Edited version of private ruling

Authorisation Number: 1011597241121

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Ruling

Subject: Am I in business

Question

Are you carrying on a business of selling second-hand car parts on EBAY?

Answer

No.

This ruling applies for the following periods:

year ending 30 June 2006

year ending 30 June 2007

year ending 30 June 2008

year ending 30 June 2009

year ending 30 June 2010

The scheme commences on:

1 July 2005

Relevant facts and circumstances

You were employed full-time as an engineer and then retired with a voluntary redundancy.

Since retirement you have lived off interest, the redundancy payment and investments (including property). You are yet to draw down on your superannuation or a government pension.

You have owned and maintained a certain type of vehicle for over 40 years.

Some time ago you purchased at auction a damaged vehicle which you rebuilt for personal use.

You required various replacement parts for your vehicle. Therefore you purchased a damaged vehicle, used some parts to repair your vehicle and sold the remainder of the parts on EBAY for a small profit.

Now you buy several damaged vehicles a year for less than $7,000 per vehicle.

You will look at approximately seven to eight vehicles before you will buy one to dismantle.

You have been selling on EBAY since 2004 and have averaged approximately 300 EBAY sales per year.

You have not traded much during the 2011 financial year as you have mostly been on holidays.

You sell vehicle parts for a period of approximately five to six weeks and then have a break of about the same time.

You spend a total of approximately three hours per day, five days per week on your activity when you are dismantling/selling vehicle parts. The three hours would include time spent managing the EBAY and PayPal accounts (posting items, administration, answering queries from buyers and finalising sales) and dismantling the vehicle.

You do not employ people to assist with dismantling the vehicles. However your spouse does assist you with some of the computer work. She is not paid a wage.

You have made a profit of less than $3,000 per vehicle. However this figure does not take into account miscellaneous expenses such as computer expenses, internet and travel expenses incurred while travelling to view cars, and EBAY (approximately 11% of the sale amount) and PayPal fees (1.1% to 2.4% + $0.30 per sale) as a result of the sales transactions. You are happy to just break even with your activity.

You were not required to purchase special equipment to perform your activities, as you had accumulated the necessary tools while working as an engineer and while maintaining your personal vehicles.

You operate your activity out of a shed on your property.

You have not kept records of sales and purchases. However as you only purchase vehicles from insurance companies with your Visa card, you have access to the purchasing records from your visa account. Also as the majority of the money paid to you from sales is paid using PayPal, you have records of sales records on your PayPal account. Further as PayPal accounts need to be connected to a bank account, you have access to sales amounts on your bank statements.

You do not have a formal business plan, projection or budget/forecast.

You consider your activities a hobby in retirement and a way of meeting people with similar interests in vehicles.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5,

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

Income Tax Assessment Act 1997 Section 6-10 and

Income Tax Assessment Act 1997 Section 995-1.

Reasons for decision

Summary

We do not consider that your second-hand car part sales activity has the necessary characteristics of a business for taxation purposes. Therefore, income derived from this activity will not be assessable.

Detailed reasoning

Assessable income

A taxpayer is liable to pay tax on their taxable income derived during the income year. Taxable income is calculated by subtracting allowable deductions from the taxpayer's assessable income.

Ordinary income

Income is generally assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997). Under subsection 6-5(1) of the ITAA 1997, ordinary income means income 'according to ordinary concepts'. This phrase is not defined under the legislation, but a large body of case law has developed to identify the factors that indicate if an amount is income according to ordinary concepts.

Statutory income

Under section 6-10 of the ITAA 1997 assessable income also includes statutory income. Statutory income is income that is not ordinary income but is included as assessable income by specific provisions of the tax law.

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 case of Evans v. Federal Commissioner of Taxation 89 ACT 4540; (1989) 20 ATR 922. stated that whether or not an activity amounts to carrying on business for taxation purposes is a question of fact. There is no exhaustive or determinative definition which can be applied to determine this matter. Martin v. Federal Commissioner of Taxation (1953) 90 CLR 470; (1953) 10 ATD 226; (1953) 5 AITR 548, however, provides that the tests for determining whether or not a business is being carried on is both subjective, which considers the individuals purpose at the relevant time, and objective, which considers the nature and extent of the activities undertaken.

Taxation Ruling TR 97/11 provides the Commissioner's 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

In your case you have a personal interest in vehicles. Your second-hand part sales activities are a hobby or pastime undertaken during retirement.

Your intention to undertake the buying and selling of second-hand vehicle parts is to make a profit and supplement your income. However you only make a small profit and would be happy just to break even.

The activity of buying vehicles and selling their parts has limited commercial character or purpose. You do not have a business plan or operate out of business premises. You do not keep records of your transactions.

You only spend approximately three hours per day on your activity. It can be expected that a business engaged in the second hand car part sales would devote many hours to that activity thus forming regular income, business and sales patterns.

Based on the information you have provided we do not consider that the activity has the necessary characteristics of a business for taxation purposes. Therefore, any income you received in relation to this activity will not be assessable under section 6-5 of the ITAA 1997 as ordinary income. In addition, any expenses that you incurred in relation to this activity will not be deductible under section 8-1 of the ITAA 1997.

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