LML4804
PORTFOLIO
MEMO
,QUESTION 1 (GROSS INCOME)
Mr Makubu is a South African resident who owns a panel beating (motor vehicle
repair) business, His-Way Mechanics, in Pretoria. On 13 January 2023, Mr
Makubu entered into a contract with Mr Naidoo whereby Mr Makubu was to
purchase parts needed for the repair of vehicles in his business in Pretoria. The
agreement provided that Mr Naidoo would be paid R10 000 upon conclusion of
the contract and R30 000 upon delivery of parts. Mr Naidoo was paid the R10
000 on 13 January 2023 and the balance was paid when the parts were delivered
on 15 March 2023.
Mr Sithole worked as a motor mechanic for His-Way Mechanics for 10 years. In
2020 His- Way Mechanics engaged in a retrenchment exercise as part of the
general policy to reduce their staff due to continuing poor performance of the
business. As a result, Mr Sithole was retrenched on 30 November 2022. Mr
Sithole received R500 000 upon retrenchment as compensation for the
termination of his employment. He was also paid R15 000 in respect of a restraint
of trade, in terms of which he was prohibited from engaging in any motor
mechanic services and activities in and around Pretoria for two years after
termination of his employment.
WHAT IS REQUIRED OF YOU:
With reference to relevant authorities, answer the following questions for
2022/2023 year of assessment:
(a) Explain whether Mr Naidoo should include both amounts of R10 000 and
the balance of R30 000 in his gross income for 2022/2023 year of
assessment. [8 marks]
(b) Does the lump sum payment received in respect of termination of
services form part of Mr Sithole’s gross income? [5 marks]
(c) Does any payment received in respect of a restraint of trade form part of
Mr Sithole’s gross income? [2 marks]
, This question involves the meaning of “accrued to” as seen in the gross income
definition.
The general definition of gross income:
• The year or period of assessment
• In the case of any resident
• The total amount, in cash or otherwise
• Received by, accrued to or in favour of such resident
• Or any person other than a resident (source)
• Excluding receipts or accruals of a capital nature
• But including specific inclusions
Here we are dealing with the question of what cash amounts must be included in the
taxpayers gross income.
The amount to be included will be any income that is off a revenue nature (it is in the
course of business). The amount must also have been received by, accrued to or in
favour of the taxpayer. We need to determine if such amount has in fact accrued to
the taxpayer. With regards to accrued to there was always uncertainty but this has
since been sorted and confirmed through case law and the legislature.
In Lategan, the court decided that once a taxpayer is entitled to an amount, such an
amount has accrued and that if an amount is payable only in the future its discounted/
present value and not the full amount has to be included in the taxpayer’s gross
income.
Ochburg indicated the taxpayer must be unconditionally entitled to an amount before
there can be any accrual.
In Delfos, the judges clouded the issue when decided that an amount had to be “due
and payable” to have accrued.
In 1990, the position was clarified in People’s Stores.
PORTFOLIO
MEMO
,QUESTION 1 (GROSS INCOME)
Mr Makubu is a South African resident who owns a panel beating (motor vehicle
repair) business, His-Way Mechanics, in Pretoria. On 13 January 2023, Mr
Makubu entered into a contract with Mr Naidoo whereby Mr Makubu was to
purchase parts needed for the repair of vehicles in his business in Pretoria. The
agreement provided that Mr Naidoo would be paid R10 000 upon conclusion of
the contract and R30 000 upon delivery of parts. Mr Naidoo was paid the R10
000 on 13 January 2023 and the balance was paid when the parts were delivered
on 15 March 2023.
Mr Sithole worked as a motor mechanic for His-Way Mechanics for 10 years. In
2020 His- Way Mechanics engaged in a retrenchment exercise as part of the
general policy to reduce their staff due to continuing poor performance of the
business. As a result, Mr Sithole was retrenched on 30 November 2022. Mr
Sithole received R500 000 upon retrenchment as compensation for the
termination of his employment. He was also paid R15 000 in respect of a restraint
of trade, in terms of which he was prohibited from engaging in any motor
mechanic services and activities in and around Pretoria for two years after
termination of his employment.
WHAT IS REQUIRED OF YOU:
With reference to relevant authorities, answer the following questions for
2022/2023 year of assessment:
(a) Explain whether Mr Naidoo should include both amounts of R10 000 and
the balance of R30 000 in his gross income for 2022/2023 year of
assessment. [8 marks]
(b) Does the lump sum payment received in respect of termination of
services form part of Mr Sithole’s gross income? [5 marks]
(c) Does any payment received in respect of a restraint of trade form part of
Mr Sithole’s gross income? [2 marks]
, This question involves the meaning of “accrued to” as seen in the gross income
definition.
The general definition of gross income:
• The year or period of assessment
• In the case of any resident
• The total amount, in cash or otherwise
• Received by, accrued to or in favour of such resident
• Or any person other than a resident (source)
• Excluding receipts or accruals of a capital nature
• But including specific inclusions
Here we are dealing with the question of what cash amounts must be included in the
taxpayers gross income.
The amount to be included will be any income that is off a revenue nature (it is in the
course of business). The amount must also have been received by, accrued to or in
favour of the taxpayer. We need to determine if such amount has in fact accrued to
the taxpayer. With regards to accrued to there was always uncertainty but this has
since been sorted and confirmed through case law and the legislature.
In Lategan, the court decided that once a taxpayer is entitled to an amount, such an
amount has accrued and that if an amount is payable only in the future its discounted/
present value and not the full amount has to be included in the taxpayer’s gross
income.
Ochburg indicated the taxpayer must be unconditionally entitled to an amount before
there can be any accrual.
In Delfos, the judges clouded the issue when decided that an amount had to be “due
and payable” to have accrued.
In 1990, the position was clarified in People’s Stores.
