Task 1 a) List the requirements of the gross income definition of the income tax act:
• Total Amount1
• In Cash or otherwise
• Received by, accrued to, or in favour of a resident
• During the year of assessment
• Excluding amounts of a capital nature.
The definition according to Section 1 of the Income Tax Act, states the above requirements
for residents of South Africa. Gross income is the total amount, in cash or otherwise,
received by or accrued to or in favour of such resident during such year or period of
assessment, excluding receipts or accruals of a capital nature.
As for non-residents, the definition is very much the same, except that it changes the fact
that the total amount is received from a source within South Africa.
1
Fundamentals of South African Income Tax 2023. p43. Carpenter, Parsons, West. H&H Publications.
, Task 1 b) Is the R20 000 considered to be of a capital nature?
When it comes to capital, there are several factors one needs to consider, namely:
1. Nature of receipt
2. Sale of assets
3. Intention
4. Change of Intention
Factors to classify as Capital of Nature Brief Overview
Nature of Receipt The amount was received as a capital gain and
not revenue.
Sale of Assets The amount was received as a capital gain and
not revenue.
Intention The intention at the time of sale of the asset
was still for the asset to be a revenue asset.
Change of Intention
Firstly, we see that the original intention of RentaGeny was that the asset will be a revenue
asset. This is established by doing the common profit-making scheme test. Based on the fact
that the company was approached to see if they had a secondhand generator, we can see
that RentaGeny has not had a change of intention for the asset up to that point. So, at the
time of sale, the asset was a revenue asset.
Referring to CIR v Stott (1928 AD), it is important to, first, establish the intention at the date
of acquisition of the asset. Secondly, it was decided that it is possible to have a change of
intention prior to the sale of the asset. We have already established the intention at
acquisition. We have also established that there was no change of intention PRIOR to the
sale of the asset.
Referring to CIR v Pick ‘n Pay Employee Share Purchase Trust (1938 AD) allows for the
purchase of an asset with the purpose of making a profit by selling the asset is allowed. This
was also not the intention of RentaGeny.
We will refer to one more case law. SBI v Aveling (40 SATC 1 17-18). In this case, it was
decided that it must have been the intention of the taxpayer, in this case, RentaGeny, to
cease from using the asset as trading stock or as a revenue asset. This was also not the case
with RentaGeny as the business in Bela-Bela was slow, but they never ceased renting out
the generator over the last four years.
Bearing all of this in mind, RentaGeny will have to exclude the R20 000 from their gross
income as this is of capital nature. Capital nature amounts are excluded from the gross
income definition based on the 5th requirement as stated in Task 1a above.
• Total Amount1
• In Cash or otherwise
• Received by, accrued to, or in favour of a resident
• During the year of assessment
• Excluding amounts of a capital nature.
The definition according to Section 1 of the Income Tax Act, states the above requirements
for residents of South Africa. Gross income is the total amount, in cash or otherwise,
received by or accrued to or in favour of such resident during such year or period of
assessment, excluding receipts or accruals of a capital nature.
As for non-residents, the definition is very much the same, except that it changes the fact
that the total amount is received from a source within South Africa.
1
Fundamentals of South African Income Tax 2023. p43. Carpenter, Parsons, West. H&H Publications.
, Task 1 b) Is the R20 000 considered to be of a capital nature?
When it comes to capital, there are several factors one needs to consider, namely:
1. Nature of receipt
2. Sale of assets
3. Intention
4. Change of Intention
Factors to classify as Capital of Nature Brief Overview
Nature of Receipt The amount was received as a capital gain and
not revenue.
Sale of Assets The amount was received as a capital gain and
not revenue.
Intention The intention at the time of sale of the asset
was still for the asset to be a revenue asset.
Change of Intention
Firstly, we see that the original intention of RentaGeny was that the asset will be a revenue
asset. This is established by doing the common profit-making scheme test. Based on the fact
that the company was approached to see if they had a secondhand generator, we can see
that RentaGeny has not had a change of intention for the asset up to that point. So, at the
time of sale, the asset was a revenue asset.
Referring to CIR v Stott (1928 AD), it is important to, first, establish the intention at the date
of acquisition of the asset. Secondly, it was decided that it is possible to have a change of
intention prior to the sale of the asset. We have already established the intention at
acquisition. We have also established that there was no change of intention PRIOR to the
sale of the asset.
Referring to CIR v Pick ‘n Pay Employee Share Purchase Trust (1938 AD) allows for the
purchase of an asset with the purpose of making a profit by selling the asset is allowed. This
was also not the intention of RentaGeny.
We will refer to one more case law. SBI v Aveling (40 SATC 1 17-18). In this case, it was
decided that it must have been the intention of the taxpayer, in this case, RentaGeny, to
cease from using the asset as trading stock or as a revenue asset. This was also not the case
with RentaGeny as the business in Bela-Bela was slow, but they never ceased renting out
the generator over the last four years.
Bearing all of this in mind, RentaGeny will have to exclude the R20 000 from their gross
income as this is of capital nature. Capital nature amounts are excluded from the gross
income definition based on the 5th requirement as stated in Task 1a above.
