TAX II

Tutorial Pack Questions

Module 2

Gross Income
Question Source Marks Time allocation
(minutes)
Question 1 Provided 20 30.0
Question 2 Provided 14 21.0
Question 3 Provided 10 15.0
Question 4 Provided 12 18.0
Question 5 Provided 10 15.0
Question 6 Provided 13 19.5
(Additional question)
Unseen Provided 20 30.0
Total 99 148.5
QUESTION 1 20 MARKS

Ignore VAT when answering this question.

Jimi Hendrix is a good friend of yours. Jimi is a man of exceptional intelligence. He left
school at the age of seventeen and started his tertiary education by taking on medicine
at the University of the Witwatersrand (Wits). Once his medical studies were completed,
he went on to study a degree in engineering while running a small medical practice in his
spare time in order to fund his studying. Four years later, he finished top of his engineering
class and graduated cum laude. However, after completing two prestigious degrees he
still felt that his superior intelligence was yet to be challenged. Accordingly, he enrolled to
study the Bachelor of Accounting Science degree on a part-time basis. Jimi met his match
when he was introduced to the concept of ‘gross income’. Despite Jimi’s enviable intellect,
he still cannot quite wrap his head around ‘gross income’.

On 12 April 2023, Jimi wrote his first Tax II test and the topic that was tested was ‘gross
income’. It has now been a week since he wrote the test, and he is unable to sleep as he
wants to know how you would have answered the questions to see if his answers were
similar. Earlier this morning, you received this email from Jimi:

To: aStudent@[Link]

From: jimihendrix@[Link]

Subject: Test woes

Date and time: 19/04/2023 at 04:28:32 am

Good morning!

So, you know I wrote my gross income test a week ago? Well, I’m not sure if it went well
or not. Usually, after a test I chat with my friends to see how they found it and what their
answers were compared to mine, but I couldn’t do it for this test because I had a doctor’s
appointment that I needed to get to. Anyways, I’ve got my test with me here and I’m going
to write parts of the scenario in this email. When you have time, please can you tell me
exactly how you would have answered these parts if you had written this test? Here are
the parts that I’m talking about:
OnForm – Paper sales

Mr Young owns a sole proprietorship called OnForm. OnForm’s core business is the retail
of office furniture and office consumables. OnForm is not a large operation, and its target
market is individuals running home offices, rather than large corporations. Mr Young is
very environmentally conscious and implemented a policy that OnForm must adhere to
when selling paper.

OnForm sells paper which is packaged in a cardboard box at R19 per box. OnForm further
requires a R1 deposit for each box sold to encourage the recycling of the cardboard box
that the paper is sold in. A customer will receive a R1 refund if they return the cardboard
box to OnForm to be recycled. OnForm will then take the boxes to a nearby recycling
plant and donate the cardboard boxes to the recycling plant. This is done on a weekly
basis. The full amount received of R20 on the sale of a box of paper to a customer is
deposited into the sole proprietorship’s only bank account when a sale is made. This bank
account is drawn upon to fund the daily running costs of OnForm.

OnForm – Credit sales

Due to the fact that OnForm’s main customers are individuals, many of them do not have
the means to pay for the relatively expensive office furniture upfront. Mr Young identified
this and, using his business savvy, he implemented a credit facility during the 2022 year
of assessment so that customers could buy the office furniture on credit. This resulted in
a sharp increase in sales. Customers purchase their furniture and are required to pay the
purchase price in equal monthly instalments over a period of 36 months. Sales on the
credit facility for the 2023 year of assessment amounted to R130 000, and at year-end
the total cash receipts for these credit sales amounted to R27 000.

I really hope you can help with this.

Regards,

Jimi
 QUESTION 1 – REQUIRED MARKS
Draft an email to Jimi in which you demonstrate exactly what you would have
written in answering each of the following questions which came up in his
test:
PART A
Assume that the Consumer Protection Act (CPA) does not apply to this
transaction.
Discuss, with reference to the relevant case law, whether R19 or R20 will be 11
included as Mr Young’s gross income for the year of assessment ended
28 February 2023 for every sale of a box of paper by OnForm.
PART B
Discuss with reference to the relevant case law what amount will be included
in Mr Young’s gross income for the credit sales made by OnForm for the year 9
of assessment ended 28 February 2023.
TOTAL MARKS 20

Source: Wits April 2013 Test - Q1 (b) and (c) (Adapted)

QUESTION 2 14 MARKS

Ignore VAT when answering this question.

Eva Thavhana (aged 53) is a South African tax resident. Eva is not married and has one
child, Zandi (aged 21). Zandi is a student at a culinary school, as she wishes to become
a chef. Eva and Zandi reside in Bloemfontein (Free State province of South Africa).

Eva runs a catering business as a sole proprietor under the name ‘Eva’s FineDishes’. The
business was established in 2017 after she resigned as a mathematics teacher at a local
school to start her business, which has grown from strength to strength since inception.
Eva caters mainly at provincial government events, birthday parties and wedding
celebrations. Eva is not a registered VAT vendor.

