Topic

Distinguishing Between Trading and Capital Transactions

Instructions

The Income Tax Act 2007 states that a ‘trade’ includes ‘any venture in the nature of a trade’. This definition is very circular and it has largely been left to the courts to distinguish between trading and capital transactions.

Required:

Discuss the factors to be considered in determining whether someone is carrying on a trade, including examples from relevant case law.
Analyse the tax implications of an activity being either trading or a capital transaction.

Answer preview

The subject matter describes the purpose for which the owner held the item under consideration. Where a person is holding an asset as an investment, or for their own personal enjoyment purpose, then if any transaction is done with the item under review as the subject matter, it would be a capital transaction (Income Tax Act, 2007). In Marson v Morton (1986), the taxpayer had purchased a piece of land as an investment. The taxpayer did not generate any income from the land, but later sold it, following an unsolicited offer.

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