Lesson 5 Business Income_6b643ec01cf0e5132e1a9e2e4edfe27b.pptx - Taxation\/Assessable Income from Business Purpose Objectives \u25e6 Identify forms of

Lesson 5 Business Income_6b643ec01cf0e5132e1a9e2e4edfe27b.pptx

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Purpose Objectives Identify forms of business organizations Discuss the badges of trade Calculate the tax adjusted profit Compute the tax payable by a person from business Taxation/Assessable Income from Business
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The Act identifies three main forms Sole Proprietorship Partnership Company Sole proprietorships and partnerships are not taxed as a business Rather, the sole proprietors and partners are taxed as individuals. Companies are taxed separate from the shareholders and the directors who are also taxed as individuals. Forms of Business Organizations
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When deciding whether or not a person’s activities make that person’s income from employment or business or investment, two important distinctions must be drawn: the distinction between employment and self- employment for a taxpayer who sells goods or other assets, the distinction between; trading activities, giving rise to income from business non-trading activities, generally giving rise to capital gains. Badges of Trade
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The term trade defined as ‘including every trade, manufacture, adventure or concern in the nature of trade’, is of little help and has been left for the courts to decide whether an activity constitutes a trade or not. A list of the main criteria which may be used to distinguish between trading and non-trading activities is known as the “badges of trade”. They are as follows: Badges of Trade Explained
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If the assets which the taxpayer has sold are of a type which might normally be acquired for personal enjoyment or as an investment (e.g. works of art, stocks and shares), this may suggest that profit arising on their sale should be treated as a capital gain rather than a trading profit. But if the assets concerned do not provide personal enjoyment and would not normally be held as an investment, any profit arising on their sale is more likely to be treated as a trading profit. In Martin v Lowry (1926) the taxpayer bought and sold 44 million yards of war surplus linen and in Rutledge v CIR (1929) the taxpayer bought and sold one million toilet rolls. In both of these cases, it was held that the subject matter of the transaction was such that the activity must be construed as trading. Subject Matter of the Transaction
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Trading stocks are normally retained for only a short period being sold, whereas assets acquired for personal use or an investment are generally retained for much longer. Therefore, if assets are bought and sold within a short space of time it is likely that any profit made will be treated as a trading profit. Length of Period of Ownership
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The more often that a taxpayer repeats a certain type of transaction, the more likely it is that the activity will be construed as trading.
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