Van Den Berghs Ltd V Clark
INTRODUCTION
In Malaysia, the Income Tax Act 1967 Section 3 sets the scope of income tax provided that income accrued in or derived from Malaysia would be tax. However, S3B of the Act specifically provides that income derived by an offshore company in respect of offshore business activity is not chargeable to income tax. The law governing the tax for such offshore business activity is the Labuan Offshore Business Activity Tax Act 1990 and not the Income Tax Act 1967.
The Act imposes income tax on income, while capital gains are not chargeable to income tax. Generally, income has the characteristics of repetitive, flow from a source of income and received in the ordinary course of business. It must also be examined from the recipient 's perspective. On the other hand, capital receipts are non-business income and it arises independently, that are not considered as business income and treated as capital gain. For instances, realisations from long term investment or personal assets are capital transactions. Such gains are capital receipts.
Moreover, Commonwealth laws provided that the income source is not necessarily of one which is expected to be continuously productive, but it must be one whose object is the production of a definite return, excluding anything in the nature of a mere a windfall. Windfall, gambling or profits arising from speculative activities are capital gains and would not be subject to income tax. Also, cost saving is not income and would not be taxed.
The distinction between ‘capital’ and ‘income’ is crucial as capital receipts generally escaped tax. Making the distinction between ‘capital’ and ‘income’ is never an easy task, especially in relation to the compensation on termination of a business contract. Generally, compensation for payment of services is income receipts while compensation for destruction of capital structure is capital receipts. The Act does not define ‘income’ or ‘capital’; therefore one needs to research through the cases
In Malaysia, the Income Tax Act 1967 Section 3 sets the scope of income tax provided that income accrued in or derived from Malaysia would be tax. However, S3B of the Act specifically provides that income derived by an offshore company in respect of offshore business activity is not chargeable to income tax. The law governing the tax for such offshore business activity is the Labuan Offshore Business Activity Tax Act 1990 and not the Income Tax Act 1967.
The Act imposes income tax on income, while capital gains are not chargeable to income tax. Generally, income has the characteristics of repetitive, flow from a source of income and received in the ordinary course of business. It must also be examined from the recipient 's perspective. On the other hand, capital receipts are non-business income and it arises independently, that are not considered as business income and treated as capital gain. For instances, realisations from long term investment or personal assets are capital transactions. Such gains are capital receipts.
Moreover, Commonwealth laws provided that the income source is not necessarily of one which is expected to be continuously productive, but it must be one whose object is the production of a definite return, excluding anything in the nature of a mere a windfall. Windfall, gambling or profits arising from speculative activities are capital gains and would not be subject to income tax. Also, cost saving is not income and would not be taxed.
The distinction between ‘capital’ and ‘income’ is crucial as capital receipts generally escaped tax. Making the distinction between ‘capital’ and ‘income’ is never an easy task, especially in relation to the compensation on termination of a business contract. Generally, compensation for payment of services is income receipts while compensation for destruction of capital structure is capital receipts. The Act does not define ‘income’ or ‘capital’; therefore one needs to research through the cases
References: Chong, K. F. (2003). Compensation in Connection With Business Receipts-An Analysis of the Malaysian Experience. Malayan Law Journal , 30. Chong, K. F. (2006). Contemporary Issues on Income Tax and Real Property Gains Tax. ACCA Tax Publication , 38. Chong, K. F. (2010). Malaysian Taxation (16 ed.). Kuala Lumpur, Malaysia: InfoWorld. Flynn, M. (1990). Distinguising between Income and Capital Receipts - A Search for Principle. Journal of Austrlian Taxation , 17. Mahalingham, S. (2005). Compensation for early contract terminations. Tax Adviser , 18. [ 4 ]. Enacted from article Contemporary Issues on Income Tax and Real Property Gains Tax by Chong, K. F. (2006). [ 7 ]. Enacted from Chapter 1 - Scope of Charge, Malaysia Taxation, 16th edition(2010)