Tax Badges – Badges of Trade Discussion
A DISCUSSION ON THE BADGES OF TRADE
TUTOR: Mr. R. Brown
A project completed in partial fulfilment of the representation of the Bachelor of Science Degree in Business Administration.
University of Technology Jamaica.
School of Business and Management.
St. Andrew, Jamaica.
Date Submitted: October 16, 2012
Badges of Trade discussion
In law the circumstances under which a trade can take place are referred to as the badges of trade. Badges of trade are important in accounting because non-trade transactions are taxed differently. Badges of trade originate in case law. Each case where the meaning of trade is an issue must be decided on its own facts. The approach of the Commissioners and the courts over the years has been to examine the facts and look for the presence or absence of common features or characteristics of trade. Examples include the nature of the subject matter being exchanged, the length of ownership, and the reason for the transaction.The report of the Royal Commission on the Taxation of Profits and Income in 1955 reviewed that case law and identified six badges. However we will discuss only three of the six badges.
Supplementary work on or in connection with the property realized
Firstly we’ll discuss Supplementary work on or in connection with the property realized which states that if the property is worked up in any way during the ownership so as to bring it into a more marketable condition; or if any special exertions are made to locate or attract purchasers, such as the opening of an office or large-scale advertising, there is some evidence of trade. For when there is an organized effort to obtain profit there is a source of taxable income. But if nothing at all is done, the suggestion tends the other way.
For example, a sales campaign by advertisement or the organization or employment of a selling agency or sales staff. An illustrating this principle is In Martin v Lowry [1926] the individual bought a very large quantity of linen with the intention of reselling it at a profit. In the course of this activity he set up a large and skilled organization for disposing of the linen in smaller quantities including the establishment of a sales office; the employment of staff and an expert in linen; and an extensive advertising campaign. This sales organization was an important factor in the Commissioners decision that he was trading, a view with which the courts agreed.
Similarly, the breaking down of assets into smaller lots to facilitate a sale may be a pointer to a trading motive, For example, in Cape Brandy