs.
 This is the usual badge of a fixed capital investment.
 We need to look at the following:
a) Are the proceeds fortuitous or are they designedly worked for?
b) To determine the intention of a company we look at the action of the directors and
not the actions of the shareholders. We must look at the individuals that effectively
control the business. (Elandsheuwel Farming)
c) We must not only look at the ipse dixit but also at the surrounding circumstances.

 Natal Estates Ltd v SIR 1975 (4) SA 177 (A)

 Natal Estates’ (The company) history dated back to the early 1920’s. It cultivated sugar
and therefore had vast tracts of cultivated sugar cane in Natal. When it started it bought
all the assets of the existing sugar millers, but then a Mauritian company offered it a
400% profit if it would sell the land because it was prime land on the coast of Natal.
 Natal Estates also knew that at that stage that the City of Durban was expanding
and that a lot of Natal Estates’ land would be expropriated to make way for urban
development.
 When it acquired the land, it then acquired more land: therefore it was clear for the
outset that it was a sugar miller and not a property developer, even though it knew the
property was valuable.
 Then in the early 1960’s, Natal Estates went as far as apply for the development of
CHANGE IN a township. It did not do this very actively,
INTENTION
 But in the mid-1960’s, Heulett Sugar took over, and the intention changed. In relation
to La Lucia and Umhlanga Rocks, they started developing the land.
 NOTE: If they had sold the land then, in terms of CIR v Stott it would have been
deemed to be capital in nature.
 It formed a subsidiary called ‘La Lucia Homes’, and employed architects,
landscapers, etc.

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 ISSUE: The court had to decide whether the disposal of these properties was merely a
realisation of a capital asset, or a realisation of the scheme of profit making. Had Natal
Estates ‘crossed the Rubicon’ into embarking on a scheme of profit making?
 In the late 1960’s the property was first sold to the public, but then it was sold in
bulk to a subsidiary company,
 The taxpayer took the matter to the AD, and there were four grounds of appeal for the
court to decide whether it was capital or revenue in nature:
a) Look at the original intention of the taxpayer, and this will stand no matter
what.
 The commissioner said that the company had a dual purpose: It was going to
cultivate sugar, but because it was sea-facing, they knew that they were going
to develop it and were not going to hold it as a capital asset. Also, the
company’s memorandum of association said that part of the business was
‘dealing with property for gain’.
 The court said that even if the original intention was to hold it as a capital
asset, that intention may change: it is not the be all and end all, although it is
important.
o But also, the court realised that companies tend to draft their
memorandums of association widely so that if they expanded their
business, then it would not be ultra vires: just because you sell the
property and the memorandum says that you sell property, does not
necessarily mean that it will be revenue.
b) Even if there was a change in the taxpayer’s original intention, this does not
mean that there is an intention to become a landjobber, it is merely realising
the asset to best value.
 The court agreed that you can hold an asset as stock in trade, and then change
your intention and hold it as a capital asset; just as the converse can also
happen: where a capital asset becomes stock in trade.  There can therefore
be a change in intention.
 The court said that it is not a definitive characteristic for carrying on a scheme
that there must be a buying in of the asset, because you might already have
that asset.
 The court had to decide on whether these properties in the Durban area were
sold at best value, or had the company embarked upon a scheme of profit
making.
o IMPORTANT DICTA: ‘You must think you way through all the
particular facts of each case’
o Remember that Elandshewel Farming said that you must look at the
totality of the facts.
c) The court then said they you need to look at the intention of the owner BOTH
at the time of acquisition and at the time the selling of the land, because your
intention might have changed.
 You need to look at the activities of the owner at the time that he sold the
asset and that he bought the asset, and the memo and articles of incorporation.
 The court then said that you must have regard to the light that these activities
through on the owner’s ipse dixit (verbal evidence) at the time of acquisition.
 Where the owner sub-divides the land, you look at the planning, the extent,
duration, nature, degree, organisation and marketing organisation of the
enterprise, and the relation all of this has to the realisation of carrying on a
business.

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 The court said that all these consideration are not individually decisive, the
list is also not exhaustive: so there might be other factors that can be taken
into account.
 From the totality of the facts, one enquires whether it can be said that ‘the
owner had crossed the Rubicon and had gone over to the business or
embarked upon a scheme of selling such land for profit or using the land as
stock-in-trade.’
 The court said that the appellant’s operations were vast, and it would seem
obvious that they had embarked into the field of township development and
market of land on a grand scale. To put it plainly, the appellant had gone into
business.
o This was nevertheless a business that was ancillary to the appellant’s
main business. Natal Estates was doing much more than merely realising
its capital assets to best value: it had crossed the Rubicon and committed
itself on a grand scale of selling land for profit and using the land as stock
in trade.
o The court therefore held this the business was stock in trade and therefore
taxable.
d) The bulk sales to an associated company were surely capital
 The court held that the land was part of stock in trade, so it did not matter that
the land had been sold in bulk or to the public, they had crossed the Rubicon
and the capital assets were therefore revenue in nature.
 Some of the land was indeed expropriated, so the court said that just because some of
the land was stock in trade, this does not mean that all the land was stock in trade.
 The subdivided land for the Indian community was borderline because there was
come development, and because it was borderline, the taxpayer had not discharged
the onus.
 Each case must be looked at in isolation.
 The farmer had a huge piece of land and part of it is expropriated to build a railway
track. There is a small piece of land across the railway tracks that was cut off from the
rest of his farm.
 The sale of this portion of the land is capital; however, if he subdivides the land,
advertises it and builds a show house to advertise the house and plans to sell
houses, then it will be revenue in nature.
 PRINCIPLE: Look at the totality of the proven facts.
2.6.1.4. THE FIXED AND FLOATING CAPITAL TEST:
The 2nd Test: Have you disposed of a fixed capital or a floating capital?
 CIR v George Forest Timber Co Ltd 1924 AD 516
 FACTS: The taxpayer was timber merchant who had land from which he felled and
sold timber.
 ISSUE: Were the proceeds from selling the timber of a capital nature?
 There court had to decide what was floating capital and fixed were fixed. The
court said that you must distinguish capital form income (which is revenue
derived from capital productively employed)
 Capital as opposed to income is wealth used for the production of fresh wealth. The
court said that the land with the timber on it was capital because it was acquired with
the view of producing fresh wealth.
 This was in the form of timber grown to be felled later.

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 The court then said that if you dispose of that capital asset, it is merely a realisation of
the capital and not an employment of the capital (i.e. growing trees on it).
 This is exactly that the taxpayer did, the trees were felled and then later sold as
part of the taxpayer’s stock in trade.
 The court said that if you produce timber in this way, there is no realisation of capital
but there is the creation of a new product.
 Importantly, floating capital is consumed and disappears in the very process of
production, while fixed capital (the land) does not – even though it produces fresh
wealth, it remains intact. The floating capital (the logs) is used up.
 SILKE uses the example of a baker: you have a van and the bread. The bread is
consumed and disappears, the van remains intact. But in the hand of a second-hand
motor dealer, the van would become floating capital.
 ALSO: A baker’s oven is fixed capital, while the flour that he uses to make bread
is floating capital.
 Remember the decision of CIR v Pick ‘n Pay Employee Share Purchase Trust, where the
MAJORITY said that it was capital in nature; but the MINORITY said that you must look
at whether the shares form part of the floating or fixed capital of the trust.
o AUSTEN (the Lecturer) feels that the minority was correct and that the Trust was
lucky that the shares and derived profits were not taxed.

 Elandsheuwel Farming (Pty) Ltd v SBI 1978 (1) SA 101 (A) says that to determine
whether the proceeds from the sale are capital or revenue in nature involves an enquiry as
to whether the sale amounted to the realisation of a capital asset or whether it was a sale of
an asset in the course of carrying on a business or in pursuance of a profit-making scheme.
o The latter connotes the acquisition of an asset for the purpose of reselling it at a profit.
This profit is then the result of the productive turn-over of the capital represented by
the asset and consequently falls into the category of income.
 The asset in effect constitutes the taxpayer’s stock in trade or floating capital.
o In contrast to this is the sale of an asset acquired with the view to holding it, either in a
non-productive way or in order to derive income from the productive use thereof, and
is in fact so held.
 This constitutes a realisation of fixed capital and the proceeds are an accrual
of a capital nature.
3.6.1.5. THE ‘TREE AND FRUIT TEST’:
 CIR v Visser 8 SATC 271
 This also says that income is what capital produces, or that income is in the nature of
interest or fruit, as opposed to the principal or the tree.
 The court said that it is all relative: law books in the hands of a lawyer are capital, but
law books in the hands of a bookseller are revenue in nature as they are trade assets.

2.6.2. SPECIFIC APPLICATION OF THE TESTS:

a) IMMOVABLE PROPERTY: Disposal of Land:
 Elandsheuwel Farming (Pty) Ltd v SBI 1978 (1) SA 101 (A)
 The court held that the intention of the initial shareholders was to hold the land as
capital. If the land had been disposed of at this initial stage, then the proceeds would
probably have been regarded as of a capital nature. However, the court held that the

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introduction of the new shareholders brought about a change of intention from holding
the asset to actually disposing of the asset in a scheme of profit-making.

 CSARS v Wyner (2004) 66 SATC 1 (SCA)

 W was a lessee of bungalows in Clifton, Cape Town. The municipality extended long
term leases to the occupiers of the properties: these would be for 10-20 years that
could be renewed. Some of the people made improvements of the properties and at the
end of the lease, the improvements would revert to the council.
 W took a property and it about R90 000 improvements herself.
 Then in 1994, the municipality changed the whole scheme. It gave the lessees the
following options:
a) They could lease the property again, but at market-related rentals, which were
higher.
b) They could vacate the property, in which event the improvements would revert to
the council, or
c) The lessees could acquire the property at a value determined by the property.
 In 1994, the property was valued at R102 000. W did not want to give up the property;
she could not afford the rental or the purchase price. Numerous banks were aware of
the municipality’s intentions. Invested approached then W. She arranged to be lent the
R102 000, and her interest would be capitalised and at the end of the year she would
repay R180 000, because she would dispose of the property within a year.
 Investec had valued the property at R230 000.
 She got the money, and then less than one year after she acquired the property, it sold
for R2.8 Million.
 SARS waned to include the proceeds in her gross income.
 At the tax court, the court held that it was revenue in nature. On appeal to the Cape
High Court, the court held in W’s favour and said that the proceeds were capital in
nature.
 What W had were rights that were sui generis: a mixture of private and public law
rights. If she was the owner of the property and disposed of it, then the rights
would be capital in nature, so why should it be any different because she was a
lessee. She had also lived on the property for more than 20 years.
 SARS took the matter to the SCA.
 ISSUE: Were the proceeds from the sale capital or revenue in nature: the TEST that
the court applied were whether the proceeds were the mere realisation of a capital
asset, or embarking upon a profit making scheme.
 The Court said that ‘if the acquisition of an asset for the purpose of reselling it at a
profit, then even if it is a single isolated transaction will be regarded as a profit-
making scheme’. The court said that she had devised the scheme to realise the profit
and the court had regard that she had bridging finance from Investec.
 As she said that she would sell the property within a year, the court knew that she
did not acquire it to live in.
 She tried to use the argument that her position was sui generus and that she should be
equated to an owner: indeed, had she been an owner, then the proceeds would have
been capital.
 The court rejected this, and said that the only rights that she had were as a result of
the lease, and that she had to sell the property within a year to satisfy her contract
with Investec.
 The court also said that it is irrelevant what she did with the proceeds afterwards: they
were still revenue in nature.

