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Capital or income?
Question
If it is not too early to submit queries, we should be glad of opinions on the following case: A firm of auctioneers and estate agents bring into their accounts sums received from the sale of properties they have purchased at times varying from six months to sixteen years ago. They still own about twenty houses, which they purchased in 1908, and we are of the opinion that the profits from the sale of the premises which have been held for more than, say, five years should be eliminated from the computation of liability. The Inspector will not agree to this. – F.S.A.A
Answers
It appears to me that if the firm of auctioneers and estate agents referred to by your correspondent ‘F.S.A.A.’ are carrying on a trade in houses, and it would appear from the facts stated by him the Inland Revenue authorities have held that this is so, no distinction can be drawn between monies received on the sale of those held (a) more than five years, and (b) less than five years. Following the decision in the case of Pearn v Miller, it would be necessary to revalue the unsold houses each year and to claim a set-off of realised losses on sales against realised profits. - J.L.
The question which will decide whether the profits on realisation will be chargeable to tax depends almost entirely on the purpose in mind when the properties were purchased. If they were purchased merely as investments, although with the possibility of profits occurring on realisation in mind, no liability should attach. In this respect there is no essential difference between houses and other investments. Where, on the other hand, the properties were purchased with the main intention of securing profits on disposal, the profits secured will be accessible to tax. In this connection it is important to see that any assessment that is made under Cases I and II of Schedule D, and not under Case VI. It is not easy to prove the intention of the parties, and the Revenue are apt to try and put the burden of proof on the taxpayer. Any such attempt should be resisted. After all, the parties themselves are the best judges as to their own intentions, and it is ‘up’ to the inspector to bring very strong evidence forward to rebut the declared object of the investor. – N.
Before one can state one’s opinions fully on a question such as this, one might wish to have more specific information on three points of vital importance which affect the decision very materially. The first is, were the purchases of the property made for the purpose of holding such securities as an investment? The next point is, were the transactions merely a few casual ones (the query gives no indication as to their volume, though one might reasonably infer by reason of the extended period over which they have taken place that they are not merely isolated items); and lastly, one would like to know whether or not the business of the firm in question is to deal in property as merchants as distinguished from purely estate agency and auctioneership. It might here be remarked, unnecessarily, perhaps, that the usual business of a firm of auctioneers and estate agents is not to act as merchants in property as though they were principals. If the firm’s business consists partly of profits from buying and selling properties more or less regularly, and systematically it is certain that all such net profits are taxable as business gains, and I do not think the question of period between purchase and sale affects the liability any more than that which elapses between the buying and disposal of any other form of stock or goods affects the liability of an ordinary merchant or shopkeeper. Consequently, I do not think that profits from the sale of premises held for five years or more should be eliminated from the liability computation. In the case of such properties the profit accrues only when the sale is effected and thus cannot, in my opinion, claim the legal immunity which the tax statutes accord to profits or income relative to a period more than six years ago. Another important factor in the case is whether or not the purchase prices of properties so bought by this firm are treated in the accounts as though they were in respect of stock or commodities held for future sale. If on the other hand the firm’s business is not materially one of dealing in properties as principals, there might be a good case for claiming that profits on such transactions are casual ones and thus not taxable. In these circumstances it could reasonably be contended that all are exempt from tax liability. The query raised by ‘F.S.A.A.’ is a very interesting one and one to which I should like to have been able to reply more specifically and definitely. I would, however, urge your correspondent not to be discouraged in his own views merely by the non-agreement of the Inspector of Taxes with them. If he has a good case he should be firm and persistent with the Revenue authorities. An Inspector always opens his side of the question by claiming on a basis most favourable to the National Exchequer, and in order to even any unfairness which might otherwise result it is generally the best policy for the taxpayer or his accountant to take the standpoint best for himself, not, however, by misstating or withholding facts, but by fully disclosing them and making his own contention clear and strong. – Munacco.
