Gross income is the bedrock of the tax system. Without gross income, there can be no personal taxation.
It is therefore not surprising that gross income is defined very widely as “the total amount, in cash or otherwise, received by or accrued to or in favour of a resident…excluding receipts or accruals of a capital nature.”
If the taxpayer can prove the amount is capital, it cannot be included in income. Capital gains tax (CGT) then becomes applicable.
Gross income includes any amount, even by way of annuity, which is not defined in the Income Tax Act. Or a voluntary award for services rendered. Even compensation in terms of a restraint of trade agreement. Fringe benefits are also included.
The question can be asked if anything can escape the “Gross Income net”. The answer is yes.
Debt. Debt is not income.
So, if you transfer money from your home mortgage equity fund into your personal bank account, that will not constitute income. And you cannot be taxed on that.
Interest free loans are debt, not income. Payments from a shareholder’s loan account also constitute debt. Selling shares to fund business activities can be capital in nature, hence cannot be assessed as income if certain conditions are met.
SARS has through the years embarked on many steps to reverse ingenious methods adopted by taxpayers to circumvent inclusion into gross income. The most prominent being the Brummeria case a few years ago.
In that case interest free loans were advanced by occupants of a retirement village to the developer taxpayer, who then granted life rights to the retirees. The taxpayer did not add interest free loans to his gross income, as it was deemed to be debt.
In the judgment it was admitted that the receipt of the interest free loans itself did not warrant inclusion as gross income. However, a monetary value can be attached to the loans, based on notional interest which should have been levied on the loans. That should be included in gross income. The reasoning was that the occupants received something in return for the loans (a quid pro quo) and hence was taxable.
The bottom line
The actual interest free loans still do not constitute gross income, unless service or goods are received as part of any agreement.
This article is general information about South African tax and is not tax advice. Tax outcomes depend on the specific facts of each matter. See our Website Terms of Use for more.
Not sure whether something counts as gross income?
Whether an amount is taxable often turns on wording most people never read closely. If you’re unsure how a receipt should be treated, get it confirmed before it becomes an assessment.