Revenue vs. Capital

Gordon Stuart considers the distinction between trading stock and capital assets, and the myth that profits made from the sale of fixed property are always of a capital nature. The reason is simple - capital gains tax (CGT) is a lot less than revenue tax. He sees the real problem lying not so much with the actual property but rather with the way the owner of the asset deals with it or perceives it.

This is the decisive test which has emerged from court decisions over the years. The intention of the taxpayer at the date of acquisition must be established as it could be one of the following:
- Investment, or
- Speculation.

In determining whether or not the intention of the individual is speculative, the court looks at a number of factors such as: was the taxpayer carrying on a trade or scheme of profit making; and whether he changed his intention and whether the taxpayer had a mixed intention. In determining intention, SARS and the courts also look at a number of external factors, inter alia, the profession or business of the taxpayer; his past and present activities; the reason, method and circumstances of the acquisition; and the reason, method and application of the profits after the sale.

This very useful article does not intend to be an exhaustive explanation of the revenue vs. capital debate, but rather to highlight the more important points. The most noteworthy point is that ultimately the onus of proving that the asset was purchased as an investment and not for speculative purposes will always rest with the taxpayer.

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