Question

1. Briefly explain any three of the six badges of trade that are considered to be relevant by Inland Revenue Department in determining whether a taxpayer is carrying on a trade.

Answer 1

3 Badges of Trade which are considered by revenue Department:

• Profit-seeking motive- When a person enters into a transaction, we need to identify his motive whether it  is a profit seeking motive or not. It is not the existence of a profit that is relevant, the most important  is the motive to earn profit. However the Revenue department will really be interested in this if a profit has actually been earned, because after that they will have something to tax. The taxpayer must show the motive rather than the actual  profit to establish that a trade is being carried.

• The source of finance- When a asset is purchased for selling it is not a asset , it is trade .. after which taxation comes in place.If an asset is purchased on a short term loan which the taxpayer is unable to repay without reselling the asset , then Revenue department can successfully argue that the asset was purchased specially with a view to selling it.After which the Profit will be taxed has trading income.

• Frequency and number of similar transactions
• If we do something once or Rarely , never to be repeated again frequently , it is unlikely that we would be carrying on a trade. However if we keep doing it, it is more likely that we are trading. hence Frequency and Number of Similar Transaction can be traced by revenue department confirming trade, after which Profit will be taxed has trading income.