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b) SHARES:
 SIR v The Trust Bank of Africa Ltd 1975 (2) SA 652 (A)
 Trust Bank was incorporeal as a bank in 1954, and mainly operated in the Western
Cape and had difficulty expanding its business. By 1865, it has about 60 branches in
SA, but it still wanted to expand.
 In mid-1965, Unit Trusts were introduced in SA, and Trust Bank saw an opportunity: it
acquired shares in unit trusts companies and agreed to act as the bank of this
management company. The decision to take up the shares in the management company
was taken by a management committee.
 So when the court had to decide what the intention of the bank was when it sold
the shares, it looked at the intention of this management committee.
 The Unit Trust fund grew beyond expectation to R504 Million in 1969, Trust Bank
then decided to establish its own fund and its own management committee and to
dispose of the shares at a huge profit.
 SARS wanted to tax this profit.
 HELD: The court said that they agree that Trust Bank knew when it acquired the
shares that they would increase in value, and they would make a profit. However,
when they acquired the shares, they did not really intend to make the profit. The court
said that the main and dominant purpose of Trust Bank was to expand its capital asset
and to put its name out.
 The collateral benefits that they got from the acquisition of the shares went over
and above the intention to sell them at a profit.
 When it ultimately disposed of the shares, this intention did not change: the mere
intention to sell does not mean that it is now suddenly revenue in nature. If your
intention did not change, then it will be capital in nature.
 Barnato Holdings Ltd v SIR 1978 (2) SA 440 (A):
 FACTS: In 1961, Barnato Holdings became a wholly-owned subsidiary of JCI. JCI
was a mining house and also dealt in shares. It decided that it would acquire shares
with a long term view and to mainly derive dividends. It established Barnato Holdings
and it acquired some shares via an interest-free loan. In its memorandum of association
it was stated that it would be an investment holding company, but it could buy shares.
JCI informed SARS that it would be an investment holding company and would not
deal in shares.
 If Barnato Holdings felt that the shares would not perform in the long-term they would
be disposed of. In the 1970’s SARS wanted to tax this company.
 Barnato Holdings acquired shares in the Stellenbosch wine trust and then disposed
of some of the shares at a profit.
 Barnato Holdings also disposed of some of the shares involuntarily
 ISSUE: At the SCA: the issue was whether the disposal of the shares was capital or
revenue in nature.
 Barnato Holdings actually conceded that the disposal of shares in the wine was
revenue in nature.
 HELD: An investment company could have a secondary business in dealing in shares
for profits. Barnato Holdings agreed that they had to switch share investments.
 SARS said that the shares were not acquired for better or for worse, only to be
disposed of if some unusual circumstances intervened which induced then to dispose
of the shares, this is the usual badge of fixed capital investments.

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 The court looked at how many shares were disposed of in each year to the time
that they were disposed of. Some were not held for very long.
 The court held that in any event, the memorandum of association allowed then to
dispose of some of the shares.
 Natal Estates Ltd v SIR 1975 (4) SA 177 (A)
 Where Natal Estates lost some of the land due to an expropriation: the court held that
some of the land was deemed to be capital in nature. But if it was clear that there was
an initial intention by the taxpayer to undertake a scheme of profit-making, then it will
be deemed to be revenue in nature, even if it was not disposed of voluntarily.
 CIR v Nussbaum 1996 (4) SA 1156 (A)
 FACTS: This dealt with a retired school teacher who inherited shares in 1946 and
started to build up a large portfolio of shares whenever he had extra capital. He would
derive income from the dividends. He said that his intention was not to buy shares; he
wanted to create a stream of income for when he retired. He wanted to acquire the
shares as a fixed asset.
 In 1981, N retired and in 1982 he entered in 167 transactions which included the
buying of selling of shares. This carried on for about three years.
 Before he retired, while he was still a teacher he did nothing with his shares.
 He testified that in 1981 he had a heart attack and realised that he might need money
on short term notice. He decided that he would have a higher stream of income by
investing instead of deriving dividends.
 He also decided that he wanted to buy a house because before that time, he had
only rented a house.
 HELD: The court had regard to the taxpayer’s own testimony who said that he was, by
nature, keenly competitive. He said that his share portfolio was his predominant
interest in life
 This scenario changes from a School teacher who had ‘crossed the Rubicon’ to
suddenly enter into over 300 transitions.
 The court had regard to the scale and frequency of the share transactions and said that
there was evidence of continuity that was a necessary aspect of an individual.
 The court said that by keeping a constant watch over his share portfolio, he was
‘farming’ his share portfolio: so although N said that his primary purpose was to
maximise his dividends, he also had a secondary purpose of dealing in the shares in
proper.
 HELD: Therefore, because of the scale and frequency, it was held to be revenue in
nature.

 Section 9B was introduced to the Income Tax Act. This was to try and overcome all the
cases that has come before SARS
o This started that if you disposed of shares prior to 1 October 2007, and they were
listed shares and you held them for more than five years, they were automatically
deemed to be CAPITAL.
 Section 9C of the Income Tax Act was introduced as a result of the short comings: this
dealt with the disposal of shares after 1 October 2007, and was applicable to both listed
and unlisted shares that had been held for three years.

2.6.5. Apportionment:

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 It is not normally possible to have one amount of income which is partly income and
partly revenue. It is also not possible to have an amount which is neither revenue nor
capital.
o In Pyott v CIR 1944 AD 121, the court held that there is no middle ground: it will
either be capital or revenue, it cannot be both, i.e. there is NO third category.
 Tuck v CIR 1988 (3) SA 819:
 PRINCIPLE: A single receipt or accrual may, however, be apportioned between its
capital and income elements:
 FACTS: Here T, in the early 1980’s, played a important role in the pharmaceutical
industry, he had a lot of contacts and was well-known. He then retired and the
company that he worked for gave him shares and said that this was to say ‘Thank You’
for the services that he rendered, but it also functioned as a restraint to trade.
 At this stage, when you get paid for a restraint of trade, the proceeds were capital
in nature.
 T said that he received 50% for services rendered and 50% for restraint of trade: i.e. he
said that his receipt had two elements.
 The court analysed this evidence and asked what the quid pro quo was for receiving
these shares: T and the company testified that it was for services rendered and for a
restraint of trade.
 Evidence was led to the extent that should T breach the restraint, then he could be
sued.
 HELD: The court agreed with T and apportioned 50% to capital (i.e. to the restraint)
and 50% for services rendered.
 In the late 1990’s, the legislature introduced Section 1(cA) to the Income Tax Act: said
that although some receipts are for a capital nature, they will be included in gross income,
and so as a result, you will be tax on the restraint, even though it is capital in nature.

SUMMARY:

Receipts and accruals of a capital nature are generally excluded. You will be taxed on proceeds that
are profit for example made from the sale of the house in terms of Capital Gains Tax, this is not
included in gross income but it is included in taxable income. Section 26A says that any capital gains
will be added to ones taxable income.

It is important to know whether the sale is revenue or capital in nature. If it is capital you will be taxed
at a lesser rate and thus all taxpayer’s want the proceeds to fall under this.

There is no definition on what is meant by capital nature. Cases law tells us the following:

Elandsheuwel Farming (Pty) Ltd v SBI: One must look at the totality of the facts, onus and in terms of
s82 to prove the proceeds are of a capital nature. The onus is based on a balance of probabilities.

Fortuitous receipts – are of a capital nature (Stander v CIR: capital in nature) (SIR v Watermeyer: gift
thus capital in nature)

Pick ‘n Pay Employee Share Purchase Trust: use common sense when deciding if it is of a capital or
revenue nature.

Income without the change of ownership is generally revenue in nature like renting out a house. When
you sell the asset it is capital in nature. If you don’t trade in something then it is usually capital in
nature.

There are tests to determine:

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Pick ‘n Pay Employee Share Purchase Trust: the tests are merely guidelines and there is no one test
that is decisive, look at sound commercial good sense.

Test 1: Realization of best value v scheme of profit-making (revenue).

To determine if profit is revenue in nature is a question of law looking at all the surrounding facts. In a
profit making scheme the proceeds will be revenue and the characteristics come from Elandsheuwel
Farming (Pty) Ltd v SBI. Elandsheuwel Farming (Pty) Ltd v SBI states one embarks on a profit
making scheme when they want to sell an asset at a profit. Profit is either the productive turnover or
the productive use of an asset. The asset is capital in nature when you hold the property and on selling
the asset it will be revenue.

Pick ‘n Pay Employee Share Purchase Trust gave characteristics of a share trader. Here the disposal
was capital in nature as it was fortuitous and not designedly sought and worked for, it was an
incidental by product of it activities. P never had a profit motive. P was not a share trader as a share
trader engages freely in the market and P never freely engaged the market, they bought and sold
shares when the trustees where forced to sell or buy. The profits were fortuitous. The minority said the
proceeds should be taxed and they used the test of floating capital and it was like stock in trade and a
profit motive was not needed.

Natal Estates Ltd v SIR: profit making scheme is when a prospective builder buys property and
constructs houses with the hope of making profit on the sale of these properties.

CSARS v Wyner: even if it is one transaction, what must be determined is: is the dominant intention to
sell it to make a profit? If it is then it will be revenue in nature. The taxpayer was realizing the asset to
best value and thus capital in nature.

Elandsheuwel Farming (Pty) Ltd v SBI: court held the proceeds were revenue in nature and gave
characteristics of a fixed asset. If you hold an asset in a non productive state and don’t derive income,
or in order to derive income from the productive use it will generally be capital in nature.

Natal Estates Ltd v SIR: this is when you sell a redundant warehouse, sell house to live in a flat, etc.
Here the taxpayer subdivided land and it was held that is was merely to adjust the land holding to the
changes in the market.

CIR v Stott:: capital in nature even though he cut up the land in lots. He merely accommodated the
asset to the demands of the market.

Berea West Estates (Pty) Ltd v SIR: realization company (13 children inherited) – the taxpayer was the
mechanism in disposing of the land and the court looked at the fact that it never acquired other land
and the memo of the company only had the purpose of disposing of the land and then the company
would be wound up. It was not a scheme f profit making.

John Dell & Co (Pty) Ltd v SIR: bought property in CBD of JHB. The main purpose of the acquisition
was to hold the property and then to read the market and sell it when he would get the most money.
When an asset merely needs the hand of time then on disposal it is not revenue in nature.

Barnato Holdings Ltd v CIR: when you hold an asset for keeps only to dispose in unexpected
circumstances this can be considered as a fixed asset.

TEST 2: Fixed and floating capital:

CIR v George Forest Timber Co Ltd: fixed capital remains in tact and floating disappears. When
disposing of floating assets it is revenue. Fixed capital is capital in nature.

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TEST 3: Fruit and Tree:

CIR v Visser: look at the tree and the fruit. “Law books in the hands of a lawyer and book seller.”

Intention of the taxpayer is important. SILKE states that because of subjectivity, self interest, the
uncertainties of recollection and possibly reconstruction (making up the past events to suit the current
situation) you must test this intention against the surrounding facts and circumstances.

Application of the Tests:

CSARS v Wyner just wanted to salvage the money spent, the court looked at the fact that she got
bridging finance, sold it within a year after acquiring the property thus the surrounding facts told
another story compared to her stated intention.