During May 2022, a government department invited all catering businesses in the
province to tender to cater for an annual event held in Bloemfontein taking place from
4 to 6 October 2022. On 28 May 2022, Eva submitted her tender for the event.

After submitting her tender for the event, Eva was informed by an acquaintance (Mr
Lorekang, who sits on the tender adjudication committee) that her name was amongst
the top three candidates to be evaluated for awarding the tender. Mr Lorekang further
mentioned that there was another candidate that may be awarded the tender as that
caterer had also impressed the committee and met all the requirements for the tender.
Mr Lorekang (aged 58) is a South African tax resident.

On 26 July 2022, Eva and Mr Lorekang verbally agreed that should he unduly influence
the decision of the adjudication committee to award her the tender, she would, in return,
reward Mr Lorekang with 10% of the contract amount. On 6 August 2022, Eva was
informed, in writing, by the head of the government department that she had been
awarded the tender to cater for the three (3) days that the event would take place. On the
same date that Eva was awarded the tender, Eva ceded 15% of the tender value to Zandi,
for Zandi to use to pay her culinary school fees. Zandi is a South African tax resident. All
the requirements for a valid cession have been met.
Eva catered at the event for the said dates and on 10 October 2022 invoiced the
government department an amount of R160 000 for her catering services provided. Zandi
did not render any catering services in respect of this event. Eva, however, requested
the government department to pay R24 000 to Zandi and the remainder of the amount
invoiced to Eva. On 25 November 2022, the government department paid the respective
amounts to Zandi and Eva. On 5 December 2022, Eva paid Mr Lorekang an amount of
R16 000 as per their verbal agreement.

On 20 January 2023, the corruption was discovered by the National Prosecuting Authority
(NPA) of South Africa. Mr Lorekang was subsequently fired as a member of the
adjudication committee and Eva was fined an amount of R176 000, which she paid on
31 January 2023 to the NPA.

QUESTION 2 – REQUIRED MARKS

PART A
Query 1
Discuss, with reference to relevant case law and legislation, whether the 8
catering service fee of R160 000 received from the government department
should be included in the gross income of Eva Thavhana for the year of
assessment ended 28 February 2023.
Query 2
Discuss, with reference to relevant case law and legislation, whether the
amount received of R16 000 by Mr Lorekang from Eva Thavhana should be
6
included in the gross income of Mr Lorekang for the year of assessment
ended 28 February 2023.
TOTAL MARKS 14

Source: Tax II – November exam 2020 – Question 1 Part A – query 1 & query 3
QUESTION 3 10 MARKS

Ignore VAT when answering this question.

Kate Melody (aged 22) is unmarried and a South African tax resident. She is a renowned
musician and singer. She carries on her music career as a sole proprietor named Kate
Melody Music.

On 1 November 2022 Kate stated during an interview that she will be donating her
earnings (amounting to R300 000) from her concert taking place at the FNB stadium on
3 December 2022 to Hope (a South African charity).

The concert took place on 3 December 2022 as scheduled. The concert earnings were
paid by the organisers to Kate on 3 December 2022 who then in turn paid it to Hope on
the same day as promised.

QUESTION 3 – REQUIRED MARKS

Discuss, providing reasons or references to legislation and relevant case
10
law, if the amounts referred to in the query above will be included in the
gross income of the respective taxpayers for the 2023 year of assessment.
TOTAL MARKS 10

Question adapted from Graded Questions on Income Tax in South Africa: 2015 – K & L
Mitchell Question 2.11

Source: Tax II Announced Test 1A – 2017

QUESTION 4 12 MARKS

Workout SA (Pty) Ltd (Workout SA) manufactures gym equipment for resale. The product
range of Workout SA includes treadmills (equipment used for indoor walking or running)
and spinning bikes (bikes used for indoor training). Workout SA owns a factory building
in Wynberg (Johannesburg) from where its manufacturing operations are undertaken.
Workout SA rents an office building in Woodmead (Johannesburg) which is located in
close proximity to the factory. Workout SA is not a small business corporation as defined
in section 12E(4) of the Act.

Workout SA is a South African tax resident with a financial year that ends on the last day
of March. Workout SA is a category A VAT vendor and makes 100% taxable supplies.
Workout SA is in possession of valid VAT invoices where applicable. The South African
Revenue Service (SARS) considers the manufacture of gym equipment to be a process
of manufacture.

The following is an extract from the profit before tax calculation of Workout SA for the
financial year ended 31 March 2023. All amounts exclude VAT, unless otherwise stated
or if the context indicates otherwise:

Description Notes Credit

Rental income earned from spinning bikes Note 1 50 000
Deposit received for spinning bikes Note 1 0

