BADGES OF TRADE

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.
Note:
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 four houses admittedly for resale. He was
held not to be trading. Conversely, the intention not to make a profit will not necessarily
mean that a trade is not being carried on.

The subject matter of realization
If the assets are normally held as trading stock, the presumption that the trade is taking place
is higher. If the assets that have been sold are normally not held as trading stock it is unlikely
that the transaction may be interpreted as trading.
In Rutledge Vs IRC (1929) the Tax- payer, whilst in Germany on business, purchased one
and a quarter million toilet rolls. Shortly after his return to England he sold them making a
profit of sterling Pounds Ten thousand. He was held to be trading. In Martin Vs Lowry (1927)
an Agricultural machinery merchant purchased from the Government its entire stock of
aircraft linen amounting to almost 45 million yards. He had hoped to sell the linen to
manufactures but instead was forced to sell it through an extensive retail operation direct to
the public. He made a profit of almost Sterling Pound two million. He was held to be trading.

The length of period of ownership

After about a year he sold it making a profit.bought it with a view to transport it. In his judgment Rowlatt J said: “Now of course it is very well known that one transaction of buying and selling a thing does not make a man a trader. Per Rowlatt. This was blended. become taxable as item in trade as a whole. This is because assets held for long periods of time are normally investments. by blending with a view to alter…” In IRC Vs Livingstone (1972). bottled and sold to over 100 separate buyers over a period of about 18 months. He was held to be trading. after expenses. then such an asset when sold will give rise to a trading profit. I do not really know what it is” The frequency of similar Transactions The more often that a tax-payer has entered into a particular transaction the greater the presumption of trading. of course and combining them all into one trade”. the Taxpayer had entered into four transactions each resulting in a profit. Done three or four times it usually is” In Pickford Vs Quirke (1927). In Wisdom Vs Chamberlain (1969) the tax.. but if that is repeated and becomes systematic then he becomes a trader and the profits of the transaction. Bolson & Sons Ltd Vs Farrell (1953). not taxable so long as they remain isolated. In the case J.000 gallons of South African Brandy. with borrowed money.J said: “This was a transaction entered into on short term basis for purpose of making a profit and if that is not an adventure in the nature of trade. but they were held to be trading! Circumstances giving rise to the Realization . Harman J.. They were held to be trading. In Cape Brandy Syndicate Vs IRC (1921). Supplementary Work If an asset is acquired when it is in a poor state and supplementary work is carried out to improve it. a syndicate purchased a cargo vessel with a view to converting it into a steam drifter and selling it at a profit.payer had. of approximately forty eight thousand sterling pounds. J. They had “. purchased silver bullion as a hedge against possible devaluation.If a person sells an Asset that he has held for a long period of time it will be quite difficult to prove that the asset had been held as trading stock. He was held to be trading. They had never previously done this. setting losses against profits. with a view to modify its character by skilful manipulation. three individuals in the wine trade bought 10. Harman J said: “A deal done once is probably not trading.

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. He was held to be trading by the Commissioners of Taxes. . In Page Vs Pogson (1954) the taxpayer built a house for himself and sold it six months later after completion. 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 of the existence of a trade. The Way in which the asset was acquired If the asset was acquired by inheritance or by way of gift the transaction may not be considered to be a trading transaction. In addition to the six badges of trade there additional factors which have to be taken into account. there have been few cases on this point. Method of Finance If the asset sold was acquired by use of borrowed funds the presumption that the asset was held as trading stock is high. The presumption is even greater if some interest was paid on the amount borrowed. Incidentally. He then built another one but had to sell it when his employment moved to another part of the Country.