When dealing with an artificial person it will be controlled by living beings (Elandsheuwel Farming
(Pty) Ltd v SBI). These people are the brains and 10 fingers of the artificial person.

Berea West Estates (Pty) Ltd v SIR: a company is an artificial person with no sole to damn and no
body to kick.

SIR v The Trust Bank of Africa Ltd: who managers and controls the company is important. Usually the
board of directors and the resolutions passed must be looked at.

In Elandsheuwel Farming (Pty) Ltd v SBI, the shareholders controlled the company (taxpayer).
Attributed the controllers activities to the company. The management committee member’s intentions
at the time of acquisition where attributed to the taxpayer. The intention at the acquisition is
fundamental.

Natal Estates Ltd v SIR: the line of attack the taxpayer took was to say that the intention at the
acquisition was capital in nature and the court found no problem with that as it was for the productive
use of the sugar cane fields. He argued that this is only what the court must look at. The court said that
the intention at acquisition is important but not decisive.

Elandsheuwel Farming (Pty) Ltd v SBI: the initially shareholders were an attorney and the farmer. The
intention of the company at the time of acquisition was to hold the farm as a capital asset but when
new shareholders were introduced the intention of the company changed and the court held that the
proceeds where revenue in nature as there was a change in intention.

If you have mixed intentions the court will look at the main or dominant intention. You must test the
intention against the surrounding circumstances to determine if the intention is the actual intention.

What factor in Elandsheuwel Farming (Pty) Ltd v SBI was important to decide it was revenue in
nature?

The introduction of shareholders that were clearly dealers in land. The new shareholders only held the
new land for less than a year only to dispose of it.

John Dell & Co (Pty) Ltd v SIR: the court will take into account that it was only one property, it never
looked for a seller in this case the seller approached the taxpayer.

Natal Estates Ltd v SIR: you must think your way through all the facts of the case and the
considerations and include the intention of the Taxpayer at acquisition and disposal, the activities
of the owner in relation to the land up until he sells it, the extent, planning, marketing etc to divide
and sell the land. Looking at the all the facts you must decided if one has crossed the Rubicon. Here

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they built house, gave glossy brochures etc and thus crossed the Rubicon. The memo of a company
is important but everyone knows that it is drafted widely so it is important but not decisive.

CIR v Stott: the subdivision was also done but here they only made the necessary improvements in
terms of the regulations regarding subdivision and thus never crossed the Rubicon.

Berea West Estates (Pty) Ltd v SIR: Same principle as above  improvements imposed on taxpayer

Topic 3: EXEMPT INCOME (Section 10):

 Remember that the liability for normal tax is calculated as follows:
GROSS INCOME Rxxxx
Less: Exempt Income (Rxxx) --
INCOME: Rxxxx
Less: Deductions and Allowances (Rxxx) --
TAXABLE INCOME Rxxxx

 You will take exemptions away from gross income; but do not get confused between this
and ‘capital receipts and accrual’.
o Your exempt income will be included in gross income, but it is then taken out because
of Section 10(1)(k).
 Exempt income is mainly determined by reference to the special character of the taxpayer,
i.e. is he a Public Benefit Organisation, or is there a special nature of the income.
o If you are younger than 65 years and receive interest of less than R25 000. This also
includes Pension Funds, Certain semi-public organisations, Political Parties, The
Development Bank of South Africa
 SILKE says that exempt income is simply income that is free or immune from tax in the
same way as receipts and accruals of a capital nature, but there is a fundamental
distinction between the two:
1. A capital receipt lacks the quality of income and does not form part of the gross
income, except in certain exceptional circumstances.
2. Except income, on the other hand, by the very nature is included in the gross income,
but does not form part of income in terms of Section 1 of the Income Tax Act.
3.1. ABSOLUTE EXEMPTIONS:
 Certain institutions, associations and bodies enjoy absolute exemption from tax on all
receipts and accruals, such as:
o Registered political parties, pension funds, provident funds, retirement annuity funds,
trade unions, fidelity funds.
3.2. PARTIAL EXEMPTIONS:
 Certain receipts and accruals are except to a certain extent:
1. This relates to the income itself, if it is done for research purposes. Maintenance from
a spouse forms part of gross income, but is then taken out by virtue of section 10.
2. Certain bursaries are also not paid.
3. In Sectionals Titles Schemes: the levies are exempt.

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4. Local Dividend income will also be except (dividends from a local share portfolio)
 NOTE: this is about to change!!
5. Interest if you are younger than 65 years old and receive R21 000. If you are older than
65, then the first R35 000 will be exempt.

Topic 4: DEDUCTIONS:
 You find deductions in section 11 and section 23. For deductions for accountancy purposes
might not be deductions for income tax purposes.
o We will look at Section 11(a), read with section 23(f)-(g).
o Section 11 tells you what you may deduct. Section 23 tells you what you may not
deduct.
 Section 11(c) says that some legal expenses will be deductible, but this is only to a
certain extent.
o Section 11(cA) allows for the deduction of a restraint of trade payment, and this will be
spread over the lesser of three years, or the number if years that the restraint of trade is
in force.
o Section 23B deals with legal expenses. You are not allowed to claim the deduction
twice.
o Section 23(a): This says that to the extent that costs are incurred for the maintenance
of the taxpayer, his family, or his establishment, you are not allowed to deduct this.
 For example:
o Section 23(b): you are not allowed to claim domestic or private expenses or costs in
respect of a premises for a premises not used in your trade.
 CIR v Hickson 1960 (1) SA 746 (A):
 There is no deduction of private expenses.
 HELD: The court said that here expenses pertaining to the household and the
taxpayer’s private life as opposed to his life as a trader.
 Interpretation Note 45 (dated 30 June 2008): this deals with security expenses:
 In most instances, on your private house you cannot claim any of these
expenses as a deduction; but this is different if you install these on your
business premises because it will not be related to your domestic or private
life.
o Section 23(c): You cannot claim any loss or expense, the deduction of which would
otherwise be allowable, to the extent to which it is recoverable under any contract of
insurance, guarantee, security or indemnity;
 If you have not insured the machine, you might be able to claim it provided you
can show that it was not of a capital nature. (revenue in print shop, capital in a
normal office)
o Section 23(d): you cannot claim any tax, duty, levy, interest or penalty imposed under
this Act, any additional tax imposed under section 60 of the Value-Added Tax Act 89
of 1991, and any interest or penalty payable in consequence of the late payment of any

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tax, duty, levy or contribution payable under any Act administered by the
Commissioner.
 The reason that it refers to the VAT Act is because one is able to claim back VAT
that has been paid by a person who has a VAT number.
o Section 23(e): You cannot claim a deduction to the extent that you transfer any income
carried over to a reserve fund or capitalised in any way..
o Section 23(f): You cannot claim a deduction on any interest on capital employed in
trade: (This is the negative leg of the formula)
 For example: You take out a bond over your house and then you take some of the
proceeds for there bond, you but new office equipment.
4.1.2. Section 11(a):
 Section 11(a): ‘For the purposes of determining this taxable income derived by any person
from carrying on any trade, there shall be allowed as deductions form the income of such
person so derived from the income of such person so derived … expenditure and losses
actually incurred in the production of the income, provided such expenditure and losses
are NOT of a CAPITAL NATURE.
o You read this section with section 11(f) which says that you are not allowed to claim a
deduction in respect of any amount received or accrued that do not constitute income.
 For example: You take out a loan of R1 Million to buy MTN shares and you
expect a lot of dividend income.
 ISSUE: Will you be entitled to claim the interest on that loan as a deduction:
 ANSWER: Dividends will form part of your gross income. In terms of
section 10(1)(k), dividend income is taken out of the formula (NOTE: if you do not
trade in shares), because for the moment it is deemed to be an exception  so
you will not be taxed on those dividends (i.e. will not form part of income in Part 1 of the
test).
o If you are a share trader, then it will form part of income, but is deducted
from part 2 of the test by virtue of section 23(f)!!
 Section 23(f) (The negative leg of the formula): you cannot claim deductions to the extent it is
interest on capital employed in trade, i.e. to the extent that expenses do not relate to
income: dividends do not form part of income.
o To the extent to that it is not for income, you are not allowed to claim it as a deduction.
 Section 23(g): ‘No deductions shall be in any case be made in respect of the following
matters namely – any moneys , claimed as a deduction from income derived from trade, to
the extent to which such moneys were not laid out or expended for the purposes of
trade.’
o This is the negative-leg of the test.
 ITC 1658 Case:
 Here the taxpayer would fly to Europe to market his employer’s products, and then end
up in Mauritius. This trip to Mauritius did not have anything to do with his employer’s
business.
 The Act previously said: ‘If expenses were not laid out for the purposes of trade, then
you are not entitled to a deduction’.
 So he could not claim anything as a deduction.
 Now, the Act has been amended where section 23(b) says that to the extent that your
expenses are not incurred for the purposes of trade are not allowed to be a deduction.
 Thus if the costs Mauritius are R23 000, then it cannot be claimed as these are
personal expenses.

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 CIR v Nemojim (Pty) Ltd1983 (4) SA 935 (A) is authority that section 11(a) is the positive
leg of the test, and sections 23(f) & (g) are the negative leg of the test.
 Section 11(a) provides positively and in general terms, in the case of a person deriving
income from carrying on of a trade … what expenditure and losses shall be allowed as
deductions form income so derived in order to determine his taxable income. Section
23(f) & (g) represent the negative counterpart of section 11(a).
 In determining whether a particular amount is deductible, it is generally appropriate to
consider whether or not such deduction is permitted by section 11(a), or prohibited by
sections 23(f) and/or (g).
 Joffe & Co (Pty) Ltd v CIR 1946 AD 157 says that a deduction must pass both the positive
and negative tests.

4.1.2.1. ‘Carrying on any trade’:

 You need to determine when a taxpayer is a trader.
 If there are any suspect trades, then in terms of section 20A, they will be ‘ring-fenced’ and
the deductions will be specifically deducted from the individual trade.
o Other suspect trades would include any gambling activities.
o CIR v Stott 1928 AD 252: HELD: The court said that you will determine whether
someone is a trader is determined in relation to the facts.
o Burgess v CIR 1993 (4) SA 161 (A): If you look at OBJECTIVE FACTORS which
indicate that the taxpayer is trading, then the commissioner has no option but to treat
him as a trader.
 It is sometimes very difficult to determine whether the taxpayer is a trader: what if he goes
out and deliberately makes a loss.
o Estate G v COT 1964 (2) SA 701 (SR): HELD: sometimes you have a grey area,
where it is not one or the other: you have to really delve into the issue to find the
solution to whether the taxpayer is a trader or not.
 Section 1 of the Income Tax Act defines a ‘trade’: As, that which including (therefore the list
is not necessarily exhaustive) every profession, trade, business, employment, calling, occupation
or venture; and includes the letting of property or the right to use a patent or trade mark.

