The distinction between whether an amount or expenditure is of a capital nature or not, is unclear as the Income Tax Act does not define the term ‘of a capital nature’. Because receipts and accruals of a capital nature do not form part of the gross income definition, the line between income and capital has often been blurred and has led to many court cases and lawsuits over many decades. It is in light of this vagueness in distinction that this paper will attempt to use various Case laws to bring to light what distinguishes receipts of a capital nature from those of a revenue nature
The problem of distinguishing between a receipt of income and a receipt of capital frequently engages the attention of the courts. No halfway house exists in this distinction and amounts that are not of a capital nature will be regarded as income (Pyott v CIR 13 SATC 121 126). However this distinction is "one of the most difficult areas of income tax law. It is tempting to say that it is the hardest area of tax law."  The various cases that have been dealt with by the courts always come with their variations leading to no single way of deciding cases to the margin. In New State Areas Ltd v CIR SATC 155 it is stated that the true nature of each transaction must be enquired into to determine whether its capital or revenue.
The pertinent question is how exactly to identify the facts and recognise the distinction within the various circumstances seeing as the courts do not apply a single test to determine the nature of an amount. To address this question, the courts then established 3 main groups of tests to distinguish capital and revenue which are; Subjective tests, Objective tests and Automatic characterization of the nature of the receipt tests.
These tests will now be discussed below:
In this case a problem arises as to how to determine the purpose for which an item was acquired. A phrase that is often used in such cases is "in pursuance of profit making." This test was made use of in the case of CIR v Pick ‘n Pay Employee Share Purchase Trust (1992) 54 SATC 271 at 820 when it was held that it "really means that receipts or accruals bear the imprint of revenue if they are not fortuitous but designedly sought for and worked for" In BP Southern Africa Ltd v C: SARS 69 SATC 79 the Supreme court held that "The purpose of the expenditure is important and often decisive in assessing whether it is of capital or revenue nature – often decisive" If a person buys property to resell at a profit when a suitable opportunity arises, the proceeds of the sale will, at first recognition be taxable. If however, the intention was to create fresh wealth or to achieve an enhanced continuing income, the proceeds of the sale of that property thereof, will prima facie, be regarded as a capital receipt.
In another case that employed the test of original intention, SIR v Trust Bank of Africa Ltd, 1975 (2) SA 652(A) (37 SATC 87) it was held that the intention at the time of acquisition was to embark on a scheme of profit making.
Other factors that have been taken by the courts to be indicative of a tax payer’s intention are as follows:
Possession of an asset for a long time
A profit making scheme was found in the case of ITC 862 (1958) 22 SATC 301, in which the period was 50 years. However, this, in itself, will not be sufficient to outweigh an initial and continuing intention to make a profit by reselling the asset.
Income from the sale of shares
Buying and selling of shares is the common activity for all. But from an income tax point of view, the income earned from buying and selling shares is stated as business income as well as capital gain. If the shares held by any person for the purposes of his business or profession and any profit arises from this purchase or sale, it is revenue receipts. In CIR v Nedbank (1986) 48 SATC 73, the bank had purchased shares in a corporation with a view of securing the banking business and the proceeds from the sale of same shares were regarded as of capital nature
Acceptance of an unsolicited offer to buy property not actually on the market or disposing of it because of expropriation will be a strong indication that the property was acquired to be held as an investment and has continued to be so held. This was the case in Constantia Heights v SIR and it was ruled that the profit derived was of capital nature and therefore not subject to income tax.
Where profitable resale occurs shortly after acquisition, it is normally regarded to be of revenue nature. There are however, situations where it may still be possible for the seller to prove that the asset was acquired as an investment and not for trading purposes for example a taxpayer might sell due to an unforeseen change in financial circumstances such as in ITC 1580 (1994) 56 SATC 275.
Intention of a company
It is particularly difficult to determine the intention of a company as it has "no body to kick and no soul to condemn" (CIR v Richmond Estate (Pty) Ltd 1956 1 SA 602 606F.) However, case law does give an indication of the factors to be taken into account. In Lace Proprietary Mines v CIR 9 SATC 349 it was held that the name of the company, its objects, its policy, and its activities may be taken into account when the intention of a company is determined. In SIR v Trust bank of Africa Ltd 37 SATC 87 it was held that the intention of a company should be determined by "the state of mind or intention of the persons in effective control of the company". However the decision in Elandsheuwel Farming (Edms) Bpk v SBI 39 SATC 163 highlights the dangers in attributing an intention to a company. In this case the majority of the court attributed the intention of new shareholders, who were speculators in their individual capacities, to the company.
