During this period of stock market volatility and inflation, many investors have diversified their investments into various types of assets. The asset classes preferred by investors are real properties, shares or even cryptocurrencies. However, on disposal, investors often overlook the taxability of the gains or receipts derived therefrom.
In order to ascertain the taxability of the gains or receipts, the first task is to determine whether such gains or receipts arose from a capital transaction or a revenue transaction.
The taxability of gains or receipts arising from Capital or Revenue transactions
Presently, Malaysia does not impose Capital Gains Tax (CGT) on capital gains arising from disposal of investments or capital assets except for Real Property Gains Tax (RPGT) which is imposed on gains arising from disposal of real property in Malaysia or shares in a real property company in Malaysia. On the other hand, gains arising from revenue transactions will be subject to tax under the Malaysian Income Tax Act, 1967 (MITA).
Whether a gain arising from a transaction is capital or revenue in nature would depend on the facts and circumstances surrounding the transaction.
The famous metaphor being frequently applied in distinguishing capital from income is “capital being likened to the trees and income being likened to the fruits”. Capital is the source whereas revenue is the income.
One of the important criteria in determining the nature of a transaction is the characteristic of recurrence. Capital transactions are usually one-off in nature whilst revenue transactions are recurring in nature. For example, the realisation of a long-term investment in real property is considered to be capital in nature. Conversely, transactions conducted in the ordinary course of carrying on a business or transactions that are adventures in the nature of trade are considered as revenue transactions.
Badges of Trade
The MITA does not prescribe the circumstances under which an income or a gain is considered as capital or revenue in nature. In practice, the principles laid down by the Courts in precedent tax cases collectively known as “badges of trade” are used as a guide in determining whether a person is carrying on trading activities or otherwise.
The characteristics of a trading activity, or the badges of trade as listed below, are used to test the existence of a trade or an adventure in the nature of trade:
- Motive or intention
- Trading interests in the same or similar field
- Nature of the asset
- Period of ownership
- Frequency of transactions
- Circumstances responsible for the realisation
- The way the sale was carried out
- Improvement made on the asset
- The method of financing
A discussion on the taxability of gains or receipts from the disposal of three (3) common investment instruments (i.e. real properties, shares and cryptocurrencies) and the important court cases are shown below: