TAX2601 Assignment 1
(COMPLETE ANSWERS)
Semester 2 2025 - DUE 8
September 2025
For assistance contact
Email:
, Answers to Tax Questions
QUESTION 1: Groundhog (Pty) Ltd Gross Income Discussion
The issue is whether the amount of R3 200 000 received by Groundhog (Pty) Ltd from the sale
of the vacant land will be included in its gross income for the year of assessment ending 31
March 2025.
Gross income, as defined in section 1 of the Income Tax Act, includes all amounts received or
accrued, in cash or otherwise, during a year of assessment, excluding receipts of a capital nature.
Therefore, the core of the discussion revolves around whether the amount received from the sale
of the land is of a capital or revenue nature.
Initial Intention: At the time of acquisition on 1 May 2024, Groundhog's intention was
to use the vacant land to build a new factory for its manufacturing business. An asset
acquired to be used for a long-term purpose in a company's business operation, such as a
factory building, is considered a capital asset. Based on this initial intention, the land was
a capital asset, and any proceeds from its sale would be considered a capital receipt.
Change of Intention: The principle of "change of intention" is relevant here. An asset
that was initially a capital asset can change its character to a revenue asset (stock-in-
trade) if the taxpayer's intention changes from holding it for long-term use to holding it
for the purpose of resale at a profit.
Application to the Case: The directors decided to sell the land because they received an
"offer too good to refuse." This was a once-off opportunity and not part of a scheme of
profit-making. The company did not engage in any actions to develop or sell the land as
part of a trading business (e.g., subdividing the land or marketing it).
Case Law: This principle was famously established in the case of Natal Estates Ltd v
SIR. The case confirmed that a change of intention on its own is not enough to convert a
capital asset into trading stock. The court must look at the facts to determine if the
taxpayer entered into a new "scheme of profit-making." The sale must be an act of trade,
not merely the realization of a capital asset.
Conclusion: Groundhog’s sale of the land appears to be a realization of a capital asset
and not an act of trade. The company’s original intention was to use the land for its
factory, which is a capital purpose. The sale was a passive response to an unsolicited
offer and not part of a broader scheme of selling property. Therefore, the amount of R3
200 000 will be regarded as a capital receipt and not included in gross income as defined
in the Income Tax Act for the year of assessment ending on 31 March 2025. This amount
would, however, be subject to Capital Gains Tax.
(COMPLETE ANSWERS)
Semester 2 2025 - DUE 8
September 2025
For assistance contact
Email:
, Answers to Tax Questions
QUESTION 1: Groundhog (Pty) Ltd Gross Income Discussion
The issue is whether the amount of R3 200 000 received by Groundhog (Pty) Ltd from the sale
of the vacant land will be included in its gross income for the year of assessment ending 31
March 2025.
Gross income, as defined in section 1 of the Income Tax Act, includes all amounts received or
accrued, in cash or otherwise, during a year of assessment, excluding receipts of a capital nature.
Therefore, the core of the discussion revolves around whether the amount received from the sale
of the land is of a capital or revenue nature.
Initial Intention: At the time of acquisition on 1 May 2024, Groundhog's intention was
to use the vacant land to build a new factory for its manufacturing business. An asset
acquired to be used for a long-term purpose in a company's business operation, such as a
factory building, is considered a capital asset. Based on this initial intention, the land was
a capital asset, and any proceeds from its sale would be considered a capital receipt.
Change of Intention: The principle of "change of intention" is relevant here. An asset
that was initially a capital asset can change its character to a revenue asset (stock-in-
trade) if the taxpayer's intention changes from holding it for long-term use to holding it
for the purpose of resale at a profit.
Application to the Case: The directors decided to sell the land because they received an
"offer too good to refuse." This was a once-off opportunity and not part of a scheme of
profit-making. The company did not engage in any actions to develop or sell the land as
part of a trading business (e.g., subdividing the land or marketing it).
Case Law: This principle was famously established in the case of Natal Estates Ltd v
SIR. The case confirmed that a change of intention on its own is not enough to convert a
capital asset into trading stock. The court must look at the facts to determine if the
taxpayer entered into a new "scheme of profit-making." The sale must be an act of trade,
not merely the realization of a capital asset.
Conclusion: Groundhog’s sale of the land appears to be a realization of a capital asset
and not an act of trade. The company’s original intention was to use the land for its
factory, which is a capital purpose. The sale was a passive response to an unsolicited
offer and not part of a broader scheme of selling property. Therefore, the amount of R3
200 000 will be regarded as a capital receipt and not included in gross income as defined
in the Income Tax Act for the year of assessment ending on 31 March 2025. This amount
would, however, be subject to Capital Gains Tax.
