TAX2601 Assignment 1
(COMPLETE ANSWERS)
Semester 2 2025 - DUE 8
September 2025
FOR FURTHER ASSISTANCE PLEASE
CONTACT
,QUESTION 1 (12 marks)
The issue is whether the R amount received by Groundhog (Pty) Ltd from the sale of the vacant
land is gross income as defined in the Income Tax Act, or if it is a receipt of a capital nature.
Gross income, as defined in section 1 of the Income Tax Act 58 of 1962, includes the total
amount, in cash or otherwise, received by or accrued to a resident during a year of assessment,
excluding receipts or accruals of a capital nature.
The distinction between a capital and a revenue receipt is a fundamental concept in tax law. A
receipt is of a revenue nature if it is from the operations of a business or as a result of a scheme
of profit-making. A receipt is of a capital nature if it arises from the realisation or disposal of a
capital asset.
To determine the nature of the receipt, the courts have consistently applied the "intention test".
This involves looking at the taxpayer's intention when the asset was acquired and also at the
time of its disposal. While the initial intention is important, a change in intention is possible and
can be demonstrated by the taxpayer's actions. The test is a subjective one, based on the facts and
circumstances of the case.
Relevant case law includes:
Natal Launcheon Trust (Pty) Ltd v. CIR (1956) 20 SATC 123: This case established
the principle that the intention at the time of acquisition is key, but can be altered.
CIR v. Stott (1928) 3 SATC 253: This case highlighted that even a profit on the sale of
an asset may not be gross income if the asset was acquired for a capital purpose and the
sale was a realization of that capital asset.
In the case of Groundhog (Pty) Ltd:
1. Initial intention: The company purchased the vacant land on 1 May 2024 for the specific
purpose of building a new factory for its manufacturing business. This is a clear capital
purpose, as the factory would be a long-term, income-producing asset. The land is an
integral part of this capital asset.
2. Change in intention: The company received an unsolicited offer to purchase the land in
January 2025. The directors "decided that the offer was too good to refuse," and accepted
it. This suggests the disposal was an opportunistic realization of a capital asset, rather
than an active step in a scheme of profit-making. The sale was a singular event, not part
of a pattern of buying and selling land. The company's core business is manufacturing
motorcycle parts, not property speculation.
3. Receipt: The R was received on 1 March 2025, which falls within the year of assessment
ending 31 March 2025.
, Conclusion: Based on the initial intention of acquiring the land for a capital purpose (building a
factory) and the subsequent opportunistic sale, the amount received is a receipt of a capital
nature. It does not fall within the definition of gross income and is therefore not subject to
normal tax. The profit, if any, on the sale would be subject to Capital Gains Tax, which is a
separate consideration and is a part of taxable income.
QUESTION 2 (12 marks)
Calculation of Provisional Tax Payments
Provisional tax is a method of paying normal tax in advance. To avoid underestimation penalties,
a provisional taxpayer (which includes all companies) must ensure their provisional tax
payments are based on a "basic amount" or a reasonable estimate of their taxable income.
The year of assessment for Kganya Solutions (Pty) Ltd ends on 31 March 2025.
First Provisional Tax Payment
Due Date: The first provisional tax payment is due six months after the beginning of the
year of assessment, which is 30 September 2024.
Basic Amount: The basic amount is generally the taxable income of the last preceding
year of assessment, provided the assessment for that year was issued at least 14 days
before the provisional payment due date.
The last preceding year is 2024. The assessment for the 2024 year of assessment was
issued on 15 February 2025, which is after the due date of 30 September 2024.
Therefore, the 2024 taxable income cannot be used.
The basic amount must then be the taxable income of the second last preceding year of
assessment, which is 2023.
The assessment for 2023 was issued on 20 September 2024. This is also after the 30
September 2024 due date.
Therefore, the basic amount for the first payment will be the taxable income of the third
last preceding year of assessment, which is 2022.
Basic Amount: R (2022 taxable income).
Calculation:
o Taxable income: R
o Tax rate for a company: 27%
o Normal tax: R x 27%
o First provisional payment = (R x 27%) / 2 = R x 13.5%
Reason: The 2024 and 2023 assessments were issued less than 14 days before the due
date of the first provisional tax payment. Therefore, the 2022 taxable income is used as
the basic amount in terms of paragraph 19(1)(d) of the Fourth Schedule.
