Raymond Yeung Tax Consultant * former IRD Assessor

飛鴻稅務顧問 * 前稅務局評稅主任楊輝洪

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Profits Tax - Badges of trade

Badges of trade were first summarized by the Royal Commission on Taxation of Profits and Income in United Kingdom. In their report published in 1955 they identified six badges of trade: (1) the subject matter of the realization (2) the length of the period of ownership (3) the frequency or number of similar transactions (4) supplementary work in connection with the subject matter (5) the circumstances leading to the realization and (6) the motive.

Afterwards, the leading case on the issue was Marson v. Morton which concerned a one-off purchase and sale of land. The Revenue treated the gain as taxable trading profits. The judges ruled that based on the evidence there had been no trade and the land had been acquired for long term investment. The judgment was important because it summarized what were badges of trade as follows:- 

"The following list of 'badges' was not comprehensive and no one pointer was decisive:

  1. Was the transaction a one-off transaction ?  Lack of repetition indicated that it might not be trade. 

  2. Was the transaction related to the trade that the taxpayer ordinarily carried on ? 

  3. The nature of the subject matter of the transaction might be a valuable pointer : was it matter of a kind generally traded with and could it readily be turned to account ? 

  4. It might be helpful to look at the way in which the transaction was carried through. 

  5. What was the source of finance?  If finance was borrowed that might be an indication to short-term resale and trading. 

  6. Was the item sold as it stood or was work done on it ?  If work was done, that again was a pointer to a transaction being a trading one. 

  7. Was the item purchased and resold in one lot or broken down into saleable parcels : if broken down that was a pointer to a trading transaction. 

  8. What was the purchaser's intention as to resale at the time of purchase ?  If he intended to hold an item indefinitely, albeit to make a profit at the end of the day, that pointed to investment and not to trade.  If before the purchase a resale contract already existed that would be a strong pointer to the transaction being trade. 

  9. Did the purchase of the item provide the purchaser with any enjoyment or pride of possession or produce an income for him pending resale.  If so that might show an intention to buy for personal satisfaction or investment rather than an intention to trade.

To reach a factual assessment of a case it was necessary to stand back and look at it as a whole and to ask 'was this an adventure in the nature of trade ?'  Put in more homely language 'was the taxpayer investing his money or was he doing a deal?' "

To know more, click the following topics:

Disposal of a property - Can it constitute a trade?

Sale of an inherited property  - Can it constitute a trade?

Change of capital asset to trading stock


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