Business Tax Notes

Problem Question guide – Business Tax

Structure:

1. Is the taxpayer ‘trading’?

2. Is the sum a ‘trading receipt’? (Is it a trading receipt or something else? Is it a capital or income receipt?)

3. Can the taxpayer claim expenses? (Is it a capital or income expense? Is it wholly and exclusively for the purposes of the trade?

1. Is the taxpayer ‘trading’? (s 5 ITTOIA)

‘Badges of trade’ in the 1945 Royal Commission list: subject matter (certain types of property such as commodities or manufactured articles are normally the subject of trade); length of period of ownership (property meant to be realized within a short time after acquisition is normally the subject of trade); frequency of transactions; supplementary work; circumstances of realization (if there is some explanation such as a sudden emergency, this negatives the idea that any plan of dealing or trade prompted the original purchase); motive.

Difficulty in determining, and guidelines on, whether there is ‘trade’ expounded on in Marson v Morton:

• T owned a company which traded in potatoes. He bought land, intending to make a capital profit and sell it in two years. He trusted the real estate agent who advised him; the real estate agent told T to sell the land. The question was whether T was engaging in trade – the General Commissioners argued that as the real estate agent was not instructed to sell at any particular price or time, the transaction was more like an investment in stocks and shares.

• Sir Nicholas Browne-Wilkinson referred to these cases as a ‘no-man’s-land’, and he did not see it fit to interfere with the General Commissioner’s decision.

• The case also provides its own ‘badges of trade’:

• (1) That the transaction in question was a one-off transaction

• (2) Is the transaction in question in some way related to the trade which the taxpayer otherwise carries on?

• (3) The nature of the subject matter: Was the transaction in a commodity of a kind which is normally the subject matter of trade and which can only be turned to advantage by realization. For example, a large bulk of whiskey or toilet paper is essentially a subject matter of trade

• (4) Was [the transaction] carried through in a way typical to the trade in a commodity of that nature? (5) What was the source of finance of the transaction? If money was borrowed that is some pointer towards an intention to buy the item with a view to its resale in the short term; a fair pointer towards trade

• (6) Was the item which was purchased resold as it stood or was work done on it or relating to it for the purposes of trade. If there was such work done, that is again a pointer towards the transaction being in the nature of trade.

• (7) Was the item purchased resold in one lot as it was bought, or was it broken down into smaller lots?

• (8) What were the purchasers' intentions as to resale at the time of purchase? If there was an intention to hold the object indefinitely, albeit with an intention to make a capital profit at the end of the day, that is a pointer towards a pure investment as opposed to a trading deal. On the other hand, if before the contract of purchase is made a contract for resale is already in place, that is a very strong pointer towards a trading deal rather than an investment. Similarly, an intention to resell in the short term rather than the long term is some indication against concluding that the transaction was by way of investment rather than by way of a deal. However, as far as I can see, this is in no sense decisive by itself.

• (9) Did the item purchased either provide enjoyment for the purchaser or pride of possession or produce income pending resale. If it did, then that may indicate an intention to buy either for personal satisfaction or to invest for income yield, rather than purely for the purpose of making a profit on turn.

Important badges:

1. Purpose of profit

• In Religious Tract & Book Society, a religious order was sending out colporteurs, alongside a profitable bookstore trade. The colporteur operation made a loss. The Commissioners distinguished the colportage from the bookstores, and held that it was not a trade as it was not carried out in a commercial manner. The losses from the colportage could not set off the profits from the bookstore.

• Hence, an activity which invariably makes a loss as it is run in an uncommercial manner is not a trade. Instead, the colportage activity was a charitable one.

2. Motive for acquisition, Purpose

• The acquisition of an asset with the hope of making a profit does not inevitably result in trade; an investment would also be for profit. The time at which resale is foreseen is of greater importance.

• In Turner v Last, the appellant purchased two fields, and intended to resell them for profit. He also farmed land, and contended that this transaction was solely for that farming, and that the profit was a capital accretion. The court held that the appellant purchased with the intention to resell as soon as he could, and hence the profit was made as an adventure in trade. [It is irrelevant if the activities of the taxpayer involve using land as capital, if the isolated transaction is an adventure in trade]

• In Iswera v CTT, the appellant wished to reside near the school where her daughters were attending, and agreed to purchase land near the school. She bought the land, and divided it into sub-plots which she sold for profits. It was held that the appellant’s dominant view was to profit and her actions were suggestive of trading, despite the case being borderline. However, it was clarified that in most cases, the appellant’s object or purpose cannot alone prevail over what he in fact does; it is only if his acts are equivocal that his purpose may be a material factor. Lord Reid also considered it important that ‘It was an essential part of her plan that the greater part of it should immediately be sold to sub-purchasers because without the money paid by them she could not have found the money to pay the balance due to the...

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