What is profit tax?
According to Inland Revenue Ordinance s 14 “Charge of profits tax”, profit tax is chargeable on every person: Carrying on a trade, profession or business in Hong Kong; and In respect of his assessable profits arising in or derived from Hong Kong from such trade, profession or business.1
What is person?
A person may include:
Trustee, whether incorporated or unincorporated; and
Body or persons.2
In this case, the Taxpayer (“T”) is a private company incorporated in Hong Kong, and is a corporation. So T fulfills the definition of person.
What is trade?
Trade is defined in Inland Revenue Ordinance s 2(1) as including ‘every trade and manufacture, and every adventure and concern in the nature of trade’.3
Whether a trade is being carried on is a question of fact to be determined by looking at all the circumstances of the case. There are six badges of trade to be considered in determining whether a taxpayer is carrying on a trade:4 1. Subject matter of transaction
A trading asset usually yields no income nor personal enjoyment. This concept was reinforced in the cases CIR v Fraser (1942), Rutledge v CIR (1929) and Martin v Lowry (1926). In Fraser and Rutledge cases, the purchase transactions in these cases were isolated transactions, but the goods purchased were obviously more than private use. It is not suitable to claim that such transactions were not trades. 2. Length of ownership of the goods
Shorter ownership period usually indicates the trading nature of an asset, but this actor alone may not be conclusive and still the nature of taxpayer’s business and the intention of taxpayer of acquiring the asset should be taken into account. The cases CIR v Beautiland Co Ltd (1992) and CIR v Sincere Insurance & Investment Co Ltd (1973) showed that periods’ length is not the only factor to determine the nature of transactions, but facts shall be looked at as a whole. 3. Frequency of similar transactions
Repeated transactions of the same kind may suggest the existence of a trade. This concept is supported by Leach v Pogson (1962). 4. Supplementary work on the property
A trade may be carried on if taxpayer has further processed the original asset or has establish an organization to sell the asset. In the case Cape Brandy Syndicate v CIR (1921), the resale of brandy by the taxpayer was a trade, since the taxpayer had mixed and re-casked the brandy. 5. Circumstances responsible for disposal
There are evidences showing that the sales of the assets was due to unexpected subsequent event, emergency or other factors, rather than for profit, and such act is not counted as trade. 6. Profit-seeking motive
There is a trade if the taxpayer’s original intention of acquiring asset is to make profit by resale. This concept was supported by the cases Clark v Follett (1973), Taylor v Good (1974) and Central Enterprise Ltd v CIR (1986).
The most important consideration of determining a trading or fixed asset would be the sixth badge of trade, i.e. the original intention of taxpayer of acquiring the asset at the time of acquisition. In Lionel Simmons Properties Ltd v CIR (1980), it is said that whether trading intention existed at the time of acquisition of an asset decide the nature of the asset.5
Objective evidences are needed to support such intention and prove that it is not any unrealistic or unachievable hope or wish only.6 Also it is taxpayer’s duty to provide sufficient evidence to prove that the asset is acquired with the alleged intention. There are different considerations when proving:7 the facts of circumstances, such as classification of the asset in the accounts, tax return, prospectus or other documents, adequacy of finance, and degree of income or personal satisfaction yielded by the asset etc.; manner of acquisition;
whether depreciation allowance has been claimed on the asset; and whether taxpayer has solicit or advertise for resale of asset etc.
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