Page 523 - SAIT Compendium 2016 Volume2

IN 59 Income Tax acT: InTeRPReTaTIon noTes IN 59
of assessment, excluding receipts or accruals of a capital nature, but including, without in any way limiting the scope of the de nition, such amounts (whether of a capital nature or not) so received or accrued as are described in paragraphs (a) to (n) of the de nition.
The computation of the gross income of a resident and the gross income of a person that is not a resident differs as follows:
• •
The receipts or accruals of a resident from all sources are brought to account.
Only the receipts or accruals from a source within or deemed to be within the Republic are brought to account by a person that is not a resident.
The term ‘income’ is de ned in section 1 and means—
‘the amount remaining of the gross income of any person for any year or period of assessment after deducting
therefrom any amounts exempt from normal tax under Part I of Chapter II’.
The exemptions from normal tax are contained in section 10, which falls under Part I of Chapter II of the Act.
The rst step in determining whether a grant is subject to normal tax is to determine whether or not it forms part of a
person’s gross income. Any receipts or accruals of a capital nature are as a general rule excluded from a person’s gross income. However, certain grants are speci cally included in gross income regardless of whether or not they are of a capital nature. If the rst test results in the grant being included in gross income, the next step is to determine whether the particular grant quali es for an exemption from normal tax under section 10.
3.2 Receipt or accrual of a capital or revenue nature 3.2.1 General remarks
Receipts or accruals of government grants only form part of a person’s gross income if they are of a revenue nature. Receipts and accruals of government grants of a capital nature are by de nition excluded from a person’s gross income. The term ‘of a capital nature’ is not de ned in the Act. Whether an amount received or accrued is of a capital or revenue nature depends on its character in the hands of the recipient.
3.2.2 Government grants calculated with reference to accounting pro ts or loss of future income
The mere fact that a grant which is received by or accrues to a person is calculated with reference to accounting pro ts does not necessarily imply that it is income in nature. For example, in DCT (Vic) v Phillips, Dixon & Evatt JJ* held that it is true that to treat a sum of money as income because it is computed or measured by reference to loss of future income is an erroneous method of reasoning.
In addition the court held that the right to future income may be an asset of a capital nature and the sum measured by reference to the loss of future income may be a capital payment made to replace that right.
3.2.3 Trading receipts
A government grant will be of a revenue nature in the hands of a person carrying on trading operations if it is a trading receipt. A grant is a trading receipt if its receipt is a normal incident of a person’s trading operations. The nature of the grant received and the relationship which exists between the grant received and the recipient’s activities needs to be examined.
A government grant will be a trading receipt when it is paid in order to assist in meeting a person’s trading obligations or in order to assist in carrying on trading operations. A grant of this nature results in trading receipts being supplemented and accordingly is itself a trading receipt.
By contrast, any amount received or accrued for the purpose of— • establishing an income-earning structure; or
• as compensation for the surrender of such a structure,
is of a capital nature.
A payment received as compensation for discontinuing a distinct part of a person’s business operations is likewise of a capital nature. The above-mentioned receipts are not normal incidents of a person’s trading operations.
The test whether a receipt or an accrual is of a capital or revenue nature is a factual inquiry. The following foreign case law provides guidance.
In Seaham Harbour Dock Co v Crook (H.M. Inspector of Taxes)† a harbour dock company had applied for and obtained grants from the unemployment grant committee. These grants were paid as the work progressed and were equivalent to half the interest on approved expenditure met out of loans. The payments were made several times a year for several years. In nding that the amounts were not trading receipts, Lord Buckmaster said the following:‡
‘It was a grant ... by a government department with the idea that by its use men might be kept in employment ... I nd myself quite unable to see that it was a trade receipt or that it bore any resemblance to a trade receipt.’
It was said by Lord Atkin that the amounts—
‘were received by the appropriate body not as part of their pro ts or gains or as a sum which went to make up
the pro ts or gains of their trade.’
In Ryan (H.M. Inspector of Taxes) v Crabtree Denims Ltd§ a grant was likewise paid to the taxpayer company in order
to enable it to retain persons in employment. The amount of the grant was calculated with reference to the interest which would have been payable on a £200 000 loan taken out by the taxpayer company. The court distinguished this case from the Seaham case cited above based on the fact that in the last-mentioned case the purpose of the payment was to add to the capital sum available to the company for carrying on certain works while in the Ryan case cited above the payment, under the grant, was neither of a revenue nor of a capital nature. According to the court the taxpayer company was free to do with the grant what it liked.
* (1936) 55 CLR 144 at 156. † (1931) 16 TC 333.
‡ At 353.
§ (1987) STC 402.
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