Page 634 - SAIT Compendium 2016 Volume2

IN 73 Income Tax acT: InTeRPReTaTIon noTes IN 73
Under the residence-based system, a ‘resident’, as de ned in section 1 (1), is assessed on taxable income derived from world-wide receipts or accruals. The following Interpretation Notes can be consulted for a discussion of the requirements for a person to be classi ed as a ‘resident’:
• No. 3 ‘Resident: De nition in Relation to a Natural Person – Ordinarily Resident’ (4 February 2002);
• No. 4 (Issue 3) ‘Resident: De nition in Relation to a Natural Person – Physical Presence Test’ (8 February 2006); and • No. 6 ‘Resident: Place of Effective Management (Persons other than Natural Persons)’ (26 March 2002).
A resident’s* ‘gross income’ as de ned in section 1(1) includes –
‘the total amount, in cash or otherwise, received by or accrued to or in favour of’
that resident during the year or period of assessment, excluding receipts or accruals of a capital nature but including a number of speci ed amounts, whether or not of a capital nature.
In Geldenhuys v CIR Steyn J stated that the words ‘received by’ as used in the gross income de nition –†
‘must mean ‘received by the taxpayer on his own behalf for his own bene t’.
The term ‘accrued to’ was held by Watermeyer J (as he then was) in WH Lategan v CIR to mean –‡
‘to which he has become entitled’.
Rental income received by or accrued to a resident will, therefore, be included in the resident’s gross income irrespective of whether it is derived from inside or outside South Africa or whether it is paid directly to the resident or collected by an agent on behalf of the resident.
As a general rule rental income derived in a foreign currency must be translated to rand by applying the spot rate on the date of receipt or accrual [section 25D (1)].§ However, individuals and non-trading trusts may elect to use the average exchange rate for the relevant year of assessment for all receipts or accruals during that year [section 25D (3)]. For more on section 25D see Interpretation Note No. 63 ‘Rules for the Translation of Amounts Measured in Foreign Currencies’ (19 September 2011).
Double taxation will arise when two or more countries impose taxation on the same amount of rental income. In such event, the provisions of any applicable tax treaty and the unilateral relief granted under section 6quat by way of rebate or deduction must be considered.
4.2 Deductions from gross income
4.2.1 General deductions – the trade requirement
Section 11 deals with general deductions allowable in the determination of taxable income. Section 23 deals with deductions not allowable in the determination of taxable income. These two sections must be read together in determining a taxpayer’s entitlement to a deduction.
Section 11 only permits a deduction if a taxpayer is carrying on a trade. The word ‘trade’ is de ned in section 1(1) as follows:
In Burgess v CIR E M Grosskopf JA stated the following on the meaning of the term ‘trade’:¶
“It is well-established that the de nition of trade, which I have quoted above, should be given a wide interpretation. In ITC 770 (1953) 19 SATC 216 at p 217 Dowling J said, dealing with the similar de nition of ‘trade’ in Act 31 of 1941, that it was ‘obviously intended to embrace every pro table activity and ... I think should be given the widest possible interpretation.’ ”
Having regard to the de nition of the term ‘trade’, which speci cally includes the letting of property,** and the case law referred to above, it is clear that an investor deriving rental income from the letting of tank containers is carrying on a trade.
4.2.2 General deductions [section 11 (a)]
The requirements for a general deduction under section 11 (a) read with section 23 (g) are that expenditure and losses must be –
• actually incurred;
• in the production of income;
• not be of a capital nature; and
* It is unlikely that a person who is not a South African tax resident will have South African-sourced rental income from tank containers and accordingly this occurrence has not been dealt with in further detail in this Note.
† 1947 (3) SA 256 (C),14 SATC 419 at 430.
‡ 1926 CPD 203, 2 SATC 16 at 20. The correctness of the interpretation of ‘accrued to’ in Lategan’s case was subsequently con rmed by Hefer JA in CIR v People’s Stores (Walvis Bay) (Pty) Ltd 1990 (2) SA 353 (A), 52 SATC 9 at 24.
§ Exchange differences, which may arise if there is a delay between the transaction date and the date the amount owing to the taxpayer is settled, are dealt with in section 24I.
¶ 1993 (4) SA 161 (A), 55 SATC 185 at 196.
** The word ‘property’ refers to rights having pecuniary or economic value and includes rights of ownership in movable property such as a tank container (see CIR v Estate C P Crewe & another 1943 AD 656, 12 SATC 344 at 352).
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‘[T]rade’ includes every profession, trade, business, employment, calling, occupation or venture, including the letting of any property and the use of or the grant of permission to use any patent as de ned in the Patents Act, 1978 (Act 57 of 1978), or any design as de ned in the Designs Act, 1993 (Act 195 of 1993), or any trade mark as de ned in the Trade Marks Act, 1993 (Act 194 of 1993), or any copyright as de ned in the Copyright Act, 1978 (Act 98 of 1978), or any other property which is of a similar nature;