Change of Intention
It is possible for a person to change their intention along the way after acquisition, and if this happens any profit which would otherwise be capital may be held to be of revenue nature. In ITC 1471 (1990) 52 SATC 97, the case was about a farmer on whose land was found large quantities of building sand. In response to approaches by building contractors, the taxpayer permitted them to remove sand, according to their requirements at a set price per cubic meter. The commissioner held that although the land itself was of a capital nature, there had been a change of intention by the taxpayer with regard to the sand that had become the subject of his trading operations. I1348 (1982) 44 SATC 46,where a company, having owned a block of 30 flats for some years, decided to sell, having regard to the poor returns by way of rentals. The sales were effected by sectional title and profit was found to be of a capital nature. The mere fact that the taxpayer decides to realise an asset is not proof of a change of intention, nor the fact that he does so in a such a way that he realises it to its best advantage CIR v Scott, 1928 AD 252 (3 SATC 253) however when intention has obviously changed and an operation of business has been has been entered into, the taxpayer will be taxed on the proceeds from the business.
A taxpayer may have had mixed intentions when he bought the asset in question. In such cases the fiduciary law has so far proven that the predominant factor which influenced to purchase will be applied. This was the case in COT v 45 SATC 59, where a mining engineer had the intention of working the surface materials on mining claims with a concurrent intention of selling the claims to a mining house which would have the resources to mine below the surface. He was held to be taxable on the profit from selling the claims, as revenue income. If the taxpayer cannot be said to have had a dominant intention, but was concerned only to make a profit out of the asset either by retaining and working it or by selling it, he will be taxable on the profits. Examples of such circumstances were in the case of Banato Holdings Ltd v SIR (1978) 409 SATC 75
Fruit tree analogy
Some writers have compared capital to a tree and revenue to the fruit of the tree. In Eisner v Macomber 252 U.S. 189 (1920, his Honour said: The fundamental relation of 'capital' to 'income' has been much discussed by economists, the former being likened to the tree or the land, the latter to the fruit or the crop; the former depicted as a reservoir supplied from springs, the latter as the outlet stream, to be measured by its flow during a period of time. The concept is traditionally associated with income produced by property: rent, royalties, dividends, interest and annuities. A definition based on that association is that: ...a flow is the consequence of some act or event in relation to property, that is seen as capital, which triggers a receipt by the owner which is not a receipt in realisation of that property. However, the concept is sometimes said to also apply to salary and wage income and income from operating a business. In the analogy drawn in Eisner v Macomber, if the tree is sold before the fruit is picked, the sum received for selling the tree with the fruit attached is wholly capital. An example is where a taxpayer who holds shares as an investment sells them cum dividend. The part of the sale price attributable to the dividend payable is not regarded as income.
The current leading authority on the nature of an amount is CIR v Pick-n- Pay Employee Share Purchase Trust 54 SATC 271. The facts of the case were that a trust was formed to provide shares to company employees. Under the terms of the trust, the trust provided shares to company employees. The trust acquired shares at the market value and from the company and on-sold them, on a continuous basis, to the employees. Although the trust had no intention of making a profit, as it had to sell the shares to the employees at a certain price, it did indeed make a profit. The question the court had to adjudicate upon was whether this profit was of a capital nature. In a three-to-two decision it was held that the profits were of a capital nature.
The ‘filling a hole’ test
When the receipt or accrual represents compensation, a test which is sometimes applied is to ask whether the compensation was designed to fill a hole in the taxpayer’s profits, or whether it was intended to fill a hole in his assets(Burmah Steamship Co Ltd v IRC 1931 SC 156, 16 TC 67). If the compensation is in respect of filling a hole in assets, it will in addition be necessary to determine whether the asset is of a capital or revenue nature.
"Compensation received in respect of the loss or sterilisation of a fixed capital asset is of a capital nature" 
In CIR v Illovo Sugar Estates Ltd 1951 (1) SA 306 (N), 17 SATC 387 compensation received from the military for destruction of sugar cane plants which produced crops every two years over 14 to 16 years was held to be of a capital nature, while the compensation for growing crops was held to be of a revenue nature.
Identifiable Asset Test, tangible assets
It is necessary to identify a specific capital asset for which the expenditure is incurred. In common law, references are mainly made of whether an asset is of; floating or fixed capital’. In Cir v George Forrest Timber Co Ltd (1924) 1 SATC 20 at 23, it was said that: "floating capital is consumed or disappears in the very process of production, whereas fixed capital does not, though it produces fresh wealth…’, so remains intact." Another example is the case of Tucker v Grenada Motorway Services Ltd (1979) 53TC92. Where the asset is tangible the question will usually be straightforward – either the asset is held as a current (revenue0 asset such as trading stock or otherwise for resale at a profit or it is held as a fixed (capital) asset.
