Chapter 4 the concept of chargeable income A. Definition of chargeable income B. Capital and income C.

Capital and capital gains D. Badges of trade E. Why is the distinction important? F. Different types of income G. Chargeable assets A. Definition of chargeable income The aggregate of all income and capital gains on which tax is charged o All gains or profits of an income nature (Art 4). All profits of an income nature are liable to tax. o Certain gains of a capital nature (Art 5). Capital gains arise from the transfer of certain capital assets. Chargeable income is subject to Malta tax provided it falls within Maltas jurisdiction to tax

Income charged to tax(Art4(1)a to g)

o o o o o o Gains or profits from any trade, business, profession or vocation Gains or profits from employment or office, including the value of any benefit provided by reason of an employment office Dividends, premiums, interest or discounts Any pension, charge, annuity or annual payment Rents, royalties, premiums and any other profits arising from property Gains or profits not falling under any of the above(catch all clause)

General rule: ALL TYPES OF INCOME are subject to tax Certain types of income are except from tax and therefore not subject to tax (Art 12 ITA) Capital assets which are charged to tax o Profits arising from the transfer of ownership or usufruct of an immovable property or the assignment or cession of any rights over such property o Gains or profits arising from the transfer or the ownership or usufruct or from the assignment or cession of any rights over securities, business, goodwill, business permits, copyright, patents, trademarks and trade names o Profits arising from a transfer of the beneficial interest in a trust Gains or profits arising from the transfer of the ownership or usufruct of or the assignment or cession of any rights over an interest in a partnership Capital gains tax o Doesnt apply to capital gains made on all types of assets o Applies only to capital gains derived on those assets which are specifically listed in Art 5(1a) ITA o Gains on assets which are not listed in Art 5(1a)ITA are not subject to tax A. Capital and income

o o

Profits which are deemed to arise on a value shift and in a de-grouping

Capital is like a tree, while income is compared to the fruits growing from that tree A house is owned as an investment. o If sold, one would derive a capital gain

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If the house is rented, rental income derived is income A property developer derives income and not capital gains because he is trading in immovable property

A. Capital and capital gains Capital gain is the profit derived from the sale of a capital asset If a capital asset is sold at a loss, such loss is a capital loss Distinction is important because trading profits and losses are calculated in a different manner than capital gains and losses Page 1 of 4

Distinction is also important because the ITA does not charge to tax the transfer of all capital assets ITA does not tax capital A. Badges of trade

Used as a tool to detect the existence of a trade o If a trade exists, profits from such a trade is income, losses are trading losses

Trading losses may be set off against all income and capital gains

If no badges of trade exist, gain is a capital (may or may not be taxable). Any loss incurred is a capital loss

Capital losses may only be set off against capital gains

Badges of trade - Facts and circumstances test

1. Quantity of goods sold e.g. toilet paper o Large quantities of goods sold indicate the existence of a trade o Goods acquired which do not give pride in possession are required with the intention
to make a profit

1. Nature of goods sold e.g. whisky in bulk o Items sold which are used for personal use and which give pride in possession do no o
indicate the existence of a trade If asset is of such a type or amount that it can only be turned to advantage by a sale, then a trade is deemed to exist Did the asset yield an income or provide a pride of possession?

o 1. Supplementary work e.g. blending of brandies before sale/ to bring it into a marketable condition o If a good is modified, it indicates that the sale has been made in the ambit of trade o If the asset is repaired or improved to make it more easily saleable or saleable at
a greater profit, then a trade is deemed to exist 1. Interval of time between purchase and resale o A short interval of time indicates the existence of a trade Asset that are subject of a trade will normally, but not always be sold quickly (when a man acquired a new family home, which he sold within a short period of time because his wife refused to live in it, the court held that there was no trade) o An asset which is to be held indefinitely is much less likely to be the subject of a trade (sale of an investment) 1. Method of acquisition and disposal o Assets acquired by means of inheritance or as a gift are not deemed to constitute stock in trade o If money was borrowed to buy an asset, then a trade is likely, but not always deemed to exist o If the funds are repaid by selling an asset indicates the existence of a trade 1. The number and frequency of transactions o The regular buying and selling of goods indicate the existence of a trade Systematic and repeated transactions will support trade o One-off transactions are unlikely to indicate the existence of a trade 1. Affinity with tax payers trading activity o Profit derived from sale of goods which are analogous to his trading stock income are not capital o Transactions that are similar to those of an existing trade may themselves be trading o Income derived from sale of home of a property developer is income and not capital 1. The organisation of the business o If a business set up exists (example employees, commercial outlets etc.) profits are of an income nature o Organisation of a sale department, registration of a trade name, adverts etc. indicate the existence of a trade o Memorandum and Articles of association object clause 1. Profit seeking motive Page 2 of 4

