Revenue And Capital Flashcards
Of a capital nature – intention - ELANDSHEUWEL FARMING (EDMS) BPK v SEKRETARIS VAN BINNELANDSE INKOMSTE
‘The shareholder’s intention could be attributed to the company itself.’
The intention of directors (not the shareholders) will represent the intention of the company
Of a capital nature – intention - CIR v RICHMOND ESTATES (PTY) LTD
A taxpayer’s intention may also change from revenue (trading stock) to capital (asset held to derive rental income).
The mere decision to dispose of a capital asset at a profit does not per se mean that the profit is revenue in nature.
Of a capital nature – intention - COMMISSIONER OF TAXES SOUTHERN RHODESIA v LEVY
Determine the main or dominant intention of the taxpayer at acquisition, should the taxpayer have mixed
intentions in respect of an asset (dominant test).
Of a capital nature – scheme of profit-making - CIR v PICK ’N PAY EMPLOYEE SHARE PURCHASE TRUST
Receipts or accruals are of a revenue nature if the receipts or accruals are generated ‘by an operation of business in carrying out a scheme of profit-making’.
Of a capital nature – mixed or dual intention - CIR v STOTT
The taxpayer’s intention at acquisition of the article is important and conclusive, unless any other factor
intervenes that indicates it was disposed of in pursuance of a scheme of profit-making.
A taxpayer is entitled to sell an asset at best advantage. A taxpayer is also entitled to accommodate the
asset to meet the demands of the market in which it is sold.
Of a capital nature – mixed or dual intention - CIR v NEL
A capital asset (Krugerrands held for ‘keeps’) was realised to purchase another capital asset (motor
vehicle) .
Krugerrands were bought for ‘keeps’ and was sold due to unusual or special circumstances that occurred. The receipt or accrual from the sale of the Krugerrands was thus capital in nature.
Thus, when the taxpayer disposed of the Krugerrands, there was no change intention and no scheme of profit- making.
Of a capital nature – change in intention - CIR v NUSSBAUM
If the taxpayer has a primary purpose that is capital in nature (held for investment) and a secondary purpose that is revenue in nature, the secondary purpose may cause the receipt or accrual to be revenue in nature as the taxpayer pursue the 2 purposes simultaneously. (that is, the taxpayer has no dominate purpose)
Of a capital nature – change in intention - NATAL ESTATES LTD v SIR
‘Something more’ than the mere decision to dispose of an asset at a profit, is required, to change the
taxpayer’s intention from capital to revenue.
The taxpayer needs to determine whether it has ‘crossed the Rubicon’ and has gone over to the business
of selling the asset at a profit, using the asset as trading stock
The taxpayer needs to determine whether it has ‘crossed the Rubicon’ by embarking on a scheme of profit- making, using the asset as trading stock.
Of a capital nature – change in intention - THE BEREA WEST ESTATES (PTY) LTD v SIR
The use of a realisation company to realise a capital asset at best advantage (thus, not embarking on a scheme of profit making) does not constitute a change in intention.
Of a capital nature – change in intention - CSARS v FOUNDER’S HILL (PTY) LTD
If special circumstances (real justification) exist for forming a realisation company, the realisation company will stand in the shoes of the entity transferring the assets to it and in turn hold them as capital assets;
If no special circumstances (no real justification) exist for forming a ‘realisation company’, the ‘realisation company’ will not stand in the shoes of the entity transferring the assets to it (not merely alter ego); that is, should the ‘realisation company’, thus, have obtained the asset for purposes of resale (trading stock), the proceeds will thus be of a revenue nature.
Of a capital nature – change in intention - JOHN BELL & CO (PTY) LTD V SIR
The courts noted that ‘something more’ than a mere decision to dispose of the asset was required to change the asset’s character and change the nature of its proceeds to gross income; thus, the receipt or accrual is still capital in nature.
Of a capital nature – change in intention - CIR v VISSER
The fruit constitutes the income produced by the income-producing asset (capital asset). The tree constitutes the income-producing asset (capital asset). Fruit is revenue in nature, while the sale of the tree is capital in nature.
Of a capital nature – change in intention - CIR v GEORGE FOREST TIMBER COMPANY LIMITED
Floating capital (trading stock) is considered to be consumed and disappears in the production process.
Fixed capital, however, does not do so; it produces fresh wealth and remains intact
Damages and compensation - WJ FOURIE BELEGGINGS v CSARS
A contract directed by its performance towards making a profit in which case the compensation received
for the cancellation of the contract will be income in nature;
and
A contract which was a means of producing income (that is, a contract that provides an income producing capital structure/asset) in which case the compensation received for the cancellation of the contract will be capital in nature.
Damages and compensation - STELLENBOSCH FARMERS’ WINERY LTD V CSARS
The amount received to compensate for the impairment of the taxpayer’s business, due to the loss of the sole distribution right, was of a capital nature.
Thus:
• Loss/termination of a capital asset OR the sterilisation/impairment of a substantial part of the income-producing structure is capital in nature.
• Loss of profits due to the loss of the sales of goods, is income in nature.
