TAX LAW (LML 4804)

MEMORANDUM TO ASSIGNMENT 01 (2018)

GENERAL COMMENTS

The purpose of this feedback is to give you general guidelines as to what was required
of you in answering this assignment. This is not a complete memorandum.

Too many students submitted assignments that were poorly drafted and incomplete.
Despite it being an open-book assignment, very few students supported their answers
with reference to relevant sections in the Income Tax Act 58 of 1962 (“ITA”), Tax
Administration Act 28 of 2011 (“TAA”), or case law. Such poorly drafted and
unsubstantiated answers not only result in very low assignment marks, but also in
failure in the exam.

The prescribed material should be studied at all times. All the assessments for this
course are based on the prescribed material. Although most students were able to
identify the issues in dispute, students should note that merely identifying the issue
and reaching a conclusion without substantiating the answer in detail will not result in
full marks being awarded. What is required is a full exposition of the relevant legislation
and case law and the legal principles applicable to the facts at hand.

We expect an integrated answer consisting of the legal issue in dispute, and

explanation of the relevant legislation and case law applicable and a conclusion based
there upon. Students should not use abbreviations when referring to legislation, the
full name of the Act should be used. For example: Income Tax Act 58 of 1962 and not
“ITA”; Promotion of Administrative Justice Act 3 of 2000 and not “PAJA”.

Kind regards,
The Lecturers.
ASSIGNMENT 01
QUESTION 1: GROSS INCOME

Karim, a South African resident, works for TAXWISE Ltd, an International Tax firm that
has a branch in South Africa and is registered on the Johannesburg Stock Exchange.
Karim is one of the shareholders of TAXWISE Ltd. On 1 January 2014, Karim was
transferred to the head office in England for a fixed period of three years, after which
he was expected returned to South Africa and resume his work at the South African
TAXWISE branch. His wife and two children, who stay in their house in Durban, did not
accompany him to England, as they did not want to disrupt the children’s school
programmes. His family visited him during school holidays as he had a very busy work
schedule and would not be able to spend his vacations in South Africa. For the duration
of his stay in England, Karim received his salary from the TAXWISE head office in
England in British currency.

In 2017, TAXWISE Ltd distributed dividends to all its shareholders – including Karim.
Then TAXWISE Ltd decided to open up a branch in Mauritius and Karim was appointed
as the Executive Manager of the Mauritius branch, with effect from 1 April 2018. Karim
resigned from his employment at the South African branch of TAXWISE Ltd and he
was paid lump sum of R5 million. Excited about the new career prospects, Karim
emigrated to Mauritius on 1 March 2018 and his family joined him there.

With the poor property market, Karim found it difficult to sell the family house before
immigration, so he employed the services of five estate agents who marketed the
house extensively. One of the estate agents sold the house in September 2018, for R3
million. Karim had bought the house in 2002 for R700 000. The proceeds of the house
were deposited in Karim’s Mauritius bank account.

Since 2015, Karim had been writing a book entitled “Income Tax Law in South Africa”
which he completed in 2017 and then he entered into a publishing contract with JUTA’s
Publishers in Durban, from whom he receives royalty income for the publication. The
royalties are deposited in Karim’s Mauritius bank account.
With reference to the relevant sections of the Income Tax Act and case law, discuss
the income tax consequences of the following:

(a) Whether Karim is liable for tax in South Africa on the salary he received from
TAXWISE head office in England in British currency. Your discussion should
consider whether Karim is entitled to any tax exemption. (8 Marks)

(b) The lump sum that Karim received from the South African branch of TAXWISE
Ltd. (3 Marks)

(c) The proceeds of the sale of the family house. (8 Marks)

(d) Whether Karim can be taxed in South Africa on the royalties deposited in his
Mauritius bank account. (6 Marks)
Subtotal [25 marks]

MEMORANDUM

(a) Discuss the whether Karim is liable to tax in South Africa on salary he
received from TAXWISE head office in England in British currency.

In terms of the definition of gross income in Section 1 of the Income Tax Act (“ITA”),
South African residents are liable to tax in South Africa on their worldwide income. A
natural person is resident in South African when the person is “ordinarily resident” in
this country or when the person (non-resident) meets the requirements of the physical
presence test.

The ordinary presence part of definition is relevant in this case. An individual is said to
be “ordinarily resident” in South Africa if it is his or her habitual and normal country of
residence, in the sense of living here with some degree of continuity. In H v COT 24
SATC 738, it was held that the taxpayer’s real home was in Somerset West because
this was where he had a permanent place of abode where his belongings were stored.
In Cohen v CIR 1946 AD 174, 13 SATC 362 at 371, the court proposed in an obiter
dictum that a person’s ordinary residence “would be the country to which he would
naturally and as a matter of course return from his wanderings”. This would be the
country a taxpayer might call his “usual or principal residence and would be described
... as his real home.” In CIR v Kuttel 54 SATC 298, 1992 (3) SA 242 (A), adopted this
formulation and acknowledged that, even though the taxpayer was still substantially
connected to South Africa through business activities, visits and the retention of a
house in Cape Town, his activities and mode of life in the USA (he rented a house, his
family lived and worked with him, he joined a church, opened banking accounts,
acquired an office, bought a car and registered with social security) and the purpose
of his remaining connections with South Africa (his initial visits were primarily business
orientated and the Cape Town house was retained for financial reasons and not to
retain a ‘home”), indicated that his “real home” was in fact not in South Africa, but in
the USA.

From 1 January 2014 to 1 January 2017, Karim was ordinarily resident in SA and his
salary should ideally be taxable here. Section 1 para (c) provides that amounts
received or accrued in respect of services rendered or any employment or the holding
of an office are included in gross income.

However, section 10(1)(o)(ii) of the ITA exempts any form of remuneration derived by
an employee in respect of service rendered outside South Africa from tax under certain
circumstances. This exemption applies in a year of assessment for amount received
or accrues by way of any salary, leave pay, wage, overtime pay, bonus, gratuity,
commission, fee emolument or allowance, including any fringe benefit and amounts
under sections 8, 8B and 8C, but only if:
 the employee was outside south Africa for more than 183 full days in total during
any period of 12 months and
 the period outside South Africa includes a continuous period of absence of
more than 60 full days during that period of 12 and
 the services were rendered for or on behalf of an employer, who can be situated
in or outside South Africa.

In the calculation of the number of days during which a person is outside of South
Africa, Interpretation of Note No 16 (27 March 2003) provides that weekends, public
holidays, vacation leaves and sick leaves spent outside South Africa are considered
to be part of the days during which services are rendered and should therefore be
included in the calculation of the 183 day and 60-day period of absence.

In terms of Provision B to section 10(1)(o)(ii), this exemption is not applicable to

remuneration:
 derived from the holding of any public office as contemplated in s 9(2)(g), which
refers to a public office to which the person was appointed in terms of an Act of
parliament; or
 received in respect of service rendered or work or labour performed on behalf
of an employer in the national, provincial or local sphere of government of the
Republic; that is a constitutional institution listed in schedule 2 of the Public
Finance Management Act, No 1 of 1999 or that is a public entity in schedule 1
of the Local Government, Municipal Systems Act No.32 of 2000; or

The remuneration that is covered by the exemption relates to remuneration received

or accrued in the year of assessment in which the 12-month period commences or
ends. In terms of SARS Interpretation Note 16, payments in respect of the
relinquishment, termination, loss, repudiation, cancellation or variation of any office or
employment or of any appointment (or right to be appointed) to any office or
employment are not covered by this exemption. Karim qualifies for this exemption.
This implies that he only be taxed in the United Kingdom.

(b) The lump sum that Karim received from the South African branch.

Section 1(d) of the specific inclusions in gross income covers amounts in respect of
termination or variation of any office or employment. This includes the lump sum
payments upon resignation from a company.

(c) The proceeds from the sale of the family house.

When Karim and his family immigrated to Mauritius in April 2018, this shows an
intention to the leave the Republic permanently. As a non-resident he will be taxed on
a source basis. The proceeds from the sale of the house will be included in his gross
income if they are revenue in nature.

Where a taxpayer sells a capital asset and the court has to determine whether the
proceeds from the sale are revenue or capital in nature, the test applied by the court
is whether the gain made by the taxpayer was acquired ‘by the operation of a business
in the carrying out of a scheme for profit making’ (Commissioner for Inland Revenue v
Pick 'n Pay Employee Share Purchase Trust 1992 (4) SA 39 (A) at 57E-G). What this
implies is that if a taxpayer purposefully pursues and works for a profit, the income
that he receives or that accrues to him is of a revenue nature as opposed to a fortuitous
profit which is not purposefully sought and worked for and is thus capital in nature.
This distinction is clearly brought out in Commissioner for Inland Revenue v George
Forest Timber Co Ltd 1924 AD 516 at 522-3, Lace Proprietary Mines Ltd v
Commissioner for Inland Revenue 1938 AD 267 and Commissioner of Inland Revenue
v Strathmore Exploration and Management 1956 (1) 591.

-Before it can be concluded that the proceeds of the sale of a capital asset are either
capital or revenue in nature, the surrounding circumstances of each case must be
decided on its own facts in order to determine whether the receipt or accrual was in
fact acquired in the operation of a business in the ‘carrying out of a scheme for profit
making’. These surrounding circumstances include an investigation into the state of
mind or intention of the taxpayer at the time of acquisition of the property and also an
investigation as to whether this intention changed prior to the sale of the asset.

In terms of section 102 of the TAA, the burden of proving that an amount is not liable
to tax lies on the person claiming such non-liability. This implies that the
commissioner’s assessment is correct until the taxpayer can prove on a balance of
probabilities that he was not engaged in a scheme of profit making and that therefore
the income derived from the sale of the asset was capital in nature and thus not
taxable. Since the taxpayer is certainly the only one who knows what his state of mind
or intention was in a particular instance, his evidence is very important and in some
occasions his allegations regarding his intention have been accepted as conclusive to
discharge the burden of proof (Commissioner for Inland Revenue v Richmond Estates
(Pty) Ltd 1956 (1) SA 602 (A) at 607B-G).
Profit making can also be an element of capital accumulation. In Commissioner for
Inland Revenue v Stott 1928 AD 252 at 263 it was held that, a person who invests
funds in an asset is entitled to realise it to the best advantage and to accommodate
the asset to the exigencies of the market in which he is selling it. The fact that he does
so cannot ‘alter what is an investment of capital into a trade or business for earning
profits’.

In order to conclude that the taxpayer changed his intention from that of investment to
speculation, there has to be something more than the mere decision to sell (even at a
substantial profit) (John Bell and Co (Pty) Ltd v SIR). This ‘something more’ was dealt
with in Natal Estates Ltd v SIR (1979 AD), where it was held that by subdividing the
land in issue and selling off the plots at a profit, the taxpayer had ‘crossed the Rubicon’
and had dealt with the property as a landjobber would in a scheme of profit making.

Thus in determining whether there was a change of intention the courts do not rely
exclusively on the taxpayer’s evidence as this usually advances his own case, but they
also consider the surrounding circumstances of the case that may show that the
taxpayer got involved in a scheme of profit. The surrounding circumstance could be;
the way in which an asset is acquired or sold, the length of time for which the asset is
held, the frequency of the transactions, the way in which the transaction is financed
and the nature of the taxpayer’s work or occupation.

In this case, Karim bought the house in 2002 for R 700 000. The house was their family
home. He only decided to sell the house because the family was immigrating. Although
the process of selling the land (employing five estate agents and the high provide
derived) could indicate a scheme of profit making. He was forced to employ all these
estate agents because of the poor property market and the fact that he had to
immigrate.

In Commissioner for Inland Revenue v Stott 1928 AD 252 at 263 it was held that, the
mere realisation of an asset to the best possible price to meet market needs, does not
‘alter what is an investment of capital into a trade or business for earning profits’. It
thus be concluded that the receipt is capital in nature and cannot be included in Karim’s
gross income.

(d) Discuss whether Karim can be taxed on the royalties deposited in his
Mauritius bank.

Since Karim is now a non-resident. He is taxed on a source basis. In terms of the

common law rules, there could be various multiple sources of income e.g. where the
book was written, where the publishing contract was concluded, where payment was
made/received. Where there are multiple originating causes of income, the Main, real,
dominant or substantial source is considered (Transvaal Associated Hide and Skin
Merchants v Collector of Income Tax, Botswana). Regarding the dominate cause of
royalty income, it was held in Millin v CIR, that it was the exercise of her wits and
labour that produced the royalties, and this was done in the Union (as the Republic
was then known). As her faculties were employed in the Union, both in writing the book
and in dealing with her publishers, the source of her whole income was in the Union.
Based on this case, Karim’s royalty income will be subject to tax in South Africa, he
wrote the book while still a South African resident and the contract for publishing the
book was signed in South Africa.

The statutory source rules provide as follows: Section 9(1) of the ITA provides that for
the purposes of this section, ‘royalty’ means any amount that is received or accrues in
respect of the use, right of use or permission to use any intellectual property as defined
in s 23I.

Section 9(2)(d) of the ITA provides that an amount is received by or accrues to a

person from a source within the Republic if that amount constitutes a royalty that is
received or accrues in respect of the use or right of use of or permission to use in the
Republic any intellectual property as defined in section 23I.

Since the use of Karim’s IP in writing the book took place in South Africa, he will be
liable to take in South on those royalties in terms of section 9(2)(d).
NOTE some students could discuss the withholding tax matters. Section 49B(1)
provides that royalties paid to non-residents are subject to a withholding tax. JUTA will
have to withhold this tax from his royalty payments.

QUESTION 2: DEDUCTIONS

In March 2017 Mr Adams bought a second-hand cruise boat in Cape Town for an
amount of R800 000. He and his family mainly use it for cruises along the Cape Town
coastline. He used R400 000 of his own funds to buy the boat and borrowed the
balance from a bank at an interest rate of 10 percent. He re-painted the exterior of the
boat for R2 500 because the old was peeling off and he paid R2 000 as municipal
taxes and harbour fees for mooring the boat at the Airlie Beach Waterfront Yacht Club.

In June 2017, in order to cover the costs involved in keeping the boat, Mr Adams
rented the boat to the Blue North Rides Boat Agency in Cape Town, to be used for
ferrying tourists to and from secluded beaches on the coastline. He and his family only
used the boat during the off-peak season. In the 2017/2018 year of assessment, his
rental income from the boat was R50 000 but his expenditures amounted to R70 000.

Explain whether the above expenses (purchase price, interest, taxes, loss suffered
and costs of repainting the boat) may be deducted from the income of Mr Adams
during the 2017/2018 year of assessment. Refer to relevant authority and substantiate
your answers. Subtotal [25 marks]
(Maximum mark allocation: 25 marks)

MEMORANDUM

(a) Can Mr Adams deduct the purchase price of the boat from his income?

In terms of the general deduction formula in section 11(a) read together with section
23(f)-(g) of the Income Tax Act 58 of 1962 (“ITA”), expenditure of a capital nature is
not deductible. The Income Tax Act does not define the term ‘capital in nature’ but
guidance as to the meaning of the term is sought from case law. In CIR v George
Forest Timber Co Ltd it was held that: ‘Money spent in creating or acquiring an income
producing concern must be capital expenditure. It is invested to yield a future profit;
and while the outlay does not recur the income does. There is a great difference
between money spent in creating or acquiring a source of profit and money spent
working it. The one is capital expenditure and the other is not’. In New State Areas Ltd
v CIR it was held that expenditure incurred ‘in the acquisition by the taxpayer of the
means of production, i.e. the property, plant, tools etc., which he uses in the
performance of his income earning operations and not only for their acquisition but for
their expansion and improvement’ is expenditure of a capital nature. Such expenditure
was also described as expenditure of a fixed capital nature which is not deductible.

Thus the amount of R800 000 spent on buying the boat will not be deductible.

(Any logical explanation of the cases which is correct should receive marks)

(b) Can he deduct all or any of the interest paid or payable on the borrowed
money?

In terms of the general deduction formula in section 11(a) read together with section
23(f)-(g) of the ITA, a taxpayer can claim a deduction for:
- any expenditure or loss
- which has actually been incurred or suffered (during the year of
assessment)
- in the production of income
- to the extent that the monies claimed as a deduction were laid out for
purposes of the taxpayer’s trade
- which is not of a capital nature.

If an amount is not deductible under the general deduction formula, it can be deducted
if it is specifically provided for as a deductible expenditure in the Act (sections 11(c) -
(x) of the ITA.

For the interest incurred to be deductible, all the elements of the formula have to be
met. In respect to purchase of the cruise boat, the facts show that he incurred interest
on only R400 000. The facts show that the boat was used for a dual purpose: partly
for Mr Adams’ private use (in off-peak season) and then he also used it to earn some
income (in peak season). In terms of section 23(a), expenses in connection to a
taxpayer’s family or private expenses are not deductible (CIR v Hickson 1960 (1) SA
746).

In terms of section 23(g) of the ITA, an apportionment will however be allowed where
the boat is used partly for trade and non-trade purposes. This could be done on a time
basis. Thus only the portion of the interest incurred that relates to the renting out of
the boat would be deductible.

Interest is defined in section 24J of the ITA to include the amount payable by a
borrower to a lender in terms of a lending arrangement as represents compensation
for any amount to which the lender would but for the lending arrangement have been
entitled.

Section 24J specifically provides for the deduction of interest. Section 24J(1) defines
an ‘instrument’ as any form of interest bearing arrangement, whether in writing or not.
This includes any secured or unsecured loan, advance or debt. In terms of section
24J(5), any interest actually paid in terms of a section 24J instrument, is deductible in
terms of section 24J, and not in terms of section 11 (the general deduction section).
This implies that the issue relating to whether the interest incurred is capital or revenue
in nature (a requirement for a deduction under section 11) is not relevant. The only
issues that have to be determined in terms of section 24J(2) is whether the interest
was incurred in production of income and for the purposes of the taxpayer’s trade.

In order to determine whether the interest was incurred in the production of income, it
is necessary to look at the purpose of the expenditure and whether there is a
connection between the interest expenditure and the income-earning operations of the
taxpayer (CIR v Nemojim (Pty) Ltd 1983 (4) SA 935 (A) at 947G-H). If the taxpayer’s
purpose in borrowing the money on which it paid interest was to obtain the means of
earning income, the interest paid on the loan is prima facie expenditure incurred in the
production of income. In CIR v Standard Bank of South Africa Limited (1985 AD), the
bank used a portion of its borrowed funds to invest in redeemable preference shares.
The deduction for interest paid by the bank was rejected by the Commissioner on the
grounds that the preference shares produced tax-free dividends, and so the interest
incurred thereon was not in the production of income. The court however ruled that
the investment in preference shares was significant in relation to the main business of
the bank. Looking at the general purpose of the funds borrowed, the court held that as
the money was generally raised by the bank to produce income and so the interest
paid on all funds borrowed was deductible.

In Mr Adam’s case, since he used the bought partly for rental purposes, the interest
incurred in that respect was incurred in the production of income.

Apart from proving that the interest was incurred in the production of income, section
24J(2) requires that interest expenditure can only be deducted if it was incurred for the
purposes of the taxpayer’s trade. The definition of ‘trade’ in section 1 of the ITA
includes the letting of property. Thus, the portion of the interest incurred on the loan
after Mr Adams started letting out the boat in the 2016/2017 year of assessment will
be deductible in terms of section 24J.

Pre–production interest:

The facts however show that Mr Adams borrowed the money in March 2016 and only
started letting out the boat in June 2016. Thus the interest incurred on the loan before
the boat was let out is referred to as ‘pre-production interest’. Section 11(bA) of the
ITA provides that for a special deduction for interest under these circumstances.
However, this deduction can only be claimed in the year in which the asset, being
financed by the applicable loan is brought into use for the purposes of the taxpayer’s
trade. This implies that Mr Adams can claim a deduction of the pre-production interest
of that portion of the interest that relates to the letting of the boat in the year of
assessment when he started letting out the boat (See Sub-Nigel Ltd v CIR 1948 (4)
SA 580 (A).

(c) Can he deduct expenses for painting the exterior of the boat?

In terms of the general deduction formula in section 11(a) of the ITA, expenditures of
a capital nature are not deductible. Section 11(d) however allows a deduction in
respect of repairs on capital assets. The requirements under section 11(d) for the
deductibility of expenditure incurred on repairs are that:
- the expenditure must be actually incurred
- during the year of assessment
- on the repair of property occupied for purposes of trade or in respect of
which income is receivable; or
- for the purpose of repairing machinery, implements, utensils and other
articles used by the taxpayer for the purpose of his trade or
- for the beetle treatment of timber of the property mentioned above.

A repair was defined in CIR v African Products Manufacturing Co. Ltd it was held that
a repair means a reconstruction by renewal or replacement of a subsidiary part of the
whole other than an improvement. The repainting of the peeling walls could that qualify
as a repair. Also the replacing of the warn-out velvet seat covers with new leather seat
covers qualifies as a repair not an improvement. If the materials used for the repairs
are different from and better than the original materials a deduction under section 11(d)
will still be allowed. In CIR v African Products Manufacturing Company Ltd, the court
allowed the deduction of the costs of the replacement of a timber roof in need of repair,
by a concrete roof. The fact that a repair involves an element of improvement will not
turn the repair into an improvement or require the apportionment of any of the costs to
the improvement element.

Section 11(d) however provides that the repair should have been effected on property
occupied for purposes of trade or in respect of which income is receivable. The facts
clearly show that Mr Adams painted the boat before it was rented out.

Section 11(d) clearly provides that expenditure can only be granted for repairs when
the property is occupied for purposes of trade or in respect of which income is
receivable. The facts show that the boat was only used or occupied during off-peak
season. The question then arises whether the ‘income was receivable’ in respect of
the property. The words ‘receivable’ have been interpreted to mean ‘capable of being
received’. If income is capable of being received from the property, then a deduction
can be granted under this section. Where a landlord makes repairs prior to letting,
these words imply that the property must be in a condition to be let before the repairs
not as a result of the repairs. The facts in this case show that the paint on the boat
was peeling off and that he replaced the warn-out velvet seat covers, this does not
imply that the boat could not be used; income was capable of being received from it.
Thus, section 11(d) can be applied to claim a deduction for the repairs. This should
however be apportioned as the boat was only used partly for trade purposes.

(d) Can he claim a deduction for Municipal taxes and harbour tariffs?

Section 23(d) of the ITA prohibits the deduction of taxes levied in terms of the Income
Tax Act, Value Added Tax Act 81 of 1991 and the Interest or penalties in terms of the
Regional Services Councils Act 109 of 1985. It does not preclude the deduction of
municipal taxes and harbour tariffs. These are recurrent in nature and a concomitant
expense for purposes of Mr Adams’ trade. So a portion of those taxes that relates to
Mr Adam’s trade can be deducted.

(e) Discuss the tax treatment of the loss made on the boat in the 2017/2018
year of assessment.

The circumstances show that this is an assessed loss as provided for under s 20 of
the ITA. An assessed loss means any amount by which the deductions in terms of
section 11 to (and including) section 19 of the Act exceed the income from which they
may be deducted.

In terms of section 20(1) of the ITA an individual (other than a company) is allowed to
carry over an assessed loss even if no trade was conducted in that year. In Mr Adams’
case, the loss suffered in the 2016/2017 tax year can be carried over to the 2017/2018
year of assessment.
(Maximum mark allocation: 25 marks)

The Lecturers.

©
Unisa
ASSIGNMENT 03
LML 4804
MEMORANDUM TO ASSIGNMENT 03 (2018)

SOME COMMENT

There are students that still write identical assignments. In as much as we

emphasised the working together, however, we do not accept identical
assignments. This is in contravention with the Unisa Rules and Regulations.
Those assignments were given 0%.

Most of you did not do bad in this assignment. You will realise that this memorandum
is very comprehensive. The other material that is put here is for further studying and
further understanding.

