Question

Business income is assessable under s 4(a) of the Act. Section 2 of the Act defines ‘business’ to include profession, vocation and trade and every manufacture, adventure or concern in the nature of trade, but excludes employment. Over the years, the courts in Malaysia have laid down various guidelines or tests to distinguish gains arising from the disposal of an investment and gains from trade or an adventure or concern in the nature of trade. The acid test is the ‘badges of trade’.

REQUIRED:

Discuss in detail all the badges of trade in Malaysia with relevant examples and tax law cases to be quoted.1500words pls

Answer 1

There are at several badges of trade and some of these are covered under

1) Profit seeking motive

An intention to make a profit supports trading, but by itself is not conclusive

Evidence that the sole object of acquiring an asset was to re-sell it at a profit, without any intention of holding it as an investment, is a pointer to the conclusion that a trade is being carried on. However, the presence of a profit seeking motive is not necessarily a decisive pointer to the existence of relevant factors.

Case refery

Salt vs Chamberlain

A research consultant made loss on stock exchange after try it to forecast market. Loss was made after several years and over 209 transaction. This was not seen as a trade and capital in nature. It was concluded tht share trading by a private individual can never have badgeof trade

2) Isolated transactions

Verifying with number of transactions

Systematic and repeated transactions will support trade

A single isolated transaction can amount to carrying on of a trade for tax purposes,but it is generally not easy to show that is the case. The transaction, if it is trading for CT purposes, has to be an adventure or concern in the nature of trade

Case reference

1) IRC v Fraser

An isolated transaction in the purchase and re -sale of whisky in bond was held to be an adventure in nat

ure of trade. The nature of commodity and quantity purchased was such that it could not reasonably be considered to be for own consumption, nd there was insufficient evidence to indicate an investment motive.

3) Nature of the asset

Is the asset of such a type or amount that it can only be turned to advantage by a sale? Or did it yield an income or give pride of possession for example a picture for personal enjoyement?

Rhe nature of asset can be of great, even decisive, importance. Some assets are generally realised by way of trade and for transactions in such assets the existence of a trade is rarely in doubt

The area of difficulty concerns assets that are generally bought

As an investment that usually, but not necessarily, yields income, for example shares or for personal use or enjoyement

Their very nature provides an presumption that these types of assets are acquired other than as subject of trade

Case reference

IRcC v Fraser

4) Connection with existing trade

Transactions that are similar to those of an existing trade may themselves be trading

If there is an existing trade, then a similarity to transaction under consideration may be a pointer to that transaction having a trading character.

Marson v Motton and Others

Some land was purchased with intention to hold it as an investment. No income was generated by the land, however, it did have planning permission. The land was sold latter following an unsolicited offer. As the transaction was far removed from the taxpayers normal activity and was similar to an investment, it was not a trading profit

5) Modification of the asset

Changes to the asset

Was the asset repaired, modified or improved to make it more easily saleable or saleable at a greater profit?

What happens to the asset pending resale may be a relevant factor. There may be modifications to the asset by way of processing or manufacture or some kind of adaptation to make it more readily marketable.

Cape Brandy Send v CIR

Members of swine syndicate joined in a separate syndicate to purchase brandu from South Africa. Some was shipped to the east with remainder being sent to London to be blended with French Brandy., re -cask it and sell it in numerous lots was all part of evidence on which the commisioners were entitled to finde that a trade was carried on

6) organization of the activity

Was the asset sold in a way that was typical of trading organizations? Alternatively, did it have to be sold to raise cash for an emergency?

It is a pointer towards trade that transactions are carried out in the same manner as those of an undisputed traders

CIRv Livingston and others

Case scenario

Breifly the argument for the inland revenue Board to tax the sum received would be under section 24 which provides that where in the relevant period a debt owing to the relevant person arises in respect of any stock in trade sold in or before the relevant period in the course of carrying in a business, the amount of debt shall be treated as gross income of the relevant person from the business for relevant period

However one needs to examine words used in section 24(1) (a) carefully some of the key words are debt owing to person and arising in respect of stock in trde sold and also in course of carrying business

Case law in Ht development Sdn MSTC v Ketua Pengarah Hasil Dalam Negeri it was held that gains from the compulsory acquisition of a dormant company's land is not liable to income tax but real property gains tax as the land is not stock in trade.