Gross Income: South African Tax Law

Gross Income Basics

• Gross income is a foundational concept in tax law
• It is defined in Section 1 of the Act
• The assessment period typically spans one year
• Natural persons assessment period: Commences on March 1st and ends on the last day of February of the subsequent calendar year
• Corporate entities assessment period: Aligns with their financial years

Defining Gross Income

• Gross income includes the total amount in cash or otherwise, received by or accrued to a person, excluding receipts or accruals of capital nature
• There exists a distinction between residents and non-residents
• For residents, gross income includes all amounts that meet the criteria, regardless of their origin in South Africa
• For non-residents, gross income is limited to amounts from a source within or deemed to be within the Republic

Cash, Other Forms, and Property

• Gross income encompasses all forms of property earned by the taxpayer, whether corporeal or incorporeal, that has monetary value, including debts and rights in action
• In CIR v Delfos 1933 AD, it was confirmed that income tax is assessed in money on all receipts and accruals having a money value
• Something without monetary value or cannot be converted into money is not considered income

Interpretations and Monetary Value

• In Stander v CIR 1997 (3) SA, the principle was interpreted, benefits that cannot be converted into money do not constitute an amount in cash or otherwise
• In CSARS v Brummeria Renaissance (Pty) Ltd, it was clarified a receipt or accrual in a form other than money has a money value, and the ability to convert it into money is one way to determine this
• The test for monetary value is objective, not subjective,

Receipt and Accrual Essentials

• Income tax liability arises only upon receipt or accrual
• The Act mandates either a receipt 'or' an accrual
• When an amount accrues to a taxpayer and is received within the same tax period, it is included in gross income only once
• The question arises: In which year of assessment should the amount be included when the amount accrues in one tax period and is received in another?

Accrual Disclosure and Timing

• In SIR v Silverglen Investments (Pty) Ltd 1969: if a taxpayer discloses an accrued amount, the Commissioner cannot opt to tax it in a later period when it was actually received.
• SARS may reopen the assessment of a previous tax year and include an undisclosed accrual, rather than taxing its receipt in a later year.

"Received By" Clarified

• Geldenhuys v CIR 1947 (3) SA established receipt means the taxpayer receives the amount "on his own behalf and for his own benefit"
• Amounts received as an agent or trustee do not form part of the gross income of that agent or trustee
• Courts use an objective approach for receipts from legal activities, examining whether a person was objectively entitled to receive the amount for their benefit
• A subjective approach is predominantly applied to receipts from illegal activities

Objective Approach: Legal Activities

• The deposit cases of Brookes Lemos v CIR and Greases (SA) Ltd v CIR involved taxpayers requiring customers to pay a container deposit, refundable upon return
• The courts determined the deposits were beneficially received for gross income because customers were not obligated to return the containers
• CIR v Genn & Co (Pty) Ltd, borrowing money is not "receiving" it for benefit, given the obligation to repay the lender

Hardship Resulting from the Objective Approach

• Objective approach caused hardship in some cases
• In CIR v Witwatersrand Association of Racing Clubs 1960 93) SA proceeds from a horse-racing event for charity were considered gross income
• The taxpayer's argument that the amount should only be regarded as beneficially received when the receiver has absolute right with disposal, use or enjoyment was not accepted
• The taxpayer had the appeal dismissed and the amount was included in the taxpayer's gross income

Subjective Approach: Illegal Activities

• Zimbabwean courts defined "amount received for own benefit" in illegal earnings as any amount received with the intention to benefit
• MP Finance Group CC (in liquidation) v CSARS, the taxpayer operated an illegal pyramid scheme and misappropriated funds
• The court considered taxpayer received money for gross income purposes because they intended to benefit from it

"Accrued To" Deciphered

• There has been uncertainty on the fundamental meaning of gross income, and different views developed
• In WH Lategan v CIR, a wine farmer sold and delivered wine to customer
• Part of the purchase price was payable in the year of assessment in which the transaction in which delivery was affected, only the balance was payable in a different tax year
• Cape Provincial Division ruled that an amount accrues to the taxpayer, becoming ‘entitled’ to it regardless of payment timing

Accrual: Case Examples

• In CIR v People’s Stores (Walvis Bay) (Pty) Ltd, the taxpayer was a retailer sold clothing and related goods for cash or credit
• During the 1983 year of assessment that taxpayer sold goods under the scheme with a total amount of R1.3 million, however R341 281 was still outstanding at the period's end.
• The commissioner included the latter amount in the gross income of the taxpayer
• Taxpayer appealed to the Income Tax Special Court on the grounds the amount did not accrue to the taxpayer in that particular year of assessment
• The Special Court applied the principle in the Lategan case giving judgement to the Commissioner

Receipt/Accrual Date and Valuation

• Taxpayer's gross income is figured out at the end of a year or period of assessment
• The whichever comes first between the receipt and accrual is what is applied
• Example of a taxpayer sold and delivered trading stock during the 2020/2021 year of assessment totaling to R200 000, with the purchase only payable at the end of December 2021, the value of the outstanding price would be R190 000
• The outstanding purchase price is an accrual for the taxpayer in the 2021 year of assessment

Reciprocal Agreements

• Tax law precedent treats entitlement to claim as "conditional."
• An amount generally accrues to a party under a reciprocal agreement after that party has performed their part.
• In the case of a merchant selling goods, the purchase price accrues once the goods have been delivered
• Date of delivery is not necessarily accrual date
• Performance is only accrued when all conditions have been fulfilled if there are unfulfilled conditions at delivery

Interest Income

• In Cactus Investment (Pty) Ltd v CIR, taxpayer advanced capital for a fixed period with a fixed interest rate
• Interest and capital were payable at the end of the loan
• SCA held that the lender's only obligation was to make the money available to the borrower with no other reciprocal obligation
• Interest accrued to lender on the day when payment was made

Legislative Relief for Interest

• Legislature introduced the special timing rules for accrual and deferral of interest to provide relieve to taxpayers
• Section 24J interest is evenly spread out over the period of the loan financial arrangement, by compounding interest over the fixed accrual periods using a predetermined rate known as the "yield to maturity"

Understanding Discounts

• When selling goods or rendering services, a agreed discount is agreed upon customer that pay the invoice on or before the provided date
• Issue - whether the full amount or the discounted amount accrues to the taxpayer, with the balance accruing if the customer does not pay on time
• ITC 1645 - the court emphasized customer was entitled to the full amount
• Duty of the taxpayer to reimburse customer with the amount of rebate
• The full amount accrued to the taxpayer that is the rebate position as well

Erroneous Gross Income Inclusion

• If a taxpayer mistakenly includes an amount in assessment and then realizes they were not entitled, the issue is whether they are entitled to any relief
• If the error is detected within three years, the statutory condictio indebiti may be applied under section 102 of the Act and section 190 of Tax Administration Act 28 of 2011
• Condictio indebiti enables the recovery of mistaken payments under civil/Roman law

Notional Income: Non-Taxable

• Unrealized appreciation in asset value or income a taxpayer could have earned, not "accrued" should not qualify as gross income
• Gross income requires realization, which means either a receipt or an accrual
• SARS questioned if it should be considered beneficial and thus taxable in the borrower of interest-free loans
• Interpretation Note 58, the Brummeria case lacks the general requirement that the value of the interest-free loan should be included in every case of the borrower's gross income.
• Mainly confined to cases where a right acquired in exchange for goods and services (business context).

Waiving Income Before Accrual

• Taxpayer unconditionally waives (future) income before accrual, the amount should not to be included in gross income.