TAX2601 ASSIGNMENT 1 SEMESTER 2
QUESTION 1
To determine whether the amount of R4 300 000 received by Groundhog (Pty) Ltd will be regarded as
gross income as defined in the Income Tax Act for the year of assessment ending on 31 March 2025, we
need to consider the definition of “gross income” in the Income Tax Act (Act No. 58 of 1962) in the
context of South African tax law.
Definition of Gross Income
Gross income is defined in section 1 of the Income Tax Act as:
- in the case of a resident, the total amount, in cash or otherwise, received by or accrued to or in favour
of such resident; or
- in the case of a non-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 a year of assessment, excluding receipts or accruals of a capital nature.
Analysis of the Amount Received
1. *Nature of the receipt*: Groundhog received R4 300 000 from GCH Developers (Pty) Ltd for the sale
of a vacant piece of land.
2. *Capital vs. Revenue*: The key issue is whether this amount is of a capital or revenue nature. The land
was purchased for the purpose of building a new factory for manufacturing, indicating it was intended
for use in the business but was instead sold.
3. *Intention at time of acquisition*: Groundhog initially intended to use the land for building a factory,
suggesting a capital asset. However, the land was sold before being used for manufacturing.
South African Tax Law Considerations
- *Case law and principles*: In South African tax law, the distinction between capital and revenue is
crucial. Amounts received from the disposal of a capital asset are generally not included in gross income
unless the taxpayer is in the business of dealing in such assets (e.g., property developers).
- *Groundhog’s situation*: Groundhog is a manufacturer of motorcycle parts, not a property dealer. The
land was acquired for a specific business purpose (building a factory) but was sold.
Conclusion
QUESTION 1
To determine whether the amount of R4 300 000 received by Groundhog (Pty) Ltd will be regarded as
gross income as defined in the Income Tax Act for the year of assessment ending on 31 March 2025, we
need to consider the definition of “gross income” in the Income Tax Act (Act No. 58 of 1962) in the
context of South African tax law.
Definition of Gross Income
Gross income is defined in section 1 of the Income Tax Act as:
- in the case of a resident, the total amount, in cash or otherwise, received by or accrued to or in favour
of such resident; or
- in the case of a non-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 a year of assessment, excluding receipts or accruals of a capital nature.
Analysis of the Amount Received
1. *Nature of the receipt*: Groundhog received R4 300 000 from GCH Developers (Pty) Ltd for the sale
of a vacant piece of land.
2. *Capital vs. Revenue*: The key issue is whether this amount is of a capital or revenue nature. The land
was purchased for the purpose of building a new factory for manufacturing, indicating it was intended
for use in the business but was instead sold.
3. *Intention at time of acquisition*: Groundhog initially intended to use the land for building a factory,
suggesting a capital asset. However, the land was sold before being used for manufacturing.
South African Tax Law Considerations
- *Case law and principles*: In South African tax law, the distinction between capital and revenue is
crucial. Amounts received from the disposal of a capital asset are generally not included in gross income
unless the taxpayer is in the business of dealing in such assets (e.g., property developers).
- *Groundhog’s situation*: Groundhog is a manufacturer of motorcycle parts, not a property dealer. The
land was acquired for a specific business purpose (building a factory) but was sold.
Conclusion