QUESTION 1 (CAPITAL GAINS TAX)

Mr. Bob Menzy (“Bob”), an admitted attorney worked for one of the leading
companies, ABC (Pty) Ltd for ten years. As a result of the government BEE
programme, Bob applied and obtained a tender to build a tar road for the Malegabe
Thema Local Municipality. The tender comprises of a new tar road and also for
maintenance of the same road for ten years. After a long discussion with his wife
Irma, Bob decided to resign from ABC. On his resignation, he received an amount of
R3m and shares worth R5m as severance package. He then embarked on the
following transactions:

(a) With a thought of emigrating to Ireland he sold the house he resided in

with his family in North Blue for R4m, which he bought four years ago for
R1.5m.
(b) He also sold his car, Vintage GH for R300 000.
(c) He bought a penthouse in the CBD of Johannesburg for R4m.
(d) He also bought a Vintage GH Sport for R700 000.
Explain all the applicable principles relating to CGT and calculate the taxable capital
gain or assessed capital loss of Bob Menzy for the 2017/ 2018 year of assessment.
SUBTOTAL [25]

MEMORANDUM

Section 26A provides that the taxable capital gain must be included in a person’s
taxable income for the relevant year of assessment. The point of departure in this
case would be to determine the taxable capital gain of the taxpayer or person as
required by the section. In determining the taxable capital gain, the first step is to
make sure that all the four key elements are present.
(1) An asset is defined very widely in paragraph 1 and includes, for purposes of
CGT,
‘(a) property of whatever nature, whether movable or immovable, corporeal
or incorporeal, excluding any currency, but including any coin made
mainly from gold or platinum; and
(b) a right or interest of whatever nature to or in such property’.

Do we have an asset? A house in North Blue and a penthouse are immovable

properties and qualify to be assets in terms of the definition. Other assets will include
shares and a Vintage car.
(2) A disposal is any event, act, forbearance or operation of law which results in
the creation, variation, transfer or extinction of an asset. A disposal includes,
inter alia, the alienation or transfer of ownership of an asset (e.g. a sale,
donation, cession, etc.), the expiry or abandonment of an asset, the
scrapping, loss or destruction of an asset, the granting, renewal, extension or
exercise of an option, and the decrease in value of a person's interest in a
company, trust or partnership as a result of a value shifting arrangement.

Was there any disposal of the asset as defined? If there was a disposal, is it one of
the listed or a deemed disposal? The house in North Blue and a Vintage car were
sold and those events are regarded as disposals. Therefore, an asset was being
disposed. Emigration, on the other hand is one of the events that trigger CGT as per
par 12(1) to 12(5). It is known as a deemed disposal for CGT purposes. A resident is
deemed to have disposed of all his capital assets at their market value on the day
before ceasing to be a resident, except fixed property situated in South Africa e.g.
immovable property and any right or interest in the property or assets attributable to
a permanent establishment through which a trade is carried on in South Africa.

(3) The base cost basically refers to all the expenditures actually incurred and
which are directly related to the cost of acquisition, creation or disposal of an
asset. An amount of R1.5m which is the cost of acquisition of the house in
North Blue will be added in the base cost.

(4) The proceeds simply refer to the results of the disposal. The house and the
car were disposed and the proceeds amounted to R2m and R300 000
respectively.

The house qualifies as a primary residence. A primary residence is defined in

paragraph 44 as a residence:
(a) In which a natural person or a special trust holds an interest; and
(b) Which that person or a beneficiary of that trust or spouse of that person
or beneficiary
(i) Ordinarily resides or resided in as his or her main residence; and
(ii) Uses or used mainly for domestic purposes.

A “Residence” is defined in paragraph 44 of the Eighth Schedule to mean any

structure, including a boat, caravan or mobile home, which is used as a place of
residence by a natural person, together with any appurtenance belonging thereto
and enjoyed therewith.1

In terms of par 45(1) a natural person and a special trust must disregard certain
capital gains and losses on the disposal of a primary residence.

In terms of para 45(1)(b) any capital gain on the disposal of a primary residence by a
natural person or a special trust is disregarded if the proceeds from the disposal of

1 Paragraph 44 of the Eighth Schedule to the Income Tax Act.

that primary residence does not exceed R2 million. 2 To qualify for the R2million
relief, a natural person or a special trust must hold an interest in the residence.
Further, the natural person or a beneficiary of the special trust or a spouse of that
person or beneficiary must ordinarily reside or have resided in the residence as his
or her main residence, and the residence must have been used mainly for domestic
purposes.3

Where the exclusion in para 45(1)(b) does not apply, a natural person or a special
trust may disregard the capital gain or loss of R2 million on the disposal of the
primary residence in terms of para 45(1)(a). The capital gain not exceeding R2
million is disregarded. In this case the proceeds of the sale are R4million. Therefore,
the primary residence exclusion in terms of para 45(1)(b) does not apply.

A house in North Blue qualifies to be primary residence exclusion. Bob will disregard
capital gains and losses of R2 million on the disposal of a primary residence in terms
of par 45(1). However, there will be a complete exclusion if the gross proceeds are
less than R2m. A Vintage GH is a personal use asset and will qualify for the
exclusion in terms of par 53. In order to determine whether there will be any capital
gains tax consequences in this case regarding the severance package, paragraph
54 is of application. Paragraph 54 provides that a person must disregard any capital
gain or capital loss determined in respect of a disposal that resulted in that person
receiving—
(a) a lump sum benefit as defined in the Second Schedule; or
(b) a lump sum benefit paid from a fund, arrangement or instrument situated
outside the Republic which provides similar benefits under similar conditions
to a pension, pension preservation, provident, provident preservation or
retirement annuity fund approved in terms of this Act”.

In terms of paragraph 54, there will be no capital gains tax consequences in respect
of the severance package received by Bob. However, the severance package is

2 The limit of R2 million is effective as from 1 March 2012 and applies in respect of years of
assessment commencing on or after that date.
3 Paragraph 45(4) of the Eighth Schedule to the Income Tax Act.
included in the gross income of Bob in terms of paragraph (d); (e) or (f) of the gross
income definition in section 1 of the Income Tax Act.

A severance package will only be dealt with under par (d) of the definition of gross
income which is not applicable here. A penthouse and a Vintage GH Sport will not be
subject to CGT. They will be subject to CGT only when they are being disposed.

Capital gain on sale of the North Blue house R4m – R1.5m

R2.5m
(R2m exclusion) par
45(1)(a)
R500 000
Capital gain on the sale of the Vintage GH 0 (exclusion)

The taxable capital gain of the house: R500 000 less R40 000 annual exclusion
Multiply inclusion rate of 40%

QUESTION 2 (TAX ADMINISTRATION)

With the use of the relevant authority, discuss the following:

1. Whether the Commissioner for SARS has a power to request the taxpayer to
pay over outstanding tax even if the taxpayer has lodged an objection or
appeal; and (15 Marks)
2. Whether the Commissioner for SARS has a power to request the any
institution or body which holds the money of the taxpayer to pay over the
amount of an outstanding taxes to SARS. (10 Marks)
SUBTOTAL [25]
GRAND TOTAL [50]

MEMORANDUM

1. The Commissioners pay now, argue later principle

The pay now, argue later principle, simply translated means a situation where the
taxpayer must pay the debt due to the Commissioner immediately, irrespective of
whether he or she has lodged an objection or appeal. This is one of the methods that
the Commissioner employs to activate his collection mandate. It shall become
apparent that the section is not without controversy. Section 164 of the Tax
Administration Act 28 of 2011 (“TAA”) provides that:
(1) Unless a senior SARS official otherwise directs in terms of subsection (3) - (a) the
obligation to pay tax; and (b) the right of SARS to receive and recover tax, will not be
suspended by an objection or appeal or pending the decision of a court of law
pursuant to an appeal under section 133.
(2) A taxpayer may request a senior SARS official to suspend the payment of tax or a
portion thereof due under an assessment if the taxpayer intends to dispute or
disputes the liability to pay that tax under Chapter 9.
(3) A senior SARS official may suspend payment of the disputed tax or a portion thereof
having regard to relevant factors, including - (a) whether the recovery of the disputed
tax will be in jeopardy or there will be a risk of dissipation of assets; (b) the
compliance history of the taxpayer with SARS; (c) whether fraud is prima facie
involved in the origin of the dispute; (d) whether payment will result in irreparable
hardship to the taxpayer not justified by the prejudice to SARS or the fiscus if the
disputed tax is not paid or recovered; or (e) whether the taxpayer has tendered
adequate security for the payment of the disputed tax and accepting it is in the
interest of SARS or the fiscus.

Section 164(6) of the TAA provides a taxpayer with a degree of legal certainty. In this
case the taxpayer is guaranteed that SARS will not continue with any collection
steps for a certain period, whilst the application is being considered. However, SARS
would reach a decision regarding the request for suspending the payment pending
an objection or an appeal as soon as possible to ensure that it can continue
collecting tax rapidly.

A classic example of where “the pay now, argue later” principle was in action is
found in the Metcash Trading Ltd v Commissioner for SARS [2000] ZACC 21; 2002
(4) SA 317; 2002 (5) BCLR 454. The applicant, Metcash was a wholly owned
subsidiary of Metro Cash and Carry Ltd (“Metro”), a public company listed on the
JSE. The applicant conducted business as a wholesaler and distributor of what was
termed “fast moving consumer goods” and a liquor retailer.

The Commissioner was not satisfied with the applicant’s Value Added Tax (“VAT”)
returns and he raised assessments. The applicant was not happy with the
assessments and it lodged an objection to the assessments claiming that it was
charged double the amount they were supposed to pay. The Commissioner
disallowed the objections and gave the applicant 48 hours to pay the outstanding
amount in terms of “the pay now, argue later” principle.

The taxpayer challenged the constitutionality of the “pay now, argue later” principle
under the then sections 36(1) of the Income Tax Act 58 of 1962 (“ITA”) and section
40(2)(a) of the Value Added Act 89 of 1991. (“VAT Act”). It should be noted that
section 36(1) of the ITA has been repealed and replaced by section 164 of the TAA
while section 40(2)(a) of the VAT Act has been repealed and replaced by section
172 of the TAA. The repealed sections provide that:
Section 36(1): The obligation to pay and the right to receive and recover any tax,
additional tax, penalty or interest chargeable under this Act shall not,
unless the Commissioner so directs, be suspended by any appeal or
pending the decision of the court of law, but if any assessment is
altered on appeal or in conformity with such decision…

Section 40(2): (a) if any person fails to pay any tax, additional tax, penalty or interest
payable in terms of this Act, when it becomes due and payable by him, the
Commissioner may file with the clerk or registrar of any competent court a
statement certified by him as correct and setting forth the amount thereof so
due or payable by that person, and such statement shall thereupon have all
the effects of, and any proceedings may be taken thereon as it were, a civil
judgment lawfully given in that court in favour of the Commissioner for a liquid
debt of the amount specified in the statement.

Sections (36(1) and 40(2)) provide that where a taxpayer has lodged an objection
against the Commissioner’s assessment, the payment of the tax shall not be
suspended by the objection. The sections also provide that where the taxpayer failed
to pay as requested, the Commissioner may institute a civil judgment against the
taxpayer. This is a situation where the Commissioner appoints an agent who is in
possession of the moneys belonging to the taxpayer to pay over monies owed by the
taxpayer to the Commissioner.

The court below – the Johannesburg High Court as per Snyders J held that section
34 has been infringed by the actions of the Commissioner. The High Court declared
the sections of the Income Tax Act invalid and the matter was referred to the
Constitutional Court for confirmation in terms of sections 167(5) and 172(2) of the
Constitution.
The issue before the Constitutional Court was whether the two sections unjustifiably
limited the right of access to courts in section 34 of the Constitution? Section 34
provides that:
“Everyone has the right to have any dispute that can be resolved by the application of law
decided in a fair public hearing before a court or, where appropriate, another independent and
impartial tribunal or forum”.

Where the court would answer the question in the affirmative, the other issue would
have been whether such limitation was justified in terms of section 36 of the
Constitution.

The second stage examines whether the limitation is a reasonable and justifiable
limitation based on the concepts of human dignity, equality and freedom. In order to
ascertain whether or not the limitation is reasonable and justifiable, the court must
consider the nature and extent of the limitation, the importance of the purpose of the
limitation, as well as the relation between the limitation and the said purpose.
Furthermore, the court must consider if there are less invasive means available, and
must also consider the nature of the right that is being limited.

Kriegler J in the Constitutional Court held and agreed with Metcash that section
40(5) of the VAT Act posed a limitation of section 34 by preventing individuals to
approach court for a relief to suspend the operation of the “pay now, argue later”
principle. The question left to be decided was whether the limitation was justified in
terms of section 36 of the Constitution.

The Constitutional Court held that the justification of a limitation could be categorised
into three features. The first one refers to the public interest in obtaining full and
speedy settlement of tax debts. In order for a “pay now, argue later” scheme to work,
it was necessary that the Commissioner was able to obtain execution against a
taxpayer without having first to air the subject matter of the objection to be
adjudicated upon by the Special Court in due course. There was therefore a close
connection between the overall purpose of the “pay now, argue later” rule and the
effect of section 40(5).
Secondly, the Constitutional Court held that the “pay now, argue later” principle was
one which was adopted in many open and democratic societies. Therefore, it could
be concluded that the principle was one which was accepted as reasonable in open
and democratic societies based on freedom, dignity and equality as required by
section 36.

Thirdly, the effect of the rule on individual taxpayers was changed by the power
conferred upon the Commissioner to suspend its operation. The rule is not absolute
but subject to suspension in circumstances where the Commissioner considers it
appropriate. The exercise of this power by the Commissioner was reviewable.

The existence of this discretionary power therefore reduced the effect of the principle
“pay now, argue later” in an appropriate manner. In all these circumstances,
therefore, it was concluded that even if the effect of section 40(5) constituted a
limitation on the right entrenched in section 34 of the Constitution, it was a limitation
which was justifiable within the meaning of section 36. It has also been argued that
this might lead to frivolous objections which could cause SARS and the South
African government to experience dire financial constraints.

It is important at this case to determine whether the cases following Metcash Trading
did in fact follow the decision in terms of the stare decisis principle.

2. The Commissioner’s power to appoint an agent for collection

Section 179 of TAA provides that:

(1) A senior SARS official may by notice to a person who holds or owes or will hold or
owe any money, including a pension, salary, wage or other remuneration, for or to a
taxpayer, require the person to pay the money to SARS in satisfaction of the
taxpayer’s tax debt.
(2) A person that is unable to comply with a requirement of the notice, must advise the
senior SARS official of the reasons for the inability to comply within the period
specified in the notice and the official may withdraw or amend the notice as is
appropriate under the circumstances.
(3) A person receiving the notice must pay the money in accordance with the notice and,
if the person parts with the money contrary to the notice, the person is personally
liable for the money.
The Commissioner invokes this section in addition to section 164 of the TAA to
further his tax collection mandate. The section empowers the Commissioner to
appoint a person as an agent and authorise him or her to recoup an amount of tax to
be paid over to the Commissioner. The agent is normally a person in possession of
monies belonging to the taxpayer. It remains the responsibility of the agent to hand
the required amount to the Commissioner and failure to do will result in the agent
being personally liable.

The right to property of the taxpayer may also be contravened where Commissioner
has appointed a person as an agent to recover the tax due in terms of section 179 of
TAA. Normally, the agent so appointed is a person who is in possession of the
monies belonging to the taxpayer, for example, a bank.

The only reason the respondent could use is an unlawful deprivation of property.
Section 25 of the Constitution guarantees that no one may be deprived of property
except in terms of the law of general application, and no law may permit arbitrary
deprivation of property.

The Commissioner further holds the agent so appointed personally liable if the
money is not delivered when so requested. What happens is that the bank so
appointed, debits the taxpayer’s account with the tax due and pays it over to SARS.
The right to property and privacy of the taxpayers to property are thus infringed in
this case (Contract Support Services (Pty) Ltd and Others v Commissioner for SARS
61 SATC 338). Normally, the section is preceded by section 172 of the TAA which
provides that:
(1) If a person fails to pay tax when it is payable, SARS may, after giving the person at least
10 business days’ notice, file with the clerk or registrar of a competent court a certified
statement setting out the amount of tax payable and certified by SARS as correct.
(2) SARS may file the statement irrespective of whether or not the amount of tax is subject to
an objection or appeal under Chapter 9, unless the obligation to pay the amount has been
suspended under section 164.
(3) SARS is not required to give the taxpayer prior notice under subsection (1) if SARS is
satisfied that giving notice would prejudice the collection of the tax.

The section provides for an application of a civil judgment by the Commissioner.

More importantly, sub-section (3) provides that a notice is not required where the
giving of such a notice would prejudice the collection of tax.
The need for SARS to be able to collect taxes efficiently and effectively is freely
acknowledged, but it is important that a taxpayer's constitutional rights as a taxpayer
should also be considered.

In the decision of Nedbank Ltd v Pestana 2009 (2) SA 189 (SCA) a series of
transactions, all taking place on 4 February 2004, involving the appellant’s
Carletonville branch was at stake. The plaintiff had been conducting a current
account at the branch since 1969. A namesake, one Joseph Michael Pestana
(Pestana), conducted a similar account at the same branch.

On 4 February 2004 Pestana requested the branch to transfer an amount of

R 480 000 from his account to that of the plaintiff. At 11h33 the branch carried out
Pestana’s instruction and ‘transferred the amount of R 480 000 to the plaintiff’s
account’ from Pestana’s account. The said amount was credited to the plaintiff’s
account and his bank statement reflected a credit entry with a corresponding debit to
Pestana’s account.

Unbeknown to the staff member at the branch who attended to the transfer of the
money to the plaintiff’s account, the bank’s head office in Rivonia had earlier that
day, received a telefaxed notice in terms of section 99 of the Income Tax Act
(repealed by section 179 of the TAA) from the Randfontein office of the South
African Revenue Service (“SARS”) in respect of Pestana’s account.

SARS informed the bank that Pestana was indebted to it in an amount of some
R340 million. As a result, it appointed the bank as the agent for Pestana and
required the bank to make payments in respect of the amount due to SARS ‘as funds
is available or became available till full settlement’.

Later that day, and after it had already transferred the R 480 000 to the plaintiff’s
account, the branch was notified by its head office of the bank’s appointment in
terms of section 99 of the Act. The branch thereupon ‘reversed the transfer to the
plaintiff’s account’ and, still on the same day, paid an amount of R 496 000 to SARS
from Pestana’s account. The bank did not request the authority of the plaintiff to
reverse the amount of R 480 000 and no authority to do so was given by the plaintiff.
The legal question was whether the bank was entitled to reverse the amount, so as
to allow a section 99 notice to take place.

The trial court answered the question of law in favour of the bank, holding that the
bank was entitled to reverse the credit to the plaintiff’s account. The full court on
appeal disagreed with this conclusion. In essence, the court held that a completed
and unconditional payment had been effected when the bank credited the plaintiff’s
account, with the result that the bank could not unilaterally reverse the credit
(Oceanic Trust Co. Ltd N.O. v Commissioner: SARS (Case number: 22556/09,
unreported).

The Supreme Court of Appeal held that the fact that the branch subsequently
changed its mind and tried to reverse the transaction, cannot undo the validity of the
completed transaction. It held further that once the debit and credit occurred as it did,
it constituted a completed juristic act independent of any underlying iusta causa.

From the above, it can be submitted that an appointment as agent, in terms of

section 99 of the Act does not have the effect of freezing a taxpayer’s account.
Neither does such appointment have the effect of automatically transferring the
funds of a taxpayer from its bank account to SARS. Section 99 is merely a
mechanism to collect taxes due to SARS.

The bank is entitled to continue with its normal operations until such time as the
where the account is held, has been informed of the appointment in terms of section
99. Under normal circumstances, the bank is entitled to fulfil instructions from its
clients in the ordinary course of business. Lastly, the Commissioner cannot appoint a
bank as agent if a transfer of funds has already taken place.

The Lecturers.

©
2018
 LML4804
FEEDBACK TO ASSIGNMENT 01

GENERAL COMMENTS

 The purpose of this feedback is to give you general guidelines as to what was required of
you in answering this assignment. This is not a complete memorandum.

 Most students did not take the effort to edit their assignments. Most assignments were
poorly structured and it bristled with mistakes. Students should be aware that assignments
are official documents and that it should be edited before it is submitted. Very few students
succeeded in writing a well-structured and well-formulated legal opinion. Most students
merely jolted down a few ideas without building solid arguments. Some students even
advised the taxpayer on issues that were not in dispute. In practice, such mistakes will
cost you dearly. Most clients will not pay for such poorly drafted opinions and your
reputation as tax attorney/advocate would be tarnished.

 In writing a legal opinion it is not advisable to use words such as ―they must pay tax‖ or
―and then I would tell him to‖. You are studying towards becoming a professional.
Accordingly, sms language, memo style, and unprofessional language is unacceptable in
a legal opinion. Marks were not deducted for not adhering to a strict ‘opinion style’ structure
as this was not pertinently required. That said, a basic structure consisting of:
 identifying the problem or legal question;
 a detailed discussion of the relevant law;
 the application of the law to the facts; and
 a conclusion

should always be followed in answering problem type questions.

 At fourth year level you are training yourself (and being trained by us) to become a tax
practitioner of note. That means you will have to acquire the skill of being extremely
meticulous in your work. You cannot afford to write superficial opinions that do not cover
ALL the relevant issues. Most students lost marks because they only discussed one or

Open Rubric
 two of the issues and not ALL of the issues in dispute. Remember that your opponent
would have researched all the legal possibilities and you cannot afford to lose a case just
because you failed to address/research all the legal possibilities. Where the sections in
the Act(s) on which your argument are based have been interpreted in a court of law, you
should refer to the court‘s interpretation thereof even if the interpretation differs from your
interpretation. In other words, you MUST refer to case law. At this point it should be noted
that a mere mention of case names is not sufficient. In fact, the mere mention of a case
name does not support your argument at all. What is required is that you explain the
relevance or the importance of the ratio of the judgment on the fact before you. Listen to
the podcast on the importance of case law on MyUnisa. Your arguments should always
be substantiated by facts, other judgments or opinions of esteemed authors. You cannot
merely state that ―Gary must be taxed coz he got the money.

 Of equal importance is the consistent use of style. For example, where you italicised case
names, ALL case names cited must be in italics. Similarly, where you adopted a specific
referencing style, that style must be used consistently throughout the document.

 Some students did not answer ALL the questions. It is important to ensure that you are
prepared to answer all the questions to avoid losing marks for failure to answer all the
questions in an assignment or an examination paper.

 It is also important to read and refer to the original source. For example, when referring to
a section in the act, you must have read the relevant section in the act and either quote or
paraphrase it in your opinion/answer. Unless you wish to bring to the attention of the
reader another author’s interpretation of the act, you cannot refer to another author’s
paraphrased version of the act as if it is the act itself.

MODEL ANSWERS

QUESTION 1
The inclusion of the phrase “received by or accrued to” in the definition of ‘gross income’ in section
1 of the Income Tax Act 58 of 1962 makes it clear that there must be either a receipt or an accrual
and, in the absence of any special provision in the Act, where a taxpayer neither receives anything

2
nor has anything accrued to her, there can be no amount included in her gross income (see
CSARS v Cape Consumers (Pty) Ltd 1999 4 SA 1213, 61 SATC 91). Neither concepts are defined
in the Act. What is clear from the wealth of jurisprudence is that the Commissioner may not tax
an amount when it has accrued and again when it is received as this would amount to double
taxation (see CIR v Delfos 1933 AD 242, 6 SATC 92; CIR v People’s Stores (Walvis Bay) (Pty)
Ltd 1990 2 SA 353 (AD); SIR v Silverglen Investments (Pty) Ltd 1969 1 SA 365 (A); Isaacs v CIR
1949 4 SA 561 (A)). In SIR v Silverglen Investments (Pty) Ltd, it was considered that if an amount
has accrued in an earlier year of assessment but it is received in a later year, irrespective if the
taxpayer has disclosed the accrual in his return, the Commissioner is bound to assess the amount
in the year of its accrual (389-390). Neither the Commissioner nor the taxpayer has a right to elect
that the amount must be assessed in the year of its receipt (390). It appears a general practice of
SARS to assess an amount in the year that it has accrued (De Koker, Koekemoer & Williams
Silke on South African income tax (2017) par 2.3).

DISCUSS DELFOS, LATEGAN AND PEOPLE’S STORES CASES

For quite a long period controversy ruled over the interpretation of the concept of “accrued to”.
The uncertainty hovered around whether the concept means that the taxpayer must be entitled to
an amount, or that the amount must be due and payable. In CIR v People’s Stores, this uncertainty
appears to have been cleared where the court reiterated the Lategan-principle (see Lategan v
CIR (1926) CPD 203, 2 SATC 16) and ruled that the concept ‘accrued to’ denotes that the
taxpayer must be unconditionally entitled to an amount. This principle was successfully cemented
in our law in Cactus Investments (Pty) Ltd v CIR (1999 1 All SA 345(A)) – or at least so it appeared.
In the recent judgment of M v CSARS ((14005) [2017] ZATC 1(30 May 2017)) it seems as if the
certainty created by the judgments in Lategan and People’s Stores –or what jurists perceive as
final certainty – is not so clear, certain, and understandable after all.

