Edited version of private ruling

Authorisation Number: 1011568593030

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Ruling

Subject: Gold fossicking activities

1. Are you carrying on a business of fossicking?

No.

2. Will any capital gain you make on the disposal of a precious metal be disregarded under subsection 118-10(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?

No.

Relevant facts and circumstances

You have engaged in fossicking activities for many years.

You also operate a business.

The only current source of the precious metal at wholesale prices are from individual miners and prospectors.

As well as for enjoyment, you now pursue your fossicking activities to source the precious metal and to make contacts.

On average you only do a small number of fossicking trips per year.

Your main objective from fossicking is to enjoy your surroundings.

The amount of precious metal you have found in the past has not covered the expense of your trips. You do not use the precious metals that you find in your business rather you collect them.

You do not have a reasonable expectation of profit however there is a potential of eventually returning a profit from your activities.

You do not plan your fossicking trips.

You do not have a mining lease or licence or any interest associated with fossicking other than the compulsory miner's right to fossick/ prospect.

You found a precious metal nugget. You sold this nugget.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-5(1)

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 995-1

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-5

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Subsection 108-20(2)

Income Tax Assessment Act 1997 Section 109-5

Income Tax Assessment Act 1997 subsection 112-20(1)

Income Tax Assessment Act 1997 Subsection 118-10(3)

Income Tax Assessment Act 1997 Section 960-400

Income Tax Assessment Act 1936 Section 160B

Reasons for decision

Question 1

Subsection 6-5(1) of the ITAA 1997 states that your assessable income includes income according to ordinary concepts. This ordinary income includes amongst other things, income from salary and wages and business operations.

Section 8-1 of the ITAA 1997 allows you to claim a deduction for a loss or outgoing that is incurred in gaining or producing your assessable income, or necessarily incurred in carrying on a business to gain or produce assessable income. These deductions are limited by the exclusion of losses or outgoings that are capital, private or domestic in nature.

Carrying on a business

Section 995-1 of the ITAA 1997 defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'.

The question of whether a business is being carried on is a question of fact and degree. The courts have developed a series of indicators that are applied to determine the matter on the particular facts.

Taxation Ruling TR 97/11 provides the Commissioners view of the factors used to determine if you are in business for tax purposes.

In the Commissioner's view, the factors that are considered important in determining the question of business activity are:

· whether the activity has a significant commercial purpose or character

· whether the taxpayer has more than just an intention to engage in business

· whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity

· whether there is regularity and repetition of the activity

· whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business

· whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit

· the size, scale and permanency of the activity, and

· whether the activity is better described as a hobby, a form of recreation or sporting activity.

No one indicator is decisive. The indicators must be considered in combination and as a whole. Whether a 'business' is carried on depends on the large or general impression gained.

Application to your circumstances

You have conducted your fossicking activities over many years. In this respect the activity has elements of repetition and regularity. However, it is not a structured activity and you only spend a few weeks of the year engaging in this activity during your spare time.

The activity has does not have a commercial feel. You commenced the activity as a hobby due to your interest in fossicking.

Your circumstances are not indicative of an operating business structure. Your activities lack the degree of organisation that would be found in the activities of people who would normally be regarded as carrying on a business of fossicking.

Your activity is conducted on a small scale. You do not devote much time to the activity and only conduct the activity a few times per year.

Your application indicated that you do not view the activity as a business operation.

You do not have an intention to make a profit. On most occasions, your fossicking activities do not cover the expenses incurred to make the trips. If a profit is made, this would not outweigh the recreational nature of your activities.

All these factors taken together support the view that you are not carrying on a business of fossicking.

Therefore, we have determined that your fossicking activities are not carried on as a business for taxation purposes and we do not consider the receipts of the activity to be assessable under subsection 6-5(1) of the ITAA 1997. Similarly, the related expenses that you have incurred will not be deductible under section 8-1 of the ITAA 1997.

Question 2

A capital gain or capital loss is made when a capital gains tax (CGT) event happens to a CGT asset you own (section 102-20 of the ITAA 1997). A capital gain is made if the amount received (called capital proceeds) from the disposal exceeds the cost base (the cost of the asset and certain other costs associated with acquiring, holding and disposing of the asset) of the CGT asset. The capital gains provisions may apply whenever a CGT event happens.

CGT event A1 occurs when a disposal contract is entered into, or if there is no contract, when an entity stops being an asset's owner (section 104-5 of the ITAA 1997). The time of the event is when you enter into the contract for the disposal of the asset, or if there is no contract, when the change of ownership occurs.

