DISCUSSION QUESTIONS

Chapter 8

1 (See 8.3, pages 206–214 of text)

Through the years, case law has provided various guidelines or tests to differentiate gains from
disposal of an investment and gains from trade/adventure/concern in the nature of trade. It is
the total effect of all relevant factors and circumstances that determine the character of a
transaction:
(i) Motive/Intention of taxpayer
A good test to determine whether the asset held is investment or stock-in-trade is to
establish the taxpayer’s motive at the time the asset was acquired. If the underlying
purpose was to make profits, the profits from the realization thereof will be treated as
income. There must be a sole or main object of realizing a gain, which must exist at the
time of acquisition of the asset.
It should be noted that a permanent investment might be sold in order to acquire another
investment thought to be more satisfactory, which does not involve an intention of trade,
irrespective of the fact that the first investment was sold at a profit or at a loss.

(ii) Subject matter of transaction

A property that does not result in income or personal enjoyment to its owner merely by
virtue of its ownership, and which is normally the subject of trading and rarely the subject
of investments, it is more likely to have been acquired for the purpose of resale at a profit
than property which does not yield such income or enjoyment.
However, if the subject matter were to be treated as trading stock, then a sale of it would
be subject to income tax even thought it was sold due to special circumstances such as the
need for funds. This does not change the character of trading stock or trading activities.
Where the owner of an investment chooses to realize his investment, and obtains a greater
price for it than he originally acquired it for, the enhanced price is not profit assessable to
tax.
(iii) Frequency of similar transactions
If there had been a repetition of the same type of transaction, it may be presumed that the
taxpayers’ purpose in purchasing the particular property was for resale at a profit.
However, a single or isolated transaction can also constitute trading [International
Investment Ltd v CGIR [1979] 1 MLJ 4 (PC)]. There need not be many purchases to
constitute a trade. A single purchase of a large quantity of shares or any quantity of
property or commodity can be for the purpose of a business or transaction or an adventure
in the nature of trade [Pickford v Quirke (1972) 13 TC 251].
(iv) Period of ownership
The longer an asset is held before its disposal, the less likely that such disposal would be
considered to be part of a trade. However, the terms “short period” and “long period” are
not defined in the Act or case laws.
A company may hold a property for a long period of time and any subsequent disposal may
still be viewed as business income because they may be viewed as waiting for the right
 opportunity to realize profits [KLE Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri (1995) 2
MSTC 2,245].
(v) Supplementary work or alteration
Performing additional or modification work on an asset before disposal could be an
indicator of a trading venture (Cape Brandy Syndicate v The Commissioners of Inland
Revenue [1921] 12 TC 358, where the Syndicate blended different types of brandy, casked
and sold them in several batches. It was a single venture and was held to be trading).
However, if the asset was clearly acquired for other purposes, extensive activities to
increase its saleability after it is no longer useful for such original purposes would not cause
any selling profit to be taxable [NYF Realty Sdn Bhd v Comptroller of Inland Revenue (1974)
1 MLJ 182].
In the case of land, where steps were taken to subdivide the land, such a move would be
viewed as a step taken in carrying out an adventure in the nature of trade.
(vi) Circumstances surrounding the transaction
If the sale of the asset is due to sudden emergency or unanticipated need for funds, such
facts could be indicators that the asset was not acquired for the purpose of resale at a
profit and that the sale was not pursuant to a profit making scheme or undertaking. The
consideration here is whether the disposal was because the taxpayer urgently needed
funds or whether he saw an opportunity to sell at a profit.

2 The application of the ITA 1967 is not restricted to lawful activities only. It is established that a
transaction is a trade or adventure in the nature of trade, then any gains arising therefrom
would assessable to income tax under S. 4(a).
Some guidance from the courts on the type of (illegal) activities that amount to trade:
 Smuggling alcohol for sale is a trade (Lindsay, Woodward & Hiscox v CIR [1932] 18 TC 43).
 Operating illegal gaming machines is a trade (Mann v Nash [1932] 16 TC 523).
 Profits of an illegal bookmaker (Partridge v Mallandaine [1886] 2 TC 179)

In addition there are also a number of statements made in passing:

 Dug dealing is a trade (Lord Sands in Lindsay, Woodward & Hiscox v CIR [1932] 18 TC 43).
 Burglary or housebreaking is not a trade (Lord Denning, in J P Harrison (Watford) Ltd v
Griffiths [1962] 40 TC 281; Lord Sands in Lindsay, Woodward & Hiscox v CIR [1932] 18 TC 43
and Finlay J in Southern v AB [1933] 18 TC5 9).
 Receiving stolen goods may be a trade (Denman J in Partridge v Mallandine [1886] 2TC179).

3 Although the purchase of the 5 burglar-proof safes appear to be isolated transactions, the
profits arising from their sale are taxable because they constitute profits from an adventure in
the nature of trade. The reasons are:
 Existence of a profit-seeking motive: the purchase was obviously made with a view of
making profits.
 Nature of the asset: the safes were not acquired for personal enjoyment nor producing
income when they were in Mr. Jupiter and Mr. Mars’ possession.
 The manner of acquisition of the asset: the safes were purchased, which reinforcing the
intention to sell at a profit.
 The effort put into selling the safes: appear to be organized to facilitate sales.
  There was a frequency of transactions.

4 As a resident individual, Ms. Lion is chargeable totax on income derived in Malaysia as well as
income received in Malaysia from overseas:
 RM150,000 is liable to Malaysian tax because it is derived in Malaysia.
 RM5,000 is not liable to Malaysian tax because it is not derived from Malaysia and it is not
remitted to Malaysia.
 RM12,000 is liable to Malaysian tax because it is remitted to Malaysia by a resident
individual.