QUESTION ONE [40]

PART A

Jack Brown, a resident of the Republic, has been achieving a reasonable return from the letting of a block of 15 flats that he purchased in 1993. He does not have a history of property dealing. Jack is aware that he can make a substantial profit by selling the 15 flats individually. He has made application for a sectional title register to be opened. To make the flats more attractive to would-be purchasers, Jack is considering improving them.

Required: Discuss with reasons whether Jack Browns receipt or accrual from the sale of the flats is of a revenue nature. Deal with the position when the flats are sold individually without improvements being made to them, and the position when the flats are first improved, and then sold. (20) PART B Berea Football (Pty) Limited, a resident of the Republic, owns the Berea football team. It recently sold two of its players, namely, Ace Ball and King Foot to Westville Football (Pty) Limited. Ace Ball was sold by Berea Football (Pty) Limited for R5 000 000 and King Foot was sold for R25 000. Ace Ball has started playing for the Berea football team eight years ago in its under-14 team and, after signing a life-service contract, had been trained by Berea Football (Pty) Limiteds trainers until he was considered to be the number one striker in the country. King Foot had been snapped up by Berea Football (Pty) Limited at a bargain price from Has-been Football Club for R3 000. When purchasing King Foot, its board of directors realized he would not suit its style of play, but anticipated being able to sell him at a quick profit. This it succeeded in doing, only eight weeks after purchasing him. Required: Discuss what amount, if any Berea Football (Pty) Limited must include in its gross income. Assume that the receipts and accruals of Berea Football (Pty) Limited are not exempt from normal tax and ignore a possible inclusion in its taxable income under section 26A (being a taxable capital gain). (20)