DISCUSS M V CSARS
The facts
During the 2012/2013 year of assessment, M, in the course of his trade, entered into deeds of
alienation of immovable property in respect of 25 stands. For M to legally give transfer of the
stands, various requirements had to be satisfied after conclusion of a valid deed of alienation. So
for example, the conveyancing attorneys were legally able to deal with the funds paid by the
purchasers in terms of the agreements only after they had been satisfied that there had been
compliance with the requirements of the Financial Intelligence Centre Act 38 of 2001 (‘FICA’). In

3
addition, the purchase price agreed upon had to be paid to the conveyancing attorneys, or
adequately secured by guarantees provided by a financial institution, or by way of a cash payment
by the purchaser, before the transfer documents can be lodged at the deeds office. As the stands
were subdivided from a larger piece of land, transfer of the subdivided stands were first required
before transfer thereof can take place into the name of the purchasers. For this to happen, M first
needed to satisfy the requirements in terms of section 31 of the Land Use Planning Ordinance
15 of 1985 (Cape). This section provides that-

“Before registration by virtue of a subdivision in respect of which an application has been granted
under section 25 is effected by the registrar of deeds concerned, the transferor shall furnish proof
to the local authority concerned that any condition on which the application for subdivision
concerned was granted, has been complied with, and no written authority under section 96(1) of
the Municipal Ordinance, 1974 (Ordinance 20 of 1974), or section 96(1) of the Divisional Councils
Ordinance, 1976 (Ordinance 18 of 1976), shall be issued unless such proof has been furnished”.

Furthermore, transfer could not be effected until the local authority had given rates clearance in
terms of section 118 of the Local Government: Municipal Systems Act 32 of 2000.

As a result of these requirements, transfer of the stands into the name of the purchasers was
finalised by the deeds office during the 2013/2014 year of assessment. Accordingly, M received
the purchase price of the stands during the 2013/2014 year of assessment. After an audit into the
tax affairs of M, the commissioner raised a revised assessment in terms of which the purchase
price for the sale of the 25 stands is included in M’s gross income for the 2012/2013 year of
assessment. This is so, the commissioner argued, because the proceeds accrued to M when the
deeds of alienation were entered into. M objected to the revised assessment without success.

The judgment

M argued that, in the case of the transfer of immovable property, it is important to distinguish
between three events, namely, the conclusion of the deed of transfer, the transfer of the property
into the name of the purchaser, and the payment of the purchase price to the seller. More
importantly, the transfer of the property into the name of the purchaser and the payment of the
purchase price are consecutive events (para [10]). Binns-Ward P, however, ruled that there is no
difference in time between the transfer of the property into the name of the purchaser and the
payment of the purchase price (para [11]). The fact that actual payment may be deferred as a
result of some or other misfortune, does not alter the conceptual character of the transaction in
that transfer and payment occur simultaneously (ibid). Even if there is a delay in the payment after

4
transfer of the property, in the case of the alienation of immovable property, the accrual of the
proceeds of the sale is not postponed until actual transfer of the property into the name of the
purchaser (para [12]). What needs to be determined is when accrual occurs in terms of the
Lategan-principle. In applying this principle, the court came to the conclusion that the entitlement
to payment “vested at the date of the fulfilment (including fictitious fulfilment in a case in which
the purchaser frustrated the actual fulfilment of the condition) of any suspensive conditions to
which the agreement was subject, or the date upon which the taxpayer obtained (or, acting
reasonably, could have obtained) the statutory permissions necessary to enable it to tender
transfer, whichever occurred later” (ibid). In short, entitlement vests as soon as the agreement
becomes enforceable at the instance of any of the parties. There is no evidence that either the
purchasers or the seller wilfully delayed or prevented the suspensive conditions to be fulfilled
(para [14]). Accordingly, the date on which the conveyancing attorneys were able to submit the
documents to the Deeds office for processing of transfer is the date on which M’s entitlement to
payment vested (ibid). In respect of the first 24 transactions, the entitlement to payment vested in
the 2012/2013 year of assessment when the amounts actually accrued to M (para [15]). However,
the commissioner argued that, in terms of the Lategan-principle, the purchase price of all 25
transactions accrued to M in the 2012/2013 year of assessment. This is so because compliance
with section 31 of the Land Use Planning Ordinance 15 of 1985 (Cape) does not constitute a
suspensive condition (ibid). This argument is rejected for the reason that the certificate issued in
terms of section 31 is required to enable the conveyancing attorneys to submit the documents at
the Deeds office for processing of transfer (para [16]). The commissioner further contended that
by virtue of section 24(1) of the Income Tax Act 58 of 1962, the proceeds of all 25 transactions
are deemed to have accrued to M in the 2012/2013 year of assessment on the date of conclusion
of the deeds of alienation (para [17]). Section 24(1) provides-

“Subject to the provisions of section 24J, if any taxpayer has entered into any agreement with any
other person in respect of any property the effect of which is that, in the case of movable property,
the ownership shall pass or, in the case of immovable property, transfer shall be passed from the
taxpayer to that other person, upon or after the receipt by the taxpayer of the whole or a certain
portion of the amount payable to the taxpayer under the agreement, the whole of that amount
shall for the purposes of this Act be deemed to have accrued to the taxpayer on the day on which
the agreement was entered into”.

5
DISCUSS SIR v SILVERGLEN INVESTMENTS
In interpreting section 24(1), the Tax Court is bound, in the interest of precedent, by the decision
in Secretary for Inland Revenue v Silverglen Investments (Pty) Ltd 1969 1 SA 365 (A) (para [29]).
In Silverglen, Steyn CJ ruled that in the case of the transfer of immovable property, the purchase
price cannot be claimed before transfer of ownership in the purchaser’s name (372 C-E). As a
result, it cannot be said that the purchase price accrued in ordinary sense of the word (ibid).
However, in terms of section 24 in the case of the transfer of immovable property, the purchase
price is deemed to have accrued to the taxpayer upon conclusion of a deed of alienation (374 B-
E). In applying this dicta in Silverglen, Binns-Ward P ruled that, section 24 does not apply to credit
agreements only (M v CSARS para [28]). It is clear from the judgment in Silverglen that it is
superfluous to consider the heading to section 24 (‘Credit agreements and debtors allowance’)
where it is clear that on ordinary tenor of its wording, the section applies notwithstanding the
granting of credit (ibid). Accordingly, in the case of the sale of immovable property, the proceeds
of the sale is deemed to accrue to the seller upon conclusion of a valid deed of alienation or
agreement to like effect (paras [28]-[29]).

Comments: the effective date of accrual

The general rule is that no tax liability can exist where there is no receipt or accrual of an amount.
There are, of course, specific anti avoidance provisions in the Income Tax Act that allows for a
tax liability to arise in cases where an amount has not been received by nor accrued to the
taxpayer (see sections 7(2); 7(3); 7(5); 7(6); 7(7), 7(8), 8A; 22(8); and 24I).

It is well-known that in the case of the alienation of immovable property, payment is generally
suspended until registration into the purchaser’s name. It can, therefore, not be said that a
taxpayer-seller received an amount upon conclusion of a valid deed of alienation. The effective
date on which the purchase price accrues to the seller must, accordingly, be resolved.

In Lategan v CIR, Watermeyer J ruled that “accrued to” means an amount to which the taxpayer
has become entitled to (p209). This entitlement denotes that as soon as an amount becomes
unconditionally and uncontingently due to the taxpayer, it is regarded as income (see ITC 1805
(2006) 68 SATC 110). Later in Ochberg (1933 CPD 256), Watermeyer J ruled that if the right to
claim future instalments is conditional or dependent upon performance of certain obligations or
the fulfilment of certain terms, there can be no accrual under the Act until the obligations have
been complied with or the conditions fulfilled. This is so because until these events have taken
place, the taxpayer is not entitled to claim any payment. De Koker and Williams argue that

6
conditions to be fulfilled may relate either to the taxpayer’s entitlement or to the quantum of the
amount (para 2.7). In other words, in cases where the amount is in dispute, accrual is suspended
until such dispute is settled and the amount is agreed upon. It is important to note that the
conditions and contingencies referred to in Lategan (which was later confirmed in CIR v People’s
Stores) signifies true conditions. Christie and Bradfield correctly point out that this part of the law
is bedevilled with semantics (Christie and Bradfield Christie’s the law of contracts in South Africa
(2011) 6th ed 137). It is well-known that many agreements contain headings entitled “conditions
of sale”. However, in the main, these paragraphs/clauses in the agreement contain mere
enforceable terms of the agreement. A true condition is distinct from the terms of an agreement.
To make this distinction requires an interpretation of the intricacies and refinements of the
agreement and/or the way it was drafted. In the case of a true condition, whether suspensive or
resolutive, the operation of the whole contract, or part thereof, and its consequences, depend
upon an uncertain future event (See R v Katz 1959 3 SA 408(C) 417E; Design and Planning
Services v Kruger 1974 1 SA 689(T) 695C; Southern Era Resources Ltd v Farndell NO
2010 4 SA 200 (SCA) para [11]; Christie and Bradfield 137). Fulfilment of the condition leads to
the contract being enforceable. While a contractual obligation can be enforced, unless otherwise
agreed, no action arises to enforce the completion of a contract where the condition is not fulfilled
(see Scott v Poupard 1971 2 SA 373 378H; Southern Era Resources Ltd v Farndell NO
2010 4 SA 200 (SCA) para [11]; MacDuff and Co Ltd (in liquidation) v Johannesburg
Consolidated Investment Co Ltd 1924 AD 573 590). In the case of the alienation of immovable
property, transfer of the property into the name of the purchaser is suspended until the fulfilment
of both contractual suspensive conditions and compliance with legal requirements. The
contractual suspensive conditions inter alia include an obligation by the purchaser to obtain
finance from a registered financial institution, or to secure payment of the purchase price by way
of guarantees submitted to the conveyancing attorneys before a certain time. The legal
requirements include that both seller and purchaser complies with the requirements of FICA, the
submission of a tax clearance certificate after payment of all taxes in respect of the transfer of the
property, the submission of a clearance certificate in respect of local rates and taxes, the
submission of an electricity certificate, and finalisation and registration of all subdivisions and
unregistered servitudes (see West, Conveyancing practice guide (2015) 4th ed para 11.7).
Compliance with the legal requirements and fulfilment of all suspensive conditions enables the
conveyancing attorneys to lodge the deed for registration. However, lodging of a deed is no
guarantee for transfer in the Deeds office. The Deeds office may reject the transfer deed for
various reasons. These include discrepancies in the existing holding title and the new deed of

7
transfer; spelling or typing errors that may cause confusion as to the parties, the bond holders, or
the property; incomplete transfer duty receipts; omission to refer to a personal servitude or
usufruct; or the holding title contains conditions or restrictions on transfer that are not complied
with. It is also possible for the financial institution granting finance to the purchaser to withdraw a
bond granted where it transpires that the bond was granted based on false or misleading
information received from the purchaser-applicant or his bond originator. The doctrine of fictitious
fulfilment of conditions find application in our law in cases where the fulfilment of a condition is
prevented through the deliberate and intentional actions (or failure to act) of one of the contracting
parties (See MacDuff and Co Ltd (in liquidation) v Johannesburg Consolidated Investment Co
Ltd 1924 AD 573; Gowan v Bouwern 1924 AD 550; Koenig v Johnson & Co Ltd 1935 AD 262;
Deetlefs v Wright 1977 2 SA 560 (A); Du Plessis NO v Goldco Motor & Cycle Supplies (Pty) Ltd
2009 6 SA 617 (SCA); Christie and Bradfield 153-157). In terms of the doctrine, the plaintiff must
prove the non-fulfilment of the condition and that the defendant’s breach of his duty was with the
intention to frustrate the fulfilment (see Scott v Poupard 379). It is for the defendant to show that
the condition would not in any event have been fulfilled (see Vos v Cronje and Duminy 1947 4 SA
873 (C); Thanolda Estates (Pty) Ltd v Bouleigh 2001 3 SA 196 (W)). Under these circumstances,
even though the conveyancing attorneys may have been able to submit the deed for transfer
when the bond was granted, the subsequent withdrawal of the bond renders the agreement void.
This is so for the reason that the suspensive condition is not fulfilled. The seller may institute a
claim for delict against the purchaser, but he has to prove damage and the quantum thereof. In
the absence of a clause in the contract to the contrary, the seller will not have a claim for breach
of contract against the purchaser. This is so because the purchaser is unlikely to fulfil the
conditions of the sale (obtaining finance) had the true facts been revealed to the financial
institutions from the start. Importantly, fictional fulfilment of a condition is based on the doctrine
that the rights of third parties cannot be negatively affected (in this case the rights of the financial
institution)(see George Municipality v Freysen 1976 2 SA 945 (A)). Accordingly, the registration
of the land into the name of the purchaser cannot be fulfilled and the agreement terminates.

In the case of the insolvency or imminent insolvency of either the purchaser or the seller, any
impeachable transaction may result in the transaction being set-aside or declared to be void, and
dispositions of property by, or on behalf of, the debtor after the commencement of sequestration
or winding-up may be voidable or void. In the main, these transactions include dispositions without
value; voidable preferences; undue preferences; collusive dealings; void transfers of a business
or of property forming part thereof; dispositions of a company’s or corporation’s property after
commencement of the winding-up thereof; unlawful dealings with a company’s property prior to

8
the winding-up thereof; and unlawful dealings with a corporation’s property prior to the winding-
up thereof, including payments to its members (see Meskin (ed), Insolvency law (2016) par
5.31.1). Thus, even if the conveyancing attorneys are able to submit the documents to the Deed’s
office, the insolvency or imminent insolvency of either the purchaser or the seller may prevent the
Deed’s office from completing the registration.

Based on the above arguments, Binns-Ward P’s ruling that the proceeds of the sale of immovable
property accrues to the seller on the date that the conveyancing attorneys are able to submit the
deed for transfer in the Deeds office is clearly incorrect. This part of the judgment is also in stark
contrast to the judgment in Silverglen which the court was so compelled to follow. In Silverglen,
at 372 C-E, Steyn CJ remarked-

“It is clear from the stated case that neither the purchase price nor the depreciation contributions
could have been claimed before the transfers took place on 7th August, 1963. They did not,
therefore, become payable during the year ended 30th June, 1963, and cannot, I think, be said
to have ‘accrued’, in the ordinary sense, to the respondent during that year”.

We strongly argue that registration is and remains an uncertain future event which suspends the
operation of whole or part of the agreement of alienation of land or the consequences thereof.
Accordingly, accrual of the proceeds of the sale is suspended until the agreement is fulfilled by
way of transfer of the property into the name of the purchaser in the Deeds office.

Comments: The interpretation of section 24(1)

Section 24(1) is a special provision that targets specific credit agreements. The vital purpose of
section 24(1) is to prevent the undue suspension or deferral of income earned under credit
agreements while at the same time, albeit on a limited basis, matching the recognition of such
income with actual cash receipts (see De Koker, Koekemoer and Williams para 17.26).Section
24(1) affects transactions entered into between the taxpayer and another person in respect of any
property whereby-

a) in the case of movable property, ownership will pass from the taxpayer to another
person;
b) in the case of immovable property, transfer of ownership will be effected from the
taxpayer to another person;
c) upon or after the receipt by the taxpayer of the whole or a certain portion of the amount
payable to him under the agreement.

9
The resultant effect is that the whole amount, excluding finance charges, is deemed to have
accrued to the taxpayer on the date of conclusion of the agreement. The finance charges must
be dealt with in terms of the provisions of section 24J.

De Koker, Koekemoer and Williams argue that the true nature of section 24(1) is to prevent a
taxpayer from arguing that, because ownership of trading stock sold by him under certain types
of credit agreement still vests in him, no accrual of the proceeds can have taken place (para
17.26). De Koker, Koekemoer and Williams further opine that the application of section 24(1) can
be extended to specific suspensive sale agreements (para 17.26). We disagree. In the arguments
that follow we seek to explain why section 24(1) applies to credit agreements only.

In interpreting statutes, the court must seek to ascertain the intention of the legislator (or more
correctly, the purpose of the legislation) form the words of the statute itself. (Cockram
Interpretation of statutes (1983) 60-61; Du Plessis The interpretation of statutes (1986) 107-110;
Devenish Interpretation of statutes (1992) 11-14). Due to the elasticity of language, it is admissible
for the court to have regard not only of the words in the text, but also of its objective and policy
that can be gathered from several parts of the Act as well as the history of the law and the
circumstances applicable to the subject matter (Cockram 61-62). This ‘golden rule’ entails that
the ordinary meaning of the words must be used and followed, unless this leads to an absurdity
or it is in contrast with the intention of the legislator (See Venter v R 1907 TS 910 914-915).
Generally, headings are regarded as preambles to the sections in the Act which follows them.
The headings of different sections in an Act may be referred to, to determine the sense of a
doubtful expression or words under that heading (Chotabai v Union Government 1911(AD) 13
24). In both Silverglen and in the case under current discussion, in interpreting section 24(1), the
court failed to recognise the importance of headings in legislation. While headings play an
important role in the interpretation of a section, its importance cannot be weighed (see Turffontein
Estates v Mining Commissioner, Johannesburg 1917 (AD) 419 431). In Fletscher v Birkenhead
Corporation ([1907] 1 KB 214), the court noted that there must be some sort of ambiguity in the
section before resort can be had for headings (see also Du Plessis 127). Cockram, referring to
Inglis v Robertson ([1898] AC 616), disagrees (89). In this case, the words of an unambiguous
section were struck down by a restrictive heading. Yet, in Mpangele & another v Botha & others
(1982 3 SA 632 (C)), the court found that ‘headnotes are not material on which to found statutory
interpretation.’ The contextual framework of interpretation of statutes dictates that all factors,
including headings, must be considered to find the purpose of the legislation. The consideration
of headings is, therefore, not limited to cases where an ambiguity exists (see Devenish 108; S v

10
Liberty Shipping and Forwarding (Pty) Ltd & others 1982 4 SA 281 (D) 285-286). Interestingly,
marginal notes are not regarded as part of a statute and are not taken into account in the process
of interpreting statutes (see Union Government v Tonkin 1918 AD 533; Durban Corporation v
Estate Whittaker 1919 AD 195; Rose’s Car Hire (Pty) Ltd v Grant 1948 2 SA 466 (A); Rossouw v
Sachs 1964 2 SA 551 (A)). Devenish (108) and Cockram (90-92) note that, as a result of different
printing methods, it is difficult to determine what constitutes headings and what constitutes
marginal notes. This is even more confusing comparing an online version to a printed version.
Badenhorst suggests that there should be no distinction between the various captions and that
the interpreter should be allowed to examine every part of the Act (Badenhorst ‘Die hededaagse
aanwending van kantskrifte en artikelopskrifte by wetsuitleg’ 1986 (49) THRHR 322 326-327).
Accordingly, Binns-Ward P’s remark that there is “no purpose to be served by us entering into the
interesting contesting arguments by the parties concerning the extent to which the heading to the
section could be taken into account in construing it” is grossly irregular and not in line with the
contextual and the constitutional framework of interpreting section 24(1). The heading to section
24(1) reads “Credit agreements and debtors allowance”. Read together with the text of the section
(see arguments below), the only inference that can logically be drawn is that section 24(1) applies
to credit agreements and any other agreement in terms of which payment is postponed by way of
granting of credit at the instance of the seller.

The wording of section 24(1) is indicative that it refers to situations where the payment of the
purchase price is suspended by way of the granting of credit at the instance of the seller. This
view is supported by the inclusion of the reference to section 24J (interest and other finance
charges) in section 24(1). Here it is important to note that at the time of Silverglen the reference
to section 24J did not appear in the wording of the text. Accordingly, a confusion as to the scope
and application of section 24(1) – as it then stood- may have existed. However, in the current
matter, the court was required to interpret a different version of section 24(1). In our view, the
insertion of the reference to section 24J (interest and finance charges), undoubtedly, limits the
scope and application of section 24(1) to situations where payment is suspended as a result of
credit being granted at the instance of the seller. Thus, Silverglen is, strictly speaking, no authority
for the application of section 24(1) in the case of alienation of immovable property where the
purchase price is suspended ex lege. Section 24(1) can apply in cases where the purchase price
is suspended as a result of the granting of credit at the instance of the seller only (this argument
is further supported by alternative lexicographic methods of interpretation of text as explained
below). Accordingly, the judgment in casu is wrong. The Lategan-principle must apply in the case
of alienation of immovable property where no credit is granted. Under the Lategan-principle, as

11
argued above, accrual of the proceeds of the sale is suspended until transfer of the property in
the name of the purchaser in the Deeds office.

NOTE: Those who followed the above argument must come to the conclusion that
accrual occurred during the 2019/2020 year of assessment. Those who followed the
argument in the judgment must come to the conclusion that accrual occurred during the
2018/2019 year of assessment.

QUESTION 2
Question 2.1

Most deductions are allowed by virtue of a so-called general deduction formula

comprising s 11(a), which sets out what may be deducted, namely, the positive test, and s 23(g),
which stipulates what may not be deducted, namely, the negative test.

The courts have laid down that s 11(a) and s 23(g) must be read together when one considers
whether an amount is capable of deduction. But it is important to know that, for a great many
years, the negative test set by s 23(g) was much more restrictive than it presently is, and there
are many court decisions that can be appreciated only in the context of the negative test applying
at the time.

Section 11(a) provides for the deduction of

‘expenditure and losses actually incurred in the production of the income, provided such
expenditure and losses are not of a capital nature’.
The current version of s 23(g) provides that
‘[n]o deductions shall in any case be made in respect of the following matters, namely . . .
‘(g)
any moneys, claimed as a deduction from income derived from trade, to the extent to which such
moneys were not laid out or expended for the purposes of trade’.
The current general deduction formula comprised by ss 11(a) and 23(g) may therefore be broken
down into the following elements:

•what has been incurred must be an ‘expenditure’ or ‘loss’;

•it must have been actually incurred;
•during the year of assessment;
•in the production of the income;

12
•it must not constitute an expenditure or loss of a capital nature, and
•if it is claimed as a deduction against income derived from trade, it must, either in part or in full,
constitute moneys that were laid out or expended for the purposes of trade

To qualify as a deduction from income in terms of s 11(a), an item of expenditure or a loss must
actually have been incurred in the production of the income.

The meaning of the expression ‘in the production of the income’ was considered in the seminal
decision of Port Elizabeth Electric Tramway Co Ltd v CIR and the interpretation accorded to it in
the decision has never since been doubted. The taxpayer concerned was a transport company.
The driver of one of its cars lost control of the vehicle, which collided with a building, and as a
result the driver suffered injuries and eventually died. The company was compelled to pay
compensation and the legal costs incurred when it contested the claim of the deceased’s
representatives. The court held that while the compensation paid was incurred in the production
of income, the legal costs incurred in resisting the claim were not. Watermeyer AJP, as he then
was, who delivered the judgment of the Cape Provincial Division of the Supreme Court,
approached the principle involved in the following manner:

‘The purpose of the act entailing expenditure must be looked to. If it is performed for the purpose
of earning income, then the expenditure attendant upon it is deductible.’

He went on to say:
‘The other question is, what attendant expenses can be deducted? How closely must they be
linked to the business operation? Here, in my opinion, all expenses attached to the performance
of a business operation bona fide performed for the purpose of earning income are deductible
whether such expenses are necessary for its performance or attached to it by chance or are bona
fide incurred for the more efficient performance of such operation provided they are so closely
connected with it that they may be regarded as part of the cost of performing it.’
Since the employment of drivers was necessary for the carrying on of the business of the
company, and since the employment of drivers carried with it, as a necessary consequence, a
potential liability to pay compensation if those drivers were injured in the course of their
employment, the court considered that the compensation paid by the company had to be regarded
as being so closely connected with the income-earning act from which the expenditure arose as
to form part of the cost of performing it. The compensation was therefore allowed as a deduction.

The court held that legal costs may be deducted if they are so closely connected with the earning
of the income as to be regarded as part of the cost of earning it. In this case they were expended
in resisting a demand for compensation, and since this was not an operation entered upon for the

13
purpose of earning income, the legal costs were disallowed. (These restrictive criteria for the
deductibility of legal expenses have since been relaxed by the enactment of s 11(c) which now
governs the deductibility of legal costs).