Second Provisional Tax Payment
(COMPLETE ANSWERS)
Semester 2 2025 - DUE 8
September 2025
FOR FURTHER ASSISTANCE PLEASE
CONTACT
,QUESTION 1 (12 marks)
The issue is whether the R amount received by Groundhog (Pty) Ltd from the sale of the vacant
land is gross income as defined in the Income Tax Act, or if it is a receipt of a capital nature.
Gross income, as defined in section 1 of the Income Tax Act 58 of 1962, includes the total
amount, in cash or otherwise, received by or accrued to a resident during a year of assessment,
excluding receipts or accruals of a capital nature.
The distinction between a capital and a revenue receipt is a fundamental concept in tax law. A
receipt is of a revenue nature if it is from the operations of a business or as a result of a scheme
of profit-making. A receipt is of a capital nature if it arises from the realisation or disposal of a
capital asset.
To determine the nature of the receipt, the courts have consistently applied the "intention test".
This involves looking at the taxpayer's intention when the asset was acquired and also at the
time of its disposal. While the initial intention is important, a change in intention is possible and
can be demonstrated by the taxpayer's actions. The test is a subjective one, based on the facts and
circumstances of the case.
Relevant case law includes:
Natal Launcheon Trust (Pty) Ltd v. CIR (1956) 20 SATC 123: This case established
the principle that the intention at the time of acquisition is key, but can be altered.
CIR v. Stott (1928) 3 SATC 253: This case highlighted that even a profit on the sale of
an asset may not be gross income if the asset was acquired for a capital purpose and the
sale was a realization of that capital asset.
In the case of Groundhog (Pty) Ltd:
1. Initial intention: The company purchased the vacant land on 1 May 2024 for the specific
purpose of building a new factory for its manufacturing business. This is a clear capital
purpose, as the factory would be a long-term, income-producing asset. The land is an
integral part of this capital asset.
2. Change in intention: The company received an unsolicited offer to purchase the land in
January 2025. The directors "decided that the offer was too good to refuse," and accepted
it. This suggests the disposal was an opportunistic realization of a capital asset, rather
than an active step in a scheme of profit-making. The sale was a singular event, not part
of a pattern of buying and selling land. The company's core business is manufacturing
motorcycle parts, not property speculation.
3. Receipt: The R was received on 1 March 2025, which falls within the year of assessment
ending 31 March 2025.
, Conclusion: Based on the initial intention of acquiring the land for a capital purpose (building a
factory) and the subsequent opportunistic sale, the amount received is a receipt of a capital
nature. It does not fall within the definition of gross income and is therefore not subject to
normal tax. The profit, if any, on the sale would be subject to Capital Gains Tax, which is a
separate consideration and is a part of taxable income.
QUESTION 2 (12 marks)
Calculation of Provisional Tax Payments
Provisional tax is a method of paying normal tax in advance. To avoid underestimation penalties,
a provisional taxpayer (which includes all companies) must ensure their provisional tax
payments are based on a "basic amount" or a reasonable estimate of their taxable income.
The year of assessment for Kganya Solutions (Pty) Ltd ends on 31 March 2025.
First Provisional Tax Payment
Due Date: The first provisional tax payment is due six months after the beginning of the
year of assessment, which is 30 September 2024.
Basic Amount: The basic amount is generally the taxable income of the last preceding
year of assessment, provided the assessment for that year was issued at least 14 days
before the provisional payment due date.
The last preceding year is 2024. The assessment for the 2024 year of assessment was
issued on 15 February 2025, which is after the due date of 30 September 2024.
Therefore, the 2024 taxable income cannot be used.
The basic amount must then be the taxable income of the second last preceding year of
assessment, which is 2023.
The assessment for 2023 was issued on 20 September 2024. This is also after the 30
September 2024 due date.
Therefore, the basic amount for the first payment will be the taxable income of the third
last preceding year of assessment, which is 2022.
Basic Amount: R (2022 taxable income).
Calculation:
o Taxable income: R
o Tax rate for a company: 27%
o Normal tax: R x 27%
o First provisional payment = (R x 27%) / 2 = R x 13.5%
Reason: The 2024 and 2023 assessments were issued less than 14 days before the due
date of the first provisional tax payment. Therefore, the 2022 taxable income is used as
the basic amount in terms of paragraph 19(1)(d) of the Fourth Schedule.
Second Provisional Tax Payment
