Badges of Trade

Decent Essays

Profit seeking motive
When a person enters into a transaction, we need to identify whether there is a profit seeking motive. It is not the existence of a profit that is important, it is the motive to earn one. However, the ZRA will really be interested in this issue if a profit has actually been earned, because then they have something to tax. A Taxpayer may argue that they are trading in order to utilize a loss to reduce their Tax bill. The taxpayer must however, demonstrate the motive rather than the existence of profit to establish that a trade is being carried on.
Intention to trade clearly constitutes trading. Intention to make a profit may not necessarily be so.

In IRC Vs Reinhold (1953) the Tax- payer bought
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In Cape Brandy Syndicate Vs IRC (1921), three individuals in the wine trade bought 10,000 gallons of South African Brandy. This was blended, bottled and sold to over 100 separate buyers over a period of about 18 months. They were held to be trading. Per Rowlatt. J. They had “...bought it with a view to transport it, with a view to modify its character by skilful manipulation, by blending with a view to alter…”
In IRC Vs Livingstone (1972), a syndicate purchased a cargo vessel with a view to converting it into a steam drifter and selling it at a profit. They had never previously done this, but they were held to be trading!

Circumstances giving rise to the Realization
If a taxpayer sells an asset in order to raise money to help solve some financial problems it will be difficult to prove that he is carrying on a trade. Incidentally, there have been few cases on this point.
In Page Vs Pogson (1954) the taxpayer built a house for himself and sold it six months later after completion. He then built another one but had to sell it when his employment moved to another part of the Country. He was held to be trading by the Commissioners of Taxes.

In addition to the six badges of trade there additional factors which have to be taken into account. These are:

Taxpayer’s other circumstances
If other circumstances of a taxpayer indicate the existence of a trade then even the current transaction is likely to be interpreted as an indication
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