Interest free loan

The preamble to Income Tax case 1791 published in 67 SATC 230 reads as follows

Gross income Interest free loan Right of use of Whether such benefit received by taxpayer i.e. the right of use of the interest free loan constituted a reward in a form other than cash which was taxable in terms of the definition of gross income in section 1 of the Income Tax Act 58 of 1962 Taxpayers being developers of retirement villages had disposed of the right to occupy units in retirement villages in exchange for the receipt of an interest free loan Life Rights Agreement providing for repayment to occupier of such interest free loan on happening of certain events and under certain conditions Commissioner for SARS contending that benefit received by taxpayers ie the right of use of the interest free loan was a benefit which had an ascertainable money value and the value of such right fell within the definition of gross income as contained in section 1 of the Income Tax Act 58 of 1962 Held that the monies in issue were not used for income producing purposes and the Commissioner for SARS had assessed them on the basis of notional income received from the use of the money and this was clearly not permissible and such notional income was not income within the definition of s 1 of Act 58 of 1962 Held further that the rights which it was alleged the taxpayers had obtained were not rights which could be transferred or ceded and the only right which the taxpayers obtained was the right to retain the money lent until the happening of certain predetermined events and this right had no money value Held accordingly that Commissioners contention had to be rejected as not falling within the definition of gross income in s 1 of Act 58 of 1962.

RECEIPTS FROM FRAUDULANT ACTIVITIES

The issue in 67 SATC 1789 was whether amounts paid by investors in a fraudulent and unlawful pyramid scheme to the taxpayer were received as gross income within the meaning of section 1 of the Income Tax Act 58 of 1962. The taxpayer acting through different entities and represented by agents solicited many millions of rand from a multitude of investors in a scheme which was fraudulent and unlawful from the outset.

The court held that the essential nature of a taxable receipt is the intention to benefit from the money received in the sense that commissions were appropriated there from. Further held that notwithstanding the illegal nature of the transactions in issue and the consequences that flowed there from inter partes the amounts received from investors were receipts within the meaning of the definition of gross income in section 1 of the Income Tax Act and that the Commissioner had correctly assessed them as such.