In another decision involving a claim by a taxpayer for a deduction in terms of s 11(a) and s
23(g) in respect of compensation arising out of a breach of contract, the Tax Court ruled that the
compensation was not deductible expenditure in terms of these provisions. In this case, the
compensation had been quantified in a settlement agreement. It was held by the Tax Court that
the taxpayer had failed to prove that the expenditure in the form of compensation had been
incurred in the production of income. The court pointed out that the taxpayer had not been legally
obliged to pay the compensation, nor was it necessary for the taxpayer to enter into the settlement
agreement to enable it to produce income, and that the purpose of the settlement agreement bore
no relation to the trade being carried on by the taxpayer.

The principles laid down in the Port Elizabeth Electric Tramway Co case have been faithfully cited
with approval by the courts. See, for example, CIR v Genn & Co (Pty) Ltd, in which Schreiner JA,
who delivered the judgment of the Appellate Division, framed his confirmation as follows:

‘If I am right in understanding the words “they may be regarded” as connoting that it would be
proper, natural or reasonable to regard the expenses as part of the cost of performing the
operation this passage seems to state the approach to such questions correctly. Whether the
closeness of the connection would properly, naturally or reasonably lead to such treatment of the
expenses must remain dependent on the court’s view of the circumstances of the case before it.’
He went on to observe:
‘In deciding how the expenditure should properly be regarded the court clearly has to assess the
closeness of the connection between the expenditure and the income-earning operations, having
regard both to the purpose of the expenditure and to what it actually effects.’
The case of Sub-Nigel Ltd v CIR authoritatively establishes that the words ‘incurred in the
production of the income’ do not mean that before a particular item of expenditure may be
deducted it must be shown that it produced any part of the income for the particular year of
assessment. The important question is: Was the expenditure incurred for the purpose of earning
income as defined in s 1, whether in the current or in a future year of assessment? Thus it was
held in that case that amounts paid by way of premiums on insurance policies against loss of
profits and loss of standing charges occasioned by fire are incurred in the production of income.
Centlivres CJ, who delivered the judgment of the Appellate Division, held as follows:

14
‘It seems to me clear on the authorities that the court is not concerned whether a particular item
of expenditure produced any part of the income: what it is concerned with is whether that item of
expenditure was incurred for the purposes of earning income . . ..

The whole raison d’être of the company is to earn profits, and in taking out these policies it was
endeavouring to maintain its profits by making provision against loss in the event of a fire. Now,
was the act entailing the expenditure of the amounts paid by way of premium performed for the
purpose of earning income? In my opinion the answer to this question is in the affirmative. The
mere fact that no income [has] actually resulted is, in my view, irrelevant: the purpose was to
obtain income on the happening of a fire which would prevent the carrying on of income-producing
operations. There can, to my mind, be no doubt that if a fire had occurred, the proceeds paid by
the company’s insurer in respect of the policies insuring net profits would have been of a non-
capital nature and would therefore have had to be included in the company’s “gross income” . . ..’

The Sub-Nigel case is therefore authority for the view that for expenditure to rank as a deduction
during the year of assessment it is not necessary to show that it will have an effect upon the
production of the income for that year.

Indeed, in some instances, it would be impossible to demonstrate that the incurring of the
expenditure in question has had a quantifiable impact – or indeed any impact – on the production
of income, but this is not a barrier to deductibility provided that the expenditure was incurred for
the purpose of producing income and provided that the other criteria, discussed above and below,
are satisfied.

These authorities clearly establish the point that, to rank as a deduction, the expenditure must not
only have been incurred for the purpose of earning ‘income’ as defined but there must also be a
sufficiently distinct and direct relationship or link between the expenditure incurred and the actual
earning of the income.

Damages and compensation

For expenditure or losses paid by way of damages or compensation resulting from negligence
during the course of earning income to be deductible there must be a very close connection
between the trade or business carried on and the cause of the liability for damages or, as it has
been put by the courts, the negligence must have constituted an ‘inevitable concomitant’ of the
trade.

15
In Joffe & Co (Pty) Ltd v CIR304 the taxpayer carried on business as engineers in reinforced
concrete. The death of a workman was caused by the negligence of the company in carrying out
one of its contracts, and it was required to pay damages and costs. The company claimed a
deduction of the amount paid. The claim was disallowed, the court holding that the expenditure
had not been incurred for the purpose of earning profits; nor, since it had not been established
that negligent construction was a necessary concomitant of the trading operations of a reinforced
concrete engineer, had it been incurred for the purposes of the taxpayer’s trade. Watermeyer CJ,
who delivered the judgment of the Appellate Division of the Supreme Court, said:

‘There is nothing . . . to show that the appellant’s method of conducting his business necessarily
leads to accidents, and it would be somewhat surprising if there were.’
But, it has been said, this case did not decide that losses occasioned by a taxpayer’s negligence
are not deductible; merely that there was no evidence that losses arising from the negligence of
the particular taxpayer concerned were necessary concomitants of the business it carried on.

Question 2.2

Legal expenses
A very fine distinction has been drawn by the courts in determining whether legal expenses may
be allowed as expenditure incurred in the production of income in terms of s 11(a). As a general
rule, the courts have repeatedly upheld the tests laid down in the Port Elizabeth Tramway case.

This distinction is well illustrated by the situation in which legal expenses are incurred by a landlord
in an appeal to the rent board. If the expenses are incurred in an attempt to have the rentals
increased, the expenditure is allowable, whether the application is successful or not. If the
landlord incurs the expenditure in order to oppose a complaint by an inspector from the rent board
or an application by a tenant for a reduction in rent, it is not allowable. In the first instance the
expenditure is incurred in an effort to produce income, while in the second the motive is to protect
income and not to produce it, and it is here that the main distinction is drawn. For an expenditure
to be deductible under s 11(a), the taxpayer must show that the legal expenditure is linked to an
operation undertaken with the object of producing income and not to operations that merely serve
to protect an existing source of income or to prevent its diminution. But if legal expenses are not
deductible under s 11(a), they may nevertheless still be deductible under s 11(c). For example,
legal costs incurred in the protection of income, to prevent a diminution of income, to prevent an

16
increase in deductible expenditure or to avoid a loss or resist a claim for compensation may be
deductible under s 11(c).

(A distinction between s11(a) and (c) must be made)

Discuss s11 (a)
In order to be deductible under s 11(a), legal costs must have been incurred in the production of
income, and the word ‘income’ must be given its meaning as defined in s 1 of the Act. Therefore
legal expenses incurred for the purpose of reducing deductible expenditure and thereby
preventing the taxable income from being diminished have not been incurred for the purpose of
earning ‘income’ as defined. Such expenses would not be regarded as having been incurred in
the production of income.
A further requirement that a taxpayer has to fulfil before legal charges will be allowed as
expenditure incurred in the production of income under s 11(a) is to show that there is a distinct
and direct relationship between the expenditure on legal costs and the actual earning of the
income of the business.

Discuss Legal expenses S11(c)

Section 11(c) permits a deduction from income of any legal expenses actually incurred by the
taxpayer during the year of assessment on any claim, dispute or action at law arising in the course
of or by reason of the ordinary operations undertaken by him in the carrying on of his trade.
But, s 23H(1) limits the deduction for certain legal expenses where, for example, not all of the
services in respect of which the expenditure was incurred during the year of assessment, will be
rendered in that year.
The legal expenses qualifying for this deduction are fees for the services of legal practitioners,
expenses incurred in procuring evidence or expert advice, court fees, witness fees and expenses,
taxing fees, the fees and expenses of sheriffs or messengers of court and other expenses of
litigation that are of an essentially similar nature to any of these fees or expenses.

Therefore legal expenses incurred on applications to or appearances before local authorities,

licensing boards and similar bodies would have to be claimed not under s 11(c) but
under s 11(a) But in practice SARS accepts that disputes before rates courts, liquor licensing
courts or valuation courts are ‘disputes or actions at law’ and fall within the deduction, but there
must be a ‘dispute or action at law’. While there must be an ‘action at law’, the ‘dispute’ need not
be one that has reached the courts. It is submitted that the words ‘at law’ govern the word ‘action’

17
only. This submission is supported by the Afrikaans text of the Act, which refers to ‘geskil of
regsgeding’. It is submitted, therefore, that the dispute need not come before the courts in order
to qualify, so that legal expenses relating to disputes that do not concern the courts qualify as
deductions. SARS accepts this view.

The deduction is limited to so much of qualifying legal expenses as:

(1)Is not of a capital nature (s 11(c)(i)).
(2)Is not incurred in respect of a claim made against the taxpayer for the payment of
compensation or damages if by reason of the nature of the claim or the circumstances any
payment that is or might be made in satisfaction or settlement of the claim does or would not rank
for deduction from his income under s 11(a) (s 11(c)(ii)).
In other words, if the expenses are incurred on a claim for damages or compensation, the
expenses will be deductible under s 11(c) only to the extent that the damages or compensation
are deductible under the so-called general deduction formula. For example, legal costs incurred
by a newspaper company to resist a claim for damages for libel would be deductible
under s 11(c) because any damages paid would be deductible under s 11(a), the risk of libel
actions being an inevitable concomitant of the trade of a newspaper company.

(3)Is not incurred in respect of a claim made by the taxpayer for the payment to him of any amount
that does or would not constitute his income (s 11(c)(iii)).
(4)Is not incurred in respect of in respect of any dispute or action at law relating to a claim referred
to in item 2 or item 3 above (s 11(c)(iv)).
In other words, when legal expenses are incurred on a claim the claim must be one either for the
taxpayer to pay damages or compensation deductible by him under s 11(a) or for him to derive
an amount that will be included in his income.

Section 11(c) does not cover the payment of damages or compensation, and the deduction
of such payments will be allowed only under s 11(a), if the requirements of those
provisions are fulfilled.

18
 LML4804

FEEDBACK TO ASSIGNMENT 03

2019

General Comments:

 The purpose of this feedback is to give you general guidelines as to what was
required of you in answering this assignment. This is not a complete
memorandum.
 Most students did not follow the basic structure to adopt in your answers which
were recommended in the feedback to assignment 01. PLEASE REFER TO
THIS STRUCTURE IN PREPARING FOR YOUR EXAM.
 YOU CAN ALSO FIND TWO IMPORTANT DOCUMENTS ON GUIDELINES
ON HOW TO ANSWER QUESTIONS ON MYUNISA, UNDER THE
‘ADDITIONAL RESOURCES TOOL’.
 Most students did not cover all the individual scenarios in Question 1 (GCT)
and failed to substantiate their answers with relevant paragraphs of the Eighth
schedule of the Income Tax Act.

QUESTION 1: CAPITAL GAINS TAX

On 30 September 2018, after winning R30million in the Lottery Powerball Competition,

Mr Tom Sloath resigned from his work as a civil engineer. On his resignation, he
receives R3million worth of shares in Krugerrands and R4million in cash as his
severance package for having worked for the company for 20 years. His fortunes were
increased when he successfully sued the Network Newspaper for R5million for having
published his name as the winner of the Powerball competition without his consent.
Mr Tom Sloath is married to Olive, and they have two children Tom and Jerry. Prior to
his winnings, Mr Sloath inherited a farm worth R10million from his father in
Popeyeville. The inheritance of the farm is subject to the condition that Mr Sloath will
occupy and enjoy the fruits of the farm until Tom, the elder of the two children finishes
Matric. Tom is currently doing Grade 10. On his resignation, Mr Sloath embarked on
the following transactions:
a) He sold his house he stayed in with his family in Bon Estates for R2.8million.
He bought this house five years ago for R1million.
b) Prior to him selling the house, Mr Sloath employed LIDO Valuators to evaluate
the house. He paid them R16 000. He also employed REALTIME estate agents
to market and advertise the house. He paid them R80 000 for their services.

Open Rubric
 c) He also sold his car, Mean Machine 3 for R250 000 and bought a more sporty
Mean Machine 4 for R500 000.
d) He bought a holiday house in Kroon dam drive for R5million.

WHAT IS REQUIRED OF YOU?

With reference to relevant legal principles and sections in the Income Tax Act 58 of
1962, discuss the capital gains tax consequences of all the transactions and calculate
the taxable capital gain of Mr Tom Sloath for the 2018/2019 year of assessment.

MODEL ANSWER:

Background

The Eighth Schedule of the Income Tax Act deals with provisions that address the
issue of taxable capital gains and assessed losses. It applies to disposals that
occurred on or after the 1st of October 2001 only. In order to determine whether there
was a capital gain or loss there are certain requirements that have to be met. All
requirements have to be met in order for the principles dealing with capital gains or
losses to find application. The requirements will be briefly discussed in the subsequent
paragraphs before analysing the main issues in this case.

Asset:
There must be an asset before the provisions of the Eighth Schedule will be applied.
The term ‘asset’ is defined in the Eighth Schedule to include
property of whatever nature, whether movable or immovable, corporeal or
incorporeal, excluding any currency, but including any coin made mainly from
gold or platinum; and a right or interest of whatever nature to or in such
property;’

The SARS Guide on Capital Gains Tax (CGT) stipulates that property is anything that
can be disposed of and turned into money.

Disposal:

A disposal is defined as any event, act, forbearance or operation of law which results
in the creation, variation, transfer or extinction of an asset. Paragraph 11(a) of the
Eighth Schedule also deals with the circumstances that may be regarded as a disposal
(these are discussed below).

Base Cost:

Base cost refers to the costs directly incurred in respect of acquisition of an asset, the
holding cost of the asset and disposal of an asset. This provision is discussed in
paragraph 20 of the Eighth Schedule.

2
Proceeds:
The term ‘proceeds’ is defined as the amount received or accrued in consequence of
a disposal.
Issue of residency

The question refers to the liability of CGT. Both residents and non-residents are
subject to CGT. Residents pay tax on capital gains resulting from the disposal of
assets situated anywhere in the world. Mr Sloath is a resident of South Africa and he
will be liable to pay tax on capital gains resulting from the disposal of assets situated
anywhere in the world.

Transactions from the facts

R30million Lottery Powerball winnings

Mr Sloath received R30million after winning the Lottery Powerball competition.
The winnings are regarded as capital in nature and therefore not included in the gross
income of the individual.
In terms of paragraph 60 of the Eighth Schedule, a natural person (unless they embark
on a scheme of profit making) must disregard a capital gain or loss on a disposal
relating to any form of gambling, game or competition. However, the following persons
shall be subject to CGT:
Companies, close corporations or trusts; foreign winnings by natural persons; and
illegal gambling, games and competitions in South Africa.
In terms of paragraph 60, there will be no CGT consequences in respect of the lottery
winnings received by Mr Sloath.

R4million cash as severance package and R3million worth of shares in

Krugerrands as severance package
A share constitutes a financial instrument. Section 1 of the Income Tax Act defines a
financial instrument to include “a loan, advance, debt, bond, debenture, bill, share,
promissory note, banker’s acceptance, negotiable certificate of deposit, deposit with a
financial institution, a participatory interest in a portfolio of a collective investment
scheme, or a similar instrument”.
The definition of an asset is wide enough to include listed or unlisted shares.
NOTE THAT although currency is excluded from the definition of asset, coins made
of gold, silver or platinum are specifically included. Therefore, Kruggerrands qualify as
an asset in terms of definition of the term ‘asset’ – HOWEVER, IN THE GIVEN FACTS
THEY WERE RECEIVED AS PART OF THE SEVERANCE PACKAGE.

3
Mr Sloath received a severance package of R4million when he resigned from his work
as a civil engineer.
In order to determine whether there will be any Capital gains tax consequences in this
case, paragraph 54 is of application. Paragraph 54 provides that a person must
disregard any capital gain or capital loss determined in respect of a disposal that
resulted in that person receiving—
(a) a lump sum benefit as defined in the Second Schedule; or
(b) a lump sum benefit paid from a fund, arrangement or instrument situated
outside the Republic which provides similar benefits under similar conditions to
a pension, pension preservation, provident, provident preservation or
retirement annuity fund approved in terms of this Act.”
In terms of paragraph 54, there will be no CGT consequences in respect of the
severance package received by Mr Sloath.
NB: this will be included under paragraphs (d), (e); and (f) of the gross income
definition in section 1 of the Income Tax Act.

Compensation for defamation – Network Newspaper

Mr Sloath received R5million compensation when he sued the Network Newspaper
for publishing his name as a winner without his consent.
The R5million will be included in the gross income of Mr Sloath.
NB: In terms of paragraph 59, a person must disregard a capital gain or loss in respect
of compensation for personal injury, illness or defamation. This paragraph does not
apply since the payment was not a result of a disposal which resulted in the taxpayer
receiving compensation for personal injury, illness or defamation.
The R5million has no CGT consequences for Mr Sloath.

Inheritance of a farm in Popeyeville – R10 MILLION

See – attribution of Capital gains resulting from a donation can be attributed to
the donor – para 70: capital gains that arise as a result of a conditional donation
are attributed to the donor
Where a person makes a donation whereby a capital gain (attributable to the donation)
will not vest in the beneficiaries until some fixed or contingent event occurs – then the
capital gain will be taxed in the hands of the donor, as long as the capital gain or any
portion of it has not vested in any resident beneficiary during the year of assessment
The inheritance of the farm (R10million) will have no CGT consequences for Mr
Sloath
Selling of Family house in Bon Estates – R2.8million

4
A primary residence is defined in paragraph 44 as a residence:
a) In which a natural person or a special trust holds an interest; and
b) Which that person or a beneficiary of that trust or spouse of that person or
beneficiary
i) Ordinarily resides or resided in as his or her main residence; and
ii) Uses or used mainly for domestic purposes.

A “Residence” is defined in paragraph 44 of the Eighth Schedule to mean any

structure, including a boat, caravan or mobile home, which is used as a place of
residence by a natural person, together with any appurtenance belonging thereto and
enjoyed therewith (paragraph 44 of the Eighth Schedule to the Income Tax Act).
In the present case, the house in Bon Estates qualifies as a primary residence. The
house is an asset in terms of paragraph 1 of the Eighth schedule.
In terms of paragraph 45(1) a natural person and a special trust must disregard certain
capital gains and losses on the disposal of a primary residence.
In terms of paragraph 45(1) (b) any capital gain on the disposal of a primary residence
by a natural person or a special trust is disregarded if the proceeds from the disposal
of that primary residence does not exceed R2 million.1 To qualify for the R2 000 000
relief, a natural person or a special trust must hold an interest in the residence.
In this case the proceeds of the sale are R2, 8million. Therefore, the primary residence
exclusion in terms of paragraph 45(1) (b) does not apply. However, where paragraph
45(1)(b) does not apply, a natural person and a special trust must disregard capital
gains and losses of R2 million on the disposal of a primary residence (see paragraph
45(1)(a)).
In the situation where more than one natural person or special trust jointly holds an
interest in a primary residence, they will have to apportion the capital gain exclusion
of R2 million (see paragraph 45(2). This would typically apply to spouses married in
community of property. This means where an asset is disposed of by a spouse who is
married in community of property, and the asset falls within the joint estate of the
spouses unless expressly excluded, the disposal is treated as having been made in
equal shares by each spouse.
Paragraph 20 of the Eighth Schedule, sets out the amounts which if actually incurred
forms part of the base cost. For purposes of these facts, the following form part of the
base cost of the house.
- The purchase price of R1 million will be used since the property was purchased
after 1 October 2001.
- Remuneration of REALTIME estate agents R80 000. The remuneration paid
to an agent is included as actually incurred as expenditure directly related to

1
The limit of R2 000 000 is effective as from 1 March 2012 and applies in respect of years of assessment
commencing on or after that date.

5
 the acquisition or disposal of that asset in paragraph 20 (c) of the Eighth
schedule.
- Valuation cost (in this case R16 000) is only included where the asset was
valued for CGT purposes in terms of paragraph 20(1)(b)

Par 20(1) (c) (i) states amongst other requirements that the remuneration of an agent
qualifies as a direct cost of acquisition and disposal.

Calculation

Capital Gains Tax = Proceeds - Base Cost

= Proceeds - (Purchase price + Remuneration)

= 2 800 000 - (1 000 000 + 80 000) apportionment

of exclusion of interest is held by more than one person para
45(2)

= 2 800 000 - 1 080 000 (base cost)

= 1 720 000 / 2

= 860 000

No CGT on the disposal of a primary residence due to para 45(1)(a).

Selling of the Mean machine 3

Paragraph 53 read with paragraph 1 of the Eighth Schedule to the Income Tax Act,
defines a personal use asset as an asset of a natural person or a special trust that is
used mainly for purposes other than the carrying on of trade. Examples of ‘personal-
use assets’ include motor vehicles, furniture and fittings, works of art, clothing,
personal effects and jewellery not used for the purposes of trade.
Paragraph 53 Personal-use assets—
(1) A natural person or a special trust must disregard a capital gain or capital
loss determined in respect of the disposal of a personal-use asset as
contemplated in subparagraph (2).
(2) A personal-use asset is an asset of a natural person or a special trust that
is used mainly for purposes other than the carrying on of a trade.
Accordingly, Mean machine 3 qualifies as a personal use asset and the capital
gain or loss of the disposal of this car must thus be disregarded.

6
trPurchasing of a sporty Mean Machine 4
The purchase of Mean Machine 4 has CGT consequences upon disposal of the car.
Therefore, before there is a disposal, there are no capital gains tax consequences
regarding the Mean Machine 4.
Purchasing of a holiday house in Kroon dam drive – R5million
The purchase of a house has CGT consequences upon disposal of the house.
Therefore, before disposal there are no CGT consequences.
Para 14 – disposals by spouses married in community of property
Where an asset is disposed of by a spouse who is married in community of property,
and that asset falls within the joint estate of the spouses, the disposal is treated as
having been made in equal shares by each spouse. However, if the asset was
excluded from the joint estate, the disposal is treated as having been made mainly by
the spouse making the disposal
-Mr Sloath is married to Olive – facts do not provide otherwise therefore assumption
is that they are married in community of property.
N.B – NO CALCULATION OF TAXABLE CAPITAL GAIN AS THERE ARE NO
DISPOSALS THAT RESULT IN PROCEEDS FOR THIS PURPOSE

(MAXIMUM 25 MARKS)

QUESTION 2

2.1 Tim Adams had failed to register as a taxpayer and had never submitted tax returns,
the Commissioner served a lifestyle questionnaire, comprising twenty-six pages, upon
him. Upon his repeated refusal to respond to it, a senior SARS official launched motion
proceedings for an order directing him to do so. The information sought in the
questionnaire constituted ‘relevant material’, and it satisfied the specificity
requirements under the Tax Administration Act.

WHAT IS REQUIRED OF YOU?

With reference to relevant legal principles and sections in the Tax Administration Act
28 of 2011, discuss the available remedies to SARS.

MODEL ANSWER
Where a taxpayer refuses to comply with SARS request to provide relevant material,
the provisions of s 46 of the Tax Administration Act (dealing with requests by SARS
for relevant material) are peremptory.
In terms of section 46 of the TAA a senior SARS official may, for purposes of
administering a tax Act require a taxpayer to submit relevant material to SARS (s46
(2) (a)).

7
S 1 provides the definition of ‘relevant material’ – any information, document or thing
that in SARS opinion is foreseeably relevant for the administration of a tax Act.
On this basis, it is important to NOTE that – it is SARS that determines whether
information is foreseeably relevant for the administration of a tax Act.
SARS will determine the format in which the relevant material must be submitted – it
may require that the material be submitted orally or in writing and within a reasonable
time period – s 46(1).
SARS may also specify the place, format and time in which the relevant material must
be provided – s 46 (4). The format must be reasonably accessible to the taxpayer.
The period within which the material has to be provided may be extended on good
cause shown by the taxpayer – s 46 (5)
The relevant material requested by SARS must be referred to in the request within
reasonable specificity – s 46 (6)
A senior SARS official may request relevant material that a person has available for
purposes of revenue estimation – s 46 (8)

Application to facts:

Since the taxpayer, Tim Adams had failed to register as a taxpayer and had never
submitted tax returns, the Commissioner served a lifestyle questionnaire, Upon his
repeated refusal to respond to it, a senior SARS official launched motion proceedings
for an order directing him to do so. The provisions of s 46 of the Tax Administration Act
are peremptory. The information sought in the questionnaire constituted ‘relevant
material’, and it satisfied the specificity requirements under the act. The issuing of the
questionnaire could not be regarded as a fishing expedition, especially since the
Commissioner had established all the jurisdictional facts outlined in s 46. Since the
request for information (the lifestyle questionnaire) was a preliminary investigation, it
did not constitute an administrative action. The Commissioner therefore, has the
remedies under s 46 available to them. Failure to adhere to the section, the
commissioner can approach the tax court.

