, TAX2601 ASSIGNMENT 1 SEMESTER 2 2025 ANSWERS
DUE DATE 8 SEPTEMBER 2025
Question 1:
Introduction
The key issue is whether the amount of R4 300 000 received by Groundhog (Pty) Ltd
from the sale of land constitutes gross income as defined in section 1 of the
Income Tax Act 58 of 1962. Gross income is defined as “the total amount, in cash
or otherwise, received by or accrued to … a resident during such year of
assessment, excluding receipts or accruals of a capital nature.” The crucial enquiry
therefore is whether the proceeds from the land disposal are capital in nature
(excluded) or revenue in nature (included).
Nature of the Receipt
Groundhog is engaged in the business of manufacturing motorcycle parts, not in the
business of dealing in land. The land was acquired with the intention of erecting a
factory, i.e. for use as part of the company’s income-producing structure (capital
asset) rather than as trading stock. This points towards the land being a capital
asset.
The decisive factor is the intention of the taxpayer at acquisition, as established
in Elandsheuwel Farming (Edms) Bpk v SIR 1978 (1) SA 101 (A) and Natal
Estates Ltd v SIR 1975 (4) SA 177 (A). If an asset is acquired for long-term use in
the business, it is capital in nature, even if later circumstances lead to its disposal.
Groundhog purchased the land with a clear long-term capital intention (to build a
factory).
Realisation vs. Profit-Making Scheme
DUE DATE 8 SEPTEMBER 2025
Question 1:
Introduction
The key issue is whether the amount of R4 300 000 received by Groundhog (Pty) Ltd
from the sale of land constitutes gross income as defined in section 1 of the
Income Tax Act 58 of 1962. Gross income is defined as “the total amount, in cash
or otherwise, received by or accrued to … a resident during such year of
assessment, excluding receipts or accruals of a capital nature.” The crucial enquiry
therefore is whether the proceeds from the land disposal are capital in nature
(excluded) or revenue in nature (included).
Nature of the Receipt
Groundhog is engaged in the business of manufacturing motorcycle parts, not in the
business of dealing in land. The land was acquired with the intention of erecting a
factory, i.e. for use as part of the company’s income-producing structure (capital
asset) rather than as trading stock. This points towards the land being a capital
asset.
The decisive factor is the intention of the taxpayer at acquisition, as established
in Elandsheuwel Farming (Edms) Bpk v SIR 1978 (1) SA 101 (A) and Natal
Estates Ltd v SIR 1975 (4) SA 177 (A). If an asset is acquired for long-term use in
the business, it is capital in nature, even if later circumstances lead to its disposal.
Groundhog purchased the land with a clear long-term capital intention (to build a
factory).
Realisation vs. Profit-Making Scheme
