Taxation: Badges of Trade

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In the question, Calvin withdrew his money from Employment Provident Fund and Alvin withdrew his money from savings to pay for 75% of the cost of the purchase. They both jointly agree to finance the remaining 25% by taking up loan from bank.

- Alterations / supplementary work on the asset

It means to make alteration or improvement to the asset or that its purpose or quality has been changed to enhance it to be more marketable would indicate that the property was for a profit making purpose.

There is no mention of any alteration made before the selling of the land except after the expiry of the tenancy that a portion of land was planted with fruits. Therefore the supplementary work on the land is not applicable in this question.

- Circumstances leading to the sale

The conditions in which the subject matter is disposed of may be important to determine whether such disposal is part of trade. A forced sale prompted by emergency need for funds, compulsory acquisition would not consider as trade. However, the sales of trading stock under hard pressed situation would not apply in this test as it is originally for trading purposes.

The land was sold in order to settle the debts owed by Alvin and to pay for Calvin’s children’s overseas education.

- Method of disposal

Method of disposal means the activities taken to sell the assets. If there were any exertion made to promote or to attract purchaser to buy the subject matter, then it will be considered the existence of resale for profit.

The brothers were approached by a used car dealer who wishes to purchase the land but was declined and there is no further information as on how they sell the land on December 2015.

- Accounting evidence / treatment

To determine whether the sales of the assets are classified as trading or an investment, we need to consider whether the asset is a current asset which held for sale or a non-current asset which held for long term investment or for own use.

In this question, the land which is a non-current was purchased for building homes for the brothers and their families upon the retirement of the brothers.

Thus, we can conclude that the sale of land was a sale of investment and the RM 2 million is a capital gain and hence it is not liable to Malaysia income tax.