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Generic Framework and Gross Income - Coggle Diagram
Generic Framework and Gross Income
Tax Framework
GROSS INCOME
LESS:
Exempt Income
=
INCOME
LESS
Deductions
LESS:
ASSESSED LOSSES
from
PREVIOUS YEAR
PLUS:
TAXABLE CAPITAL GAIN
DONATIONS TO PBO
=
TAXABLE INCOME
Elements of Gross Income
3.) Received by or accrued to, or in favour of, a person
4.) From a source anywhere in the world
, in the case of a
person who is a resident
This means that
for residents
, the
Source of Income is not Relevant
in determining whether
it should be included in Gross Income
2.) In cash or otherwise
5.) From a South African source
, in the case of a
non-resident
While for
non-residents
,
income
must have a
South African Source
to be
included in Gross Income.
1.) Total amount
6.) Other than receipts or accruals
of a capital nature
Capital Receipts
or
Accruals
refer to
amounts Received
or Accrued
from the sale, transfer
, or
disposal of capital assets
, such as
property, shares, or goodwill.
These receipts are
not considered to be revenue in nature
, as they
do not arise from a person's regular business
or
income-earning activities
.
Exceptions
to this general rule
If a person is
engaged in the business of buying and selling capital assets
, the
profits or gains
from those activities
would generally be considered revenue in nature
and
included in gross income.
Year of Assessment
For
Individuals
and
Trusts
The
Last day of February
.
28/29
Permission can be granted to individuals or trusts to use a different date if needed.
For
companies
it is the
Financial Year End
of the company, which
usually ends on the last day of February.
Companies can apply to close their accounts up to 10 days before or after their financial year end.
Income tax is
payable annually
based on
taxable income received
during specific periods.
Residence
About
A
resident is defined
as someone who is "
ordinarily resident
" in South Africa
or a non-resident who meets specific physical presence criteria
.
:star:A
juristic person
or
trust
is
deemed to be a resident of South Africa
,
or if it has its
place of effective management
in South Africa.
if it is
incorporated, established, or formed in South Africa
From 1 January 2001, South Africa
implemented a residence-based tax system
where
residents are taxed on their worldwide income regardless of the source.
A person can be a
resident of more than one country
at the same time.
Residence means a
settled and enduring connection
between a person and a place,
not just visiting a place as a tourist.
A person can be
physically absent from a place from time to time
and still be resident there.
Ordinarily Resident
A person
can only be 'ordinarily resident'
in one place at a time
'
Ordinary residence
' requires
an intention to live in a place
at a
particular point in time
, for a
significant period
, with the
place being his or her real home for that time.
A
holiday spent
in a country would be a temporary purpose and
would not constitute 'residence'.
'
Ordinary residence
' is the
place where a person resides
in the ordinary course of his or her
day-to-day life.
A person
may have more than one residence
in more than one country
at the same time
.
A person
can only be ordinarily resident in one country at a time
, which would be the
place of his or her most fixed
and
settled residence.
Physical Presence
A person is
deemed to be a resident
for tax purposes
if they
And
more than 91 days in each of the previous five years
of assessment
And were
physically present
in the country
for more than 915 days in total
during that period.
Spent more than 91 days
in South Africa
during the current tax year
The physical presence test
must be done each year,
and it is known as the '
days test
' or the 'time rule'.
The
physical presence test
is a
subsidiary test of residence
, which applies if a
person is not ordinarily resident
in South Africa.
The
Revenue Service
has
issued Interpretation Note 4
which
explains the physical presence test
in detail.
If a
person fulfils the physical presence requirements
, they are
deemed to be a resident
from the
first day of that tax year.
A person who
falls into the definition of resident because of physical presence
in South Africa will
Cease to be a resident
if they
remain outside the country for a continuous period of at least 330
full days.
The
physical presence test
does
not apply to persons
who are "
ordinarily resident
".
A person
can be a resident
or
non-resident
for
different tax years
, depending on their physical presence in South Africa.
Resident vs Non-Resident
Resident
Taxed on world-wide basis
Non-Residence
Taxed on SA source income
Non-Residents SA Source
Section 9 of the Income Tax Act
determines the source of certain types of income
If Income is
not covered by Section 9
, common
law rules from tax cases
must be
consulted
.
Non-residents
are
taxed
in South Africa
based on their source of income
1.) Total Amount
In Cash or Otherwise
The term "
amount
" includes
not only money but also the value of any property earned
by the taxpayer t
hat has a money value
, whether
tangible or intangible
.