Note 1 – Rental income and deposit received for spinning bikes

Workout SA manufactured a batch of spinning bikes that it was unable to sell. Workout
SA was approached by Sweat (Pty) Ltd (Sweat), a company that owns various spinning
studios in South African, who requested to rent these bikes from Workout SA.
Workout SA agreed to rent these bikes to Sweat from 1 November 2022 for a monthly
rental fee of R10 000. The Consumer Protection Act (CPA) does not apply to this
transaction.
In addition, Workout SA required Sweat to pay a deposit that would be refunded when
the spinning bikes are returned. Sweat was required to return the spinning bikes in a good
working condition. Any costs incurred by Workout SA to repair damage to the spinning
bikes caused by Sweat would be set-off against the deposit and the net amount refunded
to Sweat. Workout SA banked this deposit amount in its business account and raised a
corresponding liability in its Statement of Financial Position (SOFP) for the financial year
ended 31 March 2023. The deposit received from Sweat of R10 000 was, therefore, not
included in the calculation of profit before tax as set out above. The following journal entry
was processed to record the aforementioned in the financial records of Workout SA:
R R
Journal Date Description Dr Cr
no
717 1 November Bank (SOFP) 10 000
2022
Liability for deposit received for 10 000
spinning bikes from Sweat (SOFP)
Deposit received of R10 000 for spinning bikes

QUESTION 4 – REQUIRED MARKS

Discuss, with reference to relevant case law and legislation, whether the
deposit received of R10 000 from Sweat (Pty) Ltd in respect of the spinning
12
bikes will be included in the gross income of Workout SA (Pty) Ltd for the
year of assessment ended 31 March 2023.
TOTAL MARKS 12

Source: Tax II WITS November 2019 exam – Question 2 - Part A

QUESTION 5 10 MARKS

Chemicals SA (Pty) Ltd (“Chem SA”) is a South African tax resident company that
manufactures and sells a range of cleaning products, disinfectants and hand sanitisers to
retailers and hospitals. Chem SA leases a factory and office building in Isando
(Johannesburg) from where it carries on its business. Chem SA has a financial year that
ends on the last day of February.

Chem SA is not a small business corporation as defined in section 12E(4) of the Income
Tax Act. The South African Revenue Service (SARS) considers the manufacture of
cleaning products, disinfectants and hand sanitisers to be a process of manufacture.
Chem SA is a registered category B VAT vendor making 100% taxable supplies. Chem
SA is in possession of valid VAT invoices where applicable and all transactions were
concluded with registered VAT vendors, unless specifically indicated otherwise or if the
context indicates otherwise.

The calculation of the profit before tax of Chem SA for the financial year ended
28 February 2023 was as follows and all amounts exclude VAT, unless otherwise stated
or if the context indicates otherwise:
 The calculation of the profit before tax of Chem SA for the financial year ended
28 February 2023

Description Notes Amount

(ZAR)

Revenue from the sale of cleaning products, disinfectants and 1 17 000 000
hand sanitisers
Cost of chemicals (8 000 000)

Restraint of trade paid to Grace Ntuli (1 000 000)

Penalty for late payment of VAT (20 000)

Provisions for bonuses (500 000)

Loan to employee written off (5 000)

Depreciation (464 999)

Interest on lease liability (573 297)

Other expenses (all tax deductible) (4 681 704)

Profit before tax 1 755 000

Note 1:

Chem SA sells its products on 30-day credit terms to its customers. Chem SA, however,
requires customers to pay a non-refundable deposit of 40% of the value of the order when
orders are placed. These deposits are paid into a separate bank account owned by Chem
SA named ‘Non-refundable deposits received’. Once the stock is delivered to the
customer, the deposit received is set-off against the amount owed by the customer and
transferred to Chem SA’s business bank account. Should the customer cancel the order
at any stage prior to delivery, the deposit received would immediately be transferred to
Chem SA’s business bank account.

On 26 February 2023, Bryanston Private Hospital (Pty) Ltd (“Bryanston Private Hospital”)
situated in Gauteng, paid a non-refundable deposit of R20 000 for the purchase of
cleaning products, disinfectants and hand sanitisers which amounted to R50 000. The
stock was delivered to Bryanston Private Hospital on 30 March 2023 and an invoice
issued on the same day for the amount owed. On 28 February 2023, this was the only
non-refundable deposit banked in the separate bank account. As Bryanston Private
Hospital’s annual turnover exceeds R2 000 001, it is not a ‘consumer’ for purposes of the
Consumer Protection Act (CPA). The CPA, therefore, does not apply to this deposit.

The amount of R17 000 000 earned from the sales of cleaning products, disinfectants,
and hand sanitisers excludes the order of R50 000 that was placed by Bryanston Private
Hospital (referred to above) on 26 February 2023. It also excludes the deposit of R20 000
that was received in respect of this order.

QUESTION 5 – REQUIRED MARKS

PART A

In respect of note 1 above, discuss whether the non-refundable deposit of

10
R20 000 received by Chemicals SA (Pty) Ltd from Bryanston Private
Hospital, will be included in the gross income of Chemicals SA (Pty) Ltd for
the year of assessment ended 28 February 2023.

Your solution should make reference to relevant legislation and

relevant case law.

Source: Tax II WITS November 2021 exam – Question 1 - Part A

QUESTION 6 13 MARKS

Ignore VAT when answering this question.

You are an experienced tax practitioner and received the following two (2) unrelated
queries:

Query 1
Hot Air SA (Pty) Ltd (“Hot Air SA”) is a South African tax resident company. Hot Air SA
provides hot air balloon flights to tourists over the Stellenbosch winelands in the Western
Cape. Hot Air SA has a financial year that ends on the last day of February.

