QUESTION 1
(a)
Section 1 of the Income Tax Act1 gross income is defined as "the total amount, in
cash or otherwise, received by or accrued to or in favour of a resident, or earned by
the resident from carrying on any trade within South Africa."
Regarding the situation with Mr. Naidoo, the total amount of R40,000 (R10,000 paid
upon conclusion of the contract and the balance of R30,000 paid upon delivery of the
parts) he received from Mr Makubu for the sale of parts for Mr Makubu's business
could be considered as part of Mr Naidoo's gross income for the 2022/2023 year of
assessment.
This is because the money was received in exchange for goods or services (the
parts) provided by Mr Naidoo to Mr Makubu, and Mr Naidoo is a resident for tax
purposes. Therefore, under the broad definition of gross income provided in section
1 of the Income Tax Act2, these amounts should be included in Mr Naidoo's gross
income for the 2022/2023 tax year.
(b)
The lump sum payment of R500,000 received by Mr Sithole for the termination of his
employment is indeed part of his gross income. This is defined by Paragraph (d)(i) of
the definition of 'gross income' in the South African Income Tax Act, which stipulates
that any amount received or accrued as a result of the termination of employment is
included in gross income.
The case of C: SARS v KWJ Investments (Pty) Ltd3 supported the notion that
compensation payments, in consequence of a termination of an employment
contract, are indeed taxable.
Furthermore, this payment can be classified as a 'severance benefit' as per the
definition given in section 1(1) of the Income Tax Act 4. The condition of Mr Sithole
being retrenched due to a general policy to reduce staff, caused by poor business
performance, satisfies the conditions for a severance benefit. As a severance
1
Section 1 of the Income Tax Act No. 58 of 1962
2
Section 1 of the Income Tax Act No. 58 of 1962
3
SARS v KWJ Investments (Pty) Ltd [2015] 77 SATC 54
4
Section 1 of the Income Tax Act No. 58 of 1962
, benefit, this lump sum should be included in gross income in column 1 of the
comprehensive framework5 and should be taxed according to the separate tax table
for severance benefits as per section 10A of the Act 6.
(c)
Mr Sithole's R15,000 payment in respect of a restraint of trade agreement is also a
part of his gross income. As established in the landmark case of CIR v People's
Stores7, where the court held that a restraint of trade payment was income and
should be taxed, this is in line with the South African Income Tax law's position that
amounts received for a restraint of trade agreement are taxable.
Consequently, as per section 8C of the Income Tax Act8, the R15,000 received by Mr
Sithole should be included in his gross income and taxed according to the
progressive tax table for taxable income of natural persons.
QUESTION 2
2.1
R100 000 once off payment on 1 February 2021:
In considering this payment the Income Tax Act 58 of 1962, Section 11(a), enables
the deduction of expenditure if it's "actually incurred in the production of income,
provided such expenditure is not of capital nature." A fundamental principle comes
from the New State Areas Ltd v CIR9 case, which established the 'once-and-for-all'
test. According to this principle, an expense incurred to create, acquire, or extend an
income-earning structure is considered capital in nature. However, Mr Saki's annual
payment doesn't seem to fulfill this criterion. Instead, it enables him to utilize the
showroom for his business for one year. This usage doesn't extend or create an
income-earning structure, suggesting that this payment is l revenue, not capital, in
nature.
The conclusion is reinforced by the Port Elizabeth Electric Tramway Co Ltd v CIR 10
case. It held that lease payments from where a taxpayer conducts business
5
Chapter 7 of the Income Tax Act No. 58 of 1962
6
Income Tax Act No. 58 of 1962
7
CIR v People's Stores (Walvis Bay) (Pty) Ltd, (1990) 52 SATC 9
8
Income Tax Act No. 58 of 1962
9
New State Areas Ltd v CIR (1946 AD 610)
10
Port Elizabeth Electric Tramway Co Ltd v CIR (1936 CPD 241)
(a)
Section 1 of the Income Tax Act1 gross income is defined as "the total amount, in
cash or otherwise, received by or accrued to or in favour of a resident, or earned by
the resident from carrying on any trade within South Africa."