 Burgess v CIR 1993 (4) SA 161 (A)

 B went to the bank and took at a loan on which he had to pay 12% interest, which he
could claim in year one. He would then buy a ‘single premium endowment policy’,
where the insurer would invest all his premiums on the investment of shares.
 B expected a return of between 15 and 18% on that loan after the policy has
matured in year 2.
 When the policy matured, the proceeds were included in his gross income. he therefore
should have been entitled to the deduction
 However, the share market crashed and the policy only had a 4% guarantee return.
He therefore made a loss because he paid the bank 12%, and therefore lost the 7%.
 He tried to claim this as a reduction.
 SARS said that the only reason that B entered into the transaction was for a tax benefit.
Therefore because the taxpayer only had a tax benefit, it could not be seen as a trade.
 HELD: the court held that the motive of the taxpayer is irrelevant: if he enters into a
venture / trade, then your motive is irrelevant; even if you only enter into the
transaction for the tax benefit.

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 This was because the definition of ‘trade’ is not exhaustive, and in any event, the
definition includes a ‘venture’ – which is a transaction that a person risks with the
object of making profit.
 You look at it objectively to determine if it is a trade, regardless of the motive of the
taxpayer.

 NOTE: that although you might not have a profit motive, you might still be carrying out a
trade:

 Modderfontein Deep Levels v Feinstein 1920 TPD 288

 M sold cloths at a low cost price to some of its workers.
 ISSUE: Did M conduct a trade in relation to the selling of cloths, because if they ere
then it would be a contravention of the then gold laws.
 HELD: In 99 cases out of 100, a trade included the idea of making a profit, and the
essential idea underlying a trade is buying and selling.
 You might still be conducting a trade even if you do not contemplate making a
profit.
 Even if one is selling at cost price it is still a trade.
 You need to look if one is carrying on the trade on a continuous basis.
 This is because an isolated act of buying and selling does not constitute a trade: if
a person supplies his neighbour with a few bottles of milk if he has some to share,
then this is not a trade, even if he derives a profit from them.
 There must be an element of continuity.
 At the end, M would benefit from the increased productivity as the miners were
content and therefore they were carrying on a trade, regardless of the fact that the
mining company suffered a loss as a result of selling the clothes at a reduced price.
 Therefore held that M did carry on a trade.
 De Beers Holdings (Pty) Ltd v CIR 1984 (3) SA 286 (T)
 If you make a loss you must still show that it is in facilitation of your trade.
 FACTS: The taxpayer was a share dealing company, and all the shares that it acquired
would be put down as ‘trading stock’. What it also did was to acquire shares in a
company that were what is called ‘pregnant with a dividend’.
 For example: D bought shares in a company for R1 Million pregnant with a
dividend. D would declare a dividend, then strip X Co of its dividends (so it is left
without any under lying assists), and then sell shares of X Co for R100. This was
because there were no underlying assets, and it would then claim a loss in that
share trading portfolio, and therefore it should be allowed a deduction for the loss
it suffered.
 HELD: this cannot be seen as a trade. The main trade of D was to buy and sell shares
for a profit, and the main reason that it acquired share in these dividend striping
companies was to strip it of its assets.
 Where a trader normally carries on business of buying goods and selling them at a
profit, then as a general rule, a transaction entered into with the purpose of not making
a profit, or make a loss, must be shown to have been connected with the pursuit of the
trader’s trade, either via commercial expediency or an indirect facilitation of the trade.
 Unless the facts speak for themselves, the taxpayer must explain that link.
 The shares here were not bought for resale, they were acquired as part of a scheme for
distributing the assets in cash for shareholder, and the purpose was for the distribution
of the assets, and not a trade. these distributions were different and therefore not part
of the trade.

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 Estate G v COT 1964 (2) SA 701 (SR)

 At this stage in Zimbabwe, if it could be shown that it was a pure investment and you
did not trade on any means to the extent that you take out loans to pay for the
investment; then you will not be taxed on the loans.
 A South African company gave loans to four companies in Zimbabwe and also
acquired two properties in Zimbabwe from which they acquired minimal rental
income. They would be taxed on the interest income from the loans if they were
carrying on a trade.
 Are these the sort of activities which in commercial life would be regarded as
carrying on a business?
 HELD: When you want to see if someone is trading, look at the activates of the
taxpayer. You must ask if these activities in commercial life are regarded as being in
commercial life
 You will look at the activities such as the nature, scope, magnitude, object,
continuity and intention with which the property was acquired.
 Here the intention was to acquire the property as an investment and not for the rental
income.
 We must look at the proportion of income from the trade in dispute to the total
income.
 The taxpayer was not carrying on a trade on relation to the filling station and shop
because the main purpose was to hold it as an investment because it would
increase value.

 Solarglass Finance Co (Pty) Ltd v CIR 1991 (2) SA 257 (A)

 ISSUE: The issue that needed to be considered was whether a company making inter-
group company loans (either at interest free or no security) was carrying on the trade
of money lending.
 If YES, then that loan would form part of the trading stock and it could claim a
loss.
 HELD: One of the characteristics of a company carrying on money lending was to
lend to all and sundry, provided they are eligible form his point of view. Here Sub
Company is not lending to all and sundry, but only to his fellow subsidiary.
 The court also looked at continuity: is there a frequent turn over of the capital. Is
there security attached to the loan. The court said you would look at the proportion of
the income form these loans, and if it were low, then t hat would suggest that you are
not a money lender.
 From 1 January 1993: to the extent that your expenditure was for the purposes of trade,
you can claim a deduction.

 ITC 1351
 A doctor in natal wore white safari suits, and wanted to claim this as a deduction
because he wore the safari suit in the course of carrying on his trade.
 HELD: He had a dual purpose; it was for his own convenience and for the purposes of
trade.
4.1.2.2 ‘Expenditures and losses’:
 The main sections dealing with deductions are section 11(a) [says what you may deduct]
and section 23(f) & (g) [i.e. you may not deduct].
 What is meant by expenditure and losses actually incurred?

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o EXPENDITURE: An expenditure is a voluntary outlay of money by the taxpayer out

of his own choice (Joffe & Co (Pty) Ltd v CIR 1946 AD 157)
 Direct expenditure: For example: A furniture manufacturer buys his wood to
make furniture
 Indirect expenditure: For example: salaries, rental, advertising.
o LOSSES: Losses are involuntarily deprivations, such as theft, payment of damages as
compensation
 When a money-lender wants to claim in terms of section 11(a), he will not pay for
expenditure in advancing of the loan but for the loss of the capital, such as when a
debtor does not pay.
 Port Elizabeth Electric Tramway (Pty) Ltd v CIR 1936 CPD 241: “Losses” means
losses of floating capital employed in the trade which produces the income.

 Joffe & Co (Pty) Ltd v CIR 1946 AD 157 [a deduction must pass both the positive and negative tests]
 FACTS: J carried on the business as an engineer in reinforced concrete and in 1938 he
was contracted to do work on a building to be erected in Durban. He completed the
building but it collapsed and killed the sub-contracted plumber. J had to pay damages
to the family of the deceased and sought to deduct this from his income.
 ISSUE: Were the damages related to the trade to the extent that they were related to
the trade?
 HELD: The court held that the damages paid discharged a debt or a legal liability to
the dependents arising from the appellant’s negligence. This negligence and
consequent liability are not necessary concomitants of the trading operation of a
reinforced concrete engineer.
 Compare this to Port Elizabeth Electric Tramway (Pty) Ltd v CIR 1936 CPD 241:
Where the court held it was a necessary concomitant that the driver would be
killed in that situation.
 In Joffe & Co v CIR, liability was not bona fide incurred for the carrying on of the
trading operation. There is nothing in the case to state that the appellant's method
in conducting his business would necessarily lead to accidents.
 Regarding “loss”, the court held that it must make a distinction where after the
taxpayer has deducted his income he makes a loss (to the extent that your deductions
exceed your income, it will be an assessed loss – section 20) and where the taxpayer
makes as loss and then tries to claim a deduction.
 Section 11(a): an involuntarily deprivation of floating capital is not the antonym of
profits.
 Stone v CIR 1974 (3) SA 584 (A)
 FACTS: Here the taxpayer was a shareholder and director in a company which
manufactured furniture and bedding. His income consisted of salaries received from
the company, interest on investments and dividends. He met K, who alleged he had
many contracts with the State and requested financial assistance from S for the
purchase of these goods with the promise of a return of 20%. S advanced an amount of
R8 000 and the loan and return were paid. The following year the same situation
occurred, but S was to loan R20 000 and S signed suretyship.
 K was convicted of fraud and imprisoned and S was unaffected. But because he
signed surety he incurred R40 000 worth of losses and expenditure.
 HELD: The court held that for an expenditure to be deductible, it must pass both tests
set out in section 11(a) AND section 23(f) & (g). Court discussed the difference
between loss and expenditure.

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 What the taxpayer wanted to claim was not an allowance of his expenditure but
the loss he incurred as a result of his expenditure. The irrecoverability of the
capital loan constituted a loss in the sense of an involuntary deprivation.
 He was refused the deduction on grounds that it was loss of a capital nature, because
he was not engaged in the business of money lending.
4.1.2.3. ‘Actually Incurred’:
 Let’s use the following examples:
1. Baker B has a September year-end; and he buys flour to make bread and pays for it on
15 September. Should he be allowed to claim a deduction?
 Was he under an absolute obligation to pay? YES.
 Therefore the expenditure is actually incurred.
2. B ordered the flour and upon delivery he receives an invoice; is this “actually
incurred”?
 There is an obligation on him to pay, so to that extent Nasionale Pers Ltd v KBI
tells that there must be a definite and unconditional liability to pay, it would be
deemed to have actually incurred the expenditure.
3. B ordered the flour and discovers on delivery on 15 September that the flour is tainted;
is this ‘actually incurred’?
 Port Elizabeth Electric Tramway (Pty) Ltd v CIR: To determine when the
expenditure is ‘actually incurred’ does not mean the expenditure must be prudent
or necessary.
 Even if it is ineffective or extravagant, it can be deductible provided it is still
for the purposes of trade.
 CIR v Golden Dumps (Pty) Ltd 1993 (4) SA 110 (A): One cannot ignore the
wording of “actually incurred”. Here “actually” means ‘in fact’ or ‘really’. So
expenditure incurred occurs when the taxpayer is under an obligation or legal
liability regarding the amount in question (NOTE: The same principle was said in
Port Elizabeth Electric Tramway (Pty) Ltd v CIR).
 If taxpayer's liability is contingent or expenditure is subject to condition and
pending the fulfilment of that condition, the expenditure is not actually
incurred.

 Port Elizabeth Electric Tramway (Pty) Ltd v CIR 1936 CPD 241
 FACTS: PE conducted business in a tramway company and one driver lost control of a
tram while descending a steep gradient and crashed into a building, killing the driver.
The company had to pay compensation to driver's widow and the legal costs it incurred
in defending the claim.
 PE then sought to deduct legal costs and the compensation.
 HELD: The court held that section 11(a) and section 23 provide for two tests:
POSITIVE and NEGATIVE. Income is produced by a series of operations and
transactions entered into for the purpose of manufacturing or requiring a product; and
thereafter selling or by rendering services for which payment is received.
 In the course of these operations and transactions entered into, one will incur
expenditures and losses.
 The losses in the present cases are losses of floating capital employed in the trade
which produces income.
 ISSUE: The issue here was whether the expenditures and losses actually incurred were
capital nature and in the production of income?