Bookings for these flights need to be made upfront, as these flights depart at 5:00am
daily. The duration of each flight is 3.5 hours. A deposit of R2 500 per passenger is
payable when a booking is made. As flights are subject to favourable weather conditions,
deposits will be refunded to tourists should flights be cancelled by the company due to
adverse weather conditions. Where a booking is cancelled by a tourist, the deposit will be
refunded in full, unless it is cancelled within two (2) days prior to the flight. If cancelled
within two (2) days prior to a flight, then no amount will be refunded.

On 28 February 2023, deposits amounting to R30 000 were paid into Hot Air SA’s
business bank account by tourists in respect of the flights scheduled for the period
1 March 2023 to 10 March 2023.

QUESTION 6 – REQUIRED MARKS

Refer to Query 1.
For this part of the question, ignore the provisions of the Consumer
Protection Act (CPA). Discuss whether the deposits received of R30 000
13
by Hot Air SA (Pty) Ltd, will be included in the gross income of Hot Air SA
(Pty) Ltd for the year of assessment ended 28 February 2023. Your answer
should make reference to relevant case law and legislation.

Source: Tax II – June 2022 exam

UNSEEN 20 MARKS

Ignore VAT when answering this question.

This question comprises of 2 UNRELATED parts:

PART A 15 MARKS

You are a tax expert at DKPE (Pty) Ltd. You have been tasked with providing advice on
the following issues:

Issue 1

Charlie Bass (aged 56) is a South African tax resident. Charlie carries on a fishing
business in Saldanha Bay, which is located on the West Coast of South Africa. Charlie
started his business on 1 March 2013 and trades as a sole trader under the name ‘Catch-
of-the-Day’. Charlies’ fishing activities include catching lobsters for resale.

Since commencing his business, Charlie has on an annual basis during the month of
September, caught lobster for resale without the necessary permit as required by law.
During the month of September 2022, Charlie caught and sold lobster for R50 000 cash
to an exclusive seafood restaurant in Cape Town.

Issue 2

Zebra Power (Pty) Ltd (Zebra Power) is a South African tax resident company with a
financial year that ends on the last day of September. Zebra Power is a retailer of
industrial generators that are used to generate electricity for, amongst others, office
buildings and factories in the event of a power outage. On customer request, Zebra Power
also delivers and installs the industrial generators. Zebra Power is situated in Wynberg,
Johannesburg.

On 25 September 2023, Zebra Power sold an industrial generator on credit to

Ocean View Mall (Pty) Ltd (Ocean View), a shopping centre in Durban, for R200 000.
Ocean View had extended the shopping centre by building a new food court section. It,
therefore, purchased an industrial generator to supply the restaurants situated in this
section of the centre with power, should an electricity outage occur.
The sale agreement entered into between Zebra Power and Ocean View contained a
suspensive condition that stipulated that the sale was subject to the delivery and
successful installation of the industrial generator at Ocean View’s premises. On
31 September 2023 at 18:30, the industrial generator was delivered to Ocean View’s
premises. Zebra Power’s electricians could, therefore, only perform the installation of the
industrial generator on 1 October 2023.

PART A – REQUIRED MARKS

Discuss, with reference to legislation and relevant case law, whether the
amounts referred to in each issue above will be included in the gross income 15

of the respective taxpayers for the 2023 year of assessment.

The respective taxpayers being:

Issue 1: Charlie Bass

Issue 2: Zebra Power (Pty) Ltd

TOTAL MARKS 15

PART B 5 MARKS

Aya Valley (aged 35 and unmarried) is ordinarily resident in the United Kingdom (UK).
She regularly travels to South Africa, as she owns an upmarket restaurant named
‘Eminonu’ in Sandton. Eminonu is known for the exotic spices used in its dishes. Aya
carries on her business as a sole trader.

Aya was physically present in South Africa for the following number of days during the
2018 to 2023 years of assessment:

Year of assessment Days in South Africa

2023 91
2022 286
2021 193
2020 168
2019 205
2018 181
 PART B – REQUIRED MARKS
Discuss, with reference to legislation and relevant case law, whether Aya
Vally would be a resident for South African tax purposes for the 2023 year 5
of assessment.
TOTAL MARKS 5

Source: Tax II - Announced test 1 - 2018

QUESTION 1 - SUGGESTED SOLUTION

PART A
General
Gross Income in relation to any year of assessment, means 2
• The total amount in cash or otherwise (if entire
• Received by, accrued to or in favour of such a resident definition is
• During such year or period of assessment correct)
• Excluding receipts and accruals of a capital nature
Issue: All requirements of the gross income definition have been met except for 1
whether an amount has been ‘received by’ OnForm in terms of the gross
income definition.
‘Received by’ is not defined in the Income Tax Act and reference must, 1
therefore, be made to relevant case law.

