How Board of Review takes decision on original intention, badges of trade and real property transactions for taxpayer running incorporate HK company?


In this blog we will explore the answer of the question that profit on the disposal of a real property is trading profit or not. We will also discuss the decisions of Board of Review on different cases to understand the scenario completely. As we will also throw light on the factors that are relevant in determining that a person who sells and buys shares is carrying on a business or not.

Badges of Trade and Original Intention

The question can be raised that the profit on disposal of a real property is trading profit or not. For such scenario, it can be seen from the tax cases and cases of Board of Review that, the original intention is crucial factor.

In case of Real Estate Investments (N.T.) Ltd it was pointed out by court of first instance that, badges of trade and original intention approach both are consistent. In the case D 65/87 an analysis was made and according to that analysis, at the time of acquisition of the asset an intention to trade was required by the trading while in ascertaining the original intention badges of trade were relevant. This was due to the reason that, if someone claimed to hold a property as a long-term investment without supporting evidences then it would had no benefit for him at all. Objective facts must be considered by a person. The meaning of these objective facts is badges of trade. The Court of Appeal upheld the decision of court of first instance. An appeal was done before court of final appeal regarding the issue that whether the property in question should be treated as a capital asset or trading stock. The appeal was dismissed by court of final appeal and it was commented by it among other that:

  • No any specifically identifiable error of law was made by the Board of Review. The meaning of the expression ‘badges of trade’ is the circumstances that through light on the issue of intention. Those circumstance and issue of intention are not considered separately.
  • On the scenario that whether the property was a capital asset or trading stock, no positive determination was made by the Board of Review. It was determined by the Board of Review merely that, taxpayer still had right to prove that the property was a capital asset. There were only optional and rare cases that have to be disposed of on the burden of proof. It was a fact that, among different features of the case, it was also a feature that taxpayer advanced three different explanations of his motivation. And this feature might had caused the Board of Review to see this as one of those exceptional and rare occasions that were being used for deciding a case on the responsibility of proof. One other key point was that, from the most important witness for the taxpayer there was no evidence.
  • In a case of China Map Ltd., it was considered by court of final appeal that whether the Board of Review misidentified the holding in law by failing to prove its ‘stated intention’ the taxpayers running an online business registration Hong Kong had failed to discharge the burden of proof. The appeals by all the four taxpayers were dismissed by the court of final appeal and this was due to the reason that, essential statement of taxpayers was acquiring the properties. They wanted properties or building renovation as it seems a good renting income investment for a long term, so they purchased the properties. The assertion was put into issue as it was disputed by the revenue. A finding was made by the Board of Review on this issue and it was resolved against the taxpayers. It was determined by Board of Review due to his finding that, taxpayer had failed to discharge their responsibility of proving in accordance with the Section 68 (4) of Hong Kong tax law.
  • It is responsibility of taxpayer who is going to have a new company registration Hong Kong other than its online business to prove that, assessments appealed against were incorrect or excessive. It was advised by the court of final appeal that, it depends upon all the circumstance that to prove any given intention what evidence was needed to prove. As far as cases of transactions were concerned the stress appeared to be more on badges of trade. While in cases of real properties stress appeared to be more on original intention. In a case of Jacky Lee Yee Shing it was observed that, in a number of cases that involved gold, commodities in Hang Seng Index futures, despite of original intention of taxpayer that was short term gain, they were held not to be trading.
  • Real Property Transactions

 

  • In cases of profits arising from the property transactions there are numerous decisions of Board of Review. In the cases discussed below, various reasons have been rejected by the Board of Review for the sale by taxpayer as following:
 
  • In a case D 96/95 it was observed that property was not suitable because of small usage and traffic congestion.
 
  • For use as the residence after marriage, the property was acquired by taxpayer and the sale was forced in order to pay debts.
 
  • In a case D 110/95 it was observed that, a taxpayer bought the property for residence of his family. Later he sold it due to some financial constraints that were imposed on him by illness of his mother.
  
  • Holding for short periods is regarded as an important factor. In case D 100/95 (6 months), D 96/95 (11 days) it was observed that, if it was accepted by the Board of Review that original intention was acquiring the property as capital asset but it was sold later because of a change of plan. The profit tax might not be imposed on that profit. It was also observed in the above described case that, with the property after acquisition the taxpayer and his wife were not happy at all.
  