CGT asset

A CGT asset is defined in section 108-5 of the ITAA 1997 and includes any kind of property or a legal or equitable right that is not property.

CGT assets fall into one of three categories:

· collectables

· personal use assets, or

· other assets.

All assets are subject to the CGT rules unless they are specifically excluded. Capital assets acquired before 20 September 1985 are exempt assets. 

Personal use asset

A personal use asset is:

· a CGT asset, other than a collectable, that you use or keep mainly for your personal use or enjoyment

· an option or a right to acquire a personal use asset

· a debt resulting from a CGT event involving a CGT asset kept mainly for your personal use and enjoyment, or

· a debt resulting from you doing something other than gaining or producing your assessable income or carrying on a business.

ATO Interpretative Decision ATO ID 2003/451 concludes that gold nuggets are 'personal use assets' under subsection 108-20(2) of the ITAA 1997 if they are collected while pursuing a hobby and not used in the course of carrying on a business or profit making activity.

This is confirmed in Favaro v. FC of T 96 ATC 4975; (1996) 34 ATR 1 (Favaro) when Branson J held that Italian currency which was converted to Australian currency was not a 'personal use asset' as defined in subsection 160B(1) of the Income Tax Assessment Act 1936 (ITAA 1936). In making this decision Branson J accepted the Commissioner's argument 'that the expression "personal use" is used in section 160B of the ITAA 1936 in contradistinction to use for business or profit making purposes'.

The word 'contradistinction' means distinction by contrast or opposition (The Australian Oxford Dictionary, 1999, Oxford University Press, Melbourne). Therefore, an asset that is not used for business or profit making purposes is, by default, used or kept mainly for personal use and enjoyment. The two categories are mutually exclusive.

CGT event for a personal use asset

If the first element of the cost base of a personal use asset is $10,000 or less, any capital gain is disregarded (subsection 118-10(3) of the ITAA 1997). Capital losses from personal use assets are also disregarded.

Acquisition of a CGT asset

Section 109-5 of the ITAA 1997 provides the acquisition rules for CGT assets and sets out the specific rules that apply to each event number. In general you acquire a CGT asset when you become its owner or as a result of a CGT event happening.

Market value substitution rule

The market value substitution rule in subsection 112-20(1) of the ITAA 1997 states, that where an asset is acquired by you and you did not incur expenditure to acquire it, the first element of the cost base is the market value of the asset at the time of acquisition.

The term 'market value' is defined by section 960-400 of the ITAA 1997 which states that the term has its ordinary meaning.

Taxation Determination TD 10 states that where the market value of an asset needs to be determined, you can choose to either obtain a valuation from a qualified valuer, or alternatively compute your own valuation on reasonably objective and supportive data.

Ownership of minerals

At common law, the surface owner's rights extend downwards sufficiently to permit extraction of minerals, and to preclude others from interfering with minerals and geothermal resources. Usually, the Crown reserves the rights to minerals when granting land. Gold and silver are also known as "royal" minerals; they remain the property of the Crown, despite grant of the land in which they lie (Wade v. New South Wales Rutile Mining Co Pty Ltd (1969) 121 CLR 177).

Application to your circumstances

Personal use asset

In your case, you have stated that you found the precious metal pursuing a hobby and not in the course of carrying on any business or profit making activity.

As such, in accordance with the reasoning found in Favaro, it is considered that the nugget you found is a personal use asset under paragraph 108-20(2)(a) of the ITAA 1997. If the first element of the cost base of the nugget is less than $10,000 any capital gain you may make on disposal of that nugget is disregarded under subsection 118-10(3) of the ITAA 1997.

Cost base of the nugget

The Crown owns the rights to the precious metal. When you found the nugget, a change of ownership occurred. You therefore acquired the nugget from the Crown when you found it.

You did not incur any expenditure in acquiring the nugget, rather, any expense that you did incur was either in the purchase of a fossicker's license or in relation to your recreational activities. The market value substitution rule therefore applies to your acquisition of the nugget. You have stated that you sold the nugget after you found it. It is reasonable to consider, therefore, that when you found the nugget the market value of the nugget was greater than $10,000. The exemption for personal use assets does not apply to your nugget as the first element of the cost base of the nugget was greater than $10,000.

Note: As you have sold the nugget within a short period of acquiring it, it is reasonable to assume that the market value of the nugget when you found it would be around the same as the capital proceeds you received when you sold the nugget. Any capital gain would therefore be likely to be zero.

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