If a deposit is kept in a separate trust account, there is no receipt for 1 princ

purposes of the gross income definition. If a deposit is not kept in a 1 case
separate trust account, but received for the taxpayer’s own benefit and own
behalf (‘beneficial receipt’), the deposit is a receipt for purposes of the
gross income definition (Pyott case).
The potential refund amount of R1 per sale is not deposited into a separate 1
trust account. This suggests that these deposits were controlled1 by OnForm
(Mr Young).
For an amount to be ‘received by’ the taxpayer, the amount should be received 1 princ
by the taxpayer for his own benefit and on his own behalf (i.e., beneficially
received by the taxpayer) (Geldenhuys case). 1case
At the date of receipt of the refundable deposits of R1 per box of paper by
OnForm, a contingent obligation exists to refund these deposits, as OnForm 1
may need to refund these amounts in future should customers return the
cardboard box to OnForm. This does not indicate a trust relationship2. The
deposits received were, therefore, not held in trust.3
The full amount received of R20 per box of paper was banked into the business
bank account of OnForm.

Of the full amount received (R20 per box of paper), OnForm received R19 from
the sale of each box of paper for its own benefit and on its own behalf, as
OnForm could use these amounts as it wishes or for purposes it deems fit 1
(or retain it as its own absolute property).

Of the full amount received (R20 per box of paper), the R1 deposit received by
OnForm may need to be refunded to customers in future. These amounts 1
(deposits) were banked into OnForm’s business bank account which is
drawn upon to fund OnForm’s daily running costs. These amounts
(deposits) were, therefore, ‘received by’ OnForm for its own benefit and on
its own behalf, as it could use these deposits as it wishes or for purposes
it deems fit.

Conclusion
Conclusion: Therefore, the full proceeds of R20 was received by OnForm 1P
(Mr Young) for the 2023 year of assessment. Accordingly, R20 per box of
paper sold will be included in the gross income of Mr Young for the 2023
year of assessment.
Available 13

1
Silke: First Touch to Tax 2017 - page 20
2
SARS Interpretation Note 117 dated 21 May 2021 - page 6.
3
SARS Interpretation Note 117 dated 21 May 2021 - page 6.
Max 11

PART B
General
Gross Income in relation to any year of assessment, means 2
• The total amount in cash or otherwise (if entire
• Received by, accrued to or in favour of such a person definition is
• During such year or period of assessment correct)
• Excluding receipts and accruals of a capital nature
Issue: All requirements of the gross income definition have been met except for 1
whether an amount ‘accrued to’ OnForm in terms of the gross income
definition.
‘Accrued to’ is not defined in the Income Tax Act and reference must, 1
therefore, be made to relevant case law.

‘Gross income’ includes both receipts and accruals. 1

An amount ‘accrues to’ a taxpayer when the taxpayer is ‘entitled to an amount’ 1 princ
and not when the amount becomes ‘due and payable’ in a later year of 1 case
assessment (People Stores case).

OR

When the taxpayer becomes entitled to the amount, an amount accrues to the
taxpayer (Lategan case)
The R130 000 accrued to OnForm during the 2023 year of assessment, as
OnForm became ‘entitled to payment or an amount’ during the 2023 year of
assessment. OnForm became ‘entitled to an amount’ during the 2023 year
of assessment when the debt (in respect of the sales) was created, as
OnForm (the debtor) obtained the right during the 2023 year of assessment 1
to claim payment of such sales in future4.
Amounts are included in gross income at the earlier of receipt and accrual. 1

Conclusion
Conclusion: Accordingly, an amount of R130 000 accrued to OnForm
(Mr Young) during the 2023 year of assessment and will, therefore, be 1P
included in the gross income of Mr Young for the 2023 year of assessment.
Available 10
Max 9

General

Email format 1
To: jimihendrix@[Link]
From: aStudent
Subject: Tax Queries
Date and time:

4
Silke: First Touch to Tax – M Stiglingh – page 41 & 42
QUESTION 2 - SUGGESTED SOLUTION - PART A

MARKS
For purposes of completeness: In the case of a resident, an amount will be included in gross income if it is:
- a total amount, in cash or otherwise,
- received by or accrued to or in favour of such a person,
- during such year or period of assessment,
- excluding receipts or accruals of capital nature
ISSUES:
Issue: All requirements have been met except for whether the catering service fee of R160 000 was:
1) 'received by' or 'accrued to' Eva during the 2023 year of assessment; and 1
2) was of a 'capital nature'. 1
The term 'received by', 'accrued to' or 'of a capital' is not defined in the Income Tax Act, therefore refer to case law for 1
guidance.
RECEIVED OR ACCRUED
On 6 August 2022 (the date that Eva was awarded the tender), Eva ceded 15% of the tender value to Zandi, for Zandi to use to pay
her culinary school fees. All the requirements for a valid cession have been met. Eva would not be taxed on 15% of the catering
service fee income (which amounted to R24 000) when she rendered the catering services, as this amount was ceded to 1
Zandi upfront (prior to Eva rendering the catering service in terms of the tender) and therefore accrued to Zandi (not to Eva).
It would, therefore, appear that Zandi should be taxed on this amount, but proviso ii to paragraph (c) of gross income should
also be considered.

