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Consider these six factors to correctly classify your profit as either capital or revenue

by , 11 June 2014
You must clearly and separately classify your revenue and capital incomes. This because your Capital Gains Tax has a lower tax rate than your income tax. You also have to treat your capital losses differently from your revenue losses.

So when you work out which profit is revenue and which is capital, be careful. If you get it wrong you could pay too much tax and even face SARS penalties.

Remember this important fact about classifying your profits

You must remember the Income Tax Act doesn't define 'capital' or 'capital in nature'. The general definition you can use is 'capital' is the structure you use to generate your income.
But because there's no definition, you must prove whether a certain amount of your profit is income (revenue) or company capital
If SARS disagrees with you, you might find yourself in tax court where you'll have to prove the facts of how you earned that profit.
To avoid this situation, you should consider these six important factors…
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So ensure you consider these six important factors when you classify your profit as capital or revenue…
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Consider these six factors when classifying your profits

The Practical Tax Loose Leaf says you must consider:
- Your underlying intention for earning the profit (if your intention is to sell products, then it's probably revenue);
- The amount of time you had an asset before you disposed of it (if it's for a short period of time it's revenue);
- The nature of your business activities (If your business activities are around selling then the money is probably revenue);
- How frequently you make similar transactions (if you make a transaction frequently it's capital);
- Your financial position (do you have a lot of capital); and
- Your occupations (do you sell or do you buy assets).
These factors can affect the nature of your income or expense which in turn affects whether it's company revenue or capital.
If you consider these six factors when you classify your profit, you can save yourself an unwanted trip to tax court.

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