Page 10 - Test 1 Slides - 4. Gross Income

GROSS INCOME

Total amount in cash or otherwise

Example 3

• Although not discussed above, this is an example of the application of the principles of the
Brummeria Renaissance case. Peter is 72 years old. He lends an amount of R10 000 000 to
a developer of a residential housing estate on 1 August. In terms of the agreement there is
no interest charged on the loan. In return, the developer agrees that Peter can stay in the
best house in the estate until he dies. When Peter dies the R10 000 000 will be paid back
into his estate. Peter takes occupation of the house on 1 July.

• a) At what value will the amount be included in gross income of the developer? The
average prime overdraft rate for the year is 10%.

• b) At what value will the amount be included in gross income if a 5% low interest loan was
given and the average prime overdraft rate was 10%.
• The developer is a natural person.

Solution:
• a) The amount that will be included in the developer’s gross income is the value that is
attributed to the interest that the developer did not have to pay on the R10 000 000 loan.
In accordance with the Brummeria case, the value to be attributed is the average prime
overdraft rate X loan given. An amount of 10% x R10 000 000 x 7/12 = R583 333 will be
included in gross income.

• b) (10% - 5%) x R10 000 000 x 7/12 = R291 667 will be included in gross income.
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