For purpose of completeness:

The principle of the Witwatersrand Association of Racing clubs case (that is, a moral obligation to pay the proceeds to another
person does not destroy the beneficial character of the receipt or accruals for the taxpayer) does not apply, as 15% of the tender
value was ceded to Zandi upfront (prior to rendering the catering service in terms of the tender) and therefore did not accrue to Eva
as a legal obligation (not moral obligation) existed.

Eva would, however, be taxed on 15% of the tender value (which amounted to R24 000) in terms of proviso ii to paragraph (c) of
the gross income definition. This is despite the fact that the amount of R24 000 accrued to Zandi due to the upfront cession of 15%
of the tender value or despite the fact that the amount of R24 000 was received by Zandi, as proviso ii to paragraph (c) stipulates 1
that in respect of services rendered, the person that rendered the services (Eva) is deemed to have accrued or received
such amount.

The full catering service fee of R160 000 (R24 000 + R136 000), therefore, accrued to Eva or was received by her.

CAPITAL IN NATURE
The onus of proof rests upon Eva (the taxpayer) to prove that an amount is capital in nature in terms of section 102 of the Tax 1
Administration Act.
As Eva rendered the catering services during the 2023 year of assessment, the amount of R160 000 is specifically included in her
gross income for the 2023 year of assessment in terms of paragraph (c) of the gross income definition (special inclusion), 1
irrespective of whether it is of a capital nature.
OTHER
The receipt of R160 000 was not regarded as being received illegally. Eva provided the catering which was a perfectly legal 1
activity and was paid for it. Eva's actual business activity was not illegal, what was illegal was paying the bribe.
CONCLUSION
Conclusion: The catering fee of R160 000 will, therefore, be included in the gross income of Eva Thavhana for the year of
assessment ended 28 February 2023. 1C

AVAILABLE 9
MAXIMUM 8
QUESTION 2 - SUGGESTED SOLUTION - PART B

MARKS
Eva paid Mr Lorekang (a member of the adjudication committee) a bribe for unduly influencing the
decision of the committee to award the tender to her. Mr Lorekang, therefore, rendered services to
Eva which is a special inclusion in gross income in terms of paragraph (c) of the gross income 1
definition.
Eva paid Mr Lorekang (a member of the adjudication committee) a bribe for unduly influencing the
decision of the committee to award the tender to her. The services rendered by Mr Lorekang is 1
therefore of an illegal nature.
The source of the income, legal or illegal, is immaterial/irrelevant in determining if an amount 1 Case
constitutes ‘income’ (CIR v Delagoa Bay Cigarette Co Ltd ). 1 Principle
OR
An amount is ‘received by’ a taxpayer if the taxpayer intended to receive the amount for his own benefit
irrespective of the fact that such amounts are illegal in nature (MP Finance Group CC (In
Liquidation) v CSARS (2007)).
The receipt (the bribe) of R16 000 is taxable, despite its illegal nature. 1
Conclusion: The bribe of R16 000 received by Mr Lorekang will, therefore, be included in his gross
income for the year of assessment ended 28 February 2023. 1C

AVAILABLE 6
MAXIMUM 6
QUESTION 3 – SUGGESTED SOLUTION

Marks
General
An amount will be included in gross income (in the case of a resident) if it 2
is:
(if entire
• a total amount, in cash or otherwise,
• received by or accrued to or in favour of such a person, definition
• during such year or period of assessment is correct)
• excluding receipts or accruals of a capital nature

‘Received by’ or ‘accrued to’ is not defined in the Income Tax Act 1
(ITA), thus refer to case law for guidance in this regard.

Concert income of R300 000

Issue: All requirements have been met except for whether the concert 1
income of R300 000 was ‘received by’ or ‘accrued’ to Kate Melody

Any amount received by a taxpayer for his own benefit (i.e., beneficially
received) or any amount accrued to the taxpayer will be included in the
gross income of the taxpayer despite a moral obligation (not a legal
obligation) on the taxpayer to pay such amount to another person.

OR
1princ
A moral obligation does not destroy the beneficial character of a 1case
receipt/accrual.

Witwatersrand Association of Racing Clubs case

An amount ‘accrues to’ a taxpayer when the taxpayer is ‘entitled to

payment’ and not when the amount becomes ‘due and payable’ in a later
year of assessment (People’s Stores (Walvis Bay) (Pty) Ltd case)

(Students could also have provided the Mooi principle and case)
1princ
OR 1case

For an amount to be ‘received by’ the taxpayer, the amount should

be received by the taxpayer for his own benefit and on his own behalf
(i.e., beneficially received by the taxpayer) (Geldenhuys case)

Note to the marker:

As the receipt and accrual took place on the same date; that is,
3 December 2022, students could either have discussed the receipt or the
accrual of the amount.
 Kate Melody is unable to argue that the concert income received (or
accrued) was not for her benefit, as she was not contractually obliged
to donate the concert earnings to Hope (local charity). At any time prior to
donating the concert earnings to Hope, Kate was still able to choose to
retain the concert earnings for her own purposes instead of donating it.
She therefore merely had a moral obligation (not a legal obligation) to 1
donate the concert earnings to Hope in terms of her stated intention to do
so.

