Abstract
The question of whether a receipt or accrual is of a capital nature or not has vexed the courts, legal minds and tax advisors for years. Simplifying or limiting the tests would provide greater certainty. According to some writers, the case of CIR v Pick ’n PayEmployee Share Purchase Trust (1992 4 SA 39 (A), 54 SATC 271, hereinafter “Pick ’n Pay”) seems to have finally limited the test incapital/revenue cases to the “profit-making scheme” test. However, in subsequent cases there is no suggestion that the scheme ofprofit-making test is the sole test. In Berea Park Avenue Properties (Pty) Ltd v CIR (1995 2 SA 11, 57 SATC 167) it is clear that the Appellate Division (as it then was) considered a profit-making scheme and trading stock in one breath, so to speak. In SARS v Knuth and Industrial Mouldings (Pty) Ltd (1999 62 SATC 65), a case heard in the Eastern Cape Provincial Division of the High Court dealt with the proceeds of the sale of shares. The case was concerned with the floating versus fixed-capital test, and Leach J opined (72) that the distinction“is often referred to in tax cases and can now be regarded as entrenched in our law”. Leach J referred to Pick ’n Pay, but only to the extent that sound commercial and good sense should prevail in selecting the tests applicable. It was held in Pick ’n Pay that if there is no trading then there can be no floating capital. The trading stock definition was not considered in the majority judgment. The profit-making scheme test is only one way of establishing that an asset is trading stock. An asset acquired for the purpose of sale is tradingstock and the proceeds are gross income. That should, it is submitted, be the basis on which capital/revenue cases are decided. The scheme of the profit-making test is but one method of establishing intention at acquisition. It is submitted that the intention to make a profit, inherent in the concept of a profit-making scheme, is not essential to establish trading. “Gross income” is receipts and accruals, not profits. The majority judgment in this case is, it is submitted, flawed in that it did not consider this reality. For years the courts have vacillated between the “floating capital/fixed capital” and “profit-making scheme” tests to establish whether the proceeds of the disposal of an asset is of a capital or revenue nature for the purpose of establishing gross income as defined in the Income Tax Act 58 of 1962. Pick ’n Pay seems to have finally limited the test of whether proceeds are of a capital or revenue nature to the “profit-making scheme” test. This note questions that submission by examining the concepts and application of the two tests, trading stock, Pick ’n Pay and subsequent capital/revenue cases.
Highlights
The question of whether a receipt or accrual is of a capital nature or not has vexed the courts, legal minds and tax advisors for years
For years the courts have vacillated between the “floating capital/fixed capital” and “profit-making scheme” tests to establish whether the proceeds of the disposal of an asset is of a capital or revenue nature for the purpose of establishing gross income as defined in the Income Tax Act 58 of 1962
It is submitted that this analysis by Nicholas AJA uses the fixed/floating capital argument and scheme of profit-making as an overall argument to establish trading, or the carrying on of a business, which concept is included in the definition of “trade” in the Income Tax Act
Summary
The question of whether a receipt or accrual is of a capital nature or not has vexed the courts, legal minds and tax advisors for years. An asset acquired for the purpose of sale is trading stock and the proceeds are gross income That should, it is submitted, be the basis on which capital/revenue cases are decided. For years the courts have vacillated between the “floating capital/fixed capital” and “profit-making scheme” tests to establish whether the proceeds of the disposal of an asset is of a capital or revenue nature for the purpose of establishing gross income as defined in the Income Tax Act 58 of 1962. Pick ’n Pay seems to have limited the test of whether proceeds are of a capital or revenue nature to the “profit-making scheme” test. This note questions that submission by examining the concepts and application of the two tests, trading stock, Pick ’n Pay and subsequent capital/revenue cases
Sign-in/Register to view highlights & summary Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