Regarding the situation with Mr. Naidoo, the total amount of R40,000 (R10,000 paid
upon conclusion of the contract and the balance of R30,000 paid upon delivery of the
parts) he received from Mr Makubu for the sale of parts for Mr Makubu's business
could be considered as part of Mr Naidoo's gross income for the 2022/2023 year of
assessment.
This is because the money was received in exchange for goods or services (the
parts) provided by Mr Naidoo to Mr Makubu, and Mr Naidoo is a resident for tax
purposes. Therefore, under the broad definition of gross income provided in section
1 of the Income Tax Act2, these amounts should be included in Mr Naidoo's gross
income for the 2022/2023 tax year.
(b)
The lump sum payment of R500,000 received by Mr Sithole for the termination of his
employment is indeed part of his gross income. This is defined by Paragraph (d)(i) of
the definition of 'gross income' in the South African Income Tax Act, which stipulates
that any amount received or accrued as a result of the termination of employment is
included in gross income.
The case of C: SARS v KWJ Investments (Pty) Ltd3 supported the notion that
compensation payments, in consequence of a termination of an employment
contract, are indeed taxable.
Furthermore, this payment can be classified as a 'severance benefit' as per the
definition given in section 1(1) of the Income Tax Act 4. The condition of Mr Sithole
being retrenched due to a general policy to reduce staff, caused by poor business
performance, satisfies the conditions for a severance benefit. As a severance
1
Section 1 of the Income Tax Act No. 58 of 1962
2
Section 1 of the Income Tax Act No. 58 of 1962
3
SARS v KWJ Investments (Pty) Ltd [2015] 77 SATC 54
4
Section 1 of the Income Tax Act No. 58 of 1962
, benefit, this lump sum should be included in gross income in column 1 of the
comprehensive framework5 and should be taxed according to the separate tax table
for severance benefits as per section 10A of the Act 6.
(c)
Mr Sithole's R15,000 payment in respect of a restraint of trade agreement is also a
part of his gross income. As established in the landmark case of CIR v People's
Stores7, where the court held that a restraint of trade payment was income and
should be taxed, this is in line with the South African Income Tax law's position that
amounts received for a restraint of trade agreement are taxable.
Consequently, as per section 8C of the Income Tax Act8, the R15,000 received by Mr
Sithole should be included in his gross income and taxed according to the
progressive tax table for taxable income of natural persons.
QUESTION 2
2.1
R100 000 once off payment on 1 February 2021:
In considering this payment the Income Tax Act 58 of 1962, Section 11(a), enables
the deduction of expenditure if it's "actually incurred in the production of income,
provided such expenditure is not of capital nature." A fundamental principle comes
from the New State Areas Ltd v CIR9 case, which established the 'once-and-for-all'
test. According to this principle, an expense incurred to create, acquire, or extend an
income-earning structure is considered capital in nature. However, Mr Saki's annual
payment doesn't seem to fulfill this criterion. Instead, it enables him to utilize the
showroom for his business for one year. This usage doesn't extend or create an
income-earning structure, suggesting that this payment is l revenue, not capital, in
nature.
The conclusion is reinforced by the Port Elizabeth Electric Tramway Co Ltd v CIR 10
case. It held that lease payments from where a taxpayer conducts business
5
Chapter 7 of the Income Tax Act No. 58 of 1962
6
Income Tax Act No. 58 of 1962
7
CIR v People's Stores (Walvis Bay) (Pty) Ltd, (1990) 52 SATC 9
8
Income Tax Act No. 58 of 1962
9
New State Areas Ltd v CIR (1946 AD 610)
10
Port Elizabeth Electric Tramway Co Ltd v CIR (1936 CPD 241)