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 HELD: The court looked at what ‘actually incurred’ entailed: It does not mean that
the expenditure must necessarily incurred; it widens the field of deductible
expenditure.
 ‘Actually incurred’ means there must be a liability to pay, not actually paid. A
trader, by the end of a tax-year that owes money for stocks, is allowed a
deduction.
 The compensation paid to the widow as well as the legal expenses were actually
incurred.
 Nasionale Pers Ltd v KBI 1986 (3) SA 549 (A)
 The dispute related to the 1980 and 1981 years of assessment. In relation to a company
it is the financial year end, which was 1 April 1979 to 30 March 1980.
 FACTS: The taxpayer had a March year end. It would pay bonuses to employees in
September provided they were still employed at the end of October. The taxpayer
provided for the bonuses in the tax return of the previous year.
 HELD: The court held that expenditure is actually incurred in the tax year in which
the liability legally arises and not in the tax year that the debt is settled. Possible
future expenditure is not deductible. There was no actual liability to pay the bonuses;
it would only arise in the subsequent year of assessment (because employees would
receive the bonuses in October 1980).
 A future uncertain event to which liability is subject in the following year, that will
be the year you incur your expenditure.
 The liability must be definite and unconditional. If the liability is contingent, the
expenditure will only be incurred if and when the condition has been fulfilled. Usually,
a sale of property is contingent on the transfer taking place.
 Edgars Stores Ltd v CIR 1988 (3) SA 876 (A)
 FACTS: E had a June year end. E entered into lease agreement with a lessor and
sought deductions at the end of June 1978 and claimed a deduction for expenditure
regarding the rental. The agreement provided that E would pay a fixed rental of R10
000 monthly, in terms of which it had a basic rental obligation or a percentage of E's
turn over, whichever was the higher.
 On the anniversary of the lease agreement they were to look at the turnover. At
this point it would be easier to determine what had already been incurred but not
to determine subsequent months.
 The taxpayer sought to claim as a deduction that amount by which it estimated its
turn over rental would exceed the basic rental.
 ISSUE: Was E entitled to claim what it said was the higher turn over rental?
 HELD: The court held that only expenditure in respect of which a taxpayer has
incurred an unconditional legal obligation during the year of assessment can it be
deducted, and that obligation may be unconditional ab initio, or it is initially
conditional and becomes unconditional.
 Edgars did not yet have an obligation that arose regarding the turnover, it would only
occur at the maturity of lease agreement. You must distinguish between expenditure
where the taxpayer’s obligation is still unconditional and that where it is unconditional
but there is a problem with quantification.
 Therefore, the turnover amount was still contingent until such time as the amount
was quantified.
 CIR v Golden Dumps (Pty) Ltd 1993 (4) SA 110 (A)
 FACTS: This case dealt with an employee called Nash, who was employed as a
financial manager during October 1980; and his conditions of employment included
that he was entitled to shares. He worked for fewer than three months and then was

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fired, but N claimed the shares. The Court ordered the company (in 1985, five years
later) to furnish N with the shares.
 GD incurred expenditure in the acquisition of those shares, so it sought to have
that expenditure deducted in 1985.
 SARS contended that it should have been claimed in 1980 when there was an
obligation to deliver it.
 HELD: The court held that “actually” means ‘in fact’ or ‘really’, and a liability is
contingent if there is a dispute, so until such time as the dispute is resolved, the
liability stays contingent. However, the claim must be a genuine dispute and not
frivolous, vexatious or entered into for the purpose of delay.
 To the extent that one has that dispute which is genuine and bona fide, the liability
is contingent.
 In such a case the ultimate outcome of the situation will be confirmed only when
the claim is admitted or upheld by decision of the court or arbitrator.
 In instances where at the end of the tax year where deduction is claimed and the
outcome of the dispute is not yet settled, it cannot be said that that expenditure is
actually incurred.
 Caltex Oil SA Ltd v CIR 1975 (1) SA 665 (A)
 FACTS: Here the TP had a December year end. He imported crude oil from the Gulf
and it was paid for in Pounds Sterling. He ordered in June and the arrangement with
the supplier was that the moment that it was put in the ship it would become C’s stock-
in-trade, and would be put on its account.
 In June, it was R2:£1. In November, proper to the year end, when the TP settled
the obligation to the supplier, the rate was R1.72:£1.
 He claimed the amount that was settled in the books because he claimed that was
when he actually incurred the obligation.
 HELD: The court held that it is correct that the TP recorded the amount in the books in
June, but this was an accountancy principle. It is not actually incurred when the
amount paid during that year is a different sum of money. This is because Income Tax
is assessed on an annual basis in respect of the taxable income.
 The court said, importantly, that it is only at the end of the year of assessment that
it is possible, and then it is imperative, to determine the amounts received or
accrued on the one hand, and the expenditure actually incurred on the other hand
during the year of assessment.
 The amount to be allowed can only be the amount paid by the trader during the year of
assessment; or in the case of liabilities incurred (but which are not discharged at the end of the year
of assessment) then the outstanding liability for such goods will be the rate prevailing at
that date.
 Therefore C had not yet paid the obligation to the suppliers, then you would still look
at the rate at the year if assessment.
 So if the TP has incurred an amount and then settled for a lesser amount, use
Caltex Oil SA Ltd v CIR as authority.

 The expenditure does not need to be prudent, as long as it relates to expenditure, then Port
Elizabeth Electric Tramway (Pty) Ltd v CIR tells us that it was incurred.
 There must also be an obligation to pay for ‘expenditure actually incurred’.
4.1.2.4. ‘During Year of assessment’:
 Sub-Nigel Ltd v CIR 1948 (4) SA 580 (A)
 The TP took out insurance policies for loses against fire, etc.

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 The court held that you are assessed for income in any year of assessment, and if you
are assessed for income in year one, then you cannot open a previous year of
assessment and claim deductions there.
 You claim it when you incur the deduction.
 The whole scheme of the Act shows that as the TP is assessed for income tax for a
period of one year, then no expenditure incurred for the previous year can be deducted.
4.1.2.5. ‘In the production of income’:
 Section 11A of the Income Tax Act tells us expenditure and losses actually incurred in the
production of income. It must not be prohibited in section 23(f).
 If you buy shares to claim dividends, and then take out a loan say that you are supplement
the income with dividend income, and because dividend income is exempt income
(section 109(1)(k)), it will not be included in income.
o It will be included in Gross Income because it complies with all the provisions of
gross income, but it will be taken out of income.
o Section 11(a) says expenditure and losses must be made in terms of the production of
income.
o Therefore the income form the interest form the deductions cannot be deducted
because it does not form part of income of the loan cannot be deducted by it is not part
of the production of income.

 Port Elizabeth Electric Tramway (Pty) Ltd v CIR 1936 CPD 241
 The company was a tramway company, and one of its drivers lost control of the tram,
it hit a wall and was killed. The company had to pay compensation o the driver’s
widow, and incurred some legal expenses to defend the claim.
 He wanted to claim the compensation and the legal expenses as a deduction.
 NOTE: the court had held (above) that it must be actually incurred, AND in the
production of income.
 HELD: Income is produced by the performance of a series of acts. A tramway
company will produce income by way of selling tickets; they also have to employ a
driver and have to buy the trams. Intendant upon these acts are these expenses: the
driver’s salary, buying the trams.
 The court held that the expenses are deductible if they are so closely linked to the acts
as to be regarded as part of the costs of performing them.
 Two questions arise:
a) If the act to which the expenditure attached perfumeries in the production of
income?
 i.e. the act: the employment of the driver: if there is no driver then the
company will not have ticket income.
b) Is the expenditure linked closely enough?
 The salary for the driver is very closely linked to the act of employing the
driver.
 The court said that not only acts necessary for the production of income must be
looked at. This is because different people conduct their businesses differently. We
look rather at the purpose of the act entailing the expenditure, not whether it is
necessary.
 You will want to attract income and the first leg is very subjective.
 If the act is performed for the purpose of earning income, then the attendant
expenditure is deductible.

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 The court said that if the act is bona fide done for the purpose of carrying on a trade
which earns income, then the attendant expenditure is deductible.
 BUT: if the act is done unlawfully or negligently, then it would not be deductible.
Here the court looked at some cases:
 Van Glen:
o During war the TP conducted business with the enemy, he was fined and
tried to claim this as a deduction. The court held that it was unlawful and
that he should not deduct this.
 Strong:
o A chimney collapsed and had top pay compensation: was negligent so
could not claim
 To determine whether the purpose of the act was to derive income is a SUBJECTIVE
TEST: why did that specific TP enter into the act.
 Sub Nigel Ltd v CIR 1948 (4) SA 580 (A):
 FACTS: TP took out an insurance policy and incurred expenditure in the premium of
the policy. In the first year there was no income and the court had to decide whether
the income that the TP wanted to deduct was allowed in year one.
 HELD: The court allowed the deduction in year one.
 It held that it was important that it is not whether your expenditure produced
income, but rather whether it was incurred for the purpose of producing
income.
 SILKE: Sub Nigel Ltd v CIR is authority that for expenditure to rank as a deduction
during the year of assessment, it is not necessary to show that it will have an effect upon
the production of income for that year.
o The income may be earned in a future year, but for as long as the expenditure had been
incurred for the purpose of earning income, it is deductible.

 CIR v Allied Building Society 1963 (4) SA 1 (A):

 AB had certain buildings that it would rent out and get some rental income or it would
use the building for its own premises. It had then acquired some buildings that it
wanted to rent out after is had renovated it.
 Some buildings produced income, while others did not.
 SARS then wanted tax on the expenditure that AB paid to the deposits, AB would only
be allowed a pro rata portion of the amount they paid on the deposits.
 You look at the dominant purpose of the TP in incurring expenditure: the purpose here
is to obtain the means of earning income. The main purpose that they borrowed the
money was to earn income.
 The main purpose was to acquire money cheaply and then to acquire it at a higher
amount.
 The court said that the interest that society paid in the money was clearly an
expenditure incurred on the production of income. The money that it borrowed
constituted its floating capital which it lent out at interest, thereby earning income.
 The main purpose for AB was to lend the money out more expensively, so what
was the main purpose of the expenditure?
 Principle: you look at the dominant purpose of the act that you took to produce
income.
The next leg of the test is how close must the link because between the expenditure and
the act?

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 Port Elizabeth Electric Tramway (Pty) Ltd v CIR 1936 CPD 241: Is the act of the employment of
the worked done to earn income?
 Here you pay compensation, not a salary: so is that close enough?
 HELD: IMPORTANT SECTION: All expenses attached to the performance of a
business operation bona fide performed of the purpose of earning income are
deductible; irrespective of whether the expenditure is necessary, or attached to it by
chance, or bona fide incurred for the more efficient performance of such operation
provided that they are so closely linked that they may be regarded as part of the cost of
performing it.
 Here the salary was bona fide incurred, and it is so closely connected with the
tramway operation that it can be regarded as part of it
 The court went on to say that the employment of drivers carries with it a necessary
consequence a potential liability to pay compensation, and this was not an infraction of
law (NOTE: This is why fines and penalties are not allowed as a deduction).
 The court compared the compensation paid to a driver as a part of his employment
to a pension: it is necessary.
 The payment by way of compensation was to be regarded as part of the company’s
operations for the purpose of earning income and as such was deductible.
 The potential liability that you have to pay compensation is inseparable from
carrying on the business of a tramway operator.
 HELD (for compensation): The court held that the compensation paid to the driver’s
widow was an expense that was deductible.
 What about the legal costs that it incurred in defending the claim for the payment
of compensation?
 The cost must be so closely linked with the earning of income that those costs
must be regarded as part of the cost of earning the income.
 HELD (for legal costs): The legal costs were expenses incurred in resisting a demand
for compensation, and therefore were not an operation entered into for the purpose of
earning income.
 As legal expenses will not normally be allowed as a deduction, section 11(c) was
introduced to the Income Tax Act to assist the taxpayer.
 We need to see how closely linked the act of expenditure be (the 2nd leg of the
test):
 This is an OBJECTIVE TEST: The link between the expenditure and the act.
 CIR v Genn & Co (Pty) Ltd 1955 (3) SA 293 (A):
 Money received by way of a loan where there is an immediate obligation to repay will
not be included as income.
 FACTS: The taxpayer was a hardware and timber merchant. He bought some of his
stock locally and some of it internationally. He got financing for some of the stock who
charged his about 18% interest. He decided to try and raise the funds locally through
short-term loans. He told a company to go and get the loans and he would pay them
10% (this was in terms of a raising fee). As a result of the short-term loans, he even got
discounts locally.
 If he bought stock in bulk he would be able to claim a discount. He could borrow
money at 10% (as opposed to 18% that he would be charged from other
institutions). He did have to pay an agent a ‘raising fee’. The expenditure that G
wanted to deduct was the interest on the loan, and the interest paid to the agent.
 HELD: You do not need to distinguish between the interest in the loan and the raising-
fee because this is some consideration that needs to be paid in raising the loan.

