Page 369 - SAIT Compendium 2016 Volume2

IN 24 (3) Income Tax acT: InTeRPReTaTIon noTes IN 24 (3)
4.9 Total receipts and accruals
The expression ‘total receipts and accruals’ includes the total sum of all receipts and accruals from any source within or outside South Africa, irrespective of whether on capital or revenue account.
4.10 Trading activity
The term ‘trade’ is de ned in section 1(1) and includes every profession, trade, business, employment, calling, occupation or venture, letting of property and the use of or the grant of permission to use a patent, design, trade mark or copyright. The courts have interpreted trade to be neither exhaustive nor restrictive and will include any activity involving risking something with the object of making a pro t. Each case will, however, be determined on its own merits.
4.11 Unfair competition
A PBO should not be in a more favourable position or have an unfair advantage over a taxable entity conducting the same business undertaking or trading activity in that the PBO is not required to sacri ce a portion of its pro t in the form of tax. In determining whether a PBO has such an unfair advantage each case will be considered on its own merits.
5. Application of the law
Section 10(1)(cN) provides that the receipts and accruals of a PBO are exempt from normal tax, other than from any business undertaking or trading activity falling outside four exemption categories.
A PBO is permitted to carry on business or trading activities provided the sole or principal object remains the carrying on of PBAs. A PBO may not engage in commercial trading activities with the intention of earning a pro t and claim that since a portion of the pro ts are used to carry on approved PBAs, it should qualify for approval as a PBO. The requirements and conditions of section 30 must continue to be complied with.
Receipts and accruals that arise from a business undertaking or trading activity will only be exempt from tax if they fall within one of the four categories of exemption included in section 10(1)(cN). These four categories are dealt with in 6.
The receipts and accruals derived from the four categories of business undertakings or trading activities in 6.1, 6.2, 6.3 and 6.4 are exempt from normal tax. Each category of exemption has its own conditions and requirements and is applied separately.
There is no limit on the amount of receipts and accruals which are exempt from normal tax under the exemptions in 6.1, 6.2 and 6.3. There is, however, a limitation on the amount of the basic exemption discussed in 6.4.
6. Categories of business undertakings or trading activities
6.1 Integral and directly related trade [section 10(1)(cN)(ii)(aa)]
In order to qualify for this exemption –
• the business undertaking or trading activity must be integral and directly related (see 4.3) to the sole or principal object
(see 4.6) which is the approved PBA carried on by the PBO;
• substantially the whole (see 4.7) of the business undertaking or trading activity must be conducted on a cost-recovery
basis (see 4.5); and
• the business undertaking or trading activity should not result in unfair competition with other taxable entities (see 4.11).
Example 7 – Examples of ‘total receipts and accruals’
The total receipts and accruals of a PBO will include the total or gross amount received or accrued from all sources, whether of a capital nature or not, such as donations, subsidies, school fees, rent, accommodation charges, fundraising activities, investment income, the sale of movable and immovable assets and bequests.
Example 8 – Examples of trading activities
Trading activities include the letting of property, conducting farming activities, providing professional services and the grant of permission to use a copyright or patent.
Example 9 – Unfair competition
Facts:
An orphanage caring for abandoned children also operates a service station with the intention of earning a pro t to augment its income.
Result:
The operation of the service station is a commercial trading activity which will result in unfair competition with other taxpaying entities.
Example 10 – Trade integral and directly related to sole or principal object
Facts:
A PBO engages in PBAs of caring for disabled persons. As a therapeutic and remedial activity the PBO has acquired land on which the residents are taught to grow vegetables and care for a small herd of cattle. The mechanical labour as well as veterinary services are provided at no cost by a nearby agricultural college. All the manual labour is undertaken by the residents. The produce is primarily used for own consumption and any surplus is sold to a local farmers’ market to defray costs. Some of the residents have been taught to knead and bake bread which is supplied to a nearby supermarket. No commercial ovens or baking processes are used. Both the farming and baking activities are regarded as being of therapeutic bene t for the residents.
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