In order for
gross income to arise
, there
must be an actual amount received
or
accrued by the taxpayer.
Notional amounts
, such as hypothetical interest that could have been
earned on money not invested,
can
not be taxed
.*
Court Cases
Lategan v CIR
Case
Established The Principle
that the term "
amount
"
includes the value of any form of property earned by the taxpayer
that
has
a
money value
, whether
tangible or intangible
.
CIR v Butcher Bros
This case established that
the burden of proof is on the tax authority to establish
the existence of an "amount" subject to tax.
CIR v People Stores
The term "
amount
" should be
given a wider meaning to include
any
property earned by the taxpayer that has a money value
, whether
tangible or intangible.
Basically they accepted the principles of Lategan
2.) Received by or accrued to or in favour of
An amount must be
included in the taxpayer's gross income
either
when it is received or when it accrues
, whichever is earlier
Gross income arises at the
earlier of the date of receipt
or
the date of accrual
Received By
Court Cases
Pyott Ltd
The
main take from the Pyott Ltd v CIR court case
is that
deposits received by a business in the ordinary course of trade
are
considered revenue in nature
and constitute receipts of income, taxable in the year received
This
ruling clarifies that even if the deposit is refundable
, it is
still considered part of the company's normal trading income and must be included in the company's gross income
for tax purposes.
Geldenhuys v CIR
The case established that
if a person sells an asset they are allowed to use but not own
(usufructuary interest),
Any proceeds from the sale
may
not be considered as their income if the proceeds were not received for their own benefit
but rather for the benefit of the actual owners of the asset (bare dominium holders).
This
also applies to agents receiving money on behalf of a third party.
MP Finance
The main takeaway from the court case MP Finance Group is
The Legality (illegal) of the receipt does not preclude it from Tax
(Pyramid Scheme)
Accrued To
Court Cases
Peoples Stores (Walvis Bay) (Pty) Ltd
The
main takeaway
from the court case Peoples Stores (Walvis Bay) (Pty) Ltd is that the term "
accrual
" means
becoming entitled to payment
, even if the payment
is only due in the future.
Mooi
Accrual
for tax purposes
only occurs when the taxpayer becomes unconditionally entitled to the amount.
If an
entitlement is contingent on a future event
, it
does not result in an accrual
until the event has occurred
Witwatersrand Association of Racing Clubs
The
main take
from the
court case CIR v Witwatersrand Association of Racing Clubs
is that
if an entity collects money with the intention of it benefiting another person or organization
, but they are
not legally obligated to pay it over
then the
money may be considered as received beneficially by the entity
and
count as part of their gross income
for tax purposes.
Therefore,
it is important to ensure that the intention is clearly defined
and
legal obligations are in place
to avoid tax implications.
Nature of the asset
About
The
type of asset you own
can
affect how tax authorities view your actions
Buying shares
in a gold mining company with the hope of selling them at a profit later on is seen as a for-profit action
NB!!
This profit would be taxed
Assets
commonly traded
are more likely to be
seen as for-profit
, while
fixed assets
are seen as
long-term investments
The
nature of an asset can influence a court's decision
on its
classification
as
trading or fixed asset
Court Case
Visser
According to the court, "income"
is what
"capital"
produces
This distinction is important in matters of income tax.
the
classification of assets can depend on the nature of the owner's business
.
The case
deals with the economic meaning
and
distinction between
"capital" and "income."
Factors to consider when determining whether an amount is of a capital nature or of a revenue nature
About
The
onus of proof lies with the taxpayer
(s102 of the TAA). In discharging the onus, the taxpayer will have to
show that the amount is of a magnitude
: –
subjectively
and
objectively
Distinguishing between subjective and objective factors
is crucial in
determining an asset's tax nature
as it
enables a balanced assessment
of the
taxpayer's intentions
and
circumstances
.
