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TAXATION 2 - Coggle Diagram
TAXATION 2
WEEK 1:
Advanced Principles of Taxation
Relevant Principles
Scope of taxation in Section 3:
Tax Payment
Revenue vs. capital gains
Section 4A:
Income-related Principles
Characteristic of ‘Income’
Regularity:
Series of similar transactions – trading is exercised.
One transaction also can constitute trading [DGIR, Page vs. Pogson (35 TC 545); Clark vs. Follett (48 TC 677)] – so long there is a strong circumstantial evidence leaning towards trade.
Savings – not income:
Savings are not subject to income tax.
The House of Lords decided in Tennant vs. Smith (3 TC 158) that mere relief from the incurrence of an expense is not income.
A person is chargeable to tax not on what he saves from going out of his pocket but what goes into his pocket. Also referred by Australian case; FCT vs. Cooke and Sherden [1980] (10 ATR 696) (FC)
Income must be received:
Income need not be received in money but received – money worth.
Customary/habitual receipts are income:
Income need not come from employers or trade debtors.
Voluntary payments made to a clergyman during Easter offerings by strangers or outsiders were held to be income in Cooper vs. Blakiston (5 TC 347)(HC).
Illegality is not relevant:
Illegal income is to be taxed.
A trade is a trade whether it is lawful or unlawful
Speculation is not income:
Gambling activities sometime produce gains which are merely in nature of windfall
Windfall is not taxed as if in the speculation in shares acquisition.
Reward for services is income:
The services would be assessed either as income from a profession or employment income and it includes past, present or future services rendered.
Conduct of taxpayer:
Intention to make profit – taxed.
Gifts are not income:
Gift made for personal reason – not taxed.
Capital appreciation is not income:
Acquire of antique as hobby or investing in landed properties in exchange for rental, share in exchange for dividend – subsequent disposal or investment at profit – not taxed.
Relationship of Income and Source of Income
Income flow from a definite source.
‘Tree-fruit’ analogy-
Tree is the source, Fruit of the tree is the Income
sales of tree is capital in nature
Sales of the fruits of the tree is revenue in nature
Malaysian derived income
OA Pte. Ltd. vs. KPHDN (1996) MSTC 2,752 (Special Commission) define:-
Accrue – when there arises to him a fixed or unconditional right to receive it;
Derive – to receive from a specific source or origin.
In summary, income would be chargeable to tax by virtue of Section 3 of the Act:
When there comes into existence an unconditional right to receive it in Malaysia; or
When it is received from a specified source in Malaysia
Indian experience
The Privy Council (Sir George Rankin) in CIT vs. Chunilal B Mehta of Bombay (1938 AIR 521) – the source of profit lies in the place where the transactions took place.
The Indian taxpayer has several dealings in commodity exchanges overseas (Liverpool, London, New York) through independent brokers.
It was held the profits flowing from these dealings did not arise or accrue in India. Decisions made were not important.
Year of Assessment (YA)
Individual of sole proprietors or employees, executors, trade associations and clubs
Basis period of all sources of income to be assessed on calendar basis
Company, LLP, co-operatives and trusts
Basis period for investment income and business income will be assed in accordance with the accounting period of a company.
Positive and Negative Test of Business Receipts
Positive Test VS Negative test
Positive test
Factors are adopted by the judiciary to distinguish between capital and income receipts arise from the business operation. They are not mutually exclusive.
Negative test
Factors are not relevant in distinguishing between capital and revenue receipts