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 The case quoted ‘Electric Tramway: the link must be closely linked so that it is
regarded as the cost in performing…’ The court asked what this meant.
 The court held that expenses will be deductible if the expenses are so closely
connected with the income earning operation that it would be proper, natural or
reasonable to regard them as part of the cost of performing the income earning
operation.
 NEXT CONSIDERATION: Was it ‘proper, natural or reasonable’: you need to look
at the purpose of the expenditure and what it affects? You need to determine why you
took out the loan?
 If you took out more stock, you will earn more income.
 The court then said that interest paid where you acquire fixed or floating capital would
seem to be deductible.
 So even if you take out a loan to buy a machine, although you incur that
expenditure, the interest on that loan will be deductible.
 But the money that you actually pay to acquire that machine will not be deductible
because it is of a capital nature.
 Joffe & Co (Pty) Ltd v CIR 1946 AD 157:
 Expenditure which is a necessary concomitant to the business will be deductible.
 HELD: it is not a necessary concomitant to the business of a concrete engineer to pay
compensation for being negligent.
 Compare to Port Elizabeth Electric Tramway (Pty) Ltd v CIR.
 Weinberg:
 FACTS: Here the TP had a contract with the garage owner to park his car in his
garage. One of the TP’s worker’s decided to take the car for a drive and had was an
accident. The garage owner had to the pay damages, and wanted have the money paid
deducted
 HELD: The court held that this was not a necessary concomitant to pay damages for a
joy-ride.
 It would have been different if the car was on a jack and fell off, causing damages.
 CIR v Nemojim (Pty) Ltd1983 (4) SA 935 (A) (IMPORTANT CASE)
 What they would do is that it would identify companies that it could acquire that had
cash reserves (for instance it has already disposed of capital assets).
 At the time, individuals were taxed on their dividends. So Mr X would not want a
dividend From A Co. Rather Mr A would sell his shares to N Co: then his proceeds
would be capital in nature, and therefore not included in gross income.
 He could therefore afford to sell the shares for a slightly lower price.
 N Co then stepped in and said that it deals in shares: it would buy all Mr A’s shares (for
R900 000, even though A co was worth R1 Million) (NOTE: ITC 932 says that you value the shares with reference
to the underlying assets). N co then becomes the shareholder of Co A. it would then declare a
dividend, because at that stage companies were not taxed on dividends. N Co would
then sell the company for a fraction of the price because it was an empty shell (i.e. it
lost money).
 The position of X co would be that it has made a huge loss on the books: ISSUE:
can it claim the loss:  it was a share trader and it made a loss. So was the loss
incurred in the production of income?
 The court said that R (N Co’s director) through N Co. sought out and purchased
dormant companies with substantial cash reserves available for distribution.
 Then the court asked what the proceeds were in the whole transaction: It put in the sale
price of the shares and then received the dividends: the dividends and the retail price of
the shares were the income of the transaction.

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 IMPORTANT: The court held that in each case, the dividend and the resale price, the
dividend constituted by far the major component of such proceeds and were the sine
quo non for the profitability if the transaction,
 N Co would not have entered into the transaction ‘but for’ the dividend. As a
result.
 HELD: The receipt of the dividend was not a mere adventitious event it was
something planned by N Co to take place immediately after the transfer of the
shares.
 Therefore you can see where the court is going with this: dividends are except income,
you therefore cannot then claim this expenditure and claim that it was as a result of the
production of income.
 So although you include it in gross income, you do not include it in income
(section 11 read with section 23)
 The expenditure of the losses that N co wanted to claim were minimal.
 The court looked at CIR v Genn & Co (Pty) Ltd 1955 (3) SA 293 (A): the closeness of
the expenditure and the purpose: HELD the main purpose was not to earn income form
the purpose of the shares, but to acquire tax-exempt dividends.
 In this case, although there is not equity in tax, here it can be reasonable and
apportioned.

 CIR v De Beers Holdings (Pty) Ltd 1984 (3) SA 286 (T)

 The facts are very samovar to CIR v Nemojin: the court here held that dividends were
not in the production of income so any losses associated with them are not in the
production of income.
 ICT 121
 The government compelled the TP to remove locusts from his farm before he could
rent it out.
 HELD: The court held that this was too remote to be deductible.
 ITC 127
 In this case there was a jockey and he took Turkish baths in an attempt to try lose
weight and wanted to claim the money he spent as a deduction.
 The court allowed him to take these baths and claim the deduction because there was a
close enough link.
 CIR v Hickson 1960 (1) SA 746 (A) (EXAM)
 The TP was a guy who worked as a partner in a firm that took part in accounting
aspects of the company (so he got director’s fees). He also earned money on the
tonnage of a certain product. He suffered a serious injury and suffered a spinal injury.
He needed special attention as a result his injury. He did a lot of business in the USA
(New York) and the UK (London). The problem was that he needed specialist care to
look after him, dress him and bathe him as a result of his disability.
 He took his wife to the US and the UK saying that she was cheaper than a nurse, and
he wanted to claim this cost as a deduction.
 His wife spent nearly all her time helping him in the USA, and the same thinig
happened in the UK, expect where she saw her family.
 The court looked at Port Elizabeth Electric Tramway: You do not need to show that the
expenses were necessarily incurred, only that they were bona fide incurred.
 The court held that the costs need to be bona fide incurred, provided it is in the
production of income.

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 The commissioner conceded that here the expense was bona fide, but he argued that
the costs were related to the maintenance of the TP, and were represented all his
domestic or private expenses.
 The reason for this approach was section 23(a) & (b): to the extend that you incur
private or domestic expenses, you are not allowed to claim this as a deduction.
 The court looked at what is meant by ‘private or domestic’: The court said that the
maintenance of the TP means feeding or clothing himself or his family, providing them
with the necessities of life and comforts, and his necessities of life.
 Section 23(b): Here the court said that this means expenses pertaining to the household
and to the TP’s private life, as opposed to his life as a trader.
 The court referred to board-and-lodging, running motorcar for private use, etc.
 The court then had to decide if the wife’s expenses were in the production of income.
 The commissioner then conceded that the wife’s expenses were incurred for the
purposes of trade, but the commissioner then said that the costs in relation to her
were not closely linked to him in the product of income so that they cannot be
linked to his business.
 The court then said that the TP could not have made his trip to the USA and the UK
without making use of his wife’s services, just as he could not have made the trip
without making use of some form of conveyance (i.e. the aeroplane ticket).
 The court put the wife helping him on the same basis as the air ticket.
 The fact that it was his wife was incidental, if it were not for his wife he would not
have sold stuff that he had sold on the trip.
 SILKE: To rank as a deduction, the expenditure must not only have been incurred for the
purposes of income, but there must be a sufficiently distinct and direct relationship or link
between the expenditure incurred and the actual earning of income.
o So, if you taken out a loan to improve your primary residence, you will not be able to
claim this as a deduction.
Section 11(a): to determine taxable income, you are allowed expenditure and losses
The section provides: For the purpose of determining the taxable income derived by any
person from carrying on any trade, there shall be allowed as deductions from the income of
such person so derived expenditure and losses actually incurred in the production of the
income, provided such expenditure and losses are not of a capital nature.
 To the extent that you sell your house, the proceeds will not be included in gross income.
Now, if you buy that house to live in, can you claim a deduction of the house?
o To the extent that it is of a capital nature, there will not be a deduction.
 For example: A baker buys an oven, it will be capital asset that he is acquiring, there are
provisions in section 11(e) with read with section 12(C) that give you capital allowances.
 If the expenditure is of a capital nature in terms of section 11(a), you will not be allowed to
claim a deduction.
4.1.2.6. ‘Not of a Capital Nature’:
a) 1st Test: Fixed Capital v Floating capital:
 New State Areas Ltd v CIR 1946 AD 610
 The TP carried out a business (a mine) in the Springs area. He had a lot of workers and
the town counsel of Springs compelled NSA install a sanitary system for the workers.
At that stage the mine used a bucket system
 In relation to the sewerage system, he paid two charges to the Springs town council.
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a) The cost to the sewers and the connection to the mine’s own property. He would
pay a monthly fee which had to the paid in monthly instalments for 5 years.
b) The second charge was related to the removal of the waste from the company to the
town council’s own sewerage system.
 This was incurred for 15 years and this property did not belong to the Mine, it
remained there property of the town council.
 ISSUE: The court had to decide whether NSA was entitled to claim the deductions on
the payments it made to the town council.
 The court looked an Port Elizabeth Electric Tramway: income is produced by work ,or
services, or activities, or operations,. Sometimes expenditure attached to these
activities is necessary and sometimes they are not.
 The court then said that expenditure may also be incurred by the TP in the ‘means of
production’:
 For example: a property you conduct the business on, your tools used to dig the
mining shafts. This expenditure is sometimes used for the demands of production ,
and sometimes for the expansion and improvement of the business.
 This is an expenditure of a capital nature and you cannot claim it as a deduction
under section 11(a).
 The court said that it would distinguish between floating and fixed capital:
 FLOATING: when the capital employed in the business is frequently changing its
form from money to goods. If this is made for the purpose of making a profit, then
capital employed is floating capital.
 For example: A furniture-maker buys timber to make the furniture and then
sells it: Cash  Goods  Capital again, i.e. It changes its form.
 It can be compared to your stock-in-trade or to trading stock.
 The court then had to decide whether Charge (a) was deductible: the internal sewerage
formed part of the equipment of the mine, and when the instalments were paid they
became the property of the TP. It was therefore part of the capital employed by the TP
in earning its income.
 The internal sewerage formed part of the set-up of the business; therefore without
them he could not have conducted the business. The internal sewerage became
part of the fixed assets of his business.
 HELD: Because it formed part of the equipment of the mine, it was not
deductible.
 Charge (b): The court held that these sewers did not form part of the mine, they were
not made for the mine and the mine did not own the land: NSA was therefore not
acquirement the capital asset.
 The charge was for the use of the Town Council’s sewers and this was a
continuous service provided to the TP and was therefore of a revenue nature.
 This could be compared to rent paid in order to use something.
 CIR v George Forrest Timber Co Ltd 1924 AD 516
 Here the court said that floating capital is consumed and disappears in the very process
of production.
 For example: A baker buys flower and this disappears.
 Fixed capital does not disappear, rather it produces fresh wealth while remaining intact
 For example: The baker’s oven.
 Ordinary merchandise the sold in the course of trade would be floating capital, its use
involves its disappearance and the money obtained for it is received as part of the
ordinary revenue of the business,.

