8. Profits Tax 3

8. Profits Tax 3 - BUSI0018 Hong Kong Taxation Tutorial...

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BUSI0018 – Hong Kong Taxation Tutorial Notes on Profits Tax (3) The difference between Capital Receipts and Revenue Receipts Capital receipts (i.e. profits arising from the sale of capital assets) NOT-taxable Revenue/trading receipts (i.e. profits arising from the sale of trading asset) Taxable under s14(1) In order to distinguish a capital receipt from a revenue receipt, we should look at the difference between a fixed asset and a trading asset first : A fixed asset o is one which “ the owner turns to profit by keeping it in his own possession ”; o it provides the means to make profits (for example: machinery used in the course of a taxpayer’s business) o Fixed assets give rise to capital receipts when sold A trading/circulating asset o is one which the owner turns over and o makes a profit by parting with it and letting it change masters (for example, goods or produce sold to customers) o A trading asset gives rise to revenue receipts Whether a particular item is of capital or revenue nature depends on the facts and circumstances of each individual case. Profits from disposal of asset – capital or revenue? When a taxpayer has disposed an asset (e.g. property), it is necessary to determine whether the taxpayer was: 1. Realizing an investment – in this case, the profits from the disposal will be non-assessable capital gains 2. Trading – in this case, the profits from the sale will be assessable revenue profits How to determine whether the taxpayer has been trading or realizing an investment? We should look at the “six Badges of trade” including 1. Subject matter of transaction 2. Length of ownership 3. Frequency and regularity of similar transactions 4. Supplementary work on the asset to enhance marketability 5. Circumstances that cause the disposal 1
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6. Profit seeking motive The most important test is the test of the taxpayer’s intention towards the asset in question The taxpayer’s intention The relevant question is “what was the taxpayer’s intention at the time when the asset was acquired ? Was the asset acquired with the intention of disposing of it at a profit or was it acquired as a long- term or permanent investment ? E.g. if a taxpayer acquires a piece of land with the intention of holding it for investment or for permanent business use rather than intending to trade the land is a capital asset profits from its sale are considered non-assessable capital gains How to determine the taxpayer’s intention? We should refer to both subjective and objective facts . That means, the whole of the evidence must be considered. If a taxpayer displayed a subjective intention to trade when he or she purchased the asset, and the objective facts are consistent with this intention, A trading intention is identified. If the subjective and objective factors point to different intentions it is necessary for the
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This note was uploaded on 02/23/2012 for the course BUSI 0018 taught by Professor C.ng during the Spring '11 term at HKU.

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8. Profits Tax 3 - BUSI0018 Hong Kong Taxation Tutorial...

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