Suggested Solution to Exercise 2

SUGGESTED SOLUTION TO EXERCISE 2.1

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1.False – see, for example, the ‘special inclusions’ to the definition of ‘gross income’. And a taxpayer’s ‘taxable capital gain’ is included in his taxable income.

2.False – for a resident his world-wide receipts and accruals are taxable and for a non-resident his deemed South African source receipts and accruals are taxable in addition to his true South African source receipts and accruals.

3.False.

4.False – it taxes its residents on a world-wide basis and its non-residents on a source (true or deemed) basis.

5.False.

6.True – only if it accrues to a resident.

7.False.

8.False.

9.False – although it is likely to be capital in nature it is included I the employees’ gross incomeunder paragraph(cA) of the definition of ‘gross income’.

10.False – the provisions of paragraph(l) of the definition of ‘gross income’ apply only to farmers and lessors of farming land. A ‘bread’ subsidy is taxable, but it is taxable under the opening words of the definition and of ‘gross income’ and not under one of its so-called special inclusions.

11.False – but the disposal of certain inherited assets could give rise to a taxable capital gain.

12.False – it is not a ‘receipt’ within its meaning of the term ‘received by’ for purposes of the definition of ‘gross income’, and it is not
an accrual.

13.True – but it is possible for a taxpayer to be an investor (and not a dealer) in krugerrands (see, for example, CIR v Nel ([1997] 4
All SA310 (T), 59SATC349), ITC 1355 ((1981) 44SATC132), ITC1379 ((1983) 45SATC236), and ITC1543 ((1992) 54SATC446)). The disposal of krugerrands held as an investment could give rise to a taxable capital gain being included in the investor’s taxable income.

14.True – but for ‘post-21March 1962’ divorces alimony is then exempt income.

15.False – it is deemed, under paragraph(d) of the definition of ‘gross income’, to accrue to the deceased immediately prior to
his death.

16. True

17. True

18. False – there are special inclusions that form part of gross income page 75.

19. False

20. True – page 14

21. True – page 15

22. True - page 88

23. True – page 87

24. False –only in one year of assessment , whichever occurs first will determine inclusion of the year of assessment page 42.

25. True – page 53

26. True – resident taxpayers are taxed on his world wide receipts page 34.

27. True – non-resident taxpayers are taxed only on receipts and accruals derived from sources within or deemed to be within the Republic page 34.

28. True – page 38.

29. True – use “physical presence” test to determine page 37.

30. False

31. False

32. False but depends can be true if the person was born or died during current year

33. True – 91 days refer to requirement that need to be met of the “physical presence” test page 37.

34. True – page 286.

35. True – page 281.

SUGGESTED SOLUTION TO EXERCISE 2.5

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The term ‘received by’ as used in the definition of ‘gross income’ means

‘received by the taxpayer on his own behalf for his own benefit’.

Refer to Geldenhuys v CIR (1947 (3) SA 256 (C), 14 SATC 419).

It has also been held that not every obtaining of physical control over money or money’s worth is a receipt for the purposes of the definition of ‘gross income’. Refer to CIR v Genn & Co (Pty) Ltd (1955 (3) SA 293 (A), 20 SATC 113).

Money borrowedis not ‘received by’ the borrower within the meaning of the definition of ‘gross income’, since at the same time the borrower is given possession of the money he is obliged to repay it, albeit at a later date.

It has been held that when commodities are sold together with the container in which they are packed subject to the payment of a deposit fee for the container, the deposit fee received must be part of the gross income of the supplier. This is provided the deposit fees are not received in ‘trust’ by the supplier but become his absolute property. Refer to Brookes Lemos Ltd v CIR (1947 (2) SA 976 (A), 14SATC295), Greases (SA) Ltd v CIR (1951 (3) SA 518 (A), 17 SATC 358), and Pyott Ltd v CIR (1945 AD 128, 13 SATC 121).

Deposit fees are, however, not included in gross income if the deposits are received by the supplier in the capacity as a trustee for his customers. This would be in a situation when the supplier does not have the right to retain these deposits as his own absolute property and freely mix them with his own money, or to use them for his own purpose. It is submitted that he must be under an obligation to keep the deposit in trust for it not to constitute gross income. The keeping of deposits in a separate bank account controlled by a trustee may indicate that a taxpayer is holding them in trust.

The above considerations have been taken into account in answering the individual transactions that follow:

Zulu Majose

When Zulu Majose received the R90000 loan he immediately became liable to repay it on the completion of the medium term. Thus the R90000 does not constitute his gross income. (In addition, it is a receipt of a capital nature.)

Rifleman Malan

Rifleman Malan physically received R144000 during the 2012 year of assessment. He did not spend it but deposited it into a separate bank account. Does this action of his indicate that he is holding this money in trust? Was the R144000 received by him as a deposit or as a loan? His behaviour would suggest that he has not accepted the money as his absolute property. Yet what he has done, may not be the required behaviour as referred to in the reported cases, since this money is not subject to the control of trustees. Rifleman Malan may be able to argue that the R144000 is not part of his gross income since he has not as yet received it for his own use and benefit – it may have to be repaid. His actions support this argument. It is possible that a court may agree with his argument if this matter were to go on appeal.

McGlen Estate Agents CC

Only R216000 of the R4320000 received by McGlen Estate Agents CC was received by it for its own use and benefit. The R4104000 (R4320000 – R216000) was received by it in a trustee capacity. McGlen Estate Agents CC must include in its gross income the R216000 (but not the R4320000).

Clive Barclay

The movement of funds ‘within the same taxpayer’ does not constitute a receipt and a payment for normal tax purposes. The money he deposits in his current account from his call account will not constitute gross income since it is not ‘received by’ him from another person. (The money he withdraws from his call account to pay into his current account will also not be an expense incurred.) The R270000 is therefore not gross income as defined.

Lucky Boy

All the amounts received by Lucky Boy are receipts for his own use and benefit. A receipt need not be a cash receipt. It follows that the value of the motor car would constitute a receipt. It has an ascertainable money value. The bequest of the car and the bequest of the R150000 cash are receipts of a capital nature and thus, do not come into his gross income, there also being no provision to bring a receipt of this nature into the definition of ‘gross income’. The holiday bonus would be an amount for services rendered (paragraph(c) of the definition of ‘gross income’ therefore applying). But the R4500 birthday gift would not be for services rendered (but rather for friendship). There is an insufficient causal relationship between the R4500 birthday gift and the services rendered by Lucky Boy.

Fillherup Motors CC

Interest of R9900 has been earned by Fillherup Motors CC for its own use and benefit. It has accepted this money as its own absolute property. It must, therefore, include the R9900 interest in its gross income. The position in relation to the deposits could well be different. This money is being kept in a separate bank (trust) account. It has not accepted these moneys as its own absolute property and it has not used them for its own purposes. It did not mix them with its own money. It has looked after them in the capacity as a trustee on behalf of its customers. It is therefore submitted that the R135000 is not a receipt within the meaning of the term ‘received by’ for purposes of the definition of ‘gross income’.

SUGGESTED SOLUTION TO EXERCISE 2.5

Page 2 of 2 pages

Fantastic Days Limited

It is clear from the information furnished that Fantastic Days Limited sells the orange juice and the fancy bottle as one item. It is in effect dealing in bottles in addition to dealing in orange juice. The proceeds from bottle sales are used by it as its own absolute property. The deposit fees are not received in trust by Fantastic Days Limited. The R4960000 must be included in its gross income. The R744000 incurred in ‘buying back’ stocks of bottles would be an expense incurred in the production of its income from the sale of bottles. The net effect is that Fantastic Days Limited would have to include in its taxable income R4216000 (R4960000 – R744000) for amounts received and not refunded on bottles sold and not returned.

Alice Acres

The transaction that takes place between Donovan and Alice would appear to be a bona fide business or commercial transaction. He pays her the rental that she would have received had the property been let to a non-connected person. The fact that Donovan and Alice are husband and wife should not alter a normal business or commercial transaction. What she receives is her gross income and is not, under section7(2), deemed to accrue to him. He would be entitled to a tax deduction for the rental he pays against the income he earns from his architecture practice. It is submitted that even if he had not been entitled to a tax deduction for the rentals he paid, for example, if he had used the premises for a non-trade or domestic purpose, the amount received by Alice would still constitute her gross income. It results from a bona fide business or commercial transaction and meets all the requirements of the definition of ‘gross income’. Whether the payer is entitled to a tax deduction or not, is irrelevant in deciding whether the recipient has received an amount as gross income.

Ingrid Golddigger

The transaction between Charles and Ingrid could be regarded a ‘sham’ transaction. It may not be regarded as a bona fide business or commercial transaction. He is merely providing his wife with some of his capital for her to use. It is not interest earned on capital invested by her but is a compensation receipt awarded to her, by her husband, for interest that may have been earned. Yet even though it is Charles’ capital that is being paid to Ingrid, as this ‘compensation’ receipt is filling a ‘hole in her profits’ it will constitute her gross income. (See further in this regard Burmah Steamship Co Ltd v IRC (1931 SC156, 16TC67).) It is being paid to her by her husband who is a separate taxpayer. It is, thus, submitted that the R36000 is part of her gross income.

Drakensberg Pass CC

As the non-refundable deposits of R40500 are received by Drakensberg Pass CC as its own absolute property they form part of its gross income.

Although funds are available, are separately maintained, and are sufficient to cover the repayment of all refundable deposits, the refundable deposits are being actually ‘received by’ Drakensberg Pass CC. They are being freely mixed with other funds belonging to it. The method being used indicates that it is not obliged to keep these deposits in trust. In addition, it would appear not to be acting as a trustee on behalf of funds belonging to potential holidaymakers. There is no direct transaction between the receipt of the refundable deposit and a trust account being maintained. It would thus seem that Drakensberg Pass CC is accepting these refundable deposits as its own property, and therefore the refundable deposits of R27000 should be included in its gross income.