(MAXIMUM 10 MARKS)

2.2 Elite Range is aggrieved by a decision made by SARS on 19 September 2018 to

raise additional assessments to Elite Range Ltd original assessments for the years
2014-2016. According to SARS, the additional assessments were raised after two
years based on amongst others, an allegation that Elite Range misrepresented and
failed to disclose material facts in regard to ‘the true nature and substance of a series
of agreements resulting in transactions it had concluded with other entities, which in
SARS’s view, were simulated loans. Elite Range wants to object to these additional
assessments on grounds of prescription.

8
WHAT IS REQUIRED OF YOU?

With reference to relevant legal principles and section in the Tax Administration Act
28 of 2011, advise Elite Range on the chances of success to object to the decision
by SARS
(15 marks)

MODEL ANSWER
In terms of s 92 SARS must make an additional assessment where it is satisfied that
an assessment does not reflect the correct application of a tax Act to the prejudice of
SARS or the fiscus. Additional assessments can be raised by SARS after having
conducted an audit of the taxpayer’s affairs.
Can the taxpayer raise prescription successfully?

S 99 deals with the principle of prescription. The rationale behind this principle is that
taxpayers require finality in respect of a tax assessment and to provide this finality,
an assessment may not be made under the following circumstances (s 99 (1)):-

1. three years after the date of an original assessment by SARS

2. in the case of self-assessment for which a return is required, five years after the
date of assessment of an original assessment
3. in the case of a self-assessment for which no return is required, after the
expiration of five years from the date of assessment of an original assessment by
SARS
4. in the case of an additional assessment if the amount that should have been
assessed, or the full amount that should have been assessed under the preceding
assessment was not assessed due to a practice generally prevailing at the date of
assessment.

However, there are limitations to s 99 (1). In terms of s 99 (2), the limitations on

SARS to raise assessments do not apply under the following circumstances:-

 In the case of assessment by SARS, where the full amount of tax chargeable
was not assessed due to fraud; misrepresentation or non-disclosure of
material facts.
 In the case of self-assessment where the fact that the full amount of tax
chargeable was not assessed due to fraud, intentional or negligent
misrepresentation, intentional or negligent non-disclosure of material facts, or
failure to submit a return, or where no return is required, failure to make the
required payment
 Where SARS and the taxpayer agree prior to expiry of the limitation period
that the limitations will not apply
 Where it is necessary to give effect to the resolution of a dispute under the
dispute resolution process

9
It is clear from the facts that SARS wants to raise additional assessments due to
misrepresentation and non-disclosure of material facts, therefore, objection based on
prescription cannot succeed. The limitations under s 99 (2) apply.

The students must therefore advise Elite Range on the chances of success to
object to the decision by SARS

Students who raised the issue – whether the delay was unreasonable and procedurally
unfair under PAJA were awarded marks.

(MAXIMUM 15 MARKS)

GRAND TOTAL [50 MARKS]

GOOD LUCK WITH YOUR EXAMS!

The Lecturers

10
 LML4804 - 2020

FEEDBACK TO ASSIGNMENT 01

MODEL ANSWERS

QUESTION 1: GROSS INCOME

1.1

Mr Nkomo is a South African resident. He owns a brick making company (‘Bricks

Innovation Ltd’) in South Africa and he supplies bricks to building contractors around
the country. On 10 October 2019, Mr Nkomo supplied bricks to Green Buildings (Pty)
Ltd (‘Green Buildings’) worth R400 000. In terms of their agreement, payment was to
be made over six months in equal instalments. Mr Nkomo received payment for
October and November only. Green Buildings ran into cash flow problems and failed
to pay Mr Nkomo from December 2019. Green Buildings made a lot of promises and
excuses to Mr Nkomo. Eventually Mr Nkomo instituted court action in February 2020
against Green Buildings for the outstanding amount. To his surprise, Green Buildings
initially disputed his claim, but the matter was finally resolved in May 2020 in Mr
Nkomo’s favour.

WHAT IS REQUIRED OF YOU?

Discuss when the purchase price of the bricks will be included in Mr Nkomo’s
gross income.
[15 marks]

MODEL ANSWER

Mr Nkomo is a South African resident. (Candidates who discussed how residency

is determined were awarded marks). In terms of definition of gross income in section
1 of the Income Tax Act, South Africa residents are taxable on their worldwide income.

In respect of South African residents, ‘gross income’ with regard to a year or period
of assessment is defined in section 1 of the Income Tax Act as:
 the total amount whether in cash or otherwise
 received by or accrued to or in favour of such resident during a year or period
of assessment
 excluding receipts or accruals of a capital nature
 Including the specific inclusions set out in par (a) – (n) of the definition of ‘gross
income’

An amount in principle accrues to a taxpayer when the taxpayer becomes

unconditionally entitled to it. Even if it may not yet be due and payable. This principle
was explained in CIR v People’s Stores (Walvis Bay) (Pty) Ltd (1990 AD) where the
taxpayer was engaged in the business of retailing clothing in terms of a ‘6 months to

Open Rubric
pay’ revolving credit scheme. The court held that the outstanding debts at the end of
the tax year represented amounts which had accrued because the taxpayer had
become entitled to them.

The proviso to the definition of ‘gross income in section 1 of the Act also supports this
entitlement principle. It provides that, an amount accrue to a taxpayer in the year of
assessment during which the taxpayer becomes entitled to it.

Based on the decision in the People’s Stores case and the proviso to the definition of
gross income in section 1 of the Act, Mr Nkomo was unconditionally entitled to the total
of R400 000 from the first month (October 2019) when the agreement was entered
into. Even if the amount was only payable monthly. He received payment for only
October and November 2019. He will pay tax for these two months in the 2019/20 tax
year.

The balance of the payment will only be included in his gross income when he
becomes unconditionally entitled to it.

Where a right to repayment depends upon the fulfilment of a condition, there can be
no accrual until the condition has been fulfilled. In the CIR v People’s Stores case it
was held that there can be no accrual until the taxpayer has become unconditionally
entitled to an amount. When a claim is disputed, it is ‘conditional’ and so an
accrual will only occur once the condition or dispute has been met by settlement
or an order (CIR v Golden Dumps (Pty) Ltd). In Mr Nkomo’s case, balance of the
payment accrues to him in May 2020 when the dispute was resolved in his favour.

According to the proviso to the definition of gross income, the value of the accrual
when a taxpayer becomes entitled to any amount payable at a future date, is the face
value of the amount (which is outstanding amount as per the agreement); and not the
present value (which is the value of the future receipt which is normally lessened by
factors such as inflation).
MAXIMUM 15 MARKS

1.2

Mr Hassani, a property broker, inherited the family farm in Pietermaritzburg from his
father. At that time the farm had the value of R5 million. In January 2015, he moved
his family to the farm, enrolled his children in the local school, altered the farm house
to suit the needs of his family and set up a new business as a property broker, which
he ran concurrently with his farming operations. Five years later, it was evident that
his children were unhappy in the local school. He was not making success of the
farming venture and his new property business was not flourishing after the Covid-19
pandemic that engulfed the World and South Africa in 2020. Mr Hassani desired to
move back to Pretoria where most of his clients were based and where his children
were happy. He consequently attained a loan of R3 million to subdivide and renovate
the farm. He employed Jack, a well-known estate agent to market it extensively as a
progressive golf estate before selling it to a property developer for R20 million. He paid
Jack R1 million and the loan accumulated an interest of R80 000.

2
WHAT IS REQUIRED OF YOU?

Explain whether the proceeds from the sale of the farm will be included in Mr
Hassani’s gross income. Motivate your answer with reference to case law.
[10 marks]

MODEL ANSWER: (NOTE THAT THE QUESTION IS 10 MARKS BUT THE MODEL
ANSWER IS DETAILED: THE PARTS IN BOLD MUST AT LEAST BE REFLECTED
IN THE ANSWER)

The definition of ‘gross income’ includes all receipts and accruals of any resident, or a
non-resident to the extent they are from a source within or deemed to be within the
Republic, excluding receipts and accruals of a capital nature.

There is no statutory definition of which receipts and accruals are of a capital nature,
with the exception of special provisions applying to certain listed shares, and it has
been left to the courts to attempt to answer this question.

Since receipts and accruals of a capital nature, are excluded from gross income, these
do not attract tax, whereas, those which are not of a capital nature attract tax in full as
part of the taxable income of the taxpayer for the year of assessment. The simple
principle is that an amount which is not capital must be income – there is no
halfway house. This does not mean that a single amount received may not be
apportioned into capital and income elements, but it does mean that all receipts
and accruals must be categorised in one of these two manners.

In many instances, the distinction between capital and revenue is clear. Sums received
for the use of assets are generally of a revenue nature, for example, interest, rents
and royalties, and equally clearly, legacies and gifts received constitute amounts of a
capital nature. The real difficulty arises where there is a transfer of ownership of an
asset, since it is at this point that it must be determined whether the asset constitutes
part of the taxpayer’s capital structure which he uses to generate income, or is held
with an intention of generating income through its re-sale.

The onus of proof as to whether a receipt is of a capital nature rests with the
taxpayer, and this burden can be a heavy one (s 102 of the Tax Administration
Act, 2011). The decision whether an amount is of a capital nature is a question
of law decided upon the facts of each case. The court will consider the total
circumstances surrounding a case before arriving at its conclusion.

It is important to distinguish between fixed and working capital, or what the

courts have at times referred to as fixed and floating capital. The distinction can
be explained broadly in the following terms:

(a) Fixed capital is equivalent to what would be categorised as fixed assets in

accounting terms. Fixed capital, or the assets resulting from the investment of that
capital, is not consumed in the carrying on of the activity concerned, but retains its
nature or form on a more or less permanent basis;

3
(b) Working capital, on the other hand, is consumed in the carrying on of the activity
concerned, changing its form continually in the course of these activities.

It is not always clear in a particular case (as is evident from the mass of cases on this
subject) whether a particular asset forms part of the fixed or working capital of the
taxpayer. The court must then determine this issue, on all the relevant facts. In most
of the cases the issue is determined on the basis of the so-called test of intention,
which obscures the fact that the real test employed (although infrequently enunciated
as such) is that of determining whether the amount concerned arose from the
employment of fixed or working capital. The theoretical application of this test is
simple:

(a) If the amount concerned arises from the employment of fixed capital, it is of
an income nature;

(b) If the amount concerned arises from the realisation of fixed capital, it is of a
capital nature. This is linked to the principle that a taxpayer is entitled to realise
a capital asset to best advantage (See John Bell & Co (Pty) Ltd v SIR 1976 (4) SA
415 (A), 38 SATC 87; ITC 1443 (1989) 51 SATC 26, and ITC 1481 (1988) 52 SATC
285). The determination whether a particular method of realisation is simply the
realisation of a capital asset to best advantage, or the use of that asset as part
of floating or working capital, is one of degree which will be dependent upon the
particular circumstances of each case;

(c) If the amount concerned arises from the realisation or employment of working or
floating capital, it is of an income nature.

An analysis on this issue can be discussed under the three broad headings below:

(a) The so-called test of intention adopted by the courts in this area. It is
considered that this test is not in fact a substantive test, and is one which has
served to confuse the issue while obscuring the real tests used in this
connection;

(b) The actual tests used in this connection. These tests are objective, as
opposed to the supposedly subjective nature of the test of intention. It is
considered that it is in fact these tests that are used by the courts in coming to
a decision as to the capital or revenue nature of an amount, with the decision
thus reached then being justified on the basis of the test of intention; and

(c) The actual treatment of various types of amounts. As has already been
stated, the major problems arise in this area on the disposal by the taxpayer of
an asset, with the nature of the amount thus arising becoming disputed between
Inland Revenue and the taxpayer. This problem does not arise in certain other
cases, where the capital or revenue nature of an amount may be clear in the
circumstances, as a result of the nature of that amount.

4
The intention of the taxpayer

The reliance by the courts on the test of intention arises where an asset has
been disposed of, giving rise to an amount, the capital or revenue nature of
which is in dispute. While it is considered that the actual approach taken is to
determine whether, on an objective basis, the capital employed constituted fixed
or working capital, as the terms have been defined above, this is not often
acknowledged in the judgments.

The reliance by the courts, to whatever degree, on the intention of the taxpayer has
its origins in the early case of COT v Booysens Estates Ltd, in which the court adopted
the principles expounded in the English case of Californian Copper Syndicate Ltd v
Inland Revenue, although the structure of the two tax systems was and is very
different. It is noteworthy, however, that the judgment in this case did not rely upon,
or even suggest, a subjective test of intention. The approach taken by the court was
the objective one of assessing whether, in the light of all the facts, the receipt or accrual
was of a capital nature. This case was followed in CIR v Stott, with the difference
that the intention of the taxpayer in acquiring an asset was explicitly regarded
as an important factor in coming to the decision whether the proceeds on
disposal were of a capital or income nature. However, the factor of intention was
introduced at a very late stage in the judgment, after the court had effectively
decided, on a purely objective examination, that the amount in question was of
a capital nature. Since then the courts have tended to place far more reliance on
the intention of the taxpayer (See, for example, CIR v Nedbank Ltd 1986 (3) SA 591
(A), 48 SATC 73; ITC 1482 (1990) 52 SATC 298 and CIR v Malcomess Properties
(Isando) (Pty) Ltd 1991 (2) SA 27 (A), 53 SATC 153. A full discussion of the
progression in the cases is to be found in Natal Estates Ltd v SIR 1975 (4) SA
177 (A), 37 SATC 193).

This reliance on intention has been confused by the fact that the intention which the
courts have in mind is not the subjective intention which might be expected. As Botha
JA put it in SIR v Trust Bank of Africa Ltd- in an enquiry as to the intention with
which a transaction was entered into for the purpose of the law relating to
income tax, a court of law is not concerned with that kind of subjective state of
mind required for the purposes of the criminal law, but rather with the purpose
for which the transaction was entered into.

In other words, the intention of the taxpayer is not really at issue. What is at issue is
the objective set of facts before the court, which may be elucidated by evidence
given by the taxpayer, but from which the court will make an objective
assessment. The fact that logically there can be no free-standing test of intention is
shown not only by this objective bias, but also by two irrefutable principles:

(a) The ipse dixit of the taxpayer as to his intention cannot simply be accepted,
since it is likely to be coloured by self-interest (See, for example, the statement of
Miller J in ITC 1185 (1972) 35 SATC 122 that ‘It is necessary to bear in mind in that
regard that the ipse dixit of the taxpayer as to his intent and purpose should not lightly
be regarded as decisive. It is the function of the court to determine on an objective
review of all the relevant facts and circumstances what the motive, purpose and
intention of the taxpayer were’. (At 35 SATC 123.) See, also, ITC 1251 (1975) 38

5
SATC 173; ITC 1541 (1992) 54 SATC 408; ITC 1547 (1993) 55 SATC 19 and ITC
1507 (1991) 53 SATC 429. In the latter case it was held that the ipse dixit of a director
as to the intention of a company is to be treated in light of the facts; ‘it is of no use to
profess a contrary intention when it is known that such intention is unattainable – the
inevitable must be taken to have been intended’). In ITC 1071 (1963) 27 SATC 185,
this principle has been stated as follows:

As a Court we were much impressed by the appellant and the manner in which
he gave his evidence. We have formed the view that he is not only an honest
witness but an honourable man who has approached the giving of his evidence
on that footing and has tried to give his evidence as objectively as possible. We
attach considerable weight to his statement of what his intention was, but we
must, of course, bear in mind that even honest men can never quite free
themselves of the influence of their personal interests, and it is necessary for
us to test his evidence of his intention against, and in the light of, the
surrounding circumstances and outward manifestations.
Moreover, as was pointed out in Malan v KBI, human intentions are often
changeable, unformed or unformulated, and therefore evidence given after the
event as to such intentions, however honest, is often unreliable or constitutes
pure reconstruction.

(b) The intention of the taxpayer is legally irrelevant if it is not based upon a
correct interpretation or understanding of the law. The courts have held, for
example, that the test of shares held on capital account is that these are acquired ‘for
better or worse, or, relatively speaking, for keeps’ (See Barnato Holdings Ltd v SIR
1978 (2) SA 440 (A) at 454B, 40 SATC 75 at 91 and CIR v Guardian Assurance
Company South Africa Limited 1991 (3) SA 1 (A), 53 SATC 129). The taxpayer in that
case clearly did not understand that the test was so stringent, although it was intended
to hold certain shares as capital assets. This intention was irrelevant from a legal point
of view, since even the most honest and sincere intention, based upon an incorrect
belief or understanding, cannot change the nature of a receipt or accrual.

It is considered that the more logical approach is that the question whether a receipt
or accrual is of an income or capital nature is purely a question of law, to be decided
objectively on all the facts of a particular case, without recourse to the intention of the
taxpayer. The question of intention is then relevant, if at all, on the following
basis:

(a) If the facts show that the amount is of a capital nature, the intention of the
taxpayer is irrelevant;
In CIR v Pick ’n Pay Employee Share Purchase Trust, the court placed a great
deal of emphasis on whether or not the taxpayer was engaged in a scheme of
profitmaking. In this case, a share purchase trust (the Trust) was formed by Pick
’n Pay Stores Ltd to administer a share incentive scheme for the benefit of
employees in the group.

In a majority judgment the court held that:

(a) notwithstanding that a series of transactions is characteristic of the carrying on of

a business, the nature of the receipts that flow from the business depends on whether
or not it was conducted with a profit-making purpose;

6
(b) the Trust did not intend to carry on a profit-making scheme or business by trading
in shares. The sole purpose of acquiring, holding and selling the shares was to place
them in the hands of eligible employees. Accordingly, the unsold shares held by the
Trust did not constitute floating capital, as there cannot be floating capital if no trade
is conducted;

(c) the receipts of the Trust were not intended or worked for, but were purely fortuitous
and were therefore of a capital nature. The Court did, however, remark that if a profit
was inevitable, that might change the situation.

In contrast, the minority judgment found the taxpayer to be carrying on a business, in

which the shares constituted its floating capital and the proceeds on the realisation
thereof were taxable. As seen from the above findings the majority judgment rejected
this view and stressed the importance of a ‘scheme of profit-making’, per Smalberger
JA:

The appropriate test in a matter such as the present is a well-established one.

The receipts accruing to the Trust will be revenue if they constitute ‘a gain made
by an operation of business in carrying out a scheme for profit-making’ . . . The
corollary is that they will be non-revenue if they do not derive from ‘an operation
of business in carrying out a scheme for profit-making’.

The case has now clearly established that in the absence of a ‘scheme of
profitmaking’, receipts and accruals from the disposal of assets must be regarded as
being of a capital nature.

Determination of the relevant intention

If the intention of the taxpayer is invoked as a determinant of the capital or

income nature of an amount, it is immediately obvious that this intention can be
determined at a number of points in time, namely:

(a) at the time that the asset concerned was acquired by the taxpayer. This
intention may no longer be relevant, however, if that intention was changed in the
period that the asset was held. The intention may also not be clearly formed at the
time that the asset is acquired, which implies a mixed intention at this time;

(b) during the period that the asset concerned was held by the taxpayer. This
intention may not necessarily be the same as that with which the asset was acquired,
or that which applied at the time that the asset was disposed of; and

(c) at the time that the asset was disposed of. In concept it is only the intention at
the time that the asset is disposed of that is relevant, if intention is to be used as a test
in determining the capital or revenue nature of the resulting receipt or accrual. If the
intention at this time was to dispose of a capital asset, the intention prior to this is
irrelevant. Similarly, if the intention at the time of disposal was to utilise the asset as
trading stock, the intention with which the asset was acquired and held is irrelevant. In
both cases, of course, the intention at the time of disposal may be the same as that at
the time of acquisition, normally implying that no change of intention has taken place
between the two points. Differing intentions at these two points, on the other hand,
must imply a change of intention between acquisition and disposal (See, for example,
7
CIR v Paul 1956 (3) SA 335 (A), 21 SATC 1; Lydenburg Platinum Ltd v CIR 1929 AD
137, 4 SATC 8; CIR v Strathmore Consolidated Investments Ltd 1959 (1) SA 469 (A),
22 SATC 213; CIR v Richmond Estates Ltd 1956 (1) SA 602 (A), 20 SATC 355; Berea
West Estates (Pty) Ltd v SIR 1976 (2) SA 614 (A), 38 SATC 43; John Bell & Co (Pty)
Ltd v SIR 1976 (4) SA 415 (A), 38 SATC 87; Elandsheuwel Farming (Edms) Bpk v
SBI 1978 (1) SA 101 (A), 39 SATC 163). (Cases in bold must have been discussed
by students)

This issue is complicated by the distinction that the courts have drawn between
so-called dominant and secondary intentions. By definition, if a dominant
intention can be ascertained, this should determine the issue, but it has been
held that a secondary intention can be the determining factor when this
intention is totally distinct from the dominant intention. This logical inconsistency
arises from the insistence upon utilising the test of intention, which then has to be
made to fit the assessment arrived at from an objective overview of all the facts.

Change of intention?

In order to conclude that the taxpayer changed his intention from that of
investment to speculation, there has to be something more than the mere
decision to sell (even at a substantial profit) (John Bell & Co (Pty) Ltd v SIR 1976
AD). This ‘something more’ was dealt with in Natal Estates Ltd v SIR (1975 AD),
where it was held that by subdividing the land in issue and selling off the plots
at a profit, the taxpayer had ‘crossed the Rubicon’ and had dealt with the
property as a landjobber would in a scheme of profit making.

It has been suggested above that the process actually followed by the courts is
determining first, on an objective basis, the capital or income nature of a receipt or
accrual, and then examining this prima facie conclusion in the light of any explanation
the taxpayer may be able to furnish as to why a prima facie receipt or accrual of an
income nature should not be so categorised. This latter step is normally regarded as
ascertaining the intention of the taxpayer, and a great number of cases have
approached the issue on this basis. The approach taken below is to deal with the
objective factors and to illustrate how these can be rebutted in appropriate
circumstances by a satisfactory explanation by the taxpayer.

Factors considered by the courts:

 the nature of the asset
 The taxpayer’s occupation/knowledge/expertise
 The holding period of the asset
 The financing method
 The treatment of the asset prior to realisation
 The reason for realization
 The methods to realise the asset
 Circumstances of acquisition or disposal
 Continuity of activities
 Subsequent treatment of proceeds

8
Applying the law to the facts:

TAKE NOTE: Candidates must discuss the theory (above) with reference to the
facts in the question. Candidates must further clearly form their own opinion.

In the present case, the fact that the farm was divided into a progressive golf estate
and sold for a substantial profit after five years of acquiring them, in most cases, is an
important aspect in considering whether an inference unfavourable to the taxpayer (Mr
Hassani) should be drawn. However, this inference loses a great deal of its importance
when there has been an intervening cause or event. In this case, the fact that in the
past five years, the farming venture and the new property business was not flourishing
in Pietermaritzburg - and the fact that Mr Hassani’s children were unhappy in the local
school - could these factors be considered as intervening causes? (Students must
argue this point). Could the profit made on the sale of the golf estate be of a capital
nature and ought not to be included in Mr Hassani’s taxable income or could be of
revenue nature?
MAXIMUM 10 MARKS

SUB-TOTAL [25 marks]

QUESTION 2: DEDUCTIONS

Max Venter is the sole member of Venter CC t/a SupaMarket.com. SupaMarket.com

is an online business that sells ordinary grocery items exclusively to residents in
Gauteng, South Africa. When Max created SupaMarket.com in 2015 the business was
relatively small and Max was able to operate the business from his home in
Krugersdorp. As the demand for online grocery shopping increased, Max’s business
expanded at a rapid pace and by 2019 Max was in dire need of a warehouse and
decided to build a corrugated iron warehouse in his backyard. The warehouse was
completed by 19 March 2019 and Max paid R985 000 to the builder on completion of
the warehouse.

