Contractor Ltd (‘Contractor’) is a company listed on the Namibian Stock Exchange (NSX). Its primary business is the development of residential properties that the company sells or leases to unconnected third parties. Its year-end is 31 December. On 31 December 2008 Contractor commenced with the construction of residential properties that the company intended to sell as inventory. On 14 January 2020 Contractor commenced with the construction of its own office building. This building was funded from surplus cash and it was brought into use on 1 April 2020 at a total cost of N$3 600 000 (which is not less than the arm’s length price of the building.

On 1 September 2020 Contractor decided to sell this office building and to rent office facilities from an unconnected third party. Management were of the opinion that it could probably sell the building at a substantial profit, given the rising prices of office buildings. Accordingly, the building was actively marketed and advertised from 1 September 2020. After receiving numerous offers, the building was eventually sold for a cash amount of N$5 million on 15 December 2020. ). No further capital costs were incurred in respect of this building before it was sold. Management consulted senior counsel specialising in tax, who confirmed in writing that special inclusion paragraphs of the gross income definition would not apply to the sale of this office building. You may assume that this opinion is correct.

On 1 September 2020 the carrying amount of the building was lower than its fair value. For accounting purposes, Contractor deducted depreciation of N$90 000 for the period 1 April to 31 August 2020 in respect of the office building. In 2009 Contractor had also sold its previous owner-occupied office building, for a similar reason.

Required;
Discuss, with reference to relevant case law, whether the receipt from the sale of
Contractor’s office building on 1 September 2020 is of a capital nature in terms of the gross income definition. (20 MARKS)