Profits Tax - Capital
gain versus revenue gain
of Inland Revenue Ordinance exempts profits arising from the sale of
capital assets. Even without this exemption, it is a generally
accepted accounting practice that capital income should not be included in
There are a
number of court cases on the captioned question: drawing
distinction between income from “fixed capital” and income from
“circulating capital” --- referring the former to “capital receipts”
and the latter to “revenue receipts”.
It has been
established from case law that “fixed capital” is what the owner turns
to profit by keeping it in his own possession; whereas “circulating
capital” is what he makes a profit of by parting with it and letting
it change masters. It follows that land and buildings, plant and
machinery, long-term leases and goodwill are fixed capital retained
and used in the business --- they form part of the permanent structure
of the business --- any receipt from their sale, or compensation for
their loss or damage, are capital receipts and non-taxable.
On the other
hand, an asset forms part of the circulating capital if its is
acquired in the ordinary course of business --- it is to be sold, or to
be manufactured for goods to be sold --- for example: trading stock and
raw materials --- any receipt related to such items are revenue
receipts and taxable.
A summary of capital versus
revenue receipts is given by Black's Law Dictionary (5th edition) as
Profit: Most commonly,
the gross proceeds of a business transaction less the costs of
the transactions; i.e. net proceeds. Excess of revenues over
expenses for a transaction; sometimes used synonymously with net
income for the period. Gain realized from business or investment
over and above expenditures.
Revenue: Return or
yield; profit, as that which returns or comes back from an
investment; the annual or periodical rents, profits, interest or
issues of any species of property...
goods, possessions, and assets, used for the production of
profits... In accounting, the amount invested in a business.