What is the difference between capital and revenue tax. Which one is taxable?
The conceptual difference between capital and revenue tax is that tax paid on income earned from wages, rent, interest and business are termed as revenue tax whereas capital tax is generally referred to tax paid on sale or exchange of an asset such as stock or property.
Is there any clear definition in the income tax act to distinguish capital tax and revenue tax?
Clearly, none. There is no clear definition that stated in the act. Distinguishing capital tax and revenue tax has never been easy. A simple illustration is a property developer joint venture with a land owner for a consideration of 30 houses. Will this be subject to Capital or income tax? Referring to the van den berghs ltd v clark case, it is to the decided that one must go in search of light.
That’s why throughout all these years, Malaysian courts laid down various guidelines or tests to distinguish gains arising from the disposal of an investment and gains from trade or an adventure or concern in the nature of trade.
The test is known as Badges of Trade.
Badges of trade is a test to ascertain whether the disposal of certain goods is subject to income tax, real property gain tax or not taxable at all. A simple illustration is a property developer joint venture with a land owner for a consideration of 30 houses. Will this be subject to Capital or income tax?
Badges of trade tend to look into the subject matter, period of ownership, is there any formation of a company for profit making intention, frequency of transaction, circumstance responsible to realisation, long term or short term intention, method of disposal, financing agreement and even accounting classification.
Referring to van den berghs ltd v clark case, it is to the decided case that one must go in search of light. Therefore, there is no absolute answer to the case where though studies has to be conducted.
If you own several properties and depending on the frequency of disposal of the property you own, the disposal may be regarded as revenue disposal instead of capital disposal. If you are having a difficult time distinguishing between capital and revenue tax, feel free to reach out to us.