Scenario: On 1 February 2010 Andy King bought a derelict freehold office building for Rs 3m. Legal fees of Rs 250,000 were paid in respect of the purchase. Throughout 2010 Andy renovated the office building at a cost of Rs 1.8m, with the renovation being completed on 23 December 2010. He immediately put the office building up for sale, and it was sold on 5 April 2011 for Rs 9.9m. Legal fees and other expenses in connection with sale amounting to a total of Rs 150,000 were paid in April 2011.
Andy financed the transaction by bank loan of Rs 4.5m that was taken out on 1 February 2010 at an annual interest rate of 12%. The bank loan was repaid on 5 April 2011.
Andy is employed as accountant and his taxable income for 2011 (before taking in account of the office building transaction) is estimated to be around Rs 2.5m.
Although Andy bought the office building with a view to making a profit, he thinks that as an isolated transaction it must be treated as a capital gain rather than as a trade assessable to income tax.
Required:
Question1. In brief describe the criteria known as the “badges of trade” that are used when determining whether a transaction constitutes the carrying on of a trade. You aren’t expected to quote from decided cases.
Question2. Compute Andy’s additional 2011 tax liability in respect of the office building transaction if he is:
(i) Treated as carrying on a trade; or
(ii) Not treated as carrying on a trade.
You should ignore VAT.
Question3. Given that Andy’s exempt dividends and bank interest for 2011 would amount to a total of Rs 400,000, state with reasons whether he would be liable to solidarity income tax and, if so, evaluate the amount of solidarity income tax that he would have to pay.