This week we`ll look at Parts 4.6.5 and 15.1 of your tax return - that is
the parts dealing with revenue receipts and capital receipts.
The difference is important because - at least until the new capital gains
tax is introduced next year - capital gains are not taxable but revenue is.
You`ll need to understand one in order to understand the other.
Please note that these parts apply to you even if you do not conduct any
business. Also note that these parts are designed to enable the Receiver to
classify you as a trader (one who buys and sells assets with an intention
to make profit) even if you do not regard yourself as a trader.
Before stating amounts in these two parts, ask yourself the following
question:
Is the receipt of a capital nature (part 15.1) or revenue -
taxable - nature (part 4.6.5)?
Let say you bought a car (in fact it could be any property) and after a
month (it could be any period) you sell it at a profit. (I say profit
because generally if you make a loss, the Receiver ignores you unless you
make it clear that you are in the business of buying and selling that kind
of property.)
Whether this gain is taxable or not, under present circumstances, depends
on whether it is a capital gain or revenue to you. To determine this, the
Receiver will need to know your intention when you bought the goods
initially.
If your intention was not to embark on a trading activity, then the
Receiver would assess whether your initial intention subsequently changed.
To answer the question above, you have to further ask yourself the
following questions:
* How long you have held the property? The shorter the period, the more
likely it is that you were trading and will be subject to tax;
* Did you have to give away something that you could have used to make
money for yourself? If your employer gives you money to stop you from
starting your own business that receipt is not taxable;
* Have you sold the same/similar property before? Chances are that if you
did before, you are now trading and will be taxed;
* What was the reason for selling the property? The mere fact that you
happened to have luckily made a large profit does not itself mean that you
are a trader;
* Did you really intend to profit? If you went out of your way planning,
decorating extensively to attract buyers or marketing in a manner that
suggests that you are now conducting a business, even if you are selling
this property for the first time, you could be taxed;
* What was your dominant motive in holding the property? If you bought
property (such as shares or a house) with the intention of getting regular
income (dividends or rent), then any profit you make when you sell it will
not be taxable.
But if you constantly check share or property prices and
buy and sell shares or property often, the profit you make will be taxed
because you are now a trader.
The Receiver takes all this into account and no single aspect is conclusive
on its own.
I suggest that any amount that you disclose in especially Part
15.1 (dealing with non-taxable receipts) should be accompanied by a
detailed letter dealing with all the above questions because you`ll need to
justify why the receipt should not be taxed. Obviously if you conclude
otherwise, you have to include the amount in part 4.6.5.
You will realise that the similar questions are asked in Part 14.9 of the
tax return although this part is confined to property that is specifically
mentioned in the tax return.