One of Max’s jealous neighbours complained at the local municipality against Max for
disturbance due to the hustle and bustle of the activities at the warehouse. Upon
investigation (31 March 2019), it was found that Max failed to submit building plans for
the warehouse. Max paid the municipal inspector, Robin (who is also a qualified
architect) R2 000 to draw up plans and R500 as a bribe not to issue a fine. On 31 May
2019 a corruption investigation into allegations against Robin was completed. It was
revealed that Robin tried to approve Max’s building plans despite the fact that the title
deed prohibits the erection of any corrugated iron buildings. In terms of the title deed
the property is zoned as a strict residential area and any form of operation of a
business is prohibited. On 10 June 2019 a fine of R100 000 was issued against Venter
CC for operating an illegal business and an additional R15 000 fine was issued against
Max for bribing a municipal official. Max tried to reduce the fine against Venter CC with
a long legal battle and lost. Max agreed with his attorney to pay the legal fees in six
equal instalments of R5 000 each commencing on 19 November 2019.

As a result of the foregoing facts, Max decided to rent a warehouse from Mobile
Containers CC a commercial rental agent. In terms of the agreement that was reached

9
between Venter CC and Mobile Containers CC the rental agreement will commence
on 1 December 2019 and will expire on 30 November 2022. The total amount of rent
payable by the expiry date is R850 000. Should Venter CC t/a Supamarket.com
terminate the contract before the expiry date the full rental amount becomes due and
payable to Mobile Containers CC within seven days of such termination.

WHAT IS REQUIRED OF YOU?

To discuss, with reference to relevant sections in the Income Tax Act 58 of 1962
and case law, whether Venter CC t/a Supamarket.com may deduct the expenses
in the facts above from its gross income for the 2019/2020 year of assessment.
Discuss each of the relevant expenses under a separate heading.

[25 Marks]

MODEL ANSWER

Generally a taxpayer may deduct from gross income expenses that comply with the
requirements of the general deduction formula in terms of s11(a) and s23(g) of the
Income Tax Act. In terms of s11(a) a taxpayer may deduct:
- Expenditure or losses
- Actually incurred
- During the year of assessment
- in the production of income
- which is not of a capital nature

- expenditure for the purposes of trade (s 23(g)

Each of the expenses in casu will now be discussed with reference to the general
deduction formula, special deduction rules or prohibition on deductions in terms of s23
where applicable.

Building of warehouse (R985 000)

It is often difficult to distinguish between capital and non-capital expenditure. In New

State Areas Ltd v CIR, Watermeyer CJ ruled that it must be established whether the
expenditure is part of
- the cost to perform the income earning operations, for example, trading stock;
or
- the cost of establishing, improving or adding to the income earning structure,
for example, a building.

There must be a close link between the expenditure and the income earning
operations for it to be deemed part of the cost to perform the income earning
operations. If the expenditure is closer to the expansion of the income earning
structure, it would be capital in nature.

In ITC 1783, it was held that the cost to acquire a business license agreement forms
part of the income earning structure, and is capital in nature.

10
In CIR v George Forest Timber, the court ruled that there is a ‘great difference between
money spent in creating or acquiring a source of profit and money spent working on
it.’ The one is capital and the other not.

The cost to build a warehouse in this case, is money spent in creating a source of
income and is, therefore, capital in nature and not deductible.

Payment to Robin

Architectural drawings (R2 000)

The cost of the architectural drawings is a cost to establish, improve or add an income
earning structure (the warehouse) and would, therefore, be capital in nature. This cost
is not deductible. (Students could refer to BP Southern Africa v CSARS (69 SATC 79)
or Rand Mines (Mining & Services) Ltd v CIR (1997 A).

Bribe (R500)

S23(o) prohibits the deduction of expenditure incurred in respect of

- corruption or a corrupt activity in terms of the Prevention and Combating of
Corrupt Activities Act (PCCA Act) 12 of 2004 or
- a fine or penalty imposed as a result of an unlawful activity carried on in the
Republic or out of the Republic if the activity would have been unlawful had it
been carried out in the Republic

Corruption in terms of Section 3 of the PCCA Act means to give or offer to give a
benefit to a person vested with a duty intending to influence that person by means of
a reward to do or not to do something that might benefit the giver or any other person.
The bribe paid to John is not deductible. (Also, see Interpretation Note 54).

Fines (R100 000 and R15 000)

The fine of R100 000 issued against Venter CC is not deductible in terms of s23(o) as
discussed above. (See ITC1490 (1990))

Venter CC is a taxpayer in its own right as a juristic person. Max is the only member
of Venter CC and a taxpayer in his own right as natural person. The close corporation
and its members are treated as separate legal entities. Expenditure incurred by the
members in their personal capacity cannot be deducted by the close corporation and
vice versa. The R15 000 fine issued to Max will not be deductible in Venter CC’s
hands. The deduction will furthermore be denied in terms of s23(o).

Legal Costs

For legal expenditure to be deductible in terms of s11(a), the taxpayer must show that
the legal expenditure is linked to an operation undertaken with the object of producing
income, and not to operations that merely serve to protect an existing source of income
(Port Elizabeth Tramway Co Ltd v CIR). The outcome of the legal matter is of no
relevance. In African Greyhound Racing Association v CIR, the court ruled that the

11
legal cost of a taxpayer’s appearance before a commission to decide whether dog
racing should be abolished or curtailed is not deductible. The costs were incurred to
protect an income earning structure and not to produce income. For example, the legal
cost to appeal against the denial of a license will not be deductible, but the legal cost
to claim outstanding debt will be deductible. It can, therefore, be concluded that the
legal costs (legal fees) to appeal against the fines is not deductible.

If legal expenditure is not deductible under s11(a), it may be deductible under s11(c),
if it is not of a capital nature. It is important to determine the nature of the legal
expenditure. Legal expenditure laid out to secure an enduring benefit for a trade is of
a capital nature.

Warehouse rental

Expenditure must have been actually incurred in the year of assessment to be

deductible. “Actually incurred” does not mean that the taxpayer must have actually
paid the amounts. However, the amounts/liability must be due and payable. In Edgars
Stores v CIR, the court ruled that “actually incurred” means that there must be an
unconditional legal obligation to pay. Where the obligation only arises in the future, the
deduction can only be sought at that future date when the obligation realises. Although
S 11(a) does not specifically require that the expense must have been incurred in the
year of assessment, the courts have held that deductible expenditure is restricted to
the year of assessment (CIR v Golden Dumps; Edgars Stores v CIR). Section 23(e)
prohibits the deduction of anticipated or future expenses or losses. On the facts, the
rent is payable at the end of the agreement or when the agreement is cancelled
prematurely. Venter CC will, therefore, be entitled to deduct the rent actually paid in
the future year(s) of assessment when an unconditional legal duty to pay the rent
exists (when the rent becomes due and payable at the end of the contractual term; or;
in the year of assessment when the contract was prematurely cancelled).

MAXIMUM 25 MARKS

TOTAL MARKS: 50

THE END

12
 LML4804
FEEDBACK TO ASSIGNMENT 3
2020

MARKING RUBRIC:

Assessment will take place in accordance with the assessment criteria provided to the
students in the form of the following rubric:

Criteria & Poor (0-50) Good (50-70) Excellent (70-100)

Qualities

The legal No problem Issue is identified All issues are identified and
problem in the identified. but not all explained briefly in
question is problems are student’s own words.
identified highlighted

The relevant The correct The words of the The student has explained
section of the section is not Act are used and the law in his own words in
Act is explained mentioned at all. the student has not a clear and succinct
in your own explained anything manner.
words in his own words.

The relevant No case is cited. The correct case is The correct case is cited
court case is cited but its and its relevance is
explained briefly relevance is not explained.
explained

The section in No application to There is limited There is application of the

the Act, court the facts in application of the law to the facts in question
case and question. law to the facts in and all issues are resolved.
opinions are question but some
applied to the issues are not
facts in the resolved.
question

Legal advice is No advice. Incomplete advice. Brief but complete advice is

given given.

1
General Comments:

 The purpose of this feedback is to give you general guidelines as to what was
required of you in answering this assignment and how you can improve in the
next assessment. This is not a complete memorandum.

 Most students put in a lot of effort in answering the questions in this assignment
and did incredibly well particularly in the question on Capital Gains Tax (CGT).

 Some students did not follow the basic structure to adopt in your answers which
were recommended in the feedback to assignment 01. PLEASE REFER TO
THIS STRUCTURE IN PREPARING FOR YOUR EXAM.

 YOU CAN ALSO FIND TWO IMPORTANT DOCUMENTS ON GUIDELINES

ON HOW TO ANSWER QUESTIONS ON MYUNISA, UNDER THE
‘ADDITIONAL RESOURCES TOOL’.

 Some of the students did not adhere to the page limit for this assignment.
Students who exceeded 10-typed page limitation (excluding the cover
pages/Bibliography and plagiarism declaration) were penalised. PLEASE
TAKE NOTE OF THE INSTRUCTIONS AT ALL TIMES.

 Some students relied on memorandums for past assignments to answer the

question on CGT and as a result, missed the opportunity to answer the present
question as they assumed incorrect facts; names of parties and did not pay
attention to quote the correct paragraphs and legal principles. Kindly note that
‘copying and cheating’ are acts of academic dishonesty, and contravenes the
University Policy on Academic Integrity and the Copyright Infringement and
Plagiarism Policy.

 IMPORTANT ADVICE TO ALL STUDENTS: to read and understand what

the question requires. A lot of students wrote pages and pages, but the
answers were incorrect as the question was not addressed/wrong section cited.
Unfortunately marks cannot be awarded for referring to an incorrect section.

2
  FOR PURPOSES OF EXAMS, YOU MUST ENSURE THAT YOUR EXAM
ANSWER SCRIPT IS NOT PROTECTED OR A ‘READ ONLY’ DOCUMENT
AS THE EXAMINERS CANNOT MARK IT AND A ZERO MARK WILL BE
AWARDED.

Assignment specific comments:

 Question 1 required students to discuss the capital gains tax (CGT) principles
which were applicable to the scenario without calculating the capital gains.
Some students calculated the capital gains instead of discussing the relevant
principles, some mentioned the four building blocks of CGT without
demonstrating the relevance to the given scenario. Furthermore, the given
scenario was discussed, without referring to the principles of CGT and without
indicating the applicable paragraphs.

 Most students did not cover all the individual scenarios/transactions in Question
1 (GCT) and failed to substantiate their answers.

 Question 2.1 (a) - a majority of the students did not understand or did not know
how to approach this question (some referred to s 80A, part V of Donations Tax
and par 80 of the eighth schedule of the Income Tax Act).

 Question 2.1 (b) of the assignment question was whether SARS is empowered
to approach the taxpayer’s bank for the payment of the tax due, students
referred to case law which dealt with the right of taxpayer’s to be notified of the
debt before SARS appoints an agent.

 Question 2.2 a lot of students did not understand the “pay now argue later”
principle. There was a discussion of s 104 (lodging an objection, Part A of
Chapter 5 (information gathering), chapter 3 (registration) and chapter 4
(returns and records).

 Another important factor is referencing “Stinglingh”/Silke”, instead of citing the

relevant section/paragraph of the Tax Act (as if Silke is the legislation).

3
QUESTION 1 (CAPITAL GAINS TAX)
Mr. Xaba, a South African resident worked for Acce Pty Ltd (“Acce”) as an electrician
for 15 years. As a result of the Covid-19 pandemic that hit the world, Acce decided to
retrench the technical employees including Mr. Xaba. He was given a severance
package of R5 million.
Mr. Xaba is married in community of property to his childhood sweetheart, Marcia and
they stay in Waterkloof, Pretoria. They bought the house in 2011 for R900 000. They
also own a holiday house in Jeffrey’s Bay, Eastern Cape which they bought in 2012
for R800 000. The couple also own a BDH SUV and a Range Sports Car that Mr. Xaba
bought for Marcia as a 35th birthday present.
The couple decided to downsize their lifestyle in order to survive after the
retrenchment. As a result, they embarked on the following transactions:
 They appointed VEDO Real Estate agents at a cost of R200 000 to sell the
house in Waterkloof for R2,5 million; replaced all bathrooms’ taps with gold
plated ones at a cost of R30 000; appointed Pool Doctors (Pty) Ltd to fix the
leaking swimming pool at a cost of R10 000;
 They also sold their holiday house for R2 million;
 They sold Range Sports Car for R1 million;
 They sold their Kruger Rands for R500 000

Without calculating the capital gain of Mr. Xaba, discuss the capital gains tax principles
applicable in the scenario
[25]

MODEL ANSWER

Section 26A provides that the taxable capital gain must be included in a person’s
taxable income for the relevant year of assessment. The point of departure in this case
would be to determine the taxable capital gain of the taxpayer or person as required
by the section. In determining the taxable capital gain, the first step is to make sure
that all the four key elements are present. Mention Eighth schedule/ Issue of
residency

An asset is defined very widely in paragraph 1 and includes, for purposes of CGT,
‘(a) property of whatever nature, whether movable or immovable, corporeal
or incorporeal, excluding any currency, but including any coin made
mainly from gold or platinum; and
(b) a right or interest of whatever nature to or in such property’.

Assets in the question: A house in Waterkloof, Pretoria and a house in Jeffrey’s

Bay, Eastern Cape are immovable properties and qualify to be assets in terms of the
definition. Other assets will include the two cars: BDH SUV and a Range Sports Car
and Kruger Rands.

A disposal is any event, act, forbearance or operation of law which results in the
creation, variation, transfer or extinction of an asset. A disposal includes, inter alia,

4
the alienation or transfer of ownership of an asset (e.g. a sale, donation, cession, etc.),
the expiry or abandonment of an asset, the scrapping, loss or destruction of an asset,
the granting, renewal, extension or exercise of an option, and the decrease in value of
a person's interest in a company, trust or partnership as a result of a value shifting
arrangement.

Was there any disposal of the asset as defined? If there was a disposal, is it one
of the listed or a deemed disposal? The house in Pretoria and Eastern Cape, SUV,
a Sports Car and Kruger Rands were sold and those events are regarded as disposals.
Therefore, an asset was being disposed.

The base cost basically refers to all the expenditures actually incurred and which are
directly related to the cost of acquisition, creation or disposal of an asset.

Amounts to be added in the base cost: Amounts of R900 000 and R800 000 for the
houses in Waterkloof and Jeffrey’s Bay respectively which are the costs of acquisition
of the houses will be added in the base cost. (Paragraph 20 (1) – qualifying
expenditure included in the base cost) - Real Estate agents’ cost of R200 000 is
included. An improvement of bathrooms’ taps with gold plated ones at a cost of
R30 000 is included. Repairs are not included – see Paragraph 20 (2)(b).

The proceeds simply refer to the results of the disposal. The houses were disposed
for R2,5 and R2 million, the Sports Car for R1 million and Kruger Rands for R500 000.

The house in Waterkloof qualifies as a primary residence. A primary residence is

defined in paragraph 44 as a residence:
(a) In which a natural person or a special trust holds an interest; and
(b) Which that person or a beneficiary of that trust or spouse of that person
or beneficiary
(i) Ordinarily resides or resided in as his or her main residence; and
(ii) Uses or used mainly for domestic purposes.

A “Residence” is defined in paragraph 44 of the Eighth Schedule to mean any

structure, including a boat, caravan or mobile home, which is used as a place of
residence by a natural person, together with any appurtenance belonging thereto and
enjoyed therewith.

In terms of par 45(1) a natural person and a special trust must disregard certain capital
gains and losses on the disposal of a primary residence. In terms of para 45(1)(b) any
capital gain on the disposal of a primary residence by a natural person or a special
trust is disregarded if the proceeds from the disposal of that primary residence does
not exceed R2 million. To qualify for the R2 million relief, a natural person or a special
trust must hold an interest in the residence. Further, the natural person or a beneficiary
of the special trust or a spouse of that person or beneficiary must ordinarily reside or
have resided in the residence as his or her main residence, and the residence must
have been used mainly for domestic purposes.

Where the exclusion in para 45(1)(b) does not apply, a natural person or a special
trust may disregard the capital gain or loss of R2 million on the disposal of the primary
residence in terms of para 45(1)(a). The capital gain not exceeding R2 million is

5
disregarded. In this case the proceeds of the sale are R4 million. Therefore, the
primary residence exclusion in terms of para 45(1)(b) does not apply. A house in
Waterkloof qualifies for the primary residence exclusion. Mr. Xaba will disregard
capital gains and losses of R2 million on the disposal of a primary residence in terms
of par 45(1)(a).

The Sports Car is classified as a personal-use assets and will qualify for the exclusion
in terms of par 53. Paragraph 54 provides that a person must disregard any capital
gain or capital loss determined in respect of a disposal that resulted in that person
receiving—
(a) a lump sum benefit as defined in the Second Schedule; or
(b) a lump sum benefit paid from a fund, arrangement or instrument situated
outside the Republic which provides similar benefits under similar conditions to
a pension, pension preservation, provident, provident preservation or
retirement annuity fund approved in terms of this Act.”

In terms of paragraph 54, there will be no capital gains tax consequences in respect
of the severance package received by Mr. Xaba. However, the severance package is
included in the gross income of Mr. Xaba in terms of paragraph (d); (e) or (f) of the
gross income definition in section 1 of the Income Tax Act.

Disposals by spouses married in community of property – paragraph 14: does

this paragraph apply to the given scenario?

QUESTION 2 (TAX AVOIDANCE AND ADMINISTRATION)

2.1

Mabuza and Nomhle are married in community of property and they have three
children: Siphokazi aged 20, Noni aged 19 and Siviwe aged 17. Mabuza is a well-
known businessman who owns a chain of chicken outlets. After deciding to prepare
his children for the future, he embarked on the following transaction: he donated
R100 000 to each of his children. Siphokazi invested the amount at Blue Bank and
received R5000 interest. Noni kept the money in the safe. Siviwe opened women’s
boutique outlet and earned a profit of R10 000.

Mabuza also donated R200 000 to his wife, Nomhle as a Valentine’s gift. Mabuza also
formed a trust for the benefit of their children. He donated a block of flats to the trust.
The trust earned rental income in the amount of R500 000 from the letting of the flats
during the 2019/20 year of assessment. The trust deed stipulated that the income
should not be paid out to the beneficiaries until they reach the age of thirty years, or
until the trustee exercises his discretion in this regard.

(a) Discuss the income tax consequences for Siphokazi, Noni, Siviwe and
Nomhle as a result of the money Mabuza donated to them during the
2019/20 year of assessment. [10 marks]

(b) Discuss the income tax consequences for Siphokazi, Noni and Siviwe
as a result of the donation made to the trust that Mabuza formed.
[5 marks]

6
2.2

Melusi overhears on the radio that South African Revenue Service (“SARS”) demands
payment of tax due irrespective of whether a taxpayer has appealed against an
assessment. He further overhears that SARS has a power to approach a taxpayer’s
bank to request it to pay over the tax debt to SARS from the taxpayer’s account.

Melusi approaches you as tax consultant. With reference to relevant authority,

briefly explain whether the Commissioner or SARS is empowered to demand
payment of tax due or to approach the taxpayer’s bank for the payment of the
tax due.
[10 marks]

MODEL ANSWERS

2.1

(a) Section 7(3) and (4) of the Income Tax Act 58 of 1962 provides that where a parent
has made a donation, settlement or other disposition to his/her minor child which has
resulted in the minor receiving income or income accruing to or in favour of the minor
child, such income will be deemed to be the income of the parent who made the
donation.

In Kohler v CIR 1949 (4) SA 1022 (T) the court found that income derived by a minor
from sums donated by his parent were to be included in the parent’s income.

In CIR V Widan 1955 (1) SA 266 (AD) the phrase by “reason of”, was held to imply
some causal relation between the donation and the income in question, and that in
ascertaining whether such causal relation exists, one must look not necessarily to the
cause which is proximate in time, but to the real effective cause of the income being
received.

The words donation, settlement or other disposition were defined in Overstone v SIR
1980 (2) SA 721 (A) 735 as “any disposition of property that is wholly commercial or
business one, i.e. made for due consideration; it covers any disposition of property
made wholly gratuitously out of liberality or generosity; it also covers any disposal of
property made under a settlement or other disposition for consideration but in which
there is an appreciable element of gratuitousness and liberality or generosity”.

In Joss v SIR 1980 (1) SA 674 (T) the taxpayer sold assets to a company on an
interest-free loan. The taxpayer’s minor daughter was a shareholder in the company
and received a dividend. SARS deemed the dividend to be the taxpayer’s. The court
found that the portion of the dividend that accrued to the minor was attributable to the
parent, as it was “by reason of” the interest-free loan made by the parent.

In CSARS v Woulidge 2002 (1) SA 68 (SCA) the respondents’ father had created two
inter vivos trusts in terms of which the respondent’s son and daughter were the income
and capital beneficiaries. During 1982 the respondent sold shares in four companies
to the trusts. It was agreed that the purchase price would be paid in such amounts and

7
at such times as may be mutually agreed upon. Further that, the respondent would be
entitled to charge interest, not exceeding the prevailing bank rate, on the balance of
the purchase price. The trust then sold a percentage of the shares to another company
and then paid outstanding loans to the respondent. Relying on the provisions of
section 7(3) and 7(5) of the Income Tax Act, the Commissioner taxed the respondent
for the years 1990 and 1991 on the basis that notional interest was due to him in
respect of the unpaid purchase price of the shares sold by him to the trusts.

The Children’s Act provide that children become majors at 18 years. The 20-year-old
son Siphokazi is not a minor. Therefore, the income that accrues to Siphokazi (e.g.
interest of R5 000) will be subject to tax in Siphokazi’s hands. Noni is also not a minor
and does not earn interest income (section 7(3) and (4) does not apply. The 17-year-
old Siviwe is a minor and is taxed in their own name on income which is received by
or accrues to him. However, section 7(3) and (4) is applicable to Siviwe as the minor
and where he receives an income as a result of the donation from the parent, Mabuza.
The income is taxable in the hands of the parent.

Section 7(2) provides that any income received by or accrued to any person married
in or out of community of property (hereinafter referred to as the recipient) shall be
deemed for the purposes of this Act to be income accrued to such person’s spouse
(hereinafter referred to as the donor). The wife did not receive any income and the
section does not apply.
[10 marks]

2.1

(b) Section 7(5) of the Income Tax Act provides that:

“If any person has made any donation, settlement or other similar disposition which is subject
to a stipulation or condition, whether made or imposed by that person or anyone else, to the
effect that the beneficiaries or some of them shall not receive the income or some portion of
the income there under until the happening of an event, fixed or contingent, so much of any
income as would, but for such stipulation or condition, in consequence of the donation
settlement or other disposition, be received by or accrued to or in favour of the beneficiaries,
shall until the happening of the event or the death of that person, which ever takes place first,
be deemed to be the income of that person”.

In Estate Dempers v SIR 1977 (3) SA 410 (A), the trust deed settled monies upon
trustees and directed that until the donor’s death, the annual income could be used by
the trustees in their discretion for the benefit of the donor’s grandson and/or his issue,
or for making charitable donations. After the donor’s death, the annual income was to
be used in the trustees’ discretion for the benefit of the grandson. The balance of the
income was to accumulate in the trust. One third of the total fund was to be paid to the
grandson when he attained the age of twenty-five, fifty per cent of the remainder when
he attained the age of thirty, and the balance when he attained the age of thirty-five. If
he were to die before reaching any one of these ages, other beneficiaries were
substituted for him. It was held that the former section 9(5) (i.e. the section equivalent
to 7(5)) was applicable to this case. The children will have to wait for the death or the
happening of the event, whichever comes first. The income so received shall be
deemed to be taxable in the hands of Mabuza.
[5 marks]

8
2.2

The pay now, argue later principle, simply translated means a situation where the
taxpayer must pay the debt due to the Commissioner immediately, irrespective of
whether he or she has lodged an objection or appeal. This is one of the methods that
the Commissioner employs to activate his collection mandate. It shall become
apparent that the section is not without controversy.

Section 164 of the Tax Administration Act 28 of 2011 (“TAA”) provides that:
(1) Unless a senior SARS official otherwise directs in terms of subsection (3) - (a) the
obligation to pay tax; and (b) the right of SARS to receive and recover tax, will not be
suspended by an objection or appeal or pending the decision of a court of law pursuant
to an appeal under section 133.
(2) A taxpayer may request a senior SARS official to suspend the payment of tax or a
portion thereof due under an assessment if the taxpayer intends to dispute or disputes
the liability to pay that tax under Chapter 9.
(3) A senior SARS official may suspend payment of the disputed tax or a portion thereof
having regard to relevant factors, including - (a) whether the recovery of the disputed
tax will be in jeopardy or there will be a risk of dissipation of assets; (b) the compliance
history of the taxpayer with SARS; (c) whether fraud is prima facie involved in the origin
of the dispute; (d) whether payment will result in irreparable hardship to the taxpayer
not justified by the prejudice to SARS or the fiscus if the disputed tax is not paid or
recovered; or (e) whether the taxpayer has tendered adequate security for the payment
of the disputed tax and accepting it is in the interest of SARS or the fiscus.

