Financial Accounting 4

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Explain and illustrate the badges of trade. The factors to be taken into account in deciding whether an activity or a transaction has been carried out in such manner as amounting to the carrying on of a trade or adventure or concern in the nature of trade are referred to as the “badges of trade”. Profit making motive A good test to determine the subject matter held is investment or stock in trade is to establish the intention of the company at the time of acquisition of such subject matter. Where an asset purchased for investment was subsequently sold, the gain derived is not taxable. If there are facts to show that there has been a change of intention, the gain derived would be taxable as the investor has changed his intention to be a trader. Repetition/ Frequency of transactions Where the same type of object or article is repeatedly bought and sold, it would generally lead to the inference that there is trading in that article. In Pickford v Quirke TC 251, the Court held that although the transactions, considered separately, were capital, they together, constitution the carrying on a trade. In DGIR v LCW, the gain derived from 1 purchase and several sales were considered to be a trading receipt. Where transactions are found to be one of a series, that is repeated or similar arising from a pattern of activity there can be a strong presumption of trading. In Page v Pagson the court held that the profit of the second bungalow to be taxable but not the first one. Organization If the business is organized by forming a company, it was always presumed that a company was formed with the intention of carrying on a business (CIR v Eccentric Club) Financing arrangements The mode of the finance placed great importance in determining whether the taxpayer is trading in property or merely realizing its investment.…...

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