The Nature of the Proceeds Derived from the Sale of an Asset for the Purposes of Income Tax

• Jurisdiction: South Africa
• Published date: 25 May 2019
• Pages: 138-152
• Date: 25 May 2019
• Author: R Griessel

The Nature of the Proceeds Derived

From the Sale of an Asset for the

Purposes of Income Tax

R GRIESSEL*

University of South Africa

1 Background

The definition of gross income requires that the amounts which are

included in gross income may not be of a capital nature!

In spite of the fact that the words 'of a capital nature' also appear in

the general deduction formula,

2

they are not defined in the Income Tax

Act. This is probably because it would be impossible to define those

words comprehensively enough to provide for all cases. The Legislature

has thus left it to the courts to establish the meaning of those words.

All types of receipts or accruals must be classified as receipts or accruals

either of a capital or of a revenue nature.

3

Over the course of time, the

courts have developed a few general guidelines which are applied to

establish whether or not a receipt or accrual is of a capital nature.

However, the ultimate tests applied by the courts in this regard differs,

depending on the type of receipt or accrual concerned. For example, the

test applied to establish whether or not compensation for damage is of a

capital nature differs from the test applied to establish the nature of the

proceeds of the sale of an asset.

5

The purpose of this investigation is to

establish what the courts take into consideration or what test or tests they

apply when classifying last mentioned type of income.

One of the reasons why there is often a dispute regarding the nature of

proceeds derived from the sale of an asset, is that there is a difference

between the meaning of 'capital' in an accounting context and the meaning

of 'capital nature' for income-tax purposes. For the average taxpayer

6

* BLC LLB (Pret) HDipTax (Witwatersrand). Senior Lecturer in the Department of Mercantile

Law, Faculty of Law, University of South Africa.

Section 1 of the Income Tax Act 58 of 1962 ('the Act').

As set out in ss 11(a) and

(b)

and 23(f) and

(g)

of the Act.

3

Section 1 sv 'gross income'.

In this regard the test frequently applied by the courts is whether the receipt or accrual fills a

hole in the taxpayer's profits or a hole in his assets. This test was established in the English case of

The Burmah Steam Ship Company Limited v The Commissioner of Inland Revenue

1931 SC 156 (Ct

of Session) and it has been referred to as correct in many decisions of the South African Appellate

Division: see e g

Verrinder Ltd v Commissioner for Inland Revenue

1949 (2) SA 147 (T);

Commissioner for Inland Revenue v Illovo Sugar Estates Ltd

1951 (1) SA 306 (N); and

Taeuber &

Corssen (Pty) Ltd Secretary for Inland Revenue

1975 (3) SA 649 (A).

5

See par 3.1 and note 14 infra.

6

That is, a person not familiar with the details of the Act and general principles of income-tax

law.

138

(1997) 9 SA Merc LJ 138

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