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Summary TAXN7311 - LU 2 GROSS INCOME
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Summary of 8 pages for the course Taxation at Varsity College (GROSS INCOME)
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LU2: GROSS INCOME2.1. GROSS INCOME – GENERAL DEFINITION
S1 of the Act defines gross income as follows:
‘Gross income’, in relation of any year or period of assessment, means:
1. In the case of any resident, the total amount, in cash or otherwise, received by or accrued to in favour or
of such a resident; or
2. In the case of any person other than a resident, the total amount, in cash or otherwise, received by or
accrued to or in favour of such person from a source within or deemed to be within the Republic, during
such year or period of assessment, excluding receipts or accruals of a capital nature.
COMPONENTS OF THE GENERAL DEFINITION OF ‘GROSS INCOME’ WHICH SERVE AS A
GUIDELINE ON WHETHER OR NOT TO INCLUDE ANY AMOUNTS RECEIVED IN ‘GROSS INCOME’:
A. ‘Year of period of assessment’→ An amount is only included in gross income for a particular year of
assessment if it is either received or accrued in the particular year of assessment.
B. ‘The total amount’→ there must be an actual measurable amount which can be expressed in money
value.
C. ‘In cash or otherwise’→ this implies that it is not only monetary receipts and accruals that fall into
gross income. As long as a receipt has a money value or is of a value that can be converted into
money, it will be considered to be gross income.
D. ‘Received by or accrued to ’→time related. There are 2 ways in which income may arise in taxpayer’s
hands; it may actually be received by him/her or it may accrue to him/her. “Accrue to” implies that
the payment was unconditionally due but was not actually received. If payment is only to be made on
the occurrence of uncertain future events, no accrual occurs until the fulfilment of those conditions,
e.g., If Sharia sells goods to Blaine and payment is only due when Blaine actually received the goods,
the date of accrual will be the date that goods are received by Blaine (at this point Sharia is
unconditionally entitled to payment)
E. ‘In favour of’ → income received on behalf of another taxpayer by another person will still be included
in the taxpayers’ gross income.
F. ‘Resident’→ If RSA resident you are to include your worldwide income, if not - only that from a source
deemed or deemed to be within a source from SA.
G. ‘It must not be of a capital nature’ - the sale of property which was not purchased with intention of
making a profit from the sale thereof will be considered income of capital nature. The court will take
the following factors into consideration:
The taxpayer’s ipse dixit → which is his word on what his intention is.
Length of time held → asset held for a long time is more likely to be one of a capital nature
than one held for a short period of time.
Frequency → Asset which taxpayer regularly buys and sells, is likely that such income will not
be considered of a capital nature.
Nature of the taxpayers business →(refer to frequency)
Finance → when an asset that is financed by the taxpayer’s own money is sold, it is more
likely to be considered to be of capital nature than if it is financed with short-term borrowed
funds e.g. overdraft facility.
Examples of situations where income received will be regarded to be capital receipts are:
, Damages and compensation - If payment is received for compensation (e.g. insurance payout) for
the loss of a taxpayer’s capital asset, it will be of capital nature (Taeuber and Corssen (Pty) Ltd v SIR -
1975 AD). If the payment received as compensation for the loss of profits, it is of revenue nature.
Fortuitous gains: these are amounts received through very little effort from the taxpayer and may not
be linked to his/her occupation (i.e. he/she received it through good fortune). These include:
o Gifts
o Inherited amounts
o Prizes
o Donations
Gambling: Successes from gambling activities are considered to be of a capital nature and do not fall
under gross income. If, however, a person systematically and in a business-like manner conducts
gambling activities, courts will rule that he/she was engaged in a scheme of profit making. Such
persons will be regarded as a professional punter and any profit from gambling activities will be
included in gross income.
Do questions 2.1 and 2.2
2.2. – TYPES OF INCOME
Income from services rendered – Payments for services rendered of a revenue nature being the fruits
of a person’s labour. An individual can either render services in their own capacity (e.g. sole trader
who earns fee income) or as an employee (who earns a salary package). All employment income
whether of capital nature e.g. voluntary payments, special inclusions etc. is included in gross income.
Interest – the fruit of a capital sum and is therefore deemed to income of revenue nature e.g.
investment income from companies, trusts, banks, building societies and unit trusts. Government
penalises a person for living within his means and providing for his old age by including income from
interest in the gross income of an individual. Interest received on foreign investments is included in
the taxable income of a resident and indicated in their tax return. However, the act, allows for an
exemption of a set amount of annual local and foreign interest.
Pensions
Royalties – any amount received for the use or the right of use in the republic of:
o Any patent, design, trademark, copyright, model, pattern, plan, formula or processes;
o Any motion picture film, video tape or disc or any sound recording or advertising matter; and
o Any amount received or accrued in respect of imparting any scientific, technical, industrial or
commercial knowledge or information for the use in the Republic.
Must be included in the gross income of any person who received such income. The institution which pays the
royalty will pay the gross amount (without subtracting any form of income tax) to the taxpayer and provide a
statement of income which must be incorporated in the income tax return of the recipient of royalties.
Royalties paid to a non-resident are subject to a 15% withholding tax.
Rental income – From property or assert is regarded as income of a revenue nature (i.e. fruits of a
capital asset)
2.3. – GROSS INCOME – SPECIAL INCLUSIONS
Categories Sections Notes
Annuities (a) Characteristics:
It provides a fixed annual payment (even if divided into
instalments), does not imply that amount may never
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