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 For example: In the hands of the baker, the oven is fixed capital, but in the hands
of an oven merchant it will be floating capital.
 ISSUE: If you sink the shafts on the mine: this is part of the income-producing concern
and will therefore be fixed capital. If you open a liquor store, the liquor licence will be
capital in nature because it is not consumed and the licence is to set yourself up in the
business.
o If you are the TP and run a gold mine and you have to build a dam, that dam is capital
in nature because ‘but for’ that dam, you will not be able to conduct your business.

Next test: Look at when you incur the expenditure, does it relate to fixed capital?
b) 2nd Test: Nexus between expenditure and the income-producing activities:
 The ‘fixed v floating capital test’ will not be applicable some areas: such as the electricity
used to run the oven in the case of a baker.
 CIR v George Forrest Timber Co Ltd 1924 AD 516
 The court looked at the trees planted as opposed to the land.
 Capital is employed in creating fresh wealth. Money spent in creating or acquiring an
income producing concert is a capital expedite because it is used to create future profit.
The outlay does to recur (you only incur it once), but the income does recur.
 Importantly, there is a great difference between money spent in creating or acquiring a
source of profit and money spent in working it.
 The first one is capital, and the other is not.
 De Villiers:
 The company does not trade it in land, it trades in timber. The land with its accessories
forms part of the fixed capital. The cost of such land is an outgoing of a capital nature.
The acquisition of the property is added to the fixed capital stock of the company;
however, if the company speculated in land, it would have bought it for there purposes
of reselling (such as a landjobber), and the land would have been treated in the same
way as ordinary merchandise and in that case the expenditure would have been
revenue in nature.
 You look at whether you are establishing your income producing concern (if YES
 capital in nature)
 Then you look at whether it is in the running of the income producing concern: If
YES, then it is revenue in nature, and will then be deductible.
 You look at the TRUE NATURE of the transaction to determine if it is capital in
nature. The cost incidental to the performance of the income producing operation will
be revenue in nature.
 This means that when you incur electricity expenses (for example: The baker in
running his oven) then this is a cost in relation to the performance of the income
producing concern and as such will be revenue in nature.
 Then it will be recurring and you will USUALLY be able to claim it as a
deduction.
 Warner Lambert SA (Pty) Ltd v CSARS 65 SATC 346 (SCA)
 The US pharmaceutical Company operating in SA. In 1978, the company become part
of the Sullivan Code. You had to subscribe to this code, otherwise as a SA company
you will be cut-off from your US parent Company.
 The SA Company had to undertake certain expenses to subscribe to the Sullivan code:
This required its subscribers to use a percentage of its turnover to improve working
conditions for all workers based upon the non-segregation of workers, the

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development of training programmes, equal pay, improving the quality of employee’s

living conditions outside the working environment.
 WL contributed 12% of its payroll expenditure to this.
 ISSUE: Was the expenditure incurred by the TP under the Code deducible?
 Can you say that the expenses incurred by WL were capital in nature?
 Are we talking about the creation or the improvement of a capital asset, if it is
then it is capital in nature.
 HELD: The court held that the payment under the Sullivan Code did not create a new
asset and it did not make any addition to an existing asset.
 You look at the closeness of the expenditure and the income earring operation.
 Here no new asset of the enduring benefit of a training asset has been created, then any
questioned expenditure naturally tends to assumed to be of a revenue nature,
 WL’s revenue income producing operation had been erected a long time before,
and all it was doing was protecting its earnings.
 The court held that periodic payments were required to preserve it from harm (being
cut-of from its parent company), or at least to avert the risk of harm. The court
regarded these payments as being similar to insurance payments and as such were
revenue in nature.
 BP Southern Africa (Pty) Ltd v CSARS 69 SATC 79
 The court looked at what was said in Warner Lambert SA. BP South Africa, under a
licensing contract, made royalty payments to use the trademark and uniform of the
designs used by BP PLC (a foreign company).
 ISSUE: Were these royalty payment of a capital nature?
 HELD: The court held that BP South Africa not acquire a capital asset. The
Intellectual Property assets remained with BP PLC in the UK and if the agreement was
terminated, then BP SA would cease to have the right to used the Intellectual Property.
 The recurrent cost of procuring the use of something belonging to another is
revenue in nature.
 For example: Rent is an expenditure that is revenue in nature because it is of a
recurring nature and the property belongs to someone else.
 The court linked the Intellectual Property rights with rent, especially as for were of a
recurring nature.
 The expenditure was so closely linked with BP SA’s income operations that it is
considered revenue in nature.
c) 3rd Test: The Enduring Benefit Test:
 Does the baker, when he acquires the oven get an enduring benefit? YES. When he
acquires his flour he does not.
o Therefore, to the extent that you obtain an enduring benefit, the expenditure will be
capital in nature
 See New State Areas Ltd v CIR 1946 AD 610: the court said that ‘enduring’ is meant in the
way that fixed capital endures. Expenditure in acquiring floating capital is not made in
acquiring an enduring asset.
o The floating capital (for example: the flour) is made with the view of acquiring an
asset that can be turned over in the course of trade at a comparatively early date.
 Palabora Mining Co Ltd v SIR 1973 (3) SA 819 (A)
 Here the TP mined and sold copper. In 1963 it issued a prospectus to raise capital and
said that it would start mining within 3 years. The TP then had to get a supply of water
from the Water Board to enable him to do this. This would have taken a long time as

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would not have been able to begin mining within 3 years. He then installed some of his
own water works on his neighbour’s farm just to accelerate the commencement of his
business.
 He saved about eight months, he commenced trading and made up the loss that he
had incurred to accelerate the water supply within three weeks.
 ISSUE: Was the payment incurred to accelerate the water supply done in acquiring a
lasting benefit?
 The ‘Enduring Benefit Test’ is not exhaustive, it is a useful guide. The payment made
in accelerating the water supply was not made in creating an enduring, long-term
supply of water, but solely for the object of accelerating a supply of water.
 The TP’s business would carry on for 20 years, and the accelerated water supply
would only last for 8 months.
 Because there was no enduring benefit, the payment made by the TP in
accelerating the water supply was revenue in nature.
 CIR v African Oxygen Ltd 1963 (1) SA 681 (A)
 Here the TP entered into an agreement with a competitor that the competitor would not
compete with him.
 One of the tests that the court applied was whether African Oxygen acquired an asset
of an enduring benefit in entering into this agreement.
 SARS argued that this was short lived.
 HELD: The agreement would last for 20 years and the court said that ‘enduring’ here
cannot be indeterminable. Depending on the nature of the enterprise and the benefit; a
lessor degree of permanence will be enough, and as such, it will form part of an
enduring benefit of a capital nature.
d) 4th Test: The Once and For All Test:
 The recurrence of an expenditure is usually an indicator that the expenditure is of a
revenue nature: this includes administrative expenses.
o Look at BP Southern Africa (Pty) Ltd v CSARS: rental is recurring and therefore
generally revenue in nature.
 Nchnmaga Consolidated Copper Mines Ltd v COT 1962 (1) SA 381 (FC)
 Here the TP paid a sum of money to a company to not produce copper for one year.
 When expenditure is made not only ‘once and for all’, but with the view of bringing to
the existence an asset of advantage for the enduring benefit of trade, the expenditure is
usually attributable not to revenue but to capital
 When you incur it once and for all, it is capital, unlike the rental (which is
recurring).
 For example: The baker will acquire his oven once and for all. The flour will be
recurring.

4.1.2.7. Prohibited deductions: ‘to the extent … not expended for the purposes of trade’:
 PREVIOUSLY, section 23(g) read that monies had to be laid out “wholly and exclusively
for the purposes of trade”. The section was amended with effect from 1 January 1993 to
read that a deduction will be allowed “to the extent that monies” were laid out or expanded
for the purposes of trade: i.e. apportionment was allowed.
 CIR v Pick ‘n Pay Wholesalers 1987 (3) SA 453 (A)

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 P’nP incurred certain expresses from a so called ‘Urban Foundation.’ Raymond

Ackerman wanted to create the image of P’nP as a caring supermarket. It therefore
made a lot of contributions to the Urban Foundation and it wanted to claim the
contributions as deductions.
 The court looked at P’nP’s press conference: The sole purpose for the foundation was
philanthropic and therefore it was not in the production of income nor was it for the
purposes of trade.
 This was done to enhance its image as a caring supermarket
 HELD: The court therefore disallowed the deductions that P’nP wanted to claim.

4.2. APPORTIONMENT:
 CIR v Nemojim (Pty) Ltd1983 (4) SA 935 (A)
 The court apportioned expenditure incurred by the taxpayer in the acquisition of shares
according to the dual purpose of the taxpayer in the acquisition of the shares: the
expenditure was incurred to earn income in the form of the proceeds of there shares
when they were ultimately sold as well as to earn dividends which are exempt income
 N Company’s share-dealing business had a dual purpose:
a) The earning of income in the form of the proceeds of the shares on resale; and
b) The earning of exempt income in the form of dividends.
 The Income Tax Act does not make any provision for apportionment, but it is
nevertheless a device which has previously been resorted to where expenditure is a
globular sum has been incurred by the taxpayer for two purposes: one of which
qualifies as a deduction and the other does not.
 SIR v Guardian Assurance Holdings 1976 (4) SA 522 (A)
 FACTS: The TP wanted to raise capital on the market. He placed 6 Million shares at
R1.50 each because he needed R 9 Million via a public listing.
 The reason that GAH used a public listing was that there shares would be over-
subscribed and the taxpayer would earn interest for the period from payment of the
subscription price until such time as excess subscription payments were refunded.
 So for one month GAH had the use of the money derived from the overbearing of
the shares. This could be placed in a interest bearing account to derive interest.
 Because GAH went the public listing route, it incurred additional expenses (such as
advertising the shares, etc) and it wanted to claim these as deductions.
 SARS did not want to allow the deduction because it went the public and not the
private listing route.
 HELD: The court acknowledged that the Income Tax Act does not allow for
apportionment. But the court agreed with the apportionment by the taxpayer, namely
floatation in excess of what would have been expended in private listing were claimed
as a deduction as being incurred in the production of income and not of a capital
nature.

4.3. APPLICATION OF THE GENERAL TESTS: INTEREST:

GENERAL:
 Juta’s Income Tax describes interest as “consideration paid for the use of money and which
is akin to rental paid for the use of a thing or the creditor’s share of the profit which the
borrower or debtor is presumed to make from the use of money”.

