Sep 2014, Issue 11
Enhancement of a capital asset for sale does not point to a trading intention, the court held in the Sheng Kung Hui case
The Court of Appeal (COA) recently handed down its judgment in the Sheng Kung Hui case. The case concerns whether the profits derived by the taxpayers (which are charitable bodies) from the sale of certain properties located on the redeveloped land are trading profits and subject to Hong Kong profits tax.
The COA overturned the decisions of the Board of Review (the Board) and the Court of First Instance and held that there was no change of intention of the taxpayers from capital holding 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. However, the COA did not rule on whether a change of intention occurred at a later point of time and remitted the case back to the Board for it to consider that issue. Given the conclusion on the first issue, it is not necessary for the COA to decide on the second issue of whether the taxpayers qualified for the tax exemption for charitable bodies but the COA did make a few comments on that issue.
The COA's judgment indicates that activities within certain scope performed by a taxpayer to enhance the value of its capital asset before disposal would not render the transaction an adventure in the nature of trade. On the other hand, great care needs to be exercised by a taxpayer in the various stages of the tax appeal process as that may eventually affect the taxpayer's ability to make certain submissions or put forward certain arguments when the case is heard in the court. Other issues of Hong Kong Tax News Flash
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