For purposes of completeness:

The decision to donate, moral obligation, does not mean there was no
receipt for Kate.
It therefore follows that:

The concert income accrued to her on 3 December 2022 when she

‘became entitled to’ payment1 in future following her concert
performance.

1
OR

The concert income was received by Kate on 3 December 2022 for her
own benefit and own behalf, as she was entitled to keep this amount
as her absolute property or use it for any purpose she deems fit.
The amount of R300 000 will, therefore, be included in Kate Melody’s
gross income for the 2023 year of assessment as the amount ‘accrued 1C
to’ and was ‘received by’ her.
Available 11
Max 10

Question adapted from Graded Questions on Income Tax in South Africa: 2015 – K & L
Mitchell Question 2.11

1
Silke: First Touch to Tax 2019 – M Stiglingh page 41 & 42
QUESTION 4 – SUGGESTED SOLUTION

MARKS

Gross income definition:

the total amount in cash or otherwise 0.5
received by or accrued to or in favour of such resident 0.5
during such year or period of assessment 0.5
excluding receipts and accruals of a capital nature 0.5
Issue: All the requirements of the gross income definition have been met, except for whether the refundable deposit of
R10 000 received for the spinning bikes was ‘received by’ Workout SA (Pty) Ltd for the purposes of the gross income 1
definition.
‘Received by’ is not defined in the Income Tax Act, therefore, refer to case law for guidance. 1
As the deposit is not subject to the provisions of the Consumer Protection Act (CPA), the general case law principles 1
regarding deposits need to be considered.
If a deposit is kept in a separate trust account, there is no receipt for purposes of the gross income definition. If 1 Princ
a deposit is not kept in a separate trust account, but received for the taxpayer’s own benefit and own behalf 1 Case
(‘beneficial receipt’), the deposit is a receipt for purposes of the gross income definition (Pyott case).
The Workout SA(Pty) Ltd did not bank the refundable deposits into a separate bank account. This suggests that these 1
deposits are controlled by Workout SA(Pty) Ltd.
For an amount to be ‘received by’ the taxpayer, the amount should be received by the taxpayer for his own benefit 1 Princ
and on his own behalf (beneficially received by the taxpayer) (Geldenhuys case). 1 Case
On the date of the receipt of the refundable rental deposit of R10 000, there is an unconditional obligation1 to refund 1
the deposit on expiry of the lease. Workout SA (Pty) Ltd, therefore, did not ‘beneficially receive’2 the refundable deposit
of R10 000 for purposes of the gross income definition. The Workout SA merely holds the deposit as a trustee (that is,
merely holds the deposit on behalf of the Sweat (Pty) Ltd).
Workout SA (Pty) Ltd’s right to set-off any cost incurred by it to repair any damage caused by Sweat (Pty) Ltd, 1
against the deposit to be refunded to Sweat (Pty) Ltd, does not cause the rental deposit to be conditional.
Source: Pyott case: A lasting deposit for our tax heritage 2015 - A.C. Engelbrecht, G.K. Goldswain & A. Heyns page 58

1
SARS Interpretation Note 117 dated 21 May 2021 – page 12.
2
SARS Interpretation Note 117 dated 21 May 2021 – page 12.
Conclusion: The deposit of R10 000 is not beneficially received by Workout SA (Pty) Ltd and will, therefore, not be 1C
included in the gross income of Workout SA (Pty) Ltd for the 2023 year of assessment.
Available 13
Maximum 12
QUESTION 5 - SUGGESTED SOLUTION
Marks Comment
General
Gross income is defined in section 1(1) of the Income Tax Act as:
0.5
- the total amount in cash or otherwise
- received by, or accrued to, or in favour of such resident 0.5
- during such year or period of assessment 0.5
- not of a capital nature. 0.5
Issue:
All requirements of the gross income definition have been met, except whether the non-refundable deposit of
1
R20 000 received by Chemicals SA (Pty) Ltd from Bryanston Private Hospital, is 'received by' Chemicals SA
(Pty) Ltd for purposes of the gross income definition.
The non-refundable deposit of R20 000 that was paid into a separate bank account owned by Chemicals SA
(Pty) Ltd named 'Non-refundable deposits'. This constitutes a receipt in the ordinary sense of the word.
Furthermore, the non-refundable amount of R20 000 received by Chemicals SA (Pty) Ltd constitutes income 1
received in advance, as this amount was received upfront in respect of sales to made on 30 March 2023
(date of delivery) which is subsequent to 2023 year of assessment.
As Bryanston Private Hospital’s annual turnover exceeds R2 000 001, it is not a ‘consumer’ for purposes of the 1
Consumer Protection Act (CPA). As the non-refundable deposit received (or income received in advance)
of R20 000 by Chemicals SA (Pty) Ltd is not subject to the provisions of CPA under these circumstances,
the general case law principles should then be applied.

