Page 516 - SAIT Compendium 2016 Volume2

IN 58 (2) Income Tax acT: InTeRPReTaTIon noTes IN 58 (2)
(ii) in the case of any person other than a resident, the total amount, in cash or otherwise, received by or accrued to or in favour of such person from a source within or deemed to be within the Republic,
during such year or period of assessment, excluding receipts or accruals of a capital nature, but including, without in any way limiting the scope of this de nition, such amounts (whether of a capital nature or not) so received or accrued as are described hereunder, namely—
4. Principles enunciated by the SCA in the Brummeria case
The judgment of the SCA in the Brummeria case may be referred to as authority for the following principles:
• The word ‘amount’ in the de nition of the term ‘gross income’ is to be interpreted widely.
• The right to use the loan capital interest free (the right) has a monetary value. *
• Even though the receipt or accrual of the right is in a form other than money (in casu, the bene t of the use of an
interest-free loan), which cannot be alienated or turned into money, it does not mean that the receipt of the right has no money value. The test to be applied in order to determine whether the receipt or accrual has a monetary value is an objective one and not subjective.†
• The value of the receipt or accrual in a form other than money (in casu, the right to use an interest-free loan) constitutes an ‘amount’ that ‘accrues’ to the taxpayer and should be included in the gross income of the taxpayer for the year of assessment in which the right is received by or accrued to the taxpayer.‡
• For a bene t of this nature to be taxable the amount does not need to fall within paragraph (i) of the de nition of the term ‘gross income’ in section 1 (1) (that is, a ‘taxable bene t’ as de ned in the Seventh Schedule to the Act).
5. Issues not decided by the SCA
The SCA merely accepted, without deciding—
• the nature of the rights under the transaction—that is, whether they were of a capital or revenue nature (this was not
an issue before the court);
• the timing of the accrual; and
• the valuation method.
The court merely accepted the approach taken by the Commissioner in his submission on these matters, since the taxpayers had not contested them in their grounds of objection and appeal.
6. Application of the principles enunciated by the Brummeria case
6.1 Receipts and accruals in a form other than money in exchange for goods supplied, services rendered or any other bene t given
It is evident from the facts of the Brummeria case, that the rights to use the interest-free loans were intended by the lenders (the life-right holders) to be in exchange for the life rights granted by the borrower.
As a result the principles from the judgment may be applied in all cases in which bene ts in a form other than money (such as the right to use an interest-free loan) are granted in exchange for goods supplied, services rendered or any other bene t given.
The receipt or accrual in a form other than money could constitute an amount. Unless this amount is of a capital nature which is not speci cally included in the de nition of the term ‘gross income’, it should be valued and included in the gross income of the taxpayer in the year of assessment in which it is received or accrued.
6.1.1 Determination of the value of receipts and accruals in a form other than money
(a) General principles of valuation enunciated by the SCA in the Brummeria case
The SCA made it clear in the Brummeria case that the question whether a receipt or accrual in a form other than money has a money value is the primary question. The ability to turn such a receipt or accrual into money is but one of the ways in which it can be determined whether it has a money value. It does not follow that a receipt or accrual which cannot be turned into money has no value. The test is objective and not subjective.§
Arm’s length principles of valuation must be applied in each case, having regard to the facts and circumstances and the intention of the parties.
(b) Value of the right to use an interest-free loan
The basis upon which the right to use an interest-free loan was valued by SARS was never challenged on appeal by the taxpayers and therefore was not under dispute before the court. The SCA therefore did not rule on the basis used in valuing the right.
In the Brummeria case SARS applied the weighted-average prime overdraft rate of banks to the average amount of interest-free loans in possession of the taxpayer in the relevant year of assessment as a method in order to place a value on the right to use an interest-free loan. The SCA neither accepted nor rejected this approach. It does not necessarily follow that this method will always be the most appropriate for valuing a right to use an interest-free loan. Each case must be evaluated on its own merits and all facts and circumstances pertaining to the right to use the interest-free loan must be taken into account in the valuation. A person adopting a different method of valuation will bear the burden of proving its appropriateness in the speci c case.
* In the case under consideration.
† On this point, Stander v CIR 1997 (3) SA 617 (C), 59 SATC 21 was found to incorrectly re ect the law.
‡ The principles in Lategan v CIR 1926 CPD 203, 2 SATC 16, CIR v People’s Stores (Walvis Bay) (Pty) Ltd 1990 (2)
SA 353 (A), 52 SATC 9 and Cactus Investments (Pty) Ltd v CIR 1999 (1) SA 315 (SCA), 61 SATC 43 were con rmed. § The Stander case was found to incorrectly re ect the law on this point.
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