Van Den Berghs Ltd V Clark

INTRODUCTION In Malaysia, the Income evaluate Act 1967 Section 3 sets the scope of income tax provided that income accrued in or derived from Malaysia would be tax. However, S3B of the Act specifically provides that income derived by an offshore lodge in respect of offshore occupation activity is not chargeable to income tax. The law governing the tax for such offshore occupancy activity is the Labuan Offshore lineage Activity revenue enhancement Act 1990 and not the Income task Act 1967. The Act imposes income tax on income, while chapiter gains argon not chargeable to income tax.Generally, income has the characteristics of repetitive, flow from a source of income and received in the ordinary course of business. It must also be examined from the recipients perspective. On the other hand, capital receipts are non-business income and it arises indepen dently, that are not considered as business income and treated as capital gain. For instances, realisations from long term in vestment or personal assets are capital transactions. Such gains are capital receipts.Moreover, state laws provided that the income source is not necessarily of one which is expected to be continuously productive, but it must be one whose object is the production of a definite return, excluding anything in the constitution of a mere a windfall. Windfall, gambling or profits arising from speculative activities are capital gains and would not be subject to income tax. Also, cost saving is not income and would not be taxed. The short letter between capital and income is crucial as capital receipts broadly speaking escaped tax.Making the distinction between capital and income is never an easy task, particularly in relation to the compensation on termination of a business contract. Generally, compensation for payment of function is income receipts while compensation for desolation of capital coordinate is capital receipts. The Act does not define income or capital therefore one needs to research through the cases laws for guidance. plate LAW Van den Berghs Ltd v Clark Fact A oleomargarine manufacturer entered into business alliance agreements with a Dutch competitor.Following a enmity over amounts due to the company, the Dutch competitor paid ? 450,000 as remediation for the cancellation of the companys future rights under the agreements, which still had a bend of years left to run. The issue arise whether the compensation was an income or capital receipt. Held The House of churchmans held that this payment was a capital receipt of the company. In his judgement, Lord Macmillan propounded the building block structure test as the test for determining the nature of such compensation.His Lordship was of the opinion that these terminated contracts were not ordinary commercial contracts do in relation to the sale of goods but were related to the whole structure of the profit-making apparatus of the manufacturer. The contracts regulated the taxpayers ac tivities, defined what the parties in the contract whitethorn or may not do and further affected the whole conduct of the business. As the compensation was related to the termination of that which was fundamental to the bargainers activities, it was therefore a capital receipt. CONCLUSION The case to a higher place illustrated the difficulty in distinguishing between income and capital.With the same facts, the High Court and federal Court could arrive at different conclusions. It is therefore concluded that the distrust of income or capital is a question of law for the courts to decide. As summary, fudge below show the different of income and capital receipts. INCOME pass along CAPITAL RECEIPTS Chargeable to income tax Not chargeable to income tax Provision of services Gift Trading or adventure in the nature of pile Profit from disposal of long term investment sale of short-term investment Speculation, windfall gains, gambling Sale of goods/trading stock Sale of capital asse tsREFERENCES Bibliography Chong, K. F. (2010). Advanced Malaysia gross (12 ed. ). Kuala Lumpur InfoWorld. Chong, K. F. (2003). Compensation in Connection With Business Receipts-An Analysis of the Malaysian Experience. Malayan Law Journal , 30. Chong, K. F. (2006). Contemporary Issues on Income task and Real Property Gains Tax. ACCA Tax Publication , 38. Chong, K. F. (2010). Malaysian tax (16 ed. ). Kuala Lumpur, Malaysia InfoWorld. Flynn, M. (1990). Distinguising between Income and Capital Receipts A Search for Principle. Journal of Austrlian Taxation , 17. Mahalingham, S. (2005).Compensation for early contract terminations. Tax Adviser , 18. 1 . Section 3, Income Tax Act 1967 2 . Section 3B, Income Tax Act 1967 3 . Enacted from Chapter 1 Scope of Charge, Malaysia Taxation, 16th edition(2010) 4 . Enacted from article Contemporary Issues on Income Tax and Real Property Gains Tax by Chong, K. F. (2006). 5 . Van den Berghs ltd vs Clark (19 TC 390) 6 . Enacted from article C ompensation for early contract terminations by Mahalingham, S. (2005). 7 . Enacted from Chapter 1 Scope of Charge, Malaysia Taxation, 16th edition(2010)