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A colleague was asking me whether it's true that ordinary assets that have remained idle for 2 years become capital assets. Is this true?
The 2-year rule she's referring to is found in BIR Revenue Regulation (RR) No. 7-2003. Section 3.e. describes the "Treatment of abandoned and idle assets."
This section says that ordinary assets are automatically converted into capital assets if they haven't been used in business for more than two years. HOWEVER, the same section also dictates that for the conversion to happen, the owner should NOT be engaged in RE business.
Here are examples.
A PH company is engaged in the manufacture and selling of cottage industry products. It ceased operations on January 2006, leaving parcels of land and improvements idle up to the present.
The assets are by now considered "capital assets" because they've satisfied the two conditions in RR 7-2003, namely:
1. the assets were previously used in business by a taxpayer not engaged in the real estate business; and
2. the assets have not been used in business for more than two years.
If the company sells the RE assets, those assets will NOT be subjected to VAT.
Now for the other scenario...
If the same company wrote something like "buying, selling of real properties" in its primary purpose (in their Articles of Incorporation), the assets will forever be classified as ordinary assets, and their sale shall be subjected to VAT.
RR 7-2003 also states, "In the case of subsequent non-operation by taxpayers originally registered to be engaged in the real estate business, all real properties originally acquired by it shall continue to be treated as ordinary assets."
So, in short, the answer to my colleague's question is, "It depends."
If you want to read the RR 7-2003, here's a link. I've highlighted the pertinent parts so you don't have to read the whole thing.
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