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Capital gains tax always lurking in the background

Capital gains tax always lurking in the background

September 30, 2021

In the past few months we have published various articles dealing with VAT. In the next few articles we shall discuss the impact of capital gains tax (CGT) on taxpayers. This introductory article deals with the age-old debate of the capital vs revenue nature of receipts. In future articles we shall deal with the CGT legislation.


CGT is income tax payable on capital gains.

However, when we consider that only a portion of a capital gain or loss is included in a person’s taxable income, the entire dialog takes on a different complexion. The distinction between capital and revenue receipts abruptly presents itself as being as relevant as ever.

In this article we shall lay the foundation for future articles by reminding ourselves of the basic legal tests to distinguish between capital and revenue receipts.

Don’t let the facts get in the way of a good story …

As far back as 1928 the courts held in the George Forest Timber Company Case that it is dangerous in income tax cases to depart from the actual facts. The correct approach is to take the facts as they are and apply the provisions of the tax statute to such facts.

When it comes to capital vs revenue debates, rule number one is that taxpayers should ensure that they maintain accurate records of historic transactions that may in future result in capital gains or losses.

The intention test

When it comes to distinguishing between capital and revenue, the intention test is tax law’s Rock of Gibraltar and has stood the test of time.

In the Stott case handed down in 1972 the court held that the primary intention with which property is acquired is conclusive as to the nature of the receipt arising from the realisation of that property unless other factors intervene which show that it was sold in pursuance of a scheme of profit-making.

Don’t forget that the onus of proof as to the intention of a taxpayer rests with the taxpayer. So keep those records …

The “tree and fruit” test

In the Visser case handed down in 1937 the court established the tree and fruit test. The tree (capital) produces the fruit (revenue).

This is often a useful test in practice.

The “continuity in carrying on business” test

The Stott case again! The court held that as a general rule one or two isolated transactions do not constitute the carrying on of a business. This test is also referred to as the “once-and-for-all” test.

A defence by a taxpayer on this basis is however fraught with danger as a single transaction can easily constitute a profit making venture.

The “filling a hole” test

In the Burmah Steamship Co Ltd case the court held that a test sometimes applied to the nature of compensation received is to enquire whether the compensation was designed to fill a hole in the taxpayer’s profits (the receipt being revenue in nature) or whether it was intended to fill a hole in its assets (the receipt being capital in nature).

In practice this is also a useful test to defend a position.

What about a mixed grill?

While certain courts have held that an amount is either capital or revenue and that there is no basis for apportionment of a single amount between capital and revenue, other courts have held that in appropriate circumstances an apportionment can be made.

Whether it would be appropriate to apply apportionment to a single receipt would depend on the facts of the specific case.

Records, record, records …

On whom is the burden of proof?

On the taxpayer.


This article briefly touched on the legal tests to distinguish between capital and revenue receipts.

In the next article we shall deal with the framework of the CGT legislation to establish a basis for what is to follow.

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