The taxability of income in terms of the Income Tax Act 58 of 1962.
This dissertation is a comparative analysis of the taxation of income derived from illegal activities in South Africa and the United States of America, with specific reference to the South Africa Income Tax Act 58 of 1962. The issue of whether or not income which has been received by a taxpayer in the furtherance of illegal activities should be viewed as being received by the taxpayer for purposes of assessing such a person’s gross income has been a topic of debate, both in South Africa and abroad. However, it is submitted that taxation of income from illegal activities is now a well-established tax principle both in South Africa and in the United States of America, notwithstanding the fact that it is tainted with illegality. It has been established that in both jurisdictions income is taxed irrespective of the legality of the source, in other words ‘income is taxed from whatever source derived’. It is submitted that the proper and exact meaning should be attributed to the phrase ‘received by’ as provided for in the definition of ‘gross income’ in terms of Income Tax Act. This is important as the proper definition of the phrase is a useful vehicle in terms of which a decision can be made to determine whether or not to tax income derived from illegal activities. A novel approach to the interpretation of the term ‘received by’ emerged after the MP Finance Group CC (In Liquidation) v Commissioner for South African Revenue Service 2007 (5) SA 521 (SCA) case, with its interpreting of the phrase ‘received by’ being made with reference to the subjective intention of the taxpayer. The Supreme Court of Appeal in the MP Finance case resolved that the critical element of a receipt is the intention of the taxpayer to retain an amount with the objective of deriving a benefit for himself. That is to say, a person receives an amount if he claims a right to it, regardless of whether he or she is entitled to it or not. On the other hand the United States follows an ‘economic benefits approach’, which poses the question as to whether the taxpayer ‘has such control over ill-gotten gains that, as a practical matter, he derives readily realisable economic value from it’. Thus for an amount to be taxed the taxpayer must derive an economic benefit from such income. In its closing the dissertation will look at the issue of deductibility of expenses incurred in the production income from illegal activities. Due to fact that The South African Income Tax Act 58 of 1962 offer very little clarity on the deductibility of such expenses, the dissertation will look to The United States Internal Revenue Code which, a richer source of information in this regard. Tax law in the United States allows taxpayers to deduct most business expenses.