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Compensation for losses: Which ‘hole’ is filled?

Many taxpayers assume that compensation for losses is of a capital nature. It depends…

AS WE have seen from previous articles on CGT that have featured on Personal Finance and Tax, there are no hard and fast rules for determining whether a particular gain is of a capital or of a revenue nature. Each case needs to be decided on its own individual facts.

The distinction is important because of the lower effective rate of tax applicable to capital gains. Therefore, if a taxpayer wishes to save tax, it would be desirable for a particular gain to be taxed as capital rather than as revenue.

However, the courts have provided guidance as to how a case is likely to be decided based on a particular set of facts. In this second part, we look at compensation for losses, and how the courts determine that a few more tests applied by the courts when making a determination between capital and revenue.

Which hole is being filled?
One test applied by the courts is the so-called “filling which hole” test, which usually comes in …

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