RTV/RGTV301

02 Gross Income, Special Inclusions,

Exemptions
02 GROSS INCOME, SPECIAL INCLUSIONS AND EXEMPTIONS
NOTES ON SOUTH AFRICAN INCOME TAX CHAPTERS 2 - 4

TOPIC
Gross Income
(see individual headings)
Special inclusions
(excluding (j); (l) and (lA) & (lC)farming subsidies and sporting bodies,
government grants)
Exemptions
(see individual headings)
READINGS:
Notes on South African Income Tax CH 2, 3, 4
Act s1 “gross income”, “resident”, “year of assessment”, “income”
ss7B, 10, 10A, 10B, 10C, 12T
s102 of Tax Administration Act (TAA)
 02 GROSS INCOME, SPECIAL INCLUSIONS AND EXEMPTIONS
NOTES ON SOUTH AFRICAN INCOME TAX CHAPTERS 2 - 4

Review each requirement of the definition of ‘gross income’

OBJECTIVES Explain the legal and general principles of the special or statutory inclusions in
the gross income definition;

Review the listed/statutory exempt income provisions

Recognise gross income (including the special inclusions), and exemptions.

Apply the requirements of the statutory provisions to practical case studies;

OUTCOMES Recognise and apply relevant case law to the case studies;

Discuss, explain and apply the principles in professional and well-structured

written arguments.
 VISUAL CUES EXPLAINED

TAX 2: This was covered in detail in Tax 2 and is therefore

revision

TAX 4: This topic will be dealt with in your post graduate

studies

Be on the lookout for the following Not TAX 3: this is not examinable in Tax 3 and may or may
cues to highlight important points as not be examinable in your post graduate studies.
you go through the content.
IMPORTANT INFORMATION

REFERENCE TO SEMESTER 2/ANOTHER SECTION

Extracts taken directly from the Income Tax Act

will appear in this format, with definitions
indicated by “ “

Cases in bold are key cases for your studies

02 GROSS INCOME, SPECIAL INCLUSIONS AND EXEMPTIONS
NOTES ON SOUTH AFRICAN INCOME TAX CHAPTERS 2 - 4

KEY CONCEPTS AND TERMINOLOGY

Gross income, amount, received, accrued, notional amount, of a capital nature, of

a revenue nature, proviso

Person, resident, source, ordinarily resident, physical presence test, originating

cause, dominant cause

Annuity, living annuity, services rendered, causal relationship, employment,

holding of office, restraint of trade, lump sum benefits, commutation, fringe
(taxable) benefits, recoupments, key-man insurance

Exempt income
 THE INCOME TAX ACT: THE NORMAL TAX FRAMEWORK
GROSS INCOME (s1) XXX
Less EXEMPTIONS (s10) XX
Equals INCOME AS DEFINED (s1) never negative! XXX
Less DEDUCTIONS AND ALLOWANCES (mainly ss11-19 and 23) (XX)
Add INCLUSIONS IN TAXABLE INCOME (XX)

Taxable portion of s8(1) allowances

Taxable portion of capital gains (s26A; Eighth Schedule)

Less ASSESSED LOSS BROUGHT FORWARD (s20) (XX)

Equals TAXABLE INCOME/(ASSESSED LOSS – carry forward) XXX/(XXX)
Apply Tax rates for the year of assessment XX
Less Rebates for individuals (s6) (XX)
Normal tax payable for the year of assessment XXX
Less prepaid taxes (XX)

PAYE (Fourth Schedule)

Provisional Tax (Fourth Schedule)

EQUALS Tax due to/ refund due from SARS for the year of assessment XXX/(XXX)
 GROSS INCOME (TAX 2)

Starting point/fountainhead: no gross income; no TI; no normal tax (except for taxable capital
gains)
“gross income”, in relation to any year or period of assessment, means—
(i) in the case of any resident, the total amount, in cash or otherwise, received by or accrued to or
in favour of such resident; or
(ii) in the case of any person other than a resident, the total amount, in cash or otherwise,
received by or accrued to or in favour of such person from a source within the Republic,
during such year or period of assessment, excluding receipts or accruals of a capital nature,
but including, without in any way limiting the scope of this definition, such amounts
(whether of a capital nature or not) so received or accrued as are described hereunder, namely—….
>special inclusions (a – n)…

Provided that where during any year of assessment a person has become entitled to any
amount which is payable on a date or dates falling after the last day of such year, that amount
shall be deemed to have accrued to the person during such year;
 GROSS INCOME: TOTAL AMOUNT

CIR v Peoples Stores (Walvis Bay) (Pty) Ltd 1990 AD with reference to Lategan v CIR (1926 CPD)
Include every form of property earned which has money value

CIR v Butcher Bros. (Pty) Ltd 1945 AD 301, 13 SATC 21

Must be an amount / Commissioner to prove

Nondabula v CSARS and another [2017] ZAECMHC 21

SARS to establish tax based on “information readily available to it”

Notional amounts cannot constitute gross income

 GROSS INCOME: IN CASH OR OTHERWISE

Lategan v CIR 1926 CPD 203, 2 SATC 16

Every form of property – including debts and rights of action
CSARS v Brummeria Renaissance (Pty) LTD and Others, 69 SATC 205 SCA
Asset need not be able to be turned into money by the taxpayer to constitute an amount
Where the receipt is not money it must be valued
Interpretation Note 58 (issue 2): THE BRUMMERIA CASE AND THE RIGHT TO USE LOAN
CAPITAL INTEREST FREE:
• Deals only with the granting of life rights to units in a retirement village from the point of
view of the borrower of the funds, not from the point of view of the life-right holders
• Principle applies to exchange of goods, services, “any other benefit given” (quid pro quo)
• Interest free loans between shareholders & company or between group companies – not
affected where no goods/services in return for loan

IN58 gives specific formula for calculating GI (not Tax 3)

 GROSS INCOME: RECEIVED BY OR ACCRUED TO

Establishes the tax year when the amount is included in Gross Income.
In practice, the earlier of:
• date of receipt
• date of accrual

CIR v Delfos 1933 AD 242, 6 SATC 92 - The commissioner cannot include an amount in gross
income both when it accrues and when it is received
SIR v Silverglen Investments (Pty) Ltd (1969AD) - The commissioner does not have a choice as to
when to include the amount BUT in a later case Kotze v KBI, 1992 TPD), where the taxpayer
omitted an amount when it accrued, the Commissioner was permitted to tax it later when it was
received.
 GROSS INCOME: RECEIVED BY OR ACCRUED TO
RECEIPT

Geldenhuys v CIR 1947 (3) SA 256(C) 14 SATC 419 - On own behalf or for own benefit

Theft and fraud

Cot v G 1981 (4) SA 167(ZA) - Unilateral taking e.g.: theft is not on own behalf or for own
benefit
ITC 1624 - Fraudulent, negligent transactions in the course of trade – ‘receipts’ for GI purposes;
Overcharge customers -> include full amount in GI
MP Finance Group CC (in liquidation) v CSARS 2007 (5) SA 521 (SCA) 69 SATC 141 - Deposits
taken in an illegal & fraudulent pyramid scheme – receipts & thus GI
IN 80: Income Tax treatment of stolen money (theft is GI) – SARS applies principle from MP
Finance (page 13) (Excellent summary of GI & general deduction formula)
NB: legality/otherwise of transaction of no consequence
 GROSS INCOME: RECEIVED BY OR ACCRUED TO
RECEIPT

Loan monies
CIR v Genn & Co 1955 (3) SA 293(A) 20 SATC 113 - borrowed money not a receipt – immediate
obligation to repay

Disposal of Income after accrual

CIR v Witwatersrand Association of Racing Clubs (1960 AD) - Moneys for charity event beneficially

received by organisers prior to payment to charities concerned.

 GROSS INCOME: RECEIVED BY OR ACCRUED TO
RECEIPT

Deposits and Receipts in advance

Pyott Ltd v CIR 1944 AD 128, 13 SATC 121

Brookes Lemos Ltd v CIR 1947 (2) SA 976(A), 14 SATC 295
Greases (SA) Ltd v CIR 1951 (3) SA 518(A), 17 SATC 358
deposits are receipts – in these cases all to do with disposal of product in a container & deposit
was on container (obiter Pyott may not be if in trust)

Points to consider:
 Payments received by a trustee is not an advance payment
 Separate bank/trust account (a factor)
 Does not form part of day-to-day business - i.e. not used for general business purposes
 Non-refundable deposit = GI (full amount)
 GROSS INCOME: RECEIVED BY OR ACCRUED TO
ACCRUAL

Accrual:

Lategan v CIR 1926 CPD 203, 2 SATC 16 confirmed in CIR v People’s Stores (Walvis Bay) (Pty) Ltd

1990 (2) SA 353(A), 52 SATC 9 - ‘accrued to’ means to ‘become entitled to’

Mooi v SIR 1972 (1) SA 675 (A), 34 SATC 1 - unconditionally entitled to amount

Note S7(1) (below)

 GROSS INCOME: RECEIVED BY OR ACCRUED TO
ACCRUAL

Settlement Discounts:
Gud Holdings (PTY) Ltd v CSARS, 69 SATC 115

• Value of the right was selling price, net of discount

• Ignore future discount (settlement discounts not GI)

• accrual less than the sum subsequently received = additional amount in GI on receipt

• Always look at wording in the sales agreement / contract

 GROSS INCOME: RECEIVED BY OR ACCRUED TO
ACCRUAL

Value of accruals:
Present value or Face value? Face value -> include in GI (Proviso)
TAXPAYER has become entitled to amount during YOA even if amount is payable on date or dates
falling after the last day of that year

Deemed non-accruals and unquantifiable amounts:

s24M - asset disposed of for unquantified amount - only include GI once amount is quantified.
NB: n/a to services
 GROSS INCOME: RECEIVED BY OR ACCRUED TO
ACCRUAL

Deemed Accrual of Income:

7. When income is deemed to have accrued or to have been received.—

(1) Income shall be deemed to have accrued to a person notwithstanding that such
income has been invested, accumulated or otherwise capitalized by him or that such
income has not been actually paid over to him but remains due and payable to him or has
been credited in account or reinvested or accumulated or capitalized or otherwise dealt
with in his name or on his behalf, and a complete statement of all such income shall be
included by any person in the returns rendered by him under this Act

S7B Timing of accrual and incurral of variable remuneration (textbook page 131):

Variable remuneration accrues to an employee when the amount is paid. Examples: bonusses,

commission, overtime pay.

 GROSS INCOME: RESIDENCE

South Africa has a “residence” basis of taxation

s1 “resident” means any—

(a) natural person who is—
(i) ordinarily resident in the Republic; or
(ii) not at any time during the relevant year of assessment ordinarily resident in the
Republic, if that person was physically present in the Republic—
(aa) for a period or periods exceeding 91 days in aggregate during the relevant
year of assessment, as well as for a period or periods exceeding 91 days in
aggregate during each of the five years of assessment preceding such year
of assessment; and
(bb) for a period or periods exceeding 915 days in aggregate during those five
preceding years of assessment,
in which case that person will be a resident with effect from the first day of that
relevant year of assessment: Provided that—
 GROSS INCOME: RESIDENCE
ORDINARY RESIDENCE

Ordinarily Resident – not defined

Generally subjective but supported by facts
Cohen v CIR 1946 AD 174, 13 SATC 362
CIR v Kuttel 1992 (3) SA 242 (A), 54 SATC 298
Factors considered by courts:
• degree of continuity of stay
• mode of life of taxpayer, before, during & after YOA
• physical presence/physical abode – not essential
• intention of being in the country
• facts surrounding the matter
 GROSS INCOME: RESIDENCE - PHYSICAL PRESENCE TEST

(ii) not at any time during the relevant year of assessment ordinarily resident in the Republic, if
that person was physically present in the Republic—
(aa) for a period or periods exceeding 91 days in aggregate during the relevant year of
assessment, as well as for a period or periods exceeding 91 days in aggregate during each
of the five years of assessment preceding such year of assessment; and
(bb) for a period or periods exceeding 915 days in aggregate during those five preceding
years of assessment,
in which case that person will be a resident with effect from the first day of that relevant
year of assessment: Provided that—
(A) a day shall include a part of a day, but shall not include any day that a person is in
transit through the Republic between two places outside the Republic and that person does
not formally enter the Republic through a “port of entry” as contemplated in section 9 (1) of
the Immigration Act, 2002 (Act No. 13 of 2002), or at any other place as may be permitted
by the Director General of the Department of Home Affairs or the Minister of Home Affairs
in terms of that Act; and
(B) where a person who is a resident in terms of this subparagraph is physically outside the
Republic for a continuous period of at least 330 full days immediately after the day on
which such person ceases to be physically present in the Republic, such person shall be
deemed not to have been a resident from the day on which such person so ceased to be
physically present in the Republic; or
 GROSS INCOME: RESIDENCE
RESIDENCE OF PERSONS OTHER THAN NATURAL PERSONS
Residence of persons other than natural persons
• Incorporated or
• established or
• formed or
• place of effective management
in the Republic (IN6)
SARS Interpretation Note No. 6 (Issue 2)
A company’s place of effective management is the place where key management
and commercial decisions that are necessary for the conduct of its business as a
whole are made in substance. (Aligned with OECD).
The definition of “resident” is subject to the provisions of any DTA (TAX4):

….but does not include any person who is deemed to be exclusively a resident of another
country for purposes of the application of any agreement entered into between the
governments of the Republic and that other country for the avoidance of double taxation.
GROSS INCOME: SOURCE (See next NON-RESIDENTS, SOURCE AND WITHOLDING
TAXES – TOPIC 13)
 GROSS INCOME: CAPITAL V REVENUE
“gross income” excludes receipts/accruals “of a capital nature (but consider the Eighth Schedule:
Determination of taxable capital gains and assessed capital losses: s26A of the Act)
An amount received by or accrued to a person is either revenue (gross income) in nature OR
capital in nature. However, note that an amount that is capital in nature may be
included in gross income through the special inclusions.
Pyott Ltd v CIR (1945) AD - Not possible to have an amount which is neither revenue nor capital
“This is a halfway house of which I have no knowledge”
Tuck v CIR (1988) AD - A single receipt can be apportioned (normally not the case)

Generally: revenue receipt from business activity, personal exertion, employment of capital (use
or letting)
Decision usually arises on the disposal (sale) of an asset
CIR V Visser 1937 - Income is fruit as opposed to the principal or tree
CIR v George Forest Timber Co Ltd SATC 20 1924AD 516 – Fixed v Floating Capital (reason the
asset was acquired)
Courts consider subjective evidence together with all other relevant objective factors, Each case
determined on own facts and circumstances – guided by principals established. S102(TAA): onus
is on taxpayer
 GROSS INCOME: CAPITAL V REVENUE
INTENTION – THE GOLDEN RULE
Is the receipt capital or revenue in nature?
Look at intention of the taxpayer (ipse dixit = taxpayer’s verbal evidence)
 intention at date of acquisition (subjective evidence) CIR v Stott (1928 AD)
 change intention subsequent to acquisition (during whole period over which TAXPAYER
held the asset)
 Intention at date of disposal

Investment (acquired to hold, future flow of income) v speculation (acquired for gain, scheme of
profit making)
Mixed intentions – establish the dominant intention COT v Levy, 1952 AD
Alternative intentions – generally revenue in nature (facts and circumstances!)
Scheme of profit making:
CSARS v Capstone 556 (Pty) Ltd 2016 (4) SA 341 (SCA)
CIR v Pick n Pay Employee Share Purchase Trust 1992 (4) SA 39 (A), 54 SATC 271 – things
acquired other than in a scheme of profit making are capital.
 GROSS INCOME: CAPITAL V REVENUE

INTENTION OF A NATURAL PERSON – state of mind (ipse dixit supported by objective factors)

INTENTION OF A COMPANY – formal acts

Artificial person: separate & distinct from & not to be confused with its shareholders.
• General rule: determined without reference to the intention or activities of the
shareholders, except in their capacity as directors of the company.
Elandsheuwel Farming (Edms) Bpk v SBI 1978 AD - Shareholders’ intentions attributed to
coy (3/2)

The acts of company determined with reference to:

CIR v Richmond Estates (Pty) Ltd 1956 AD: intentions & actions of directors
SIR v Trust Bank of Africa Ltd: intentions & actions of those controlling the entity
COT v Booysens Estates Ltd: objectives clause in Memo/Articles
 GROSS INCOME: CAPITAL V REVENUE
CHANGE OF INTENTION: Capital to Revenue OR Revenue to Capital

CIR v Stott (1928 AD) - TAXPAYER has right to realise asset to best advantage
John Bell & Co (Pty) Ltd 1976 AD- Something more than the mere decision to sell or holding an
asset to sell at a higher price
Natal Estates Ltd v CIR (1975 AD)
 Embarking on a scheme of profit-making
 Crossed the Rubicon
 Using capital asset as stock-in-trade
Elandsheuwel Farming (Edms) Bpk v SBI 1978 AD
CIR v Richmond Estates (Pty) Ltd (1956 AD)

SARS v Wyner (2003 4 All SA 541 SCA), 66 SATC 1

Berea Park Avenue Properties (PTY) LTD v COMMISSIONER FOR INLAND REVENUE 57 SATC 167
 GROSS INCOME: CAPITAL V REVENUE

Onus (s102 of the TAA): Some objective factors that would be considered by a court:
• The taxpayer’s ipse dixit
• Length of time asset is held
• Frequency of similar transactions
• Nature of taxpayer’s business or occupation
• Income stream
• Reason for sale. Circumstances of the realization (disposal)
• Source of finance when asset was acquired
• Nature of the asset
 GROSS INCOME: CAPITAL V REVENUE
EXAMPLES OF SPECIFIC TRANSACTIONS
CRYPTO ASSETS Normal Rules apply
(EG BITCOIN)
BUSINESS SALE Selling price is allocated to assets sold:
 Capital Assets (Fixed capital)
 Trading Stock/Inventory (Floating capital)
DAMAGES AND Burmah Steamship Co Ltd v IRC; WJ Fourie Beleggings CC v SARS (71 SATC
COMPENSATION 125) 2009 SCA; Taeuber and Corssen (Pty) Ltd v SIR
• loss/sterilisation of capital asset = capital (fill a hole in assets)
• Loss of profits = revenue (fill a hole in profits)
Stellenbosch Famers Winery v CSARS (74 SATC 235)
Cancellation of a distribution agreement was capital in nature
FORTUITOUS  Gifts, donations, inheritances
GAINS  Prizes
GAMBLING  Sporadic successes = capital
 systematically and in a business-like manner = revenue
GOODWILL  normally of capital nature.
 unless for share of future profits
INTEREST AND CIR v VISSER 1937 TPD
RENTAL
 GROSS INCOME: CAPITAL V REVENUE
EXAMPLES OF SPECIFIC TRANSACTIONS
ILLEGAL CIR v Delagoa Bay Cigarette Co. Ltd (1918 TPD 391, 32 SATC47)
BUSINESS
FIXED PROPERTY Normal Rules apply
Bloch v SIR (42 SATC7, 1980(2) SA 401 (C)
SALE OF SURPLUS Intention at acquisition & change of intention:
PROPERTY Cases dealt with above
CIR v Paul (1956(3) SA 335 (A) 21 SATC 1

KRUGERRANDS  Capital / revenue depending on facts and circumstances of each case

 Investment difficult to prove because no income
 Profit on sale is only income
 ITC 1543: classified as investment because held as a hedge against
inflation
 Purchase of asset because know the value may rise is only one factor to
consider – not per se make proceeds revenue
CIR v Nel (1997) – forced to sell (held for long term investment) = capital
LOANS  Repayment of loan = capital
 Speculating in loans = revenue
Interest = revenue
Interest free loans as a quid pro quo
CSARS v Brummeria Renaissance (Pty) LTD and Others, 69 SATC 205 SCA
 GROSS INCOME: CAPITAL V REVENUE
EXAMPLES OF SPECIFIC TRANSACTIONS
REALISATION  Berea West Estates (Pty) Ltd v SIR (38 SATC 43)
COMPANIES  CSARS v Founder’s Hill (509/10)[2011]ZASCA 66
RESTRAINT OF  Capital in Nature
TRADE Taeuber and Corssen (Pty) Ltd v SIR - But see special inclusion

SAND Ernst Bester Trust v CSARS

SERVICES Fruit of labour
SIR v Watermeyer 1965 AD – voluntary payment/donation by employer =
capital, but see special inclusion!
INTANGIBLE Examples: Patent, design, license: normal rules
ASSETS
SHARE TRUST CIR v Pick ’n Pay Employee Share Purchase Trust 1992 AD
SCHEME  Majority judgement: scheme of profit-making test
 GROSS INCOME: CAPITAL V REVENUE
EXAMPLES OF SPECIFIC TRANSACTIONS
SHARES Look at intention of TAXPAYER

CIR v Nussbaum (1996AD, 58 SATC 283)

Secondary intention of share dealing (speculation)

GROSS INCOME: CAPITAL V REVENUE

DEEMED CAPITAL PROFIT ON SALE OF SHARES s9C

s9C: “equity shares” held 3+ years: sale = capital

equity share excludes
• share block coy or non-tax resident company unless listed on JSE
• hybrid equity instrument

Expenses claimed added back to income, FIFO used

s22(8) requires add-back to income if shares transferred from trading stock to capital: n/a for
s9C shares
BUT s9C(5) add back on disposal unless recouped in s8(4)(a)
Proceeds in form of dividends NOT deemed capital (9C(2))

Anti-avoidance provision: “anti-stuffing” rule applies to taxpayers connected to companies (Tax 4)

 GROSS INCOME: CAPITAL V REVENUE
TAX ON CAPITAL GAINS

s1 GROSS
GROSS
INCOME
INCOME
ARISING
AMOUNT
RECEIVED
OR
ACCRUED
CAPITAL GAIN
RECEIPT OF OR LOSS
A CAPITAL ARISING
NATURE (EIGHTH
SCHEDULE)
 GROSS INCOME: CASES SUMMARY

Relevant to the definition of “gross income” in s1(1)

Words or phrase considered Taxpayer
resident Cohen
Kuttel
amount Brummeria Renaissance (Pty) Ltd
Butcher Bros (Pty) Ltd
from a source within ...the Republic Lever Brothers and Unilever Ltd
accrued to People’s Stores (Walvis Bay) (Pty) Ltd
Witwatersrand Association of Racing Clubs
Lategan
Mooi
received by Geldenhuys
MP Finance Group CC (In Liquidation)
Pyott Ltd
of a capital nature – intention of company Capstone 556 (Pty) Ltd (excl. transaction/scheme details)
of a capital nature – scheme of profit- making Pick ‘n Pay Employee Share Purchase Trust
of a capital nature – mixed or dual intention Stott
Nel

of a capital nature – change in intention Nussbaum

Natal Estates Ltd
Founders Hill (Pty) Ltd
John Bell & Co (Pty) Ltd
of a capital nature – the nature of the ‘asset’ George Forest Timber Co Ltd
Nel
Damages and compensation WJ Fourie Beleggings
Stellenbosch Farmers’ Winery Limited (25 May 2012)
the legality or otherwise Delagoa Bay Cigarette Co Ltd
of the business productive of Income MP Finance Group CC (in liquidation)