For purpose of completeness:

In respect of income received in advance (as per ITC 1918 (2019) / IT 24510) or refundable deposits received
by a taxpayer, SARS Interpretation Note 117 dated 17 May 2021 stipulates the following:
- Page 15: 'If applicable, the consequences of the CPA and any obligations it places on a taxpayer must be
considered in determining whether a deposit must be included in a taxpayer’s gross income.'

As the non-refundable deposit (income received in advance) of R20 000 is not subject to the provisions of the
CPA under these circumstances (i.e., Bryanston Private Hospital is not a ‘consumer’ for purposes of the CPA),
the general case law principles are, therefore, merely applied.
As the term 'received by' is not defined in the Income Tax Act, case law should be referred to for guidance.
1
For an amount to be ‘received by’ the taxpayer, the amount should be received by the taxpayer for his own 1 Principle
benefit and on his own behalf (i.e., beneficially received by the taxpayer) (Geldenhuys case) 1 Case

The non-refundable deposit received (or income received in advance) of R20 000 by Chemicals SA (Pty) Ltd 1
was received for its own benefit and own behalf as:

- Chemicals SA (Pty) Ltd could use these amounts for any purpose it deems fit; and
1
- Chemicals SA (Pty) Ltd is not, in any way, obliged to repay/refund these amounts.

The non-refundable deposits are paid into a separate bank account owned by Chem SA named ‘Non-refundable
deposits received’ and only transferred to Chemicals SA (Pty) Ltd business account when the sale is made (i.e.,
goods to delivered) or the order is cancelled. As Chemicals SA (Pty) Ltd has no intention to refund these
deposits, it is irrelevant whether the deposit was paid into a separate bank account and was, therefore,
received by Chemicals SA (Pty) Ltd for purposes of the gross income definition. The Pyott case is,
1
therefore, not applicable.

SARS Interpretation Note 117 dated 17 May 2021 stipulates on page 15 that ' ....even if the taxpayer keeps the
deposits in a separate bank account but there is no intention of refunding them, they must be included in gross
income in the year of assessment in which they are received.'
Conclusion
The non-refundable deposit received by Chemicals SA (Pty) Ltd from Bryanston Private Hospital of R20 000 is
'received' (beneficially received) for purposes of the gross income definition and will, therefore, be included 1 C
in Chemicals SA (Pty) Ltd's gross income for the 2023 year of assessment.
Available Marks 12
Maximum Marks 10
 QUESTION 6 - SUGGESTED SOLUTION

General comments Marks

0.5
Gross income is defined in section 1(1) of the Income Tax Act as:
- the total amount in cash or otherwise 0.5
- received by, or accrued to, or in favour of such resident
- during such year or period of assessment 0.5
- not of a capital nature.
0.5

Issue: All requirements of the gross income definition have been met, except whether the deposits of R30 000 received by Hot Air SA (Pty) Ltd from tourists are 'received by' Hot Air
1
SA (Pty) Ltd for purposes of the gross income definition.
As the deposits received of R30 000 by Hot Air SA (Pty) Ltd is not subject to the provisions of Consumer Protection Act (CPA), the general case law principles should then be
1
applied.
As the term 'received by' is not defined in the Income Tax Act, case law should be referred to for guidance. 1

1 Princ
If a deposit is kept in a separate trust account, there is no receipt for purposes of the gross income definition. If a deposit is not kept in a separate trust account, but
received for the taxpayer’s own benefit and own behalf (‘beneficial receipt’), the deposit is a receipt for purposes of the gross income definition (Pyott case).
1 Case

Deposits of R30 000 were paid into Hot Air SA (Pty) Ltd’s business bank account. These deposits were not banked into a separate bank account. This suggests that the deposits
1
received amounting to R30 000 was controlled by Hot Air SA (Pty) Ltd.

For an amount to be ‘received by’ the taxpayer, the amount should be received by the taxpayer for his own benefit and on his own behalf (i.e., beneficially received by the taxpayer) 1 Princ
(Geldenhuys case).
1 Case
A contingent liability exists** to refund the deposits received of R30 000, as Hot Air SA (Pty) Ltd may need to refund these deposits received in future, should the flights be
cancelled due to adverse weather conditions or where a booking is cancelled by a tourist, the deposit will be refunded in full, unless cancelled within 2 days prior to the flight. This 1
does not indicate a trust relationship**. The deposits received were not held in trust**.

Deposits of R30 000 were paid into Hot Air SA (Pty) Ltd’s business bank account. These deposits were received by Hot Air SA (Pty) Ltd for its own benefit and on its own behalf,
1
as it could use these deposits as it wishes or for purposes it deems fit. Hot Air SA (Pty) Ltd, therefore, controlled the deposits received that amounted to R30 000.

Conclusion: The refundable deposits received by Hot Air SA (Pty) Ltd that amounted to R30 000 was 'received by' (beneficially received) by Hot Air SA (Pty) Ltd for purposes of the
1 C
gross income definition and will, therefore, be included in Hot Air SA (Pty) Ltd's gross income for the 2023 year of assessment.
Available 13
Max 13

** SARS Interpretation Note 117 dated 21 May 2021 - page 6

University of the Witwatersrand, 2019 Page 1 of 1