Revenue or capital

Investors must consider a range of tax laws dealing with income, assets and deductions. Investment returns can be on revenue or capital account. Similarly investment expenditure could also be on revenue or capital account. The distinction between revenue and capital is not aways clear and characterisation of a receipt will ultimately depend on the circumstances which apply to the taxpayer.

The distinction between and income and capital receipt has been likened to the fruit and the tree, where the capital amount is the tree and the fruit being the return of income from the capital. Generally an income receipt is regarded as an amount that is regular, recurrent or periodic and income tax applies to a net amount of income. A good example is dividend returns from a shareholding.

However, it is not always clear whether an amount should be treated as income or capital. What may appear to be a capital gain for example may in fact be classified more correctly as income where the taxpayer had entered into a profit-making venture. The intention of the taxpayer when the asset is acquired (or any subsequent change of intention) and the length of the ownership period may be relevant in determining whether a gain is on revenue or capital account. Note also where the amount is a capital return, the investor may have access to CGT discount provisions which provides a better tax result than would be the case where it is fully taxed as assessable income.

Similarly the treatment of an outgoing is important to determine whether an immediate deduction is allowable or whether the outgoing forms part of the cost base of a CGT asset.

Matters to be considered when deciding whether an outgoing is revenue or capital in nature include:

• the character of the advantage sought by the outgoing
• the advantage sought by the taxpayer, and
• how the advantage comes about, eg recurrent payments (refer Sun Newspapers Case)

Generally, those holding investment products fall into two categories – traders and longer term investors.

Traders on revenue account
Generally, where the holder of an investment product carries on activities for the purpose of earning income from buying and selling investments, that holder will be in the business of trading. Generally, a trader:

• holds investment products as trading stock
• includes gross receipts from the sale of investment products as income
• recognises expenses incurred in relation to trading activities as allowable deductions, and
• includes in assessable income investment returns such as interest, dividends and distributions.

NOTE: Where the holder of an investment product enters into an isolated transaction with a profit making intention, they will not be in the business of trading. However, any net profit from the transaction will be assessable on revenue account. See TR 92/3 for further guidance on whether profits from isolated transactions are on revenue account.

Investors on capital account
Where investments are held with the intention of earning regular income from those investments, the investor may seen as generally not carrying on a business. This type of investor generally:

• does not include gross receipts from the sale of investments as income. Any net gain is assessable under the capital gains tax provisions.
• cannot include capital losses from the sale of investments against income from any other sources except current or future capital gains (in other words, quarantining these losses)
• cannot include expenses incurred in relation to buying and selling investments as a deductioon when incurred. These are taken int oaccount in determining the amount of any capital gain or loss insted, and
• includes investment returns such as interest, dividends and distributions in assessable income

NOTE: In determining whether the holder of an investment product is a trader or a longer-term investor, the intention, frequency and volume of the taxpayer’s investing activities must be considered. Additional guidance on this issue is contained in the Decision Impact Statement of The Taxpayer and Commissioner of Taxation 2011 ATC 1-037

NOTE: Tax Determination TD 2011/21 considers the factors which may be relevant in deciding whether gains and losses from the disposal of securities would be on capital or revenue account for the trustee of a trust

For more information please contact our team on 02 9267 4468 or [email protected]. Please visit our website on www.maxgrowth.com.au for an up to date information.