Van Den Berghs Ltd V Clark

Introduction

In Malaysia, the Income Tax Act 1967 Section 3 sets the scope of income tax provided that income accrued in or derived from Malaysia would be tax. However, S3B of the Act specifically provides that income derived by an offshore company in respect of offshore business activity is not chargeable to income tax. The law governing the tax for such offshore business activity is the Labuan Offshore Business Activity Tax Act 1990 and not the Income Tax Act 1967. The Act imposes income tax on income, while capital gains are not chargeable to income tax.

Generally, income has the characteristics of repetitive, flow from a source of income and received in the ordinary course of business. It must also be examined from the recipient’s perspective. On the other hand, capital receipts are non-business income and it arises independently, that are not considered as business income and treated as capital gain. For instances, realisations from long term investment or personal assets are capital transactions. Such gains are capital receipts.

Moreover, Commonwealth laws provided that the income source is not necessarily of one which is expected to be continuously productive, but it must be one whose object is the production of a definite return, excluding anything in the nature of a mere a windfall. Windfall, gambling or profits arising from speculative activities are capital gains and would not be subject to income tax. Also, cost saving is not income and would not be taxed. The distinction between ‘capital’ and ‘income’ is crucial as capital receipts generally escaped tax.

Making the distinction between ‘capital’ and ‘income’ is never an easy task, especially in relation to the compensation on termination of a business contract. Generally, compensation for payment of services is income receipts while compensation for destruction of capital structure is capital receipts. The Act does not define ‘income’ or ‘capital’; therefore one needs to research through the cases laws for guidance. CASE LAW – Van den Berghs Ltd v Clark Fact A margarine manufacturer entered into business alliance agreements with a Dutch competitor.

Following a dispute over amounts due to the company, the Dutch competitor paid ? 450,000 as damages for the cancellation of the company’s future rights under the agreements, which still had a number of years left to run. The issue arise whether the compensation was an income or capital receipt. Held The House of Lords held that this payment was a capital receipt of the company. In his judgement, Lord Macmillan propounded the “whole structure” test as the test for determining the nature of such compensation.

His Lordship was of the opinion that these terminated contracts were not ordinary commercial contracts made in relation to the sale of goods but were related to the whole structure of the profit-making apparatus of the manufacturer. The contracts regulated the taxpayer’s activities, defined what the parties in the contract may or may not do and further affected the whole conduct of the business. As the compensation was related to the termination of that which was fundamental to the trader’s activities, it was therefore a capital receipt. CONCLUSION The case above illustrated the difficulty in distinguishing between income and capital.

With the same facts, the High Court and Federal Court could arrive at different conclusions. It is therefore concluded that the question of income or capital is a question of law for the courts to decide. As summary, table below show the different of income and capital receipts.

References(Bibliography)

• Chong, K. F. (2010). Advanced Malaysia Taxation (12 ed. ).
• Kuala Lumpur: InfoWorld. Chong, K. F. (2003). Compensation in Connection With Business Receipts-An Analysis of the Malaysian Experience.
• Malayan Law Journal , 30. Chong, K. F. (2006). Contemporary Issues on Income Tax and Real Property Gains Tax.
• ACCA Tax Publication , 38. Chong, K. F. (2010). Malaysian Taxation (16 ed. ).
• Kuala Lumpur, Malaysia: InfoWorld. Flynn, M. (1990). Distinguising between Income and Capital Receipts – A Search for Principle.
• Journal of Austrlian Taxation , 17. Mahalingham, S. (2005).Compensation for early contract terminations. Tax Adviser , 18.
• Section 3, Income Tax Act 1967
• Section 3B, Income Tax Act 1967
• Enacted from Chapter 1 – Scope of Charge, Malaysia Taxation, 16th edition(2010)
• Enacted from article Contemporary Issues on Income Tax and Real Property Gains Tax by Chong, K. F. (2006).
• Van den Berghs ltd vs Clark (19 TC 390)
• Enacted from article Compensation for early contract terminations by Mahalingham, S. (2005).
• Enacted from Chapter 1 – Scope of Charge, Malaysia Taxation, 16th edition(2010)