Subjective factors:
Relate to the taxpayer's
personal intentions
and
motivations
Objective factors:
Based on
observable
and
verifiable facts and circumstances
Purpose
Objective factors
Income stream
A
capital asset
is generally one which is
acquired as a source of income
If it is apparent that the
pursuit of an income flow was negligible or non-existent
, the court is likely to conclude that the
intention was of a revenue nature
Reason for sale
The
shorter the period
between
acquisition and sale
, the
greater the problem for the taxpayer
The taxpayer needs to
satisfy the court
that the
sale does not refute their stated intention
Nature of taxpayer’s business
(difficult to prove sale of business asset - capital)
If the
asset sold
is
of the type which the taxpayer buys and sells in the ordinary course of business
, the taxpayer will have greater
difficulty in proving that the amount is capital
The taxpayer needs to
give reasons to support the contention
that the
asset did not form part of the business assets
Finance (financed with own money – capital)
If the
asset acquisition is financed with the taxpayer's own money
, it is
more likely to be a capital asset
(investment)
than if its acquisition is financed with short-term borrowed funds
Frequency of transactions (infrequent – capital)
If the
taxpayer regularly buys and sells the asset
, the
presumption is that it is a revenue asset
If the
taxpayer infrequently buys and sells assets
, the
proceeds
are more
likely to be of a capital nature
Nature of asset
(trading vs fixed assets)
Certain assets
may have the appearance of trading assets
while others may have the
appearance of fixed assets
The
nature of the asset
may
have an effect on the court's decision
Length of time held (long – capital)
An
asset held for a long period of time is more likely to be a capital asset
than one held for a short time
All factors have to be taken into consideration
Subjective factors
Intentions: Dominant Test
Natural Persons
The
intention
of a natural person is
found in their state of mind at the time
To
determine the intention of a natural person
, it is
necessary to establish their state of mind
, usually by
asking them
Intention
is
crucial for determining tax liability
in individuals and companies
The
response of a taxpayer
is referred to as their
ipse dixit
The
ipse dixit
can be a
critical factor in determining Tax Liability
, but other facts may discredit it
Unless other facts discredit the
taxpayer's ipse dixit
, it will be conclusive
Company
B
eing empowered to engage in a particular type of transaction
does
not
necessarily make the
income resulting from that transaction taxable
An
isolated transaction may not be considered capital for a company
, but it
may be for an individual
(continuity test)
Objects
clause in the memorandum of association
should
not be relied on too heavily
as it is not conclusive
A company's intention is
determined by the intentions of its directors
, as shown in the CIR v Richmond Estates (Pty) Ltd case
Actions
of directors
carry the most weight
in determining the
intention of a company
A
change in shareholders
can lead to a
change in intention for a company
, as demonstrated in the Elandsheuwel farming case.
Intentions of a company are
determined by formal acts of directors
, such as
minutes of directors' meetings
,
articles of association
, and
resolutions of members
Change in Intention
CIR v Stott (1928 AD) established that a person who invests surplus funds in an asset is entitled to realize the asset to the best advantage and to accommodate the asset to the exigencies of the market in which he is selling.
It is important to establish whether the
profit was the motive for the sale
or if the
sale resulted in a profit
.
The mere fact that an
asset is sold at a profit does not indicate a change of intention.
The
decision to sell an asset
, even at a substantial profit,
does not constitute a change of intention
unless it is part of a scheme for earning profits.
Dominant/Mixed Intention
Levy suggests that the
dominant intention should be chosen
The
taxpayer's dominant intention must be determined
in cases where
there is a mixed intention.
The
Taxpayer’s Ipse Dixit
/Commercial activity
Courts will
examine the surrounding facts
and
circumstances to establish intention
If the intention is of a scheme of profit-making, the
lack of frequency will not assist the taxpayer
Refers to the
taxpayer's intention
or
word
Profit Motive
The
profit motive and intention
of the owner are key factors in determining whether a
gain or profit from the sale of an asset is taxable as income
or
whether the asset has been converted from capital to trading stock.
Two landmark cases in South African tax law, Natal Estates Ltd v SIR and CIR v Stott, provide guidance on how to distinguish between capital gains and trading profits.
Natal Estates Ltd v SIR
The
court held that the proceeds from the sale were taxable as income
because the company had
converted its fixed asset into trading stock
and was involved in a scheme of profit-making.
The court noted that the
company's intention at the time of acquiring the land was of a capital natur
e, but that its
subsequent actions had changed the nature of the asset
.
In this case, the taxpayer, Natal Estates,
sold land that it had originally acquired for farming sugar cane
, but which it
later sold in a manner that resembled the activities of a land dealer
.
CIR v Stott
In this case, the
taxpayer sold shares that he had acquired as an investment
, but the Commissioner of Inland Revenue argued that the sale was part of a profit-making scheme.
The court held that the
mere decision to sell an asset
, even at a substantial profit,
does not constitute a change of intention from capital to revenue
.
The court also noted that
a person who invests in assets is entitled to realize them to the best advantage
and to accommodate them to the market without changing their nature.