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TAX EDUCATION COURSE LECTURE 3

TAX EDUCATION COURSE LECTURE 3. BUSINESS INCOME. Learning Objective. What constitute business income?. Critical Issues: IRB vs T/P. Learning Objective. IRB: uses “badges of trade” Therefore, t/p engage in an “adventure in the nature of trade” Taxable as business income. T/p:

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TAX EDUCATION COURSE LECTURE 3

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  1. TAX EDUCATION COURSE LECTURE 3 BUSINESS INCOME

  2. Learning Objective What constitute business income? Critical Issues: IRB vs T/P

  3. Learning Objective • IRB: • uses “badges of trade” • Therefore, t/p engage in an “adventure in the nature of trade” • Taxable as business income • T/p: • Relying on the same “badges of trade” • Argue that he is realising a long-term investment • Capital in naturecapital receipts • May be subject to RPGT if dispose landed propertyno tax if >6 yrs

  4. BUSINESS INCOME • S. 2 • Includes - profession - vocation - trade - manufacturing - adventure or concern in nature of trade

  5. BUSINESS INCOME • Involves the idea of an occupation requiring either purely intellectual skill, or of any manual skill…. What is Profession?

  6. BUSINESS INCOME • …..vocation is……admitted to be analogous to the word “calling”….it means the way in which a person passes his life. • Eg: person who attends races, and makes systematical bets…..”vocation of betting” What is Vocation?

  7. BUSINESS INCOME • Involves buying and selling • Series of transaction, continuity, repetition • Isolated transaction  one purchase/one sale, or one purchase/many sales • Existence of “intention” to make profit What is Trade?

  8. Adventure • Leeming vs Jones (1930) • 3 conditions: • The existence of organisation ( for the adventure) • Activities which led to the maturing of the asset to be sold (steps taken) • The fact that the nature of the asset should lend itself to commercial transaction ( the transaction is associated with the kind of business which the person in question is carrying on)

  9. Business • Depends on the facts (supporting evidence) • Whether the transaction (situation) has or has not the characteristics of ‘adventure’ • Enhanced value on realisation of investment is taxable if the transaction is the carrying on a business.

  10. KLE vs. DGIR PKR 423CASE STUDY Facts 1. Purchased land in 1967 for RM 5.5m 2. Financed by issue of shares 3. Sold in 1972 for RM 8m 4. Profit of RM 2.39m 5. Earthworks RM 28k (0.52%) 6. Assessed to income tax

  11. Arguments for TaxpayerCase Study 1. Capital Gain 2. KLE is an investment holding company 3. Fixed asset in accounts 4. Land unsuitable for development 5. Activities not development 6. Financed by share issue 7. Isolated transaction 8. No expertise

  12. Arguments for IRBCase Study 1. Co. Sec. admitted company’s intention 2. Objects in M & A 3. Sale to development. Co. 4. Land in excess of needs 5. Land no personal enjoyment 6. Length of holding period

  13. BADGES OF TRADE • Subject matter of transaction • Period of ownership • Frequency of transaction • Alteration to property

  14. BADGES OF TRADE • Circumstances responsible for realisation • Motive • Methods employed in disposal

  15. BADGES OF TRADE • Rutledge v CIR • Pickford v Quirke • Martin v Lowry • Extensive advertisment (linen) • Cape Brandy • Alteration of goods

  16. Derivation of Business Income In order for business income to be taxed in Malaysia, the following conditions must exist: • existence of a “business income”, • business transaction is “income in nature” • business income is deemed derived from Malaysia

  17. Business Overseas Exported Overseas Malaysia Sale of Trading stock Services

  18. Grainger & Sons v Gough (1896) Agent UK France - Place of contract Wine Merchant Trading with (not in)UK – place of contract

  19. Derivation of Business Income S. 12(1)(a) • Not attributable to operations .. outside Malaysia • S 12(1) (b) • Manufacturing, growing, mining, producing, • harvesting : • Sale outside Malaysia • - contract concluded outside

  20. Derivation of Business Income • S. 12(1)(a)- Operations Test • Contract negotiated and concluded • Stocks maintained • Passing of ownership and risk- title • Sales proceeds are invoiced/received • Where services are rendered • Costs of operations incurred/charged

  21. Derivation of Business Income • S. 12(2)-is to deem gross income “wherever derived” as Msian derived income. • Appy to financial institution and insurance company.

  22. Learning Objective What is taxable and non taxable business income?

  23. Non Taxable Business Income • Capital receipts • Receipts: • Disposal of Fixed assets are capital receipts • Disposal of circulating assets are revenue Compensation: • Substantial restriction on trader’s activity are capital receipts • Payments in lieu of trading receipts are revenue receipts Para 2.2(a) Tax Elite

  24. Business Income Fixed assets Stock-in trade Car dealer Sale of Cars

  25. Non Taxable Business Income Sale of intangible asset- ‘know-how’? - ‘rights under a contract”? • Selling the ‘secret’ process • Using the process in their business (‘right to use”) Para 2.2(a) Tax Elite

  26. Non Taxable Business Income Foreign Exchange Revenue Capital Unrealised Realised Not taxable Para 2.2(b)/(c) Tax Elite

  27. Non Taxable Business Income Foreign exchange: Not taxable - Non trade gains - eg repayment of advances/loans resulted in a loss/ purchase of fixed asset Taxable: Buy goods at a contract price say A$ 100. Currency is devalued and payment made. - trade- realised. Para 2.2(b)/(c) Tax Elite

  28. Non Taxable Business Income Foreign source income exempted: - Dividends from China,Singapore - Interest from Indonesia - Royalties from China - Business income from PE and not ‘M’sia income” Para 2.2(c) Tax Elite

  29. Non Taxable Business Income Distribution of assets under liquidation: Compensation under certain circumstances: - Compulsory acquisition (land not trading stock) - Compensation for loss of equipment ( equipment not trading stock) Para 2.2(e)/(f) Tax Elite

  30. Exemption Order • Eg: • Allocation by Federal Govt and the State Govt in the form of grant and subsidy [4/2003] • Conference promoter • Inbound tours • Outbound tours Para 2.2(g) Tax Elite

  31. Non Taxable Income- Exempt Foreign source income remitted into Malaysia by a resident person (other than Bank, insurance and air and sea transport). Para 2.2(g) Tax Elite

  32. Non Taxable Income- Exempt Partially exempt – Pioneer Status Co Statutory Income 100,000 Less : 70% exempt income 70,000 Taxable Income 30,000 Para 2.2(g) Tax Elite

  33. Statutory Income - Taxable S. 22(2) Insurance, indemnity, recoupment, recovery, reimbursement – ‘revenue’: - tax ‘deductible’ - under a contract Compensation for loss of profits Para 2.2(g) Tax Elite

  34. Statutory Income - Taxable S. 22(2) X acquired trading stock in 2003 for RM 100,000. The stock was destroyed by fire in 2004 and X received RM 130,000 under a insurance policy. Earlier, X sue supplier for substandard goods and Received RM 30,000. Para 2.2(g) Tax Elite

  35. Statutory Income- Taxable S. 30(4) • Release of debt previously deductible • Taxable • Eg. • Y claimed in 2003 the purchase of stock • for RM 100,000. In 2004, he was • forgiven of the payment of debts. Para 2.2(g) Tax Elite

  36. Business Income Illegal trading Mutual trading

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