  • In a case D 17/14, it was observed that, a property was purchased for opening a business in Hong Kong as a foreigner named on person T. The date of expiry of existing tenancy for the property was 30 May 1997. On 10 June 1997, the property was sold by T with existing tenancy at a gain. It was claimed by T that, sale was produced by very generous and unsolicited offer. It was pointed out by the Inland Revenue department that, for the purpose of monthly mortgage installments the monthly rental income fell short. The appeal of T was allowed by the Board of Review. The claim of T was that; property had been acquired by him as a long term investment to open a business in near future. The basis for this allowance was that, the claim of T was provided support by the following matters, considered cumulatively:
  
  • After paying all the legal costs and stamp duties the purchase was completed in May 1997.
 
  • A 15-year mortgage from a bank and funds of director of T were used to finance this purchase.
 
  • The property had not been put by T in market for sale.
 
  • When there was protection of tenure, at that time property was purchased with existing tenancy.
 
  • Some monetary charges were imposed by the term of mortgage that discouraged the early repayments.
 
  • 6.5 years of the rental income was equivalent to gain from sale.
 
  • All the individuals in the management of T and one of its directors, all of them were clearly experienced in selling and buying the properties in Hong Kong as trading stock and long term investment.
  
  • An accidental hope or only a simple wish that the property would be purchased to be used as a family residence was not enough to support a supposed intention of long term holding. In a case D 50/95 it was observed that, an uncompleted property was acquired by a taxpayer in March 1991 and it was sold out without even using it as residence in April 1992.
  
  • In a case of Chinachem investment Co Ltd it was observed that, a number of properties were held by the taxpayer having incorporate HK company for over a period of 10 years. These properties were held by it as rental properties. The classification of properties was held under current assets. The properties were sold to its associated companied and these were sold as a part of corporate organization. It supposed by the controlling director that a mistake had been made in the accounts. It was found by the Board of Review that, taxpayer was not able to discharge the burden of proof. This finding of the Board of Review was supported by the Court of Appeal.
  
  • Shares
 
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  • There are two ways in which shares can be held. First as a long term investment for purposes of income yielding and second for trading by resale.
 
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  • An individual usually not trade in shares as a corporation does. In the case of Dr. Chang Liang Jen, it was observed that, a doctor of economics was a manager in an export and import company. Many transactions in shares were carried out by him. It was decided by board of review that, the profits were non-trading profits and on this basis the decision was upheld by the court. The taxpayer who previously had his online business that he acquired after online business registration Hong Kong and now opening a new company registration Hong Kong was neither connected with share-trading nor a stockbroker. He also had no commercial organization. But in case of D 52/87 it was observed that, a medical practitioner was held to be trading in shares. This trading was for heavy borrowing from banks, using bank nominee, etc. In a case of Woo Kwok-hing it was observed that, beside his logical practice a barrister was held by the Inland Revenue department to carrying on a share dealing business. But issue in this case was not that whether he was trading in the shares.
  
  • In a case of Yeung Yuk Ching and Lee Yee Shing Jacky it was refused by the Board of Review to accept that T carried on share trading. Although the volume of transactions was huge and in respect of shares transactions, T spent a great deal of time. When the tax deduction was allowed on T and his wife, both were failed in their claim for deduction of share losses in computing their total income for personal assessment purposes. T was unable to obtain the registration until after several years he supposing begun the business. The method used for trading by him lacked professionalism and that was also unconventional of a true trader. T had no staff, office, staff office equipment of his own. It was considered by the Board of Review that, pure supposition is not a trading. Court of first instance, court of final appeal and the court of appeal upheld the decision of the Board of Review. In the court of final appeal, it was considered by the Mr. Justice McHugh NPJ that, for determining that whether a person who sells or buys shares was carrying on a business, following factors were relevant:
  
  • Trading with such intention of making profit.
 
  • Being engaged in repetitive and regular transactions.
 
  • Engaging full time or mainly full time in selling and buying the shares.
 
  • Having a staff and office to assist in buying or researching and selling shares.
 
  • Being relied on the share trading as dominant or sole source of income.
 
  • Paying for market, financial and trading data, or subscribing to the financial and trade journals and services that provide such type of data. 
 
  • Being employed or owing in or closely associated with the business. And the business that involved in broking, fund management, security analysis, share-trading or provision of financial information.
 
  • Keeping account books that have record of the results of dealings.
 
  • Making the visits of company possible.
 
  • Allocation of capital for dealings of share.
 
  • Assessing the future profitability of companies after researching their business intensively.
 
  • Setting the target price for reselling of some specific shares.
 
  • Obtaining briefing of private companies or having access to the management of companies.
 
  • To re-balance the structure of share portfolio systematically that should reflect the different weightings for various classes of shares.
 

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