Section 14 of the Inland Revenue Ordinance states that profits arising from the sale of capital assets are outside the scope of charge of profits tax. Therefore, such gains are not subject to tax.

There are numerous 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 item are revenue receipts and taxable.

The Inland Revenue Department will examine all the surrounding circumstances to consider whether a gain is capital in nature or revenue in nature.