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LECTURE 2
BUSINESS
INCOME
BY
DR JEYAPALAN KASIPILLAI
Lecture 2: Outline
Why is it important to distinguish between business
income and capital receipt/receipts from hobby /other
types of income?
Badges of Trade 6 factors can be considered to determine
if the receipt/gain is from a trade/business activity or is a
capital item.
Note:
Business v Hobby
Business v Isolated Transactions
Compensation Payment in Hands of a Business
When did the business commence/start?
Introduction
Business income is taxed under Sec. 4 (a)
Business income of individuals has calendar year as basis period [Sec.21
Income Tax Act 1967] & business income of companies has accounting
year as basis period [Sec. 21A(2)]
Business income arises on the day it becomes due and payable to
recipient .
Sec. 3 Territorial jurisdiction of ITA 1967 covers income accruing in /
derived from Malaysia / received in Msia from outside Msia. However,
para 28 Schedule 6 ITA exempts income remitted from abroad.
Sec. 12 Business income deemed derived in Msia (widens tax
net).
Source of Income
The source of income should be from Malaysia before the income is
taxed in Malaysia.
CIR v Lever Brothers & Unilever Ltd explains source of income
(ii)
(iii)
(iv)
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Badges of Trade
(MT: pp. 196-203 GMT)
The Royal Commission Report of 1954 referred to 6 guidelines (badges
of trade) for ascertaining whether a taxpayers profits / gains were from
a trade/business or capital receipt. The Badges of Trade are as follows :-
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Business v Hobby
For distinction between business & hobby (MT: p 208). where money
can be made from both means, refer to case law Haws v Gardiner.
Profits from selling greyhounds bred as a hobby was held to be
taxable.
Characteristics of a Business :(1) Repetition: London Australia Investment [1977]
(2) System and Organization (i.e. commerciality)
Ferguson [1979] (Raise cattle after retiring). Systematic
organization.
Walker [1985] (Goat breeding and selling offspring)
(3) Magnitude ( Size & Scale )
McInnes [1977] Bought 4-5 cattle. Sold 2-3 of the natural
increase. Not business of grazing but a hobby.
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Business v Hobby
(Contd)
(4) Profit Making Intention
Barwick CJ in White [1943] A business necessarily involves the
earning of or intention to earn profits.
Note: Gambling tax cases, where the betting activities are on a
fairly large scale and organized
Graham v Green [1925] Definition habitual bets on horse
racing not taxable.
Partridge v Mallandaine (2 TC 179) systematic and habitual
betting on horse racing vocation taxable.
Profit / gains from Illegal / Unlawful Activities
Mann v Nash [16 TC 523] Gaming machines illegal but
profits taxable
Southern v A.B. [(1933) 18 TC 59] Illegal but still taxable
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Business v Isolated
Transactions
(MT: p. 195)
Generally Gains / profits from isolated transactions not
regarded as being from trade, profession / vocation.
BUT May well come under adventure in the nature of
trade and thus held to be business.
IRC v Korean Syndicate - Confirmed in DEF v CIT
Company formation/ transaction meant to be a business
Punjab Co-operative Bank v CIT
Profits from isolated transaction that is not t/ps ordinary business is
taxable
Teruntum Theatre S/B v KPHDN [2006]
Adventure in the nature of trade hence taxable
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Business v Isolated
Transactions
Leeming v Jones [(1930) 15 TC 333] - For an adventure in the
nature of a trade to exist, at least one of the 4 criteria must exist
(i) the existence of an organisation
(ii) activities which lead to the maturing of the asset sold
(iii) existence of special skill, opportunities in connection with the article dealt with
(iv) the nature of the article itself should indicate that it is for commercial
transactions.
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Has Business
Commenced?
Southern Estates [1967]
Cost of clearing shrub & fencing land disallowed as business has not
commenced.
Softwood Pulp & Paper [1976]
Cost of feasibility studies into pulp & saw mills operations & paper
manufacturing plant were held to be pre-operating costs.
Ferguson [1979]
Small business. Sale of bull calves was evidence that a business has
commenced, hence expenses deductible.
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