DO YOU DERIVE INCOME FROM AN ADVENTURE IN THE NATURE OF TRADE?

Now that Government has contracted an American company to provide a system that will integrate data from various Ministries, Departments and Agencies to enable proper identification of individuals and companies that own and transact in property, many individuals and companies will soon be receiving notifications from #URA inviting them to declare and account for capital gains, rental tax and understated business income, either because they bought or sold property, or because various leased properties can be traced to them and yet they do not appear on the tax register, or if they appear, their gross incomes are grossly under-declared.

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In case you did not know, the distinction between capital gains and business income is very important for income tax purposes. The tax treatment of business income contrasts with capital gains for the reason that gains that are not included in business income, are exempt from income taxation. This is crucial for taxpayers since the failure to distinguish the two can result in additional tax assessments by the taxman.

When a taxpayer sells property (personal or business), any capital gain realized may qualify to be treated as business income for purposes of income taxation. Under the Act, where a gain on a disposition of property that is held for a business purpose arises, that gain automatically represents a derivation of business income and is taxable. Generally speaking, when a taxpayer “habitually” carries out a transaction (such as engaging in the sale or purchase of land) which allows them to produce profit, this may constitute a “business” as defined in the Income Tax Act. The Income Tax Act defines “business” to include any trade, profession, vocation or adventure in the nature of trade. Income from employment is specifically excluded from this definition. While the Act defines “business” it does not define an “adventure in the nature of trade”. Important to note is that the presence of an “adventure in the nature of trade” does not automatically imply that a taxpayer who has undertaken on an “adventure” is doing so in a business context or “in the nature of trade.” However, the above definition of “business” can cause an otherwise “isolated transaction” to constitute a business transaction, simply by falling into the definition. This is a complex area of tax law that requires detailed analysis and advice from an experienced tax professional.

Adventure in the nature of trade is a common law concept that has been crafted to determine whether (or not) a purchase or sale transaction is of a “business nature”. Basically, in order to make a determination, each transaction must be considered in light of its own circumstances.

How does a taxpayer determine whether (or not) a transaction undertaken is an “adventure in the nature of trade” and therefore, constitutes a business transaction?

The first consideration is whether or not the transaction occurs habitually, less frequently or as a one-off. Of course, transactions that occur habitually will more often than not, constitute a business transaction. Be that as it may, the first requirement for an “adventure to be in the nature of trade” is that the transaction in question must involve a scheme for profit making. In other words, the evidence must clearly show that the taxpayer’s intention or motivation as a result of the transaction was to generate a profit. However, evidence of intention for profit is not sufficient to constitute a business adventure. Several factors may be considered and these include:

1. The taxpayer’s conduct in relation to the transaction.
2. The timeline during which the property was held by the taxpayer and the taxpayer’s conduct from the time the property is purchased, the time in which the taxpayer was in possession of it, to when it was sold.
3. The taxpayer’s familiarity and experience in dealing with such property (or a property of a similar nature) for business purposes. This includes considering the nature of the taxpayer’s occupation and their previous involvement in similar transactions.
4. The nature of business, profession, calling or trade of the taxpayer.
5. The nature of the property.
6. Factors that motivated the transaction in question.
7. Financial aspects that are relevant to the transaction in question.
8. Whether (or not) a person, other than the taxpayer, shares an interest in the property, and the nature of that person’s occupation, intentions and involvement in carrying out the transaction, as well as their previous involvement in similar transactions.

Once it is determined, after considering the above factors (the list is not exhaustive), that the transaction in question falls under the definition of business in the Income Tax Act, the taxpayer must include all income (from the sale of the property) when declaring income for tax purposes. This is because income, a profit or gain derived from a business is fully taxable as business income in the hands of the taxpayer.

If you have questions regarding a specific transaction and whether (or not) it constitutes a business transaction that may be categorised as an “adventure in the nature of trade”, please contact #LibraTaxConsultants and speak with one of our experienced team of lawyers and consultants. You could just save yourself a huge unforeseen tax bill. Better yet, undertake a self-tax health check and streamline your tax disclosures before the Tax man cometh!