Section 164(6) of the TAA provides a taxpayer with a degree of legal certainty. In this
case the taxpayer is guaranteed that SARS will not continue with any collection steps
for a certain period, whilst the application is being considered. However, SARS would
reach a decision regarding the request for suspending the payment pending an
objection or an appeal as soon as possible to ensure that it can continue collecting tax
rapidly.

A classic example of where “the pay now, argue later” principle was in action is found
in the Metcash Trading Ltd v Commissioner for SARS [2000] ZACC 21; 2002 (4) SA
317; 2002 (5) BCLR 454. The applicant, Metcash was a wholly owned subsidiary of
Metro Cash and Carry Ltd (“Metro”), a public company listed on the JSE. The applicant
conducted business as a wholesaler and distributor of what was termed “fast moving
consumer goods” and a liquor retailer.

The Commissioner was not satisfied with the applicant’s Value Added Tax (“VAT”)
returns and he raised assessments. The applicant was not happy with the
assessments and it lodged an objection to the assessments claiming that it was
charged double the amount they were supposed to pay. The Commissioner disallowed
the objections and gave the applicant 48 hours to pay the outstanding amount in terms
of “the pay now, argue later” principle.

The taxpayer challenged the constitutionality of the “pay now, argue later” principle
under the then 36(1) (repealed by section 164 of the TAA) and the appointment of an
agent of the Commissioner in terms of section 40(2)(a) and (5) of the VAT Act of 1991
(“VAT Act”) (repealed by section 179 of the TAA). The repealed sections provided that:
Section 36(1): The obligation to pay and the right to receive and recover any tax,
additional tax, penalty or interest chargeable under this Act shall not,
unless the Commissioner so directs, be suspended by any appeal or

9
 pending the decision of the court of law, but if any assessment is
altered on appeal or in conformity with such decision…

Section 40: (2)(a) If any person fails to pay any tax, additional tax, penalty or
interest payable in terms of this Act, when it becomes due or is payable
by him, the Commissioner may file with the clerk or registrar of any
competent court a statement certified by him as correct and setting
forth the amount thereof so due 25 or payable by that person, and such
statement shall thereupon have all the effects of, and any proceedings
may be taken thereon as if it were, a civil judgment lawfully given in
that court in favour of the Commissioner for a liquid debt of the amount
specified in the statement.

(5) It shall not be competent for any person in proceedings in

connection with any statement filed in terms of subsection (2)(a) to
question the correctness of any assessment upon which such
statement is based, notwithstanding that objection and appeal may
have been lodged against such assessment.

Section 36 of the VAT Act basically provided that where a taxpayer has lodged an
objection against the Commissioner’s assessment, the payment of the tax shall not be
suspended by the objection of the taxpayer. However, the taxpayer may request the
Commissioner to exercise his or her discretion to suspend the payment of the tax debt.
Section 40 of the VAT Act provides that where the taxpayer failed to pay as requested,
the Commissioner may institute a civil judgment against the taxpayer. This is a
situation where the Commissioner appoints an agent who is in possession of the
moneys belonging to the taxpayer to pay over monies owed by the taxpayer to the
Commissioner.

The court below – the Johannesburg High Court as per Snyders J held that section 34
has been infringed by the actions of the Commissioner. The High Court declared the
sections of the Income Tax Act invalid and the matter was referred to the Constitutional
Court for confirmation in terms of sections 167(5) and 172(2) of the Constitution.

The issue before the Constitutional Court was whether the two sections unjustifiably
limited the right of access to courts in section 34 of the Constitution? Section 34
provides that:
“Everyone has the right to have any dispute that can be resolved by the application of law
decided in a fair public hearing before a court or, where appropriate, another independent and
impartial tribunal or forum”.

Where the court would answer the question in the affirmative, the other issue would
have been whether such limitation was justified in terms of section 36 of the
Constitution.

The second stage examines whether the limitation is a reasonable and justifiable
limitation based on the concepts of human dignity, equality and freedom. In order to
ascertain whether or not the limitation is reasonable and justifiable, the court must
consider the nature and extent of the limitation, the importance of the purpose of the
limitation, as well as the relation between the limitation and the said purpose.
Furthermore, the court must consider if there are less invasive means available, and
must also consider the nature of the right that is being limited.

10
Kriegler J in the Constitutional Court held and agreed with Metcash that section 40(5)
of the VAT Act posed a limitation of section 34 by preventing individuals to approach
court for a relief to suspend the operation of the “pay now, argue later” principle. The
question left to be decided was whether the limitation was justified in terms of section
36 of the Constitution.

The Constitutional Court held that the justification of a limitation could be categorised
into three features. The first one refers to the public interest in obtaining full and speedy
settlement of tax debts. In order for a “pay now, argue later” scheme to work, it was
necessary that the Commissioner was able to obtain execution against a taxpayer
without having first to air the subject matter of the objection to be adjudicated upon by
the Special Court in due course. There was therefore a close connection between the
overall purpose of the “pay now, argue later” rule and the effect of section 40(5).

Secondly, the Constitutional Court held that the “pay now, argue later” principle was
one which was adopted in many open and democratic societies. Therefore, it could be
concluded that the principle was one which was accepted as reasonable in open and
democratic societies based on freedom, dignity and equality as required by section
36.

Thirdly, the effect of the rule on individual taxpayers was changed by the power
conferred upon the Commissioner to suspend its operation. The rule is not absolute
but subject to suspension in circumstances where the Commissioner considers it
appropriate. The exercise of this power by the Commissioner was reviewable.

The existence of this discretionary power therefore reduced the effect of the principle
“pay now, argue later” in an appropriate manner. In all these circumstances, therefore,
it was concluded that even if the effect of section 40(5) constituted a limitation on the
right entrenched in section 34 of the Constitution, it was a limitation which was
justifiable within the meaning of section 36. It has also been argued that this might
lead to frivolous objections which could cause SARS and the South African
government to experience dire financial constraints.

NB: The conclusion by students may differ based on the principles raised by the
case.

Section 179 of TAA provides that:

(1) A senior SARS official may by notice to a person who holds or owes or will hold or owe
any money, including a pension, salary, wage or other remuneration, for or to a
taxpayer, require the person to pay the money to SARS in satisfaction of the taxpayer’s
tax debt.
(2) A person that is unable to comply with a requirement of the notice, must advise the
senior SARS official of the reasons for the inability to comply within the period specified
in the notice and the official may withdraw or amend the notice as is appropriate under
the circumstances.
(3) A person receiving the notice must pay the money in accordance with the notice and,
if the person parts with the money contrary to the notice, the person is personally liable
for the money.

The Commissioner invokes this section in addition to section 164 of the TAA (above)
to further his tax collection mandate. The section empowers the Commissioner to
appoint a person as an agent and authorise him or her to recoup an amount of tax to

11
be paid over to the Commissioner. The agent is normally a person in possession of
monies belonging to the taxpayer. It remains the responsibility of the agent to hand
the required amount to the Commissioner and failure to do will result in the agent being
personally liable.

The Commissioner further holds the agent so appointed personally liable if the money
is not delivered when so requested. What happens is that the bank so appointed,
debits the taxpayer’s account with the tax due and pays it over to SARS.

NB: The students must mention the principles in the cases below

In Contract Support Services (Pty) Ltd and Others v Commissioner for SARS 61 SATC
338 the applicant carried on business as an administrative agent in respect of the
financial affairs of various contract workers in drafting, engineering and the computer
information technology fields. The applicant received a notice that R4 042 192, 52 was
due and owing to SARS. As such, they received a garnishment order from SARS.

The applicant in this case sought an interim order to review and set aside the decision
to issue notices in terms of the now repealed section 47 of the VAT Act (now repealed
by section 179 of the TAA). This section provides the following:
“The Commissioner may, if he thinks it necessary, declare any person to be the agent of any
other person and the person so declared an agent shall for the purposes of the Act be the agent
of such other person in respect of the payment of any amount of tax, additional tax, penalty or
interest payable by such other person under the Act and may be required to make payment of
such amount form any monies which may be held by him for or be due to him to the person
whose agent he has been declared to be”.

The section provides the Commissioner for SARS with the power to appoint one
person as the agent of the taxpayer. That person would normally be someone in
possession of monies belonging to the taxpayer. The person is required to pay over
monies as tax due and owed to SARS. Should the agent fail to pay over to SARS as
requested, he or she would be personally liable for the outstanding amount.

Section 179 of the TAA is a clear example and it provides that a senior SARS official
may by notice to a person who holds or owe any money, including a pension, salary,
wage or other remuneration, for or to a taxpayer, require the person to pay the money
to SARS in satisfaction of the taxpayer’s tax debt. In this case the court held that the
Commissioner’s actions were reasonable and justifiable.

In the decision of Nedbank Ltd v Pestana 2009 (2) SA 189 (SCA) a series of
transactions, all taking place on 4 February 2004, involving the appellant’s
Carletonville branch was at stake. The plaintiff had been conducting a current account
at the branch since 1969. A namesake, one Joseph Michael Pestana (Pestana),
conducted a similar account at the same branch.

On 4 February 2004 Pestana requested the branch to transfer an amount of R 480 000
from his account to that of the plaintiff. At 11h33 the branch carried out Pestana’s
instruction and ‘transferred the amount of R 480 000 to the plaintiff’s account’ from
Pestana’s account. The said amount was credited to the plaintiff’s account and his
bank statement reflected a credit entry with a corresponding debit to Pestana’s
account.

12
Unbeknown to the staff member at the branch who attended to the transfer of the
money to the plaintiff’s account, the bank’s head office in Rivonia had earlier that day,
received a telefaxed notice in terms of section 99 of the Income Tax Act Act 58 of 1962
(“the Act”) (repealed by section 179 of the TAA) from the Randfontein office of the
South African Revenue Service (“SARS”) in respect of Pestana’s account.

SARS informed the bank that Pestana was indebted to it in an amount of some
R340 million. As a result, it appointed the bank as the agent for Pestana and required
the bank to make payments in respect of the amount due to SARS ‘as funds is
available or became available till full settlement’.

Later that day, and after it had already transferred the R 480 000 to the plaintiff’s
account, the branch was notified by its head office of the bank’s appointment in terms
of section 99 of the Act. The branch thereupon ‘reversed the transfer to the plaintiff’s
account’ and, still on the same day, paid an amount of R 496 000 to SARS from
Pestana’s account. The bank did not request the authority of the plaintiff to reverse the
amount of R 480 000 and no authority to do so was given by the plaintiff. The legal
question was whether the bank was entitled to reverse the amount, so as to allow a
section 99 notice to take place.

The trial court answered the question of law in favour of the bank, holding that the
bank was entitled to reverse the credit to the plaintiff’s account. The full court on appeal
disagreed with this conclusion. In essence, the court held that a completed and
unconditional payment had been effected when the bank credited the plaintiff’s
account, with the result that the bank could not unilaterally reverse the credit.

The Supreme Court of Appeal held that the fact that the branch subsequently changed
its mind and tried to reverse the transaction, cannot undo the validity of the completed
transaction. It held further that once the debit and credit occurred as it did, it constituted
a completed juristic act independent of any underlying iusta causa.
[10 marks]

TOTAL MARKS: 50

GOOD LUCK WITH YOUR EXAMS

THE LECTURERS

13
 LML4804: 2021

FEEDBACK TO ASSIGNMENT 01

MODEL ANSWERS

QUESTION 1: GROSS INCOME

1.1

The board of directors of GreatGrapes Wines Pty (Ltd) (GreatGrapes Wines), a company
formed and incorporated in South Africa, resolved on 20 April 2020 that it was
unsustainable to continue with its business operations. This is so, unless it receives a
relief grant from the government or payment of a claim from its insurer, before the end of
its financial year on 28 February 2021. The company suffered financial hardship due to
national lockdown restrictions imposed by government as a result of COVID-19
pandemic.

Prior to the national lockdown restrictions, Ocean Sun Hotels Ltd (Ocean Sun Hotels) in
Dubai, had ordered a consignment of wines worth R800 000 from GreatGrapes Wines on
10 March 2020. Although GreatGrapes Wines received the payment from Ocean Sun
Hotels on 17 March 2020, the shipment could not be processed due to the restrictions
imposed on the selling and exporting of alcohol as from 27 March 2020.

On 30 June 2020 Farmers Shield Ltd (Farmers Shield), an insurance company with its
registered offices in Australia, made a payment of R300 000.00 to GreatGrapes Wines to
cover the losses suffered by it due to the national lockdown. On 02 July 2020, the
government of South Africa under the Department of Labour also made a payment of
R500 000.00 out of the Unemployment Insurance Fund to GreatGrapes Wines as a relief
grant to pay its employees

GreatGrapes Wines exported the consignment of wines ordered by Ocean Sun Hotels on
08 March 2021 after the government lifted the ban on the selling and exporting of alcohol.

WHAT IS REQUIRED OF YOU?

The Commissioner for the South African Revenue Service (the Commissioner) is
of the view that the following amounts received by GreatGrapes Wines should be
included in its gross income for the 2020/2021 year of assessment:

1
 - R800 000 received prior to national lockdown from Ocean Sun Hotel;
- R300 000 received from Farmers Shield; and

- R500 000 received from the government of South Africa.

With reference to relevant sections in the Income Tax Act 58 of 1962 as amended,
case law, and scholarly articles, advise GreatGrapes Wines on whether the
indicated amounts should be included in its gross income in the 2020/2021 year of
assessment.

[15 marks]

MODEL ANSWER

1.1
The basis for determination of gross income liability is found in section 1 of the Income
Tax Act 58 of 1962 as amended. In terms of definition of gross income in section 1 of the
Income Tax Act, South Africa residents are taxable on their worldwide income.
According to the given facts, GreatGrapes Wines is a South African resident entity as it
is clearly stated that it is formed and incorporated in South Africa. As a result, the
company will be liable for gross income on a worldwide basis.
In respect of South African residents, ‘gross income’ with regard to a year or period of
assessment is defined in Section 1 of Income Tax Act define gross income as follows;
“gross income”, in relation to any year or period of assessment, means

 the total amount whether in cash or otherwise

 received by or accrued to or in favour of such resident during a year or period of
assessment
 excluding receipts or accruals of a capital nature
 Including the specific inclusions set out in par (a) – (n) of the definition of ‘gross
income’

Should an amount of R800 000 received by GreatGrapes Wines be included in the gross
income of GreatGrapes Wines for the 2020/20201 years of assessment?
As per the definition of gross income, such an amount must have been received by or
must have accrued to GreatGrapes Wines during the 2020/2021 period of assessment
for it to be included in the gross income of GreatGrapes Wines. If GreatGrapes Wines did
not receive that amount or that amount did not accrue to it during the period of
assessment in question, then there will be no liability of gross income attributed to
GreatGrapes Wines during that period of assessment.

2
The courts have historically grappled with the meaning of received by or accrued to. In
the given scenario it is clear that GreatGrapes Wines received the amount of R800 000.
In Geldenhuys v CIR – the principle laid and affirmed in the case is that money received
should be for own benefit. Thus, not received, therefore not included in gross income.

STUDENTS MUST DISCUSS THE FACTS AND THE LAW DEVELOPED IN THE CASE

The question is whether the fact that “the shipment could not be processed due to the
restrictions imposed on the selling and exporting of alcohol as from 27 March 2020” has
any bearing on the legal principles of ‘receipt’ and ‘accrual’?

‘Accrued to’: - It is trite law that not amounts physically received during a tax year, but
also all amounts accrued will be included in the gross income. An amount in principle
accrues to a taxpayer when the taxpayer becomes unconditionally entitled to it. Even
if it may not yet be due and payable.

This principle was explained in CIR v Peoples Stores (Walvis Bay) (Pty) Ltd (1990 AD)
where the taxpayer was engaged in the business of retailing clothing in terms of a ‘6
months to pay’ revolving credit scheme. The court held that the outstanding debts at the
end of the tax year represented amounts which had accrued because the taxpayer had
become entitled to them.
The proviso to the definition of ‘gross income in section 1 of the Act also supports this
entitlement principle. It provides that, an amount accrues to a taxpayer in the year of
assessment during which the taxpayer becomes entitled to it.
From our facts and in light of the court decisions cited above, it is concluded that, although
the exportation of wines to Ocean Sun Hotels took place only on 08 March 2021, the
amount received by GreatGrapes Wines will be included in its gross income for the period
of 2020/2021 year of assessment. The reason is that GreatGrapes Wines received the
amount during the 2020/2021 period of assessment and that amount also accrued to it
during that period and despite the wine being delivered in the following year of
assessment.
On the question whether R300 000 that was received by GreatGrapes Wines from
Farmers Shield should also be included in the gross income we will have to refer to
paragraph 2(k) and 12C of the Act. An insurance policy that relates to an event arising
solely out of and in the course of employment of employee is excluded from taxable
income. Also excluded from gross income is the R500 000 received by GreatGrapes
Wines from the government of South Africa (Department of Labour and Employment)
under the Unemployment Insurance Fund relief. Section 10(1) (mB) provides that any
benefits or allowance payable in terms of the Unemployment Insurance Act 63 of 2001 is
exempt from normal tax.
MAXIMUM 15 MARKS

3
1.2
During 2017, a large part of South Africa experienced drought and most farmers were
affected. As a result of the drought, Mr Jack and his family emigrated to Australia in June
2017. Prior to emigrating, Mr Jack lived on his farm located in Sinoville, North of Tshwane,
since 1992 with his family where he farmed wheat. On his emigration, Mr Jack leased his
farm to Mrs Rikhotso who continued to utilise the farm for the purposes of farming wheat.
On August 2020, Mr Jack came across a news article, stating that the South African
Parliament took a resolution to pass a bill that intended to authorise the expropriation of
privately owned land without compensation to be distributed equally to small-scale
farmers. He immediately terminated the lease agreement with Mrs Rikhotso on November
2020 and he appointed land surveyors to subdivide the farm into small pieces of plots to
sell to emerging small scale farmers. The project was completed successfully in February
2021 and Mr Jack received the proceeds of the sale on February 2021.

WHAT IS REQUIRED OF YOU?

Advise Mr Jack on whether the proceeds from the sale of the subdivided land into
small plots of farms can be included as part of his gross income. Motivate your
answer with reference to the sections of the Income Tax Act and case law.

[10 marks]

MODEL ANSWER

1.2 (NOTE THAT THE QUESTION IS 10 MARKS BUT THE MODEL ANSWER IS
DETAILED: THE PARTS IN BOLD MUST AT LEAST BE REFLECTED IN THE
ANSWER)

The residence status of a person is fundamental in determining the person’s tax

liability. Section 1 of the Act states that a person is not a resident if that person is
deemed to be exclusively a resident of another country in terms of a double tax
agreement.
A natural person is a resident if he/she is either ordinarily resident in the Republic or meet
the requirements of the physical presence test. The definition of a resident distinguishes
between natural person and person other than natural person. However, for the
purposes of the given case, the focus will solely be on the resident of a natural
person. Although the term ordinarily resident is not defined in the Act, the
interpretation given by the courts must be followed. In Cohen v CIR, the court
established three important principles but of most relevant to our case is the first
principle which state that a person’s ordinary residence would be the country to
which he would naturally and as a matter of course return from his wandering.
When compared to other countries in which a person may live, a person’s ordinary
residence is the person’s usual or principal residence, or the person’s real home.

4
From the given facts, Mr Jack relocated to Australia in April 2017 with his family. When
applying the principle established in Cohen case, it is submitted that his primary
residence will be Australia. This is also in line with SARS Interpretation Note No 3 (Issue
2 of June 2018) which stated that one of a factor that should be considered to determine
a residence of a natural person is a place where the person stays most often, and his
present habits and mode of life. However, because Mr Jack’s farm is located within the
Republic, he will be liable for gross income tax on the amount of rent he receive monthly
form Mr Rikhotso. According to the definition of gross income, if a person is not an
ordinarily resident of the Republic of South Africa, the person will still be liable for
gross income tax on his/her receipts or accrual which are from a source within a
Republic.
The next question is to assess the tax liability of Mr Jack on the income he received from
selling pieces of land. The definition of gross income excludes the income a person
received from selling of or realizing a capital asset if such sale is not in the nature of the
person’s business. But where a person embarked on some scheme for selling such
assets for profit and use the assets as his stock-in-trade, then the income received
from the sale of such assets will be included in the gross income of such person
and therefore be liable for tax. (see John Bell & Co (Pty) Ltd).
In CIR v Stott the taxpayer was a surveyor and architect. On a number of occasions,
he purchased land when he had funds to invest. During a particular year he derived
profit from the sale of plots of land which were subdivided from two properties.
The taxpayer acquired the first property as a seaside residence. The property was
larger than what he required but was only for sale as a whole. After building a
cottage on the land, the taxpayer subdivided half the property into small plots and
sold it. The second property was a small fruit farm which was subject to a long term
lease when acquired. After the tenant defaulted, the taxpayer subdivided the
property into plots and sold it. According to SARS, the taxpayer embarked on a
scheme of profit-making when he subdivided the land into plots and sold it.
In ruling in favour of the taxpayer, the court outlined number of considerations that must
be taken into account when determining whether the receipts from the sale of land were
of a revenue or capital nature. For the purpose of the given scenario the focus will
only be on one consideration outlined by the court that is relevant to the case. The
court held that the mere fact that the land was subdivided into plots rather than
sold as a whole could not by itself alter the character of the proceeds derived from
the land from capital to revenue.
It is concluded that, in light of the decision of the court as stated above, the sale of
the plots of land by Mr Jack was of a capital nature as Mr Jack was selling his asset
to his best advantage. He did not have the intention of trading in capital asset when he
initially acquired the farm, he was pushed into the sale of the plots of the farm by
circumstances beyond his control. STUDENTS CAN REACH A DIFFERENT
CONCLUSION, BUT IT MUST BE SUBSTANTIATED.
MAXIMUM 10 MARKS
SUB-TOTAL [25 marks]

5
QUESTION 2: DEDUCTIONS

Mpuma Properties Ltd (Mpuma Properties) is a South African company based in

Mpumalanga which owned a large piece of land located at Witbank that it purchased in
2016. However, the land could not be utilised as there was an ongoing dispute regarding
the ownership of that land. The matter was finally settled in the Constitutional Court in
2018 after it found that the land was not part of the land claim and the community of
Witbank could not claim the land back as the land was rightly acquired from the rightful
owners by the company. The company spent R600 000 in litigation to defend its
ownership of the land and it also paid the transfer costs of R350 000. The company initially
purchased the land for the purposes of farming, but it changed its intention after it came
to the attention of the company that the government plans to build a large university in
the nearby town of Witbank.

On June 2019, the directors of the company appointed town planners and surveyors to
investigate possible residential developments on the land. The report of town planners
and surveyors cost the company R200 000. The company decided to proceed with the
project of building student accommodation. The architects, financial advisors and
marketers were appointed in the project. The company paid a fee of R700 000 to the
architects, R400 000 to the financial advisors who administer the company’s loan of R8
000 000 it took from Ablec bank. The project was successfully concluded on 1 March
2021. The company appointed the StudentLife Accommodations agency to market and
advertise the student accommodation. The company paid R400 000 to StudentLife
Accommodations agency for their services. On 1 April 2021, the occupants moved in and
became liable for rent to the property owner. The rates and taxes amounted to R150 000
for the period of 1 April 2021 to 30 June 2021.

WHAT IS REQUIRED OF YOU?

Discuss, with reference to relevant sections in the Income Tax Act 58 of 1962 as
amended and case law, whether Mpuma Properties may deduct the expenses in the
facts above from its income for the 2021/2022 year of assessment. Discuss each of
the relevant expenses under a separate heading.
[25 marks]

MODEL ANSWER

As a starting point, it should be noted that most deductions are allowed by virtue of the
so-called general deduction formula in section 11(a) read with section 23(g) of the Act.
Unless specifically provided for elsewhere in the Act (specific deductions provisions),
expenditure and losses incurred in the production of income may only be deductible if the
requirements laid down in section 11(a) are complied with.

6
Generally, a taxpayer may deduct from gross income expenses that comply with the
requirements of the general deduction formula in terms of s11(a) and s23(g) of the Income
Tax Act. In terms of s11(a) a taxpayer may deduct:
- Expenditure or losses
- Actually incurred
- During the year of assessment
- in the production of income
- which is not of a capital nature

- expenditure for the purposes of trade (s 23(g).

Expenditure incurred prior to the commencement of that trade is not deductible in terms
of section 11(a). The non-deductibility of these start-up costs stem from the fact that the
taxpayer is not yet carrying on a trade.
In terms of s 11A, effective from the commencement of years of assessment ending on
or after 1 January 2004, certain pre-trade expenses are allowed as a deduction in the
year that trade commences. These include expenditure and losses:
(a) actually incurred prior to the commencement and in preparation of trade; and
(b) which would have been allowed as a deduction in terms of s 11 (other than s 11(x)),
11B, 11D or 24J, had the expenditure and losses been incurred after trade had
commenced; and in other words, the expenditure must comply with the general
deduction formula. The general deduction as outlined above:
• expenditure or losses; actually incurred; during the year of assessment (although
this element is not expressly stated in the Act, it can be deduced from case law); in
the production of income; not of a capital nature; either in part or in full laid out or
expended for the purposes of trade;
(c) were not allowed as a deduction in that year or any previous year of assessment.

These costs are ring fenced and can only be set off against the income from the trade to
which they relate, after deducting any other expenses which may be allowed under any
other provisions of the Act.

On face value the expenditure incurred complies with the requirements of S11A.
However, each of the expenditure must comply with the general deduction formula to
qualify for a deduction in terms of S11A.
We will then scrutinize each and every expenditure incurred by the company with
reference to the general deduction formula, special deduction rules or prohibition on
deductions in terms of s23 where applicable, to determine if it is deductible or not as the
case may be.

7
Expenditure incurred on litigation process (R600 000)

It is stated from the facts that the company have spent R600 000 on the litigation against
regarding ownership of the land. It should be noted from the facts that at the time of
litigation that ensued, the company was not carrying on a trade as per the requirements
of section 11(a).
Because the company did not incur the litigation expenditure while carrying on of a trade,
the next step is to look at whether the expenditure can be deducted in terms of section
11(A). Section 11A allows certain qualifying expenditure and losses, incurred before the
commencement of that trade and not previously claimed or allowed as a deduction, as
deduction once that specific trade is carried on (but subject to limitation of section 23H).
It is therefore concluded that the company will not be able to claim deductions on the
litigation expenditure under either section 11(a) or section 11A because both these
provisions do not allow deduction of expenditure of a capital nature – the litigation
expenditure was to protect the right to own the land.
(note legal expenditure of a capital nature does not qualify for deductions in terms
of section 11c).

Expenditure incurred on the transfer costs, town planners and surveyors,

architects and financial advisors (R350 000; R200 000; R700 000; R400 000)

It is stated from the facts that the company have spent R350 000 on the cost of transfer,
R200 000 on the fees of town planners and surveyors, R700 000 on the cost of architects,
and R400 000 on financial advisors. The same principles explained under the expenditure
incurred on litigation expenditure will also apply under this paragraph mutatis mutandis.
The expenditure relates to pre-trade expenditure which does not qualify for deductions
under section 11A because it amounts to expenditure of a capital nature.

It is often difficult to distinguish between whether income is of a capital nature or non-

capital nature. The courts have nevertheless laid down the following very useful test for
distinguishing between capital and revenue expenditure.
- In New State Areas Ltd v CIR, the fixed and floating capital (floating being capital
the frequently changes its form from money to goods and fixed capital being capital
employed to acquire or improve property which may qualify for capital allowance)
test laid down in SIR v Guardian Assurance Holdings was used but the main
test was the ‘operations v structure’ test.

Expenditure incurred to perform the income-earning operations is income in

nature and expenditure incurred to establish, improve or add to the income-earning
structure is capital in nature.

8
It is therefore concluded that, based on decided cases, money spent in the acquisition of
fixed capital assets for use in a business, included here would be all expenditure
connected with or attached to the acquisition of capital assets (for example transfer duty
on land acquired) will be expenditure of a capital nature.

Expenditure incurred on advertising fees (400 000)

According to section 11 of the Act, advertising expenditure incurred by a business already

in existence will be allowed if the expenditure qualifies as a deduction in terms of the
general deduction formula. The company appointed the advertising agency after the
project was concluded but the tenants occupied the premises on 01 April 2021. Therefore,
section 11A will be relevant on this scenario as the expenditure qualify as a pre-trade
expenditure. It is therefore concluded that such expenditure will be allowed for deductions
because it was incurred for the purposes of generating income, that is for the purposes
of attracting students to move in and occupy the premises.

Expenditure incurred on rates and taxes (150 000)

It is stated from the facts that the company spent R150 000 for rates and taxes for the
period of 1 April 2021 to 30 June 2021. These are expenditures incurred by the company
after trade has already commenced and therefore, such expenditure would be allowed
undersection 11(a).

MAXIMUM 25 MARKS

TOTAL MARKS: 50

PAGE LIMIT: 10 TYPED PAGES (excluding Cover page/Bibliography/Plagiarism

declaration)
©
UNISA 2021

9
 LML4804: 2021
FEEDBACK TO ASSIGNMENT 03
MODEL ANSWERS

MARKING RUBRIC:

Assessment will take place in accordance with the assessment criteria provided to
the students in the form of the following rubric:
Criteria & Poor (0-50) Good (50-70) Excellent (70-100)
Qualities
The legal No problem Issue is identified All issues are identified
problem in the identified. but not all and explained briefly in
question is problems are student’s own words.
identified highlighted
The relevant The correct The words of the The student has
section of the section is not Act are used and explained the law in his
Act is mentioned at the student has own words in a clear and
explained in all. not explained succinct manner.
your own anything in his
words own words.

The relevant No case is The correct case The correct case is cited
court case is cited. is cited but its and its relevance is
explained relevance is not explained.
briefly explained
The section in No application There is limited There is application of
the Act, court to the facts in application of the the law to the facts in
case and question. law to the facts in question and all issues
opinions are question but are resolved.
applied to the some issues are
facts in the not resolved.
question
Legal advice is No advice. Incomplete Brief but complete
given advice. advice is given.

1
QUESTION 1: CAPITAL GAINS TAX
Mr and Mrs Thalitha are both tax resident in South African. They are married out
of community of property. On 1 November 2002, Mr Thalitha purchased a piece of
land (less than 2 hectares) in Midrand in Gauteng for R750 000 where they intended
to build their dream house where they would live. Construction of the house began
on 15 March 2005. The construction costs amounted to R450 000. The construction
ended on 3 December 2005, upon which date they moved in (i.e.13 months from date
of commencing the building of their home).
In 2006, the Thalitha added an additional bedroom for Mr Thalitha’s aged mother to
move in. The construction costs R100 000. While the builders were building the
additional bedroom, they repaired a leaking roof in the kitchen at a cost of R50 000.
During their 2020 annual December holiday at Jeffreys Bay, in the Eastern Cape, the
family decided that they are tired of the city life and that they want to move to Jeffreys
Bay. On 18 February 2021, the house was sold for R3 500 000, with no suspensive
conditions attached to the sale.

Shortly after, Mr and Mrs Thalitha entered into a lease-with-the-option-to-buy

agreement in respect of a small-holding some 3km from Jeffreys Bay. Mr Thalitha is
so happy that her wife agreed to the move to Jeffreys Bay, that he gave a painting to
her wife as a birthday gift. He bought the painting as a long-term investment five years
ago for R300 000. At the time of her wife’s birthday, the painting is worth R600 000.

WHAT IS REQUIRED OF YOU:

1. Explain the Capital Gains Tax consequences of the sale of the house in Midrand.
Your explanation must include a calculation of the taxable capital gain/loss in the
2020/2021 year of assessment.
[15 marks]

2. Advise Mr Thalitha on the Capital Gains Tax consequences of the painting he gave
to his wife as a birthday present.
[5 marks]

3. After three months of settling at Jeffrey’s Bay, Mrs Thalitha is offered a job as an
English Teacher in Dubai. Mrs Thalitha has thoughts of emigrating from South Africa
to Dubai. Discuss the Capital Gains Tax consequences of Mrs Thalitha should he
decide to emigrate from South Africa to Dubai.
[5 marks]
Sub-total [25 marks]

2
MODEL ANSWER:

1. Explain the Capital Gains Tax consequences of the sale of the house in Midrand.
Your explanation must include a calculation of the taxable capital gain/loss in the
2020/2021 year of assessment.
[15 marks]

1) Identify the four CGT Building Blocks:

1.1 Asset: An “asset” is defined in para 1 of the Eighth Schedule as property of
any nature (movable/immovable, corporeal/incorporeal), and any right or interest of
any nature in such property. The house and land attached to it that is owned by Mr
Thalitha therefore meets the definition of an asset.
1. 2 Proceeds: Defined in Para 35 of the Eighth Schedule as the total amount received
by or accrued to a person in respect of a disposal. Mr Thalitha received payment for
the disposal of his house (R 3 500 000) so such payment would constitute “proceeds”
as defined.
1.3 Disposal: Defined in para 1 as an event, act, forbearance or operation of
law envisioned in para 11. Events that qualify as “disposals” are listed in para 11(1)
of the Eighth Schedule. A sale of an asset is specifically included in the list of disposal
events (para 11(1)(a)) and for CGT purposes there would have been a disposal made
by Mr Thalitha when he sells his house in Midrand.

1.4 Base Cost: The house in Midrand is built/acquired after valuation date
(1 October 2001). As a result, the base cost of the house would be the cost of
acquiring the house (building the house, in this case) and qualified expenditure that
is listed in paragraph 20 of the Eighth Schedule. For example, the cost for adding on
an extra bedroom would be included as qualified expenditure (para 20(1)(e)), but
the repair of a leak in the kitchen is maintenance (holding costs) and will not be
included in the base cost of the house in Midrand (para 20(2)(b)).
Conclusion: All four CGT building blocks are present, and the disposal will be subject
to Capital gains tax legislation.

2) Calculating the Capital Gain/Loss

2.1
Base Cost:
The asset is a post-valuation date asset (purchased after 1 Oct 2001).
In terms of par 20, the base cost is the expenditure actually incurred in respect
of the cost of acquisition or creation of that asset. There is also certain qualifying
expenditure that can be added to the base cost of the asset. In this case
study, the base cost of the asset would be: R750 000 (land) + R450 000
(building house) + R100 000 (additional bedroom) EQUALS R1 300 000

3
 The repair of the leaking roof is a repair (part of holding costs) and cannot
be included in the base cost. Refer to par 20(1)(e) of the Eighth Schedule

2.2
Proceeds:
R3 500 000

2.3
Capital Gain/Loss:
Proceeds – Base Cost = Capital Gain/Capital Loss
3 500 000 – 1 300 000 = R2 200 000 Capital Gain

Capital Gain 2 200 000

Less: Primary residence* (2 000 000)
200 000
Less: Annual exclusion (40 000)
Equals Aggregate Capital Gain 160 000
Less: prior year Capital Loss nil

Net Capital Gain 160 000

Taxable capital gain (160 000 x 40%) R64 000

“Primary residence” is defined as a residence (“residence” means any structure,

includes boat, caravan, mobile home etc.) in which a natural person holds an interest
and must ordinarily reside in the residence and view it as his/her main residence and
use it mainly for domestic purposes.

*Mr. Thalitha qualifies for the primary residence exclusion

as:
The house meets the requirements of being a “primary residence” (para 44) –
a “Residence” is defined in paragraph 44 of the Eighth Schedule to mean
any structure, including a boat, caravan or mobile home, which is used as a
place of residence by a natural person, together with any appurtenance
belonging thereto and enjoyed therewith.
The capital gain on sale of the property exceeds R2 million (para 45(1)(a));
The land adjacent to the house does not exceed 2 hectares (para 46)

4
 The family moved in within 2 years from the house being constructed and
will be deemed to be ordinary resident in the primary residence (para 47)
In terms of par 5 of the Eighth Schedule, the annual exclusion for a natural person
is R40 000. The exclusion reduces both capital gains and capital losses. The excess
of the exclusion not utilised during a year of assessment cannot be rolled forward.

Maximum marks = 15

2. Advise Mr Thalitha on the Capital Gains Tax consequences of the painting he

gave to his wife as a birthday present.
[5 marks]

MODEL ANSWER

Purchasing and donating a painting to his wife, Mrs Thalitha

Mr and Mrs Thalitha are married out of community of property.

The purchase of the painting has CGT consequences upon disposal of the asset. In
terms of the definition in par 1 of an asset includes property of any nature whether
movable or immovable; this excludes any currency but includes any coin made mainly
from gold or platinum.

Donating the painting to wife, Mrs Thalitha – Section 9HB (previously para 67) –
transfer of assets between spouses

Section 9HB provides a form of ‘roll-over relief’ with regard to disposals

between spouses. The transferor or spouses must disregard any capital gain or
capital loss determined in respect of the disposal of asset to his or her spouse
(transferee).

The transferee is treated as having;

● acquired the asset on the same date on which it was acquired by the
transferor;
● acquired the asset for an amount equal to the base cost expenditure
incurred by the transferor prior to the disposal;
● incurred that expenditure on the same date and in the same currency
that it was incurred by the transferor;
● used the asset in the same manner that it was used by the transferor in
the period prior to the disposal, and
● received an amount equal to an amount received by the transferor in
respect of that asset that would have constituted proceeds on disposal
of that asset had that transferor disposed of it to a person other than the
transferee.

5
It is submitted therefore that there shall be no CGT consequences on the above
transaction. Should Mrs Thalitha subsequently disposes of the asset, she will calculate
the capital gain or capital loss in the same way as the transferor would have calculated
it. The market value of the painting when it was received should be used as the base
cost of the painting when Mrs Thalitha disposes it.

Maximum marks = 5

3. After three months of settling at Jeffrey’s Bay, Mrs Thalitha was offered a job as an
English Teacher in Dubai. Mrs Thalitha has thoughts of emigrating from South Africa
to Dubai. Discuss the Capital Gains Tax consequences of Mrs Thalitha should she
decide to emigrate from South Africa to Dubai.
[5 marks]

MODEL ANSWER
Where a taxpayer changes its place of residence to another country (ceases to be a
resident of South Africa), it is deemed to be a disposal for capital gains tax purposes.
For a natural person cessation of tax residence takes place when that individual
permanently leaves South Africa.
Emigration is one of the events that triggers the deemed disposal rules. A resident is
deemed to have disposed of all his capital assets at their market value on the day
before ceasing to be a resident, except fixed property situated in South Africa, for
example, immovable property and any right or interest in the property or assets
attributable to a permanent establishment through which a trade is carried on in South
Africa (see sec 9H(2)).
The taxpayer is deemed to have made a capital gain of an amount equal to the market
value of the relevant assets less its base cost. The disposal is deemed to have
occurred before the taxpayer ceases to be a resident and therefore any double tax
agreement between the taxpayers new county of residence and South Africa that
exempts the taxpayer from Capital Gains exit charge in South Africa, must be ignored.
In the Tradehold limited v CSARS (132/11) [2012] ZASCA 61 (SCA), the court stated
that the time of disposal takes place while the taxpayer is still a resident, that is, just
before the taxpayer ceases to be a resident.
Application to facts: - in this case there will not be a deemed disposal as section
9H(2) does not apply to immovable property in Jeffrey’s Bay (hence no CGT
consequences).
-What about CGT to movable property/assets? – painting? This means that should
Mrs Thalitha decide to emigrate from South Africa to Dubai, it shall be deemed to have
disposed all her movables excluding the immovable.

6
SPECIFIC INFORMATION AS IT APPEARS FROM THE RELEVANT
PARAGRAPHS - IF INCLUDED, STUDENTS WERE AWARDED MARKS

Para 12(1)(a) provides that a person who ceases to be a resident, in respect of all
assets of that person other than-
(i) assets in the Republic listed in paragraph 2(1)(b)(i) and (ii);
(ii) any qualifying equity share contemplated in section 8B, which was
granted to that person less than five years before the date on which that
person so ceases to be a resident; and
(iii) any equity instrument contemplated in section 8C, which had not yet
vested as contemplated in that section at the time that the person so
ceases to be a resident.

Para 2(1) assets refers to the following:

(a) any asset of a resident; and
(b) the following assets of a person who is not a resident, namely-
(i) immovable property situated in the Republic held by that person
or any interest or right of whatever nature of that person to or in
immovable property situated in the Republic; or
(ii) any asset which is attributable to a permanent establishment of
that person in the Republic.

This applies to the disposal of assets on or after valuation date.

Maximum marks = 5

Sub-total [25 marks]

QUESTION 2: TAX ADMINISTRATION AND TAX AVOIDANCE

Amogelang has received a letter from SARS, dated 15 June 2021, informing her that
there is an outstanding payment against her, which is due and payable from her 2017
year of assessment. The date on the original assessment issued by SARS when
Amogelang filed her 2017 return is 20 October 2017. In the assessment dated 15 June
2021, SARS is disputing some of Amogelang’s medical expenses claimed in the
amount of R6 200. SARS has also levied interest and penalties in terms of section 89
of the Income Tax Act 58 of 1961 and section 222 of the Tax Administration Act 28 of
2011. Amogelang is very organised and has kept every invoice relating to the medical
expenses claimed for the past five years and she can substantiate the R6 200 claimed.

She is anxious because she has since lodged an objection against her 2017
assessment because she requested reasons for assessment, and she was not
provided with reasons. She approaches your office for advice.

7
WHAT IS REQUIRED OF YOU:

2.1 With reference to relevant authority, advise Amogelang on her rights as a taxpayer
to be provided with reasons for assessment and to object to the assessment if she
feels aggrieved.
[18 marks]

2.2 Amogelang asks you to assist in drafting further the grounds of objection against
the assessment raised by SARS, as she doubts that she did not do that properly.

Draft the grounds of objection including (i) the amount(s) that are being objected to,
(ii) which grounds of the assessment is being disputed and (iii) reference to any
documents that substantiates the grounds of objection. Where necessary, make
specific reference to the relevant sections of the Tax Administration Act 28 of 2011.

[7 marks]
Sub-total [25 marks]

MODEL ANSWER
2.1
Relevant legislation: The Constitution of the Republic of South Africa; The
Promotion of Administrative Justice Act; Tax Administration Act and Rules issued
under sec 103 of the Tax Administration Act

➢ Taxpayer’s right to request reasons for assessment.

- section 33 (1) and (2) of the Constitution of the Republic of South Africa (the
Constitution):
- section 33 (1) – everyone has the right to administrative action that is lawful,
reasonable and procedurally fair
- section 33 (2) – everyone whose rights have been affected by administrative
action is entitled to be given written reasons

- to give effect to these rights, the Promotion of Administrative Justice Act

(PAJA) was enacted: to govern the exercise of administrative action

- The Tax Administration Act (TAA) applies to administration of tax legislation

- A taxpayer who is aggrieved by an assessment or decision may, prior to lodging

an objection, request SARS to furnish reasons for the assessment or decision
(sec 96 of TAA). The reason for the assessment would enable the taxpayer to
formulate an objection to the assessment or decision (rule 6(1)). In Minister of
Environmental Affairs & Tourism v Phambili Fisheries (Pty) Ltd 2003 (6)
SA 407 (SCA))., the Supreme Court of Appeal stated that the reason must be

8
 adequate, meaning that the decision-maker must explain his decision in a way
in which will enable a person aggrieved to fully understand the decision.

See also CSARS v Sprigg Investment 117 CC (36/10) [2010] ZASCA 172 (1
December 2010)

- The taxpayer will need to make the request to SARS within 30 days from the
date of assessment (rule 6 (2)(c). If SARS is satisfied that reasonable grounds
exist for not complying with the 30 days period, it can be extended by a period
not exceeding 45 days (rule 6(3)).

- If SARS is satisfied that reasons required to enable the taxpayer to formulate

an objection have been provided, SARS must inform the taxpayer accordingly
within 30 days after delivery of the request.

- If SARS is of the view that such reasons have not yet been provided, it must
provide the reasons within 45 days after delivery of the request for reasons (rule
6(5)).

- If a SARS official is satisfied that more time is required by SARS to provide

reasons due to exceptional circumstances, the complexity of the matter, or the
principle or the amount involved, the period for providing the reasons may be
extended by SARS by a period not exceeding 45 days (rules 6(6) and 6 (7)).

➢ Taxpayer’s right to object against the assessment.

- If Amogelang as a taxpayer feel aggrieved by an assessment or decision, even

after obtaining an understanding of SARS’ reasons, she may object to the
assessment within 30 days after one of the following two dates, depending on
whether reasons for the assessment or decision were requested or not:

➢ the date of assessment, or

➢ if Amogelang requested reasons for the assessment, the date on which
the reasons or the notice that adequate reasons have already been
provided is delivered (rule 7(1)).

- A senior SARS official may extend the period within which objections must be
made for another 30 business days if satisfied that reasonable grounds exist
for the delay in lodging the objection, the objection can be allowed for up to
three years from the date of the assessment or decision (see sec 104 (5)).

- The taxpayer’s objection must comply with the following requirements:

➢ It must be lodged on the prescribed forms

9
 ➢ It must be submitted within the prescribed period
➢ It must specify the grounds of the objection in details
➢ It must be signed by the taxpayer
➢ It must be delivered to the Commissioner at the address specified in the
assessment for this purpose (rule 7(2)).

- Should Amogelang submit an objection that does not comply with the above
requirements, SARS may regard the objection as invalid. In such case, SARS
must, within 30 days of delivery of the invalid objection, notify Amogelang
accordingly and must state the grounds for invalidity (rule 7(4)).

- Amogelang will then, within 20 days of receiving the notice, submit a revised
and valid objection without having to apply for an extension of the period in
which an objection should be lodged (rule 7(6)).

- If Amogelang fails to submit a revised objection, or submit a revised objection

that still does not comply with the above mentioned requirements, she may
thereafter only submit an objection together with an application to SARS for an
extension of the period in which an objection should be lodged.

- SARS must consider a valid objection in the manner and within the period
prescribed under sec 106(1) of TAA and rule 9. SARS may allow an objection,
either in whole or in part, or disallow it (sec 106(2).

- If no objection is made to an assessment or when the objection is withdrawn,

the assessment will be final and conclusive (sec 100(1)(b)).

Maximum marks = 18

MODEL ANSWER
2.2
Amogelang asks you to assist in drafting further the grounds of objection against the
assessment raised by SARS, as she doubts that she did not do that properly.

Draft the grounds of objection including (i) the amount(s) that are being objected
to, (ii) which grounds of the assessment is being disputed and (iii) reference to any
documents that substantiates the grounds of objection. Where necessary, make
specific reference to the relevant sections of the Tax Administration Act 28 of 2011.

Grounds of Objection: (MARKS AWARDED FOR STRUCTURE)

The Taxpayer (Amogelang) hereby objects in full to the assessment issued by SARS
dated the 15th of June 2021. The amounts that are being objected to is the outstanding
payment for her 2017 year of assessment together with interests and penalties levied
by SARS.

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The grounds of assessment are as follows:

1. Amogelang is of the view that she qualifies for the deductions on her medical
expenditure amounts of R6 200.

2. Amogelang dispute the interests and penalties levied by SARS on the alleged
outstanding payments for the period of 2017 year of assessment.

Amogelang has since lodged an objection against her 2017 assessment and has
requested reasons for assessment and she was not provided with the reasons for her
assessment. In terms of Rule 6, a taxpayer who is aggrieved by an assessment or
decision may, prior to lodging an objection, request SARS to furnish reasons for the
assessment or decision. (see also Minister of Environmental Affairs & Tourism v
Phambili Fisheries (Pty) Ltd 2003 (6) SA 407 (SCA)). Amogelang was not provided
with such reasons and therefore it was incorrect for SARS to impose additional
interests and penalties on the assessment which she has since lodged an objection
on.

It is further stated on the facts that Amogelang has kept every invoice relating to the
medical expenses claimed for the past five years and she can substantiate the R6 200
claim.
Maximum marks = 7
Sub-total [25 marks]

TOTAL MARKS: 50

PAGE LIMIT: 10 TYPED PAGES (excluding Cover page/Bibliography/Plagiarism

declaration)

THE END

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