Restraint of Trade
Receipts in respect of restraint of trade are generally of a capital nature. In Tuck v CIR (1988) 50 SATC 98, a receipt in the hands of a retired employee was found, on the particular facts, to have been partly in recognition for services rendered and partly in recognition of services rendered and partly in recognition of future restraint of trade. The taxpayer was thus held to be liable on 50% of the amount. In Taeuber and Corssen (Pty) Ltd v SIR 1975 (3) SA 649 (A), 37 SATC 129 a payment in restraint of trade held to be of a capital nature
Gambling and Hobbies
Income derived from betting transactions undertaken as a once off event or solely for recreational purposes is not of a capital nature and therefore not taxable. However, if a person conducts gambling activities in such a systematic way that he is regarded as a professional gambler, he will become taxable on his earnings. A well known case for this is Morrison v CIR (1949) 16 SATC 377 where it was held that income derived from betting activities as part of a person’s established business of racing is taxable regardless of whether he bets on his own horses or on those of others.
All business expenditure is intended to procure some commercial advantage, and where the expenditure is on an intangible benefit or advantage (for example, trading agreements, licenses or other intangibles, it will be necessary to ask whether the identifiable asset is of a sufficiently substantial and enduring nature to count as capital income as well. Goodwill constitutes a capital asset of the business and any amount receivable for its outright sale will be of capital nature and an exemplary case is that of Jones v CIR (UK (1920) 7TC 310
Expenditure on Licenses
Expenditure on material commercial rights which are well defined in law is likely to be capital if the rights endure for, as a rough rule of thumb, two years or, more. Expenditure on the acquisition of a business franchise or on a license needed before a trade can begin, are common examples of capital expenditure of this type.
Automatic characterization tests
Some receipts can be automatically distinguished as either revenue or of a capital nature by way of the following tests:
Reason for receipt
Any amount, even if disguised as a donation, gift or even inheritance that is received for services rendered is considered to be of a revenue nature.
Legal Nature of a transaction
Vaculug (PVT) Ltd v COT, 1963 (2) SA 694 (SR) (25 SATC 201) illustrates how amounts like rent, interest, royalties as amounts received for allowing another person to use an asset is of a revenue nature.
No change in asset ownership
Where there is no change in ownership of an asset from which Income is derived from capital productively employed, the receipt is considered of a revenue nature as was the case in CIR v Booysens Estate Ltd, 1918 AD 576 (32 SATC 10)
Nature of asset disposed of
As soon as fruit of the land, which is not wasting assets is severed and sold, the proceeds are recognised to be of a revenue nature; ITC 740 (18SATC 219)
Profit making scheme operation of business
This is best illustrated by Innes, CJ in Oversees Trust Corporation Limited V CIR, 1926 444 (2SATC 71) "when an asset is realised as a mere change of investment, there is difference in character between the amount of the enhancement and the balance of the proceeds. But where the profit is a ‘gain made in operation of business in carrying out a scheme for profit-making, it becomes revenue derived from capital productively employed and must be income"
Whilst the law reports are replete with cases involving this distinction, in the end each case has been found to turn on its own facts. No criteria prominently emerged of universal application; but the decided cases provide useful guidance to principles which may be helpful in considering the question.  In capital versus revenue disputes the legal principles are well established, and the vast majority of cases are won or lost on the facts. The importance of establishing the true facts by gathering sufficient evidence cannot be over-emphasised. This is particularly important in presenting a case before the tax court, for once that court has made a finding of fact it cannot, except on certain limited grounds, be overturned on appeal. As was pointed out by Innes CJ in CIR v George Forest Timber Co Ltd ‘it is dangerous in income tax cases to depart from the actual facts; the true course is to take the facts as they stand and apply the provisions of the statute’. In the case of ITC 1543 (1992) 54 SATC 446 at 448 it was held that "Whether a particular receipt or accrual is of capital nature or in income must be determined in the light of the facts and circumstances of the particular case."
Due to the large number of case laws, new situations will arise and courts have warned against attempts to apply the words of judges too rigidly, almost as if they were statute law. No single test is likely to be decisive. To come up with a balanced view, it is essential that all the relevant facts be established before entering into an argument. However, as reiterated in Struck v Regent Oil Co Ltd (1965) 43TC1, Lord Reid underlined a statement made in 1935 by Lord Macmillan: ‘while each case is found to turn upon its own facts, and no infallible criterion emerges, nevertheless the decisions are useful as illustrations and as affording indications of the kind of considerations which may relevantly be borne in mind when attempting to distinguish between income accrual of revenue and capital nature. This implies that there is no standard blueprint which irrevocably distinguishes between receipts or accruals of revenue or of capital nature but facts and circumstances are key.