BADGES OF TRADE

Profit seeking motive
When a person enters into a transaction, we need to identify whether there is a profit seeking motive. It is not the existence of a profit that is important, it is the motive to earn one. However, the ZRA will really be interested in this issue if a profit has actually been earned, because then they have something to tax. A Taxpayer may argue that they are trading in order to utilize a loss to reduce their Tax bill. The taxpayer must however, demonstrate the motive rather than the existence of profit to establish that a trade is being carried on.
Note:
Intention to trade clearly constitutes trading. Intention to make a profit may not necessarily be so.

In IRC Vs Reinhold (1953) the Tax- payer bought four houses admittedly for resale. He was held not to be trading. Conversely, the intention not to make a profit will not necessarily mean that a trade is not being carried on.

The subject matter of realization
If the assets are normally held as trading stock, the presumption that the trade is taking place is higher. If the assets that have been sold are normally not held as trading stock it is unlikely that the transaction may be interpreted as trading. In Rutledge Vs IRC (1929) the Tax- payer, whilst in Germany on business, purchased one and a quarter million toilet rolls. Shortly after his return to England he sold them making a profit of sterling Pounds Ten thousand. He was held to be trading. In Martin Vs Lowry (1927) an Agricultural machinery merchant purchased from the Government its entire stock of aircraft linen amounting to almost 45 million yards. He had hoped to sell the linen to manufactures but instead was forced to sell it through an extensive retail operation direct to the public. He made a profit of almost Sterling Pound two million. He was held to be trading.

The length of period of ownership
If a person sells an Asset that he has held for a long period of time it will be quite difficult to prove that the asset had been held as trading stock. This is because assets held for long periods of time are normally investments.
In Wisdom Vs Chamberlain (1969) the tax- payer had, with borrowed money, purchased silver bullion as a hedge against possible devaluation. After about a year he sold it making a profit, after expenses, of approximately forty eight thousand sterling pounds. He was held to be trading. Harman J.J said: “This was a transaction entered into on short term basis for purpose of making a profit and if that is not an adventure in the nature of trade, I do not really know what it is”

The frequency of similar Transactions
The more often that a tax-payer has entered into a particular transaction the greater the presumption of trading. In the case J. Bolson & Sons Ltd Vs Farrell (1953), Harman J said: “A deal done once is probably not trading. Done three or four times it usually is”
In Pickford Vs Quirke (1927), the Taxpayer had entered into four transactions each resulting in a profit. He was held to be trading. In his judgment Rowlatt J said: “Now of course it is very well known that one transaction of buying and selling a thing does not make a man a trader, but if that is repeated and becomes systematic then he becomes a trader and the profits of the transaction, not taxable so long as they remain isolated, become taxable as item in trade as a whole, setting losses against profits, of course and combining them all into one trade”.

Supplementary Work
If an asset is acquired when it is in a poor state and supplementary work is carried out to improve it, then such an asset when sold will give rise to a trading profit.
In Cape Brandy Syndicate Vs IRC (1921), three individuals in the wine trade bought 10,000 gallons of South African Brandy. This was blended, bottled and sold to over 100 separate buyers over a period of about 18 months. They were held to be trading. Per Rowlatt. J. They had “...bought it with a view to transport it, with a view to modify its character by skilful manipulation, by blending with a view to alter…”
In IRC Vs Livingstone (1972), a syndicate purchased a cargo vessel with a view to converting it into a steam drifter and selling it at a profit. They had never previously done this, but they were held to be trading!

Circumstances giving rise to the Realization
If a taxpayer sells an asset in order to raise money to help solve some financial problems it will be difficult to prove that he is carrying on a trade. Incidentally, there have been few cases on this point.
In Page Vs Pogson (1954) the taxpayer built a house for himself and sold it six months later after completion. He then built another one but had to sell it when his employment moved to another part of the Country. He was held to be trading by the Commissioners of Taxes.

In addition to the six badges of trade there additional factors which have to be taken into account. These are:

Taxpayer’s other circumstances
If other circumstances of a taxpayer indicate the existence of a trade then even the current transaction is likely to be interpreted as an indication of the existence of a trade.

The Way in which the asset was acquired
If the asset was acquired by inheritance or by way of gift the transaction may not be considered to be a trading transaction.

Method of Finance
If the asset sold was acquired by use of borrowed funds the presumption that the asset was held as trading stock is high. The presumption is even greater if some interest was paid on the amount borrowed.