,TAX2601 Assignment 1 (COMPLETE ANSWERS)
Semester 1 2025 - DUE 7 April 2025; 100% correct solutions
and explanations.
Mr Xhumalo lives in Gqeberha, South Africa. He manufactures and sells
various grass baskets and placemats from a street stall. Due to the high
demand for his products, he concluded a sales agreement with a well-
known houseware retailer in South Africa. In terms of the agreement, the
retailer will purchase R25 000 worth of products from Mr Xhumalo on
15 February 2025 on credit. The goods must be manufactured and
delivered by 15 March 2025, with payment scheduled for 31 March
2025. The agreement clearly states that Mr Xhumalo will only become
entitled to payment once he has delivered the goods.
Mr Xhumalo’s accountant is uncertain in which year of assessment the
R25 000 must be declared for tax purposes and contacted you for advice.
REQUIRED
MARKS
Discuss whether the R25 000 of the sale will constitute gross income in
the hands of Mr Xhumalo for the 2025 year of assessment.
Note:
• You can support the main issue in the question with relevant case law
from the module's prescribed case law.
12
To determine whether the R25,000 from the sale will constitute gross
income in the hands of Mr Xhumalo for the 2025 year of assessment, we
need to consider the key concepts of gross income as defined in South
African tax law, specifically in the Income Tax Act (ITA).
, 1. Definition of Gross Income in terms of the Income Tax Act
According to Section 1 of the Income Tax Act, "gross income" is
defined as the total receipts or accruals of a taxpayer during a year of
assessment, excluding amounts of capital nature. Gross income includes
amounts received or accrued from any trade or business, including
amounts derived from the sale of goods, such as Mr Xhumalo's sale of
baskets and placemats.
However, it’s important to understand when such income is considered
to be "received" or "accrued," as this will determine when Mr Xhumalo
must declare the R25,000 for tax purposes.
2. Accrual vs. Receipt
In South African tax law, the general rule is that income is taxed on an
accrual basis, meaning that income is recognized as soon as it is due,
regardless of whether it has actually been received.
Accrual Basis: According to Section 22 of the Income Tax Act,
the accrual basis of accounting applies unless otherwise specified.
This means that Mr Xhumalo must declare the R25,000 in the year
he has accrued the right to payment, which in this case is when
the goods have been delivered.
Receipt Basis: In contrast, if Mr Xhumalo operated on a cash basis
(which is not specified in the scenario), he would declare income
when the payment is actually received.
3. When Does the Income Accrue?
The sales agreement clearly states that Mr Xhumalo will only be entitled
to payment once the goods have been delivered. Based on this clause,
the income will accrue to Mr Xhumalo on the date of delivery, which
is stipulated as 15 March 2025.
This is critical because, under the accrual system, income is recognized
when the taxpayer has earned the right to receive payment. Since Mr
Semester 1 2025 - DUE 7 April 2025; 100% correct solutions
and explanations.
Mr Xhumalo lives in Gqeberha, South Africa. He manufactures and sells
various grass baskets and placemats from a street stall. Due to the high
demand for his products, he concluded a sales agreement with a well-
known houseware retailer in South Africa. In terms of the agreement, the
retailer will purchase R25 000 worth of products from Mr Xhumalo on
15 February 2025 on credit. The goods must be manufactured and
delivered by 15 March 2025, with payment scheduled for 31 March
2025. The agreement clearly states that Mr Xhumalo will only become
entitled to payment once he has delivered the goods.
Mr Xhumalo’s accountant is uncertain in which year of assessment the
R25 000 must be declared for tax purposes and contacted you for advice.
REQUIRED
MARKS
Discuss whether the R25 000 of the sale will constitute gross income in
the hands of Mr Xhumalo for the 2025 year of assessment.
Note:
• You can support the main issue in the question with relevant case law
from the module's prescribed case law.
12
To determine whether the R25,000 from the sale will constitute gross
income in the hands of Mr Xhumalo for the 2025 year of assessment, we
need to consider the key concepts of gross income as defined in South
African tax law, specifically in the Income Tax Act (ITA).
, 1. Definition of Gross Income in terms of the Income Tax Act
According to Section 1 of the Income Tax Act, "gross income" is
defined as the total receipts or accruals of a taxpayer during a year of
assessment, excluding amounts of capital nature. Gross income includes
amounts received or accrued from any trade or business, including
amounts derived from the sale of goods, such as Mr Xhumalo's sale of
baskets and placemats.
However, it’s important to understand when such income is considered
to be "received" or "accrued," as this will determine when Mr Xhumalo
must declare the R25,000 for tax purposes.
2. Accrual vs. Receipt
In South African tax law, the general rule is that income is taxed on an
accrual basis, meaning that income is recognized as soon as it is due,
regardless of whether it has actually been received.
Accrual Basis: According to Section 22 of the Income Tax Act,
the accrual basis of accounting applies unless otherwise specified.
This means that Mr Xhumalo must declare the R25,000 in the year
he has accrued the right to payment, which in this case is when
the goods have been delivered.
Receipt Basis: In contrast, if Mr Xhumalo operated on a cash basis
(which is not specified in the scenario), he would declare income
when the payment is actually received.
3. When Does the Income Accrue?
The sales agreement clearly states that Mr Xhumalo will only be entitled
to payment once the goods have been delivered. Based on this clause,
the income will accrue to Mr Xhumalo on the date of delivery, which
is stipulated as 15 March 2025.
This is critical because, under the accrual system, income is recognized
when the taxpayer has earned the right to receive payment. Since Mr
