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GENERALLY, income tax is applied to income, just as real property gains tax is applied to gains on disposal of real properties, whether or not the land is vacant or with buildings erected.An exception would be where a person has held the land as trading stocks or where the land transaction has elements of badges of trade. The gains from disposal of such land would then be subject to income tax.
Let us say an individual inherited a piece of land. He later entered into a joint venture agreement with a property developer to develop the land into residential properties. To pay for the construction cost of the residential units, he sold part of the land to the developer.
Would the sale of this part of the land be subject to real property gains tax or to income tax?
Can he be said to have the badges of trade (such as knowledge in land trading, intention to trade, activities carried out, and commercial value of the land) because of the joint venture agreement with the developer?
Companies are usually incorporated to carry out a business.Budget 2022 runup
Would this make companies more inclined to have the badges of trade compared to individuals?
However, some companies are formed to hold landed properties as investments.
Would there be any badges of trade if such investment land is developed after it has been held for say, more than 10 years?
Shouldn’t this be treated as a realisation of investment instead? Would it make any difference if the land was previously acquired from its holding company which is a property developer, instead of it being acquired from a third party?
In tricky, ambiguous situations, real property gains tax returns which have been previously filed by the taxpayers and tax clearance obtained are being disregarded by the tax authorities for the reason that the gain ought to be subject to income tax instead of real property gains tax, allegedly due to the presence of the badges of trade.
The pertinent question is, when did the badges of trade arise in respect of the developed land?
Could there have been a change in intention which the landowner might not even be aware of?
The debate of whether income tax or real property gains tax should apply to gains from disposal of land has remained a contentious issue since time immemorial.
A myriad of appeals has gone from the Special Commissioners of Income Tax right up to the Court of Appeal for a decision.
Judgements may not always be unanimous. The final decision is a question of mixed law and fact.
Certainty in the law is crucial as legal principles are applied to the facts of each taxpayer’s case.
An examination of the facts of each case to establish the intention for the acquisition of land is, therefore, of paramount importance.