(20 Marks)

Kate Davidson, unmarried and a resident, recently resigned from her job in Cape Town and as a result moved to Johannesburg to start her own business in public relations. Kate decided that the easiest way to make her move stress-free was to sell most of her belongings in Cape Town and to purchase new assets in Johannesburg.

As a result, the following assets were sold:

 A motor car purchased on 2 May 2010 for R160 000. On 15 October 2016, Kate sold the car for R60 000. Kate was required to use her car for any travelling related to her employment and received an allowance for such expenses.

 While in Cape Town, Kate lived in a penthouse in Bantry Bay. Kate owned 50% of the penthouse and the other 50% was held in a discretionary trust, of which she is a beneficiary. The penthouse, along with all its contents (furniture etc.), was sold on 20 October 2016 for R8 million. Of the total selling price, R800 000 related to the contents of the flat. The penthouse itself had been purchased at an auction in April 2011 for R2.2 million (excluding furnishings). Kate owned all the contents of the penthouse, which she had acquired for R400 000.

 In December 2011, Kate inherited a large yacht (12 metres long) from her late grandfather when the market value was R350 000. The yacht was moored in the Hout Bay harbour and was used by Kate on a regular basis. As she had no use for the yacht in Johannesburg, Kate sold the yacht for R360 000 on 5 November 2016.

(Assume for CGT purposes that the base cost of an inherited asset for the heir is the market value on date of inheritance.)

Kate needed to find premises from which she could establish her business and subsequently operate.

Coincidently, ‘Tolet (Pty) Ltd’ (Tolet), a property owning company, had recently completed the erection of a new office park (Southern Gardens) and was anxious to secure long-term tenants for the new offices. The offices were exactly what Kate needed for her new public relations venture.

‘Prop Co Ltd’ (Prop Co) also had premises available for Kate. Both Prop Co and Tolet required R20 000 per month in rental. Prop Co also required an amount of R30 000 over and above the rentals to enter into the lease. Tolet, desperate for tenants, offered to pay Kate an amount of R50 000 to enter into the lease, on the condition that any improvements made to the offices, which she occupied, were to remain should the lease agreement not be renewed. Apart from the above, the clauses were all standard for lease agreements. Kate agreed to the terms of Tolet’s agreement, with the lease commencing 1 March 2017.

Kate is a little worried about this contract, because a friend of hers, who had been on a one-week introductory course on income tax, said that the Commissioner would merely see the payment to her as an adjustment to the monthly rental to be deducted and would subsequently disallow a portion of her rental deduction.

Apart from the above, Kate had taxable income of R600 000 for the year of assessment ended February 2017.

YOU ARE REQUIRED TO:

1. Discuss whether the amount of R50 000 received by Kate in terms of the agreement with Tolet is gross income, using case law where appropriate. You may ignore the anti-avoidance provisions of the Income Tax Act.

2. Based on the above information, calculate Kate’s taxable income for the year ended 28 February 2017.