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o Receipt or accrual of interest is generally revenue in nature and therefore taxable. The
deduction of interest is often disallowed under section 11(a) or on the basis that it is
prohibited in terms of section 23(b) as it is a domestic or private expenditure.
 WILLIAMS: Expenditure on interest qualifies as a deduction under section 11(a) if it was
incurred in the ‘carrying on of trade’ and ‘in the production of income’, and was not of a
capital nature.
o Interest incurred for domestic or private purposes is explicitly barred from deduction
by section 23(b).
o Where the interest was partly for the purposes of trade and partly not (for example:
private purposes), section 23(g) permits apportionment into deductible and non-
deductible components.
 NOTE: Regarding Interest, try to think of this as being similar to rental. It is recurring and
should be revenue in nature. The problem is that it is not usually deductible as it is not
‘in the production of income’, and it is not ‘for the purposes of trade’.
o Do not get confused with the capital amount of the loan and the interest payable on that
loan.
o If you take out a loan to buy a house to derive rental, then you need to ask if this is in
the production of income, whether this is a capital nature.
 The case of CIR v Genn and Co (Pty) Ltd 1955 (3) SA 293 (A) says that interest paid on
money borrowed and used for the purposes of a business would appear to be expenditure
actually incurred in the production of the income of the business, whether the loan was for
acquisition of fixed or floating capital.
o Generally, if the interest is for your business, it would be for the purposes of trade and
it will therefore be revenue in nature.
o You will not be able to claim the deduction if it is incurred privately and not for the
purposes of trade.
a) Borrowing for General Trading Purposes:
 Producer v COT 1948 SR 62
 This case dealt with a Zimbabwean partnership that had formed a South African
company in order to have a platform for the sale of its product in South Africa. All the
shares in the South African company were held by the Zimbabwean partnership except
for two shares. The Zimbabwean partnership made substantial loans to the South
African company and this was for the South African company to extend credit to its
creditors. Then the partnership sold all its assets and liabilities to another Zimbabwean
company.
 The South African company was therefore indebted to the Zimbabwean company.
So its balance-sheet did not very good. What they did was that the Zimbabwean
company took up extra shares in the SA company, so instead of having £50 000 of
shares, it now took up an additional £50 000: therefore the share capital was
increased to £100 000.
 The SA company owed the Zimbabwean company an amount because of the loans
extended to it and the Zimbabwean company owed the SA company an amount for the
acquisition of the shares (i.e. they both owed each other money).
 The shares were therefore acquired by the Zimbabwean company by way of a
cancellation of the loan.
 The Zimbabwean company also had other areas of business and it took out loans itself
in order to fund the loans to the SA company, and it had to pay interest on those loans.

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The Zimbabwean company wanted to claim a deduction of the interest on the loans
made in its course of business and for the SA company.
 The Commissioner wanted to disallow a portion of the interest that the Zimbabwean
company wanted to claim on the basis that that portion of interest related to the shares
that are not income-producing.
 Remember CIR v Nemojim (Pty) Ltd: If you buy shares for the purposes of
dividends, then you will not be able to claim a deduction on this because those are
exempt income.
 HELD: The court agreed with the Commissioner and said that if it could be shown
that the Zimbabwean company had gone out to the bank to get a loan to acquire shares,
then there is a direct link between the loan and acquiring shares and you will not be
able to claim the deduction.
 The TP agreed with this principle, but argued that it did not go out and borrow that
specific amount to acquire the shares: it was merely a cancellation of the loan the
Zimbabwean company had previously given. They had borrowed the money for
general trading purposes / activities of the trading company, and it was not for the
acquisition of the shares.
 The court held that the loan was for trading purposes and the balance sheet of the SA
company had been strengthened because the liabilities had decreased and it owed less.
 Therefore, indirectly, the Zimbabwean company had benefited.
 PRINCIPLE: There must be an immediate and direct link between the borrowing
and the income producing asset (here the shares produced dividends).
 The Zimbabwean company was allowed to claim the total interest of the loans
because there was no direct link.
 Financier v COT 1950 SR 69
 Here there was a Zimbabwean company that carried on a business as a money-lender.
It would discount bills, it made loans and it also had investments in shareholding. It
took out loans in doing the course of its business.
 The commissioner disallowed a portion of the interest on the loans taken out by
Financier in its business as a money-lender, to the extent that it related to the shares.
 HELD: The court looked at Producer v COT and said that following about that case:
where the TP borrows a specific sum of money and applies that sum to a purpose
unproductive of income, not directly connected with the income-earning part of the
business, then the interest paid on the borrowed money cannot be deducted as
expenditure incurred in the production of income.
 Where a TP had for good and sufficient reasons borrowed money for use in the
business of producing his income, then despite the fact that he subsequently, in
pursuit of legitimate business purposes, invested such money in an investment that
does not produce income, then the interest is still deductible for Income Tax
purposes.
 What the court said was that in Section 82 of the Income Tax Act, the onus in on
the TP to show that he is entitled to a deduction.
 HELD: Here the court agreed with the Commissioner because initially it was clear that
part of the borrowing made by Financier was in the acquisition of shares.
 The TP did not discharge the onus to show that all the borrowing did not relate to
income producing assets.
 CIR v Standard Bank of SA Ltd 1985 (4) SA 428 (A) (EXAM)
 NOTE: Banks will take deposits from the public and give that person a small amount
of interest, and then lend money to people who do not have money and charge a very
high interest.

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 Standard Bank would take in all these little loans and would want to claim the interest
it pays (e.g. 5%) as a deduction, but the interest that it receives would be included in
its gross income. The deposits that it gets will go into a general pool from which it
would conduct its business: make loans, etc.
 What happened was that Standard Bank was required by some of its customers (Co A)
to subscribe for preferent shares instead of a loan. Therefore what Standard Bank will
receive is interest as well as dividend income because it has now subscribed for
preferential shares instead of a loan.
 Standard Bank therefore became a shareholder and it now received interest. The
reason that Co A would want to subscribe for preferential shares and not a loans
was because the preferential share is not reflected as a loan in that company’s
books. Here Standard Bank would be reflected as a shareholder.
 NOTE: Dividend income is also exempt income, so Standard Bank would not pay
tax on exempt income. The dividend rate will normally be lower than the interest
rate (for example: 10% interest for loans; 7% for dividends), but it will not pay tax and this will
compensate Standard Bank for not paying tax.
 Standard Bank was reluctant to allow this ‘Preferent-Shares-Scheme’: Its security
was also less because the creditors are paid first in the event of insolvency. As a
shareholder, its position would be weaker.
 As a result of this reluctance, in 1981 about 2.5% of its income was derived from
this type of scheme.
 SARS said that it would not allow it the full amount of interest that Standard Bank
had to pay its depositors because a portion of Standard Bank’s gross income was
exempt income. It wanted to apply an apportionment as well.
 ISSUE: The court had to determine whether the Commissioner was correct in only
allowing Standard Bank to claim a portion of the interest that it had to pay to its
depositors.
 HELD: The court asked what the purpose of the expenditure and what it affects (this was
said in CIR v Genn and Co (Pty) Ltd and Port Elizabeth Electric Tramway (Pty) Ltd v CIR): You look at the
closeness of the expenditure and the income earning operations of Standard Bank.
 The court asked if Standard Bank could show that it borrowed a specific amount
to subscribe to shares: was there an immediate link between the investment and
the subscribing to preferent shares?
 The court held that Standard Bank borrowed in general and upon a large scale to raise
floating capital for its business. The money went into the general pool of funds and
because if this you are not longer able to show the link between the deposit and the
subscription of the preferent shares.
 The court went on to say that the business of Standard Bank is of a matter of
commercial necessity the borrowing of money from its depositors. This money
goes into a common pool to be used for all purposes because of preferent shares or
loans that it has made. If you look at the small proportion of the dividend income,
then this was ‘small and insignificant’ if you look at the general total of the
business.
 The court also looked at the fact that Standard Bank only took out these shares in
special circumstances, i.e. for certain special customers.
 The court therefore held that Standard Bank was allowed to claim the total amount of
the deduction and there was no apportionment.
 CIR v Allied Building Society 1963 (4) SA 1 (A):
 The facts were similar to CIR v Standard Bank of SA Ltd. Allied Building Society
received deposits from the public in general. It then invested these in various

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properties; some was for the producing of income and others were rented out. So the
expenses incurred by Allied Building for its head office staff will be allowed as a
deduction for the purposes of trade. Allied Building also had various properties that
were not occupied but that it wanted to renovate later on to derive rental on.
 It therefore invested in some of the properties.
 The Commissioner wanted to disallow Allied Building (like Standard bank) a portion
of the deposits because it felt that some of the properties were not productive, so Allied
Building should not be able to claim a deduction of the interest.
 HELD: The court held that you look at the true nature of the transaction, you do
not look at the ultimate use or destination of the depositee’s money to determine
whether you are entitled to a deduction or not.
 You look at the purpose of the borrowing: Allied Building’s purpose in taking the
deposits was to earn income. Allied Building’s basic business was to borrow
money cheaply and lending it out more dearly, and the money that it borrows
constitutes its floating capital which it lends out at interest, and thereby earning
income, because ‘but-for’ these deposits, Allied Building would not earn income.
 The fact that it borrowed money carried with it an obligation to pay interest, and only
by paying interest can the society carry on with its business.
 The court then held that the business of the company was not the acquisition of
immovable property, but the earning of income by investment. The acquisition of the
non-revenue producing property was purely incidental to the business of borrowing
money in order to earn income by investment.
 The court said that the society would not have borrowed less or more depending
on whether it would acquire properties.
 The court held that Allied Building was entitled to claim the full deduction on the
interest it paid on the deposits.
b) Borrowing for the Purposes of Acquiring Shares:
 Shapiro v CIR 1928 NPD 436
 NOTE: If you acquire shares and you take out a loan to get those shares, then the
interest on the loan will generally not be in the production of income.
 S borrowed money (i.e. he took out a loan) to fund the acquisition of shares from a
company’s controlling shareholder (Mr A). After the acquisition of Mr A shares, in
terms of the agreement, S would be appointed as the Managing Director of
Company A.
 As the Managing Director, he would earn a salary, commission, and a housing
allowance.
 S wanted to claim the interest on that loan as a deduction, because he said that if he got
the shares he would get a salary, commission and housing allowance: i.e. he would get
income.
 He said that he did not acquire the shares to ‘supplement’ his income; rather had
acquired the shares to derive income in the form of a salary.
 HELD: The court held that S’s shareholding did not produce that income. It did agree
that ‘but for the shares’ he would not get the position of the Managing Director, but
after he was made the Managing Director, the Company would pay the salary from its
own resources. The TP’s occupation as a Managing Director gave rise to the salary
and the commission and allowance; and not his position as a shareholder.
 As that income was in relation to his position as a Managing Director, he could
not claim the interest on the loan as a deduction because the acquisition of the
shares was not in the production of income.

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 CIR v Drakensburg Garden Hotel (Pty) Ltd 1960 (2) SA 475 (A)
 FACTS: The TP was a lessee from Company A that had a hotel on the property as well
as a trading store. The TP subleased the hotel to a partnership and derived rental
income from this lease. The TP then acquired the shares in Company A from the
existing shareholders and took out a loan in order to do so.
 The TP said that it did not acquire the shares to get a dividend income; it acquired
the shares to ensure that it would get a fixed and secure rental income in the
future.
 HELD: The court found in favour of the TP that the interest of the loan was an
expense incurred it the production of income (the TP took out the loan in order to
acquire the shares in Company A that leased the hotel, thereby deriving income).
 The court therefore allowed the TP to claim a deduction on the interest on the loan
 The court said that the connection was close enough between the interest incurred on
the loan, and the income that he would derive as rental income.
 NOTE: The dissenting judge said that the interest incurred on the loan was of a
capital nature, but even it he was wrong, it was not in the production of income.

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