In the matter between: The Appellant and The commissioner for the South African Revenue Service. Case No: 11100
The appellant had received R1 million in respect of a restraint of trade. For the relevant year of assessment, the respondent issued an assessment on the basis that 50 % of ⅝ of the R1 million was gross income and therefore taxable. The appellant’s objection was dismissed, and an appeal was noted to the Tax Board. The Board found that the whole amount of R1 million was received in respect of the restraint of trade undertaking and was therefore of a capital nature and not taxable. It directed that the assessment be amended accordingly. The appeal to the present court was noted by the respondent, who was still referred to as the "respondent” in the court’s judgment.
Held that the issues to be decided on appeal were whether the whole of the R1 million was the quid pro quo for the restraint undertaking and therefore of a capital nature and not taxable or whether 50 % of ⅝ of the R1 million was correctly subjected to tax; and whether the court should award the appellant costs in terms of section 83(17)(c) of the Income Tax Act 58 of 1962 if the appeal succeeded as it did before the Board.In order to be subject to income tax, a receipt or accrual must be "gross income” as defined in section 1 of the Act. The special inclusion of an amount received or accrued as compensation for a restraint of trade in paragraph (cA) of the definition of "gross income” applies to amounts received on or after 23 February 2000. In the present case the amount accrued on 24 November 1999 and paragraph (cA) was not applicable. The question of whether or not the amount was taxable had to be decided by the application of the general part of the definition of "gross income” which excludes from its ambit "receipts or accruals of a capital nature”. An amount received as compensation for the surrender of a right to trade, ie a restraint of trade, is of a capital nature since it is paid for the sterilisation of a capital asset.
The court concluded that the R1 million was the quid pro quo for the restraint undertaking and therefore of a capital nature. The respondent was ordered to revise the assessment.
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