Taxation Principles Cheat Sheet

Sem 1 & 2: Conceptual framework income tax and Heads of charge

Types of Receipt

Capital receipts. Receipts from disposal of Profit-making apparatus (PMA) aka (Tree). ➔ NOT TAXABLE, since receipt is CAPITAL IN NATURE. PMA = asset retained and used in the income generation process as means to produce Income

Income / Revenue receipts. Income from operating activities of Co. In the nature of circulating capital or aka fruit ➔  TAXABLE

Compensatory receipt for the loss of trading rights. (E.g. Cancel contract) Capital receipt not taxable if it resulted in the loss of the trader’s profit making apparatus. Is it of such fundamental importance that its termination ended or materially crippled the trader’s business operations.

Receipts for imparting trade related know how. (E.g Intellectual Property Rights) Capital receipt and not taxable if it resulted in the loss of the person’s profit making apparatus

Badges of Trade Test – Determine Trading Income s10(1)(a) Vs Non-Trading

(1) Nature of subject matter of realization – Ready market | Large Quantity | Personal enjoyment | Asset yielding Periodic Income

(2) Period of ownership:  Short ➔ Objective of trading

(3) Frequency of similar Transaction: More frequent ➔ More likely to be trade 

(4) Supplementary work done (eg, improvement, marketing effort) : must differentiate from ordinary steps to ↑ value of capital

(5) Circumstances of realization: Can realization be explained?  Force sale/ unplanned/ sudden emergency/opportunity / very good offer→ less likely trade

(6) Motive: Short term profit making motive➔ Trade | Look at mode of financing (ST / LT)  financial ability to hold, feasibility study done?

S10(1)(d) Dividends, interest, discounts

Dividends can be under  s10(1)(a) if person is trader s10(1)(d) if passive investor.

Interest can be 10(1)(a) if from trade receivables or person is in business of lending.

Interest only taxable when due and payable. For fixed deposit, only taxable when deposit due. Interest income from bank is Tax Exempt for individuals, Taxable for Companies

S10(1)(f) Rent. Royalties, any profits arising from property. Rent taxed under s10(1)(a) if dealing in real properties. S10(1)(f) if hold for rental yield.

Sem 3: SOURCE OF INCOME

Agents: Dependent → PE, Independent (e.g commission agents)→ no PE