LML_4808 Income Tax Law Test Bank.

LML_4808 Income Tax Law Test Bank. Question 1 In order to advise Mofokeng if the proceeds of the sale of the fixed property must be included in his gross income for the 2016/2017 year of assessment one has to start by analysing the definition of gross income and it various aspects. “Gross Income” “Gross income” is defined in Section 1 of the Income Tax Act 58 of 1962 which reads as follows: “‘gross income’ in relation to any year or period of assessment, means, i) in the case of any resident, the total amount, in cash or otherwise, received by or accrued to or in favour of such resident, or ii) in the case of any person other than a resident, the total amount, in cash or otherwise, received by or accrued to or in favour of such person from a source within the Republic, during such year or period of assessment, excluding receipts or accruals of a capital nature, 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”1 . From the facts in the question and the definition it is clear that in order to determine if the proceeds forms part of Mofokeng’s “gross income” one has to determine:  whether or not the proceeds is an amount in cash or otherwise;  was Mofokeng is a resident for income tax purposes;  if the proceeds accrued to Mofokeng during the 2016/2017 year of assessment;  if the proceeds for the sale of the fixed property was capital in nature;  if the proceeds are of a capital nature; and  if there is any special inclusions for the amount in gross income. An amount in cash or otherwise Even though the definition of “gross income” specifically states “the total amount, in cash or otherwise” the definition would have included not only money but also the monetary value of property, corporeal or incorporeal, as the term “amount” includes both. In the case of CIR v Delfos the court held that “…tax is to be assessed on all receipts and accruals having a money value…”2 . From the Lace Proprietary Mines Ltd v CIR case is clear that the general principle is, that if a taxpayer receives an amount 1 Section 1 of the Income Tax Act 58 of 1962 2 SILKE: Income Tax Volume 1 16 other than in cash, the market value of such asset should be included in the taxpayer’s gross income3 . As the facts in the question clearly state that the proceeds of the farm is R 7,650,000 there is no question that the proceeds does not have a monetary value. An amount received by or accrued to in favour of the Mofokeng From the definition it is clear that a person must receive an amount or an amount accrues to the person for it to be included in his “gross income”. In the absence of such a receipt or accrual, or any special provisions no amount can be included in the person’s “gross income”4 . As the Act does not define “received by” or “accrued to” it is essential to determine the exact meaning of these words. In Geldenhuys v CIR the court held that the words “received by” means that the taxpayer has received or that it has been received on the taxpayer’s behalf5 . In CIR v Genn & Co (Pty) Ltd the court held that it was not necessary for the taxpayer to have obtained physical control over the money or equivalent for that value to constitute a receipt for the purposes of “gross income” 6 . From the above case’s it is clear that if a taxpayer is entitled to an amount the physical receipt constitute receipt for income tax purposes. In Lategang v CIR it was held that the phrase “accrued to” has the same meaning as entitled to. The principle was therefore formulated that “gross income” accrues to a person in the year of assessment in which the taxpayer becomes entitled to the amount, irrespective of whether the taxpayer only receives the amount at a later date 7 . There is however an important qualification to this principle. In Ochberg v CIR the court confirmed the principle that, for an amount to accrue to a person the person must be unconditionally entitled to the amount 8 . From CIR v Silverglen Investments it is clear that the amount must be included in earlier of the year of assessment in which the accrual or receipt takes place9 . 3 SILKE: Income Tax Volume 1 16 4 SILKE: Income Tax Volume 1 17 5 SILKE: Income Tax Volume 1 18 6 SILKE: Income Tax Volume 1 18 7 SILKE: Income Tax Volume 1 20 8 SILKE: Income Tax Volume 1 21 9 SILKE: Income Tax Volume 1 22 From the facts in the question it is clear that the proceeds of the sale accrued to Mofokeng as the farm was sold to Exaro on 1 March 2016 and as a result it must be included in the year of assessment starting 1 March 2016. Received or accrued to during the year of assessment