Edited version of your private ruling

Authorisation Number: 1012171127812

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Ruling

Subject: GST and enterprise

Question

Would the Commissioner confirm that your of activities (that are similar to those of an associated entity) not constitute an enterprise for the purposes of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes, the Commissioner confirms that your set of activities (that are similar to those of an associated entity) does not constitute an enterprise for the purposes of the GST Act.

Relevant facts and circumstances

You are registered for goods and services tax (GST) and have been in existence for a number of years.

In the application for a ruling your director has provided the following information. As prompted by your director in the ruling application we have used this information as applying to your situation.

You do not have:

· funding for the business activities

· a business plan

· a marketing plan

· existing customers or potential customers

· repetition and regularity of activities.

Your market is a subset of an associated entity and the fact situation is very similar. Your director believes that if the associated entity has no potential customers, then you would also not have any potential customers.

Your activities are a subset of what the associated entity has done or had intended to do prior to these kinds of activities being "disproved" as enterprises by the ATO.

Based on activity statements, there has been no business activity whatsoever for you.

You operate at a loss. However, the losses have not been transferred to another entity.

You have not claimed any deductions for losses for taxation purposes.

You have not always operated at a loss and have a plan in place to cut losses.

The activities create the scenario where liabilities may exceed assets according to taxation reporting rules.

You have not had supplies and have no business listings either on the internet or through telephone directories.

You conduct various activities and that the activities involved in this ruling request only focuses on a subset of your activities and do not include all the activities being conducted.

The activities involved in the ruling include the intended developing or providing software and information products for the benefit of other entities.

You may or may not carry your activities in a similar manner to that of other businesses in the same or similar trade. You apply the differentiation strategy or are innovative in processes. Your intent is to be different rather than similar to those in the same or similar trade.

Your director has also informed that:

· there is a purpose of profit as well as a prospect of you making a profit and your activities are not inherently unprofitable

· you do not have any employees and do not report any PAYG instalments.

· there is currently a market or potential markets for you

· you have strategies in place to cover expenses incurred

· you keep books of accounts and other records

· you have not borrowed any money and no interest has been claimed as business expenses

· there is no licence, permit or registration requirements needed to operate an entity such as you

· the director has knowledge, experience and skills in activities carried on by entities in similar industry as you.

In the ruling issued to the associated entity recently, it was determined that the tax invoices issued by you were not reported on your activity statements and the associated entity was denied any input tax credits relating to the corresponding tax invoices.

Your director has also informed that they do not register companies like you for the purposