8 Tax Workbook Solutions – 2021

Solution 2.1

For a resident, “gross income” is defined in section 1(1) of the Income Tax Act as the
total amount, in cash or otherwise, received by or accrued to him, or in his favour,
during the year of assessment that is not of a capital nature.
The question to be decided is whether James Jockey’s jockey fees and prize money
were
“received by”

or
“accrued to”

him.
When James Jockey rides and wins prize money, does he receive the riding fees and
prize money
“on his own behalf for his own benefit”
(Geldenhuys v CIR 1947 (3) SA 256, 14 SATC 419)?
Before the Gauteng Summer Racing Season commenced, James Jockey announced
that he would donate his jockey fees and prize money to “a charity”. At that stage this
charity was unidentified. He has a so-called moral obligation to donate his jockey fees
and prize money, but no legal obligation. He could change his mind and keep the
money. It follows then that at the moment of riding and earning the riding fees and
winning the prize money, these amounts accrued to him, and at that point in time he
earns them for his own use and benefit.
If, at the time of James Jockey announcement, he had specified a “specific charity” as
the donee, would the situation have been different?
No – James Jockey would still have had only a moral, but legally unenforceable,
obligation.
In CIR v Witwatersrand Association of Racing Clubs (1960 (3) SA 291 (A),
23 SATC 380), the circumstances were that the association staged a special race
meeting that it advertised as being
“in aid of SANTA and Queenshaven”.
The net proceeds of the race meeting amounting to R7 906 were then divided between
these two charitable organisations. The Commissioner contended that the R7 906 was
received by the association as the result of a scheme of profit making and that it was
therefore liable for normal tax on the net proceeds. The Appellate Division of the
Supreme Court (now the Supreme Court of Appeal) agreed with the Commissioner’s
contention, stating that in the absence of contracts entered into for the benefit of
SANTA and Queenshaven,
“the [receipts and accruals] of the race meeting in law accrued to the [Association]
beneficially”.
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If James Jockey had ceded the spes of the riding fees and prize money to a charity
before the races, and this charity had accepted the cession, would the situation have
been different?
No – although in this event, at the moment of James Jockey riding, earning the riding
fees and winning the prize money, he would have had no right to these amounts, and
upon receiving them, he would have been obliged to hand them over to the charity
resulting in them not accruing to him, the provisions of paragraph (c) of the definition of
“gross income” would still apply to them. They would then still form part of his gross
income.
In the Witwatersrand Association case, Ogilvie Thompson JA said obiter that
“conceivably the holding of the race meeting might have been so ordered, arranged and
executed as to avoid attracting tax”.
A binding cession by James Jockey on behalf of a charity could have resulted in the
riding fees and prize money accruing to the charity. The “opening words” of the
definition of “gross income” would not have applied to him. But then the deeming
provisions of paragraph (c) of the definition of “gross income” would result in the
amount being deemed to be his resulting in it being included in his gross income.
For paragraph (c) of the definition of “gross income” to apply, there must be a causal
relationship between the amount received or accrued and the services rendered. It is
unnecessary for the amount to be made between an employer and an employee. All
that is necessary is for the amount to be for services rendered.
Another aspect of paragraph (c) of the definition of “gross income” is that it denies the
taxpayer the opportunity for the dispersal of an accrual to another taxpayer. This
provision deems an amount received by or accrued to, or for the benefit of, one person
for services rendered by another person to have been received by or accrued to the
person who actually rendered the services (the “other” person). Therefore, no matter
who is entitled to the amount accruing from the services rendered, it is the person who
actually rendered the services who must include the amount in his gross income.
It follows then that when James Jockey rides in a race, he is rendering a service, and
the riding fees he earns and the prize money that he wins are amounts that are
awarded to him for the service that he renders. Even if he cedes these amounts to
another person (for example, the charity), they are still deemed to accrue to him,
because he is the person who rendered the service. These amounts will then be
included in his gross income as a result of the application of the provisions of
paragraph (c) of the definition of “gross income”.

Solution 2.2

Fresh Produce (Pty) Ltd

Part 1
“Gross income” is defined in relation to a resident in section 1(1) of the Income Tax Act
as the total amount, in cash or otherwise, received by or accrued to or in favour of the
resident that is not of a capital nature, during the year of assessment.
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The question to be answered for Fresh Produce (Pty) Ltd is whether the amount
received by it from the sale of its farm was of a capital nature?
In the determination of whether an amount received by a taxpayer is of a capital nature,
it is necessary to establish his intention both at the time
• when the asset was acquired, and
• on its subsequent disposal.
It is then necessary to determine Fresh Produce (Pty) Ltd’s intention at the time of its
purchase of the farm. Its intention could have been to purchase it
• as an income-earning asset (an investment intention), or
• as part of a profit-making scheme (a speculative intention)
(CIR v Stott 1928 AD 252, 3 SATC 253).
It is then necessary to consider whether there has been a subsequent change of
intention by Fresh Produce (Pty) Ltd (Natal Estates Ltd v SIR 1975 (4) SA 177 (A),
37 SATC 193).
The onus would be on Fresh Produce (Pty) Ltd to prove, on a balance of probabilities,
that
• the asset was acquired as an income-earning asset, and
• there has been no subsequent change of intention.
The fact that Fresh Produce (Pty) Ltd purchased the farm knowing that it could be sold
at a profit is not decisive in the determination of whether it was purchased with a
speculative intention (SIR v The Trust Bank of Africa Ltd 1975 (3) SA 652 (A),
37 SATC 87).
Also, the fact that Fresh Produce (Pty) Ltd has decided to sell the farm would not
automatically indicate a change in its intention (John Bell & Co (Pty) Ltd v SIR 1976 (4)
SA 415 (A), 38 SATC 87).
Fresh Produce (Pty) Ltd purchased the farm with the intention of using it as a produce
farm. But then, due to the deterioration in the economic conditions of the produce
industry, this did not transpire, and since it was surplus to its requirements, a decision
was then made to sell it.
The sale of the farm by Fresh Produce (Pty) Ltd is then the realisation of a capital asset
and not the sale of an asset in the course of carrying on a business or in pursuance of
a profit-making scheme (Elandsheuwel Farming (Edms) Bpk v SBI 1978 (1) SA 101,
39 SATC 163).
The amount obtained by Fresh Produce (Pty) Ltd from the sale of the farm would be of
a capital nature and excluded from its gross income.
Part 2
In CIR v Stott (1928 AD 252, 3 SATC 253), the taxpayer subdivided excess land and
sold this excess. The Appellate Division of the Supreme Court (now the Supreme Court
of Appeal) held that the amount earned by Stott was of a capital nature, since he was
entitled to sell a capital asset to his best advantage.
But in Natal Estates Ltd v SIR (1975 (4) SA 177 (A), 37 SATC 193), when the Appellate
Division was dealing with farm land sold by way of a township development, it indicated
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that, if the nature and extent of the township development operation was such that it fell
within the ordinary commercial meaning of
“carrying on a trade or business for profit”,
the receipts or accruals from the sale of the land could be of a revenue nature. This
would be the situation even if the asset, being of a capital nature, could have been
realised as capital had it been sold in different circumstances.
Since Fresh Produce (Pty) Ltd would have had to incur considerable expenditure in
developing the township, for example, by laying out roads and developing services, the
Commissioner may argue that there had been a change in its intention. The farm would
then be sold in the course of carrying on a business or in pursuance of a profit-making
scheme (Elandsheuwel Farming (Edms) Bpk v SBI 1978 (1) SA 101,
39 SATC 163).The amounts earned by Fresh Produce (Pty) Ltd from the sale of the
plots may then be included in its gross income.
Ivan Hesse
If Ivan Hesse’s profits on the sale of the flats are capital in nature, they will be excluded
from his gross income.
To decide whether the amounts earned by Ivan Hesse from the sale of the flats are
capital in nature, his intention must be ascertained.
First, Ivan Hesse’s original intention at the date of purchase must be ascertained:
Ivan Hesse originally purchased the flats as a capital investment. This is supported by
the fact that he
• has held them for a long time,
• has earned rentals from them, and
• does not have a history of dealing in property.
Having ascertained that the flats were purchased by Ivan Hesse as a capital
investment, it is then necessary to consider whether there has been a subsequent
change in his intention. The mere sale of the flats is insufficient to show a change of
intention (John Bell & Co (Pty) Ltd v SIR 1976 (4) SA 415 (A), 38 SATC 87).
In CIR v Stott (1928 AD 252, 3 SATC 253), it was held that every man is entitled to
realise his capital asset to best advantage.
The opening of a sectional title register by Ivan Hesse and the sale by him of individual
flats is not an indication that his intention has changed from investment to speculation.
He is merely realising his capital asset to best advantage. The amounts received or
accrued to him would then still be capital in nature. This being so, they will not be
included in his gross income.
Yet a point can be reached when a taxpayer is no longer realising an asset to best
advantage, but entering into the business of dealing in it. If this is the situation, then it
becomes trading stock, and the receipts or accruals from its realisation are then gross
income.
It is unclear where the dividing line is, but in Natal Estates Ltd v SIR (1975 (4) SA 177
(A), 37 SATC 193), when farming land was subdivided and developed in a business-
like manner, with roads and a few show-houses being built to set the tone, and an
12 Tax Workbook Solutions – 2021

extensive advertising campaign was embarked on, the Appellate Division of the
Supreme Court (now the Supreme Court of Appeal) found that the taxpayer had
“crossed the Rubicon”
and was no longer realising it to best advantage, but conducting a business of
developing and selling it.
The Commissioner may argue that this is the position if Ivan Hesse were to improve the
flats prior to selling them. This could then result in his receipts or accruals from their
sale being included in his gross income.
Berea Football (Pty) Ltd
For an amount to be included in Berea Football (Pty) Ltd’s gross income, it must be a
receipt or accrual that satisfies all the requirements of the definition of “gross income”.
“Gross income” is defined in relation to a resident in section 1(1) as the total amount, in
cash or otherwise that is not of a capital nature, that is received by or accrued to him or
in his favour of the resident during the year of assessment.
The issue in regard to the Berea Football (Pty) Ltd’s receipts or accruals for its two
players, Ace Ball and King Foot, relates to whether they are of a “capital nature”. If the
receipt or accrual from their sales is of a “capital nature” then it would be excluded from
its gross income.
To determine whether an amount received by or accrued to a taxpayer is of a capital
nature, it is necessary to establish whether his intention with the acquisition and sub-
sequent sale of the asset was that of investment (capital and not gross income) or
speculation (revenue and gross income).
Ace Ball
Ace Ball was an income-producing asset as far as Berea Football (Pty) Ltd was
concerned. It had been using him for eight years to produce its income, in the form of
gate money sales and prize money won. Therefore, he is a capital asset. The
R5 000 000 receipt or accrual for him would be of a “capital nature” and would be
excluded from its gross income. (A capital gain may arise on his sale, but this issue is
beyond the requirements of this particular question.)
King Foot
King Foot was purchased by Berea Football (Pty) Ltd as an asset with the intention of
trading with him, and making a profit from his re-sale (that is, he was purchased as
trading stock). He was purchased because of the bargain price asked for him. It never
intended to use him as an income-producing asset. Its intention, from the time it
purchased him, was to make a profit from his re-sale. He was therefore sold in the
pursuance of a profit-making scheme (Elandsheuwel Farming (Edms) Bpk v SBI 1978
(1) SA 101, 39 SATC 163). The R25 000 receipt or accrual for him would therefore be
of a revenue nature and must be included in its gross income. (The R3 000 paid for him
will be deductible from this R25 000 inclusion in its gross income (and its subsequent
“income”) in the determination of his taxable income.)

Further points to note

Other points that should be noted are that
13 Tax Workbook Solutions – 2021

• the burden of proof lies with Berea Football (Pty) Ltd (section 102 of the Tax
Administration Act 28 of 2011),
• the short time period that King Foot was held by it indicates a revenue intention,
and
• the Commissioner may argue that there was a change in intention in relation to its
asset, Ace Ball. But it would seem that this argument would be unsuccessful (John
Bell & Co (Pty) Ltd v CIR 1976 (4) SA 415 (A), 38 SATC 87).

Solution 2.3

Citrus crop
The receipt or accrual from the sale of an asset received from a donation or inheritance
is generally of a capital nature. But in ITC 782 ((1953) 19 SATC 410), the tax court held
that the amounts earned from the sale of the wool from inherited sheep should be
included in the heir’s gross income. Herbstein J (who gave the judgment in this case)
submitted that it was incompetent for the heir to argue that the amounts earned from
the sale of the wool (fructus) were a partial sale of the capital asset inherited. The
principle thus established was that when an inherited asset is an asset that produces
fructus (a receipt or an accrual)) the resulting amount from the sale of this fructus would
constitute gross income.
The important point is that the receipt or accrual must come from the sale of the fructus
before it will be included in gross income.
In the light of what has been stated above, the R75 000 earned by Max Jacob from the
sale of the oranges would be included in his gross income.

Citrus farm
As stated above, the receipt or accrual from the sale of an inherited asset is generally of
a capital nature. Therefore, the R6 000 000 from the sale of the Max Jacobs’ citrus farm
is of a capital nature and should be excluded from his gross income. In CIR v Visser
(1937 TPD 77, 8 SATC 271), capital was compared to a tree and revenue to its fruit.
The farm in this instance is the tree (that is, capital in nature and not gross income),
producing the fruit of the tree (that is, revenue in nature and included in gross income).

Local dividends
The local dividends that accrued to Max Jacobs will be included in his gross income
under paragraph (k) of the definition of “gross income”. But they are then exempt from
normal tax under section 10(1)(k)(i).
Computer games
The computer was an inheritance bequeathed to Max Jacobs by his late aunt, a capital
receipt or accrual and therefore excluded from his gross income.
Max Jacob’s then used this computer to render a service to his friends and a profit of
R6 500 was made by him.
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The R6 500 is earned Max Jacobs as a result of the activities that he renders by letting
his friends play computer games on his computer. The R6 500 will therefore be included
in his taxable income. (The total amount earned will be included in his gross income, and
the expenditure incurred in producing this gross income will then be deducted from it.) In
CIR v Visser (1937 TPD 77, 8 SATC 271), capital was compared to a tree and revenue
to its fruit. The computer in this instance is the tree (that is, capital in nature and not in
gross income), producing the fruit (the amounts earned from letting his friends play the
computer games) which is revenue in nature and included in gross income.

Mauritian earnings
Max Jacob is a resident of the Republic (as defined). He is therefore subject to normal
tax in South Africa on his world-wide receipts and accruals. The equivalent of R5 000 is
then included in his South African gross income.

Commission
Only R80 000 of the R800 000 received by Max Jacob was received by him for his own
use and benefit (Geldenhuys v SIR 1947 (3) SA 252 (C), 14 SATC 419). The R720 000
(R800 000 – R80 000) was received by him in a trustee capacity, not for his own use or
benefit. He must include the R80 000, but not the R720 000, in his gross income. The
owner of the block of flats (his uncle), not the agent (Max Jacob himself), will include
the rentals in his South African gross income, since they were received or accrued in
his favour.