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If the intention is to acquire a good to re-sell it at a profit such income is deemed to be a trading profit An intention to make a profit support trading If one sells his personal car, we try to do so at a profit, but this does not mean that the transaction is trading in nature Conversely, the absence of profit does not render the transaction out of scope of trading

The badges of trade will not be present in each and every case and some may point one way, while others may point another way The presence or absence of a particular badge is unlikely to provide a conclusive answer to the question of whether a trade exist s or not The weight to be attached to each badge depends on the circumstances of the case

A. Why is the distinction between income and capital important? All gains of an income nature are taxable (Art 4 ITA) subject to certain exemptions (Art 12 ITA) while only certain capital gains are taxed (Art 5 ITA) o For a capital gain to exist, 2 conditions need to be met: 1. There must be a transfer of a capital asset 2. Capital asset must be an asset listed in Art 5 ITA Different computational rules o Capital gains is subject to special computational rules which depend on: 1. The type of asset 2. The manner in which it is acquired (inheritance, donation, acquisition inter vivos, etc.) 3. The manner in which it is transferred o Computational tax on Income depends on type of income i.e. income derived from a trade/business, employment income, rents, dividends etc. Rules relating to deductions and exemptions are different e.g. inflation index allowance and maintenance allowance only apply as a deduction against capital gains. Tax treatment of losses are different o Capital losses can only be set off against future capital gains. Such capital losses can be c/f indefinitely. Capital losses cannot be surrendered to other companies in the same group. o Trading losses can also be c/f indefinitely and can be set off against both future capital gains and trading profits. Trading losses can be transferred by companies to other companies in same group of companies Capital gains Yes Yes on capital gains arising in Malta No on foreign capital gains which are remitted to Malta No on foreign capital gains

Different jurisdictional rules apply Status of person Income Resident and domiciled in Yes Malta Either resident or domiciled Yes on income in Malta arising in Malta Yes on foreign income which is remitted to Malta No on foreign income which is not remitted to Malta Page 3 of 4

Non- resident

Yes on income arising in Malta No on foreign income which is remitted to Malta No on foreign income which is not remitted to Malta

which are not remitted to Malta Yes on capital gains arising in Malta No on foreign capital gains which are remitted to Malta No on foreign capital gains which are not remitted to Malta

A. Different types of income

1. Income from a trade business, profession or vocation (Art4(1a) ITA) earned income
o o o o o o All non-passive income from self-employment Profession or vocation not exercised in employment Expenses incurred in the production of the income is allowed as a deduction against income Include fringe benefits Remuneration paid to directors is chargeable to tax under this Article Deductions not only wholly and exclusively incurred but also necessarily incurred

1. Income from employment or office (Art4(1b) ITA) detail in chapter 5

1. Investment income: dividends, premiums, interest, discounts (Art4(1c) ITA) unearned

income o Passive income o Dividends include bonus shares and deemed distributions economic double taxation eliminated by ITA though the full imputation system o Interest includes traditional bank interest (Investment Income provision). If derived in the course of a trade, it should be reported under Art4 (1a) ITA. Non- resident are not subject to tax on interest under Art4(1c) ITA o Premiums that fall under this article are premiums which are not derived from immovable property 1. Pensions, charges, annuity or annual payments (Art4(1d) ITA) o Pensions are taxable (certain non-contributory pensions are not) o Alimony payments are treated as annual payments (payments made for maintenance of a child is exempt from tax) o Financial assistance for the maintenance of a child is exempt

1. Rent, royalties, premiums and any other profits from property (Art4(1e) ITA)
Rental income, ground rents etc. Rent of trading nature falls under Art4 (1a) ITA. Rents for long periods are rarely considered to be of a trading nature o Royalties is a return received from the exploitation of intellectual property (recurring royalties (under this article) vs transfer of right over intellectual property(under Art 5 as they constitute capital gains)) o Premiums paid for the use of property 1. Any other income Art4(1g) ITA) o Is a blanket all catching provision which charges to tax any other income which is not covered in Art4(1a) to(e) o e.g. casual receipts from electoral duties, examination fees, radio and TV participation o

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