Sheng Kung Hui's enhancement activities do not constitute trading albeit there is no 'enhancement for realisation' principle
The Court of Final Appeal (CFA) handed down its judgment in the Sheng Kung Hui case on 4 February 2016. The case concerns whether there was a change of intention, with respect to a piece of land owned by the taxpayers, from capital holding to trading such that the profits from disposal of the land should be subject to profits tax.
The CFA held that although there is no ‘enhancement for realisation’ principle as cited by the Court of Appeal (COA), the COA is correct in holding that there was no change of intention to trading up to the period of time within which the taxpayers had engaged in various activities to enhance the value of the land for realisation. This is because none of the taxpayers’ enhancement activities within that period had gone beyond what might be expected of a non-trader owner in similar circumstances. As a result, the case will be remitted back to the Board of Review as previously ordered by the COA for the Board to determine if a change of intention occurred on a later date.
The CFA has ruled in this case that there is no principle of law defining ‘trade’ that can be applied universally, although the badges of trade provide some guidance on that. Each case has to be considered based on its own facts and circumstances. To support the claim that there is no trade or intention to trade, taxpayers have to demonstrate that their enhancement activities with respect to the assets disposed do not go beyond the activities that may be expected of a non-trader owner in similar circumstances. However, there is no universal rule on what may be expected of a non-trader owner as that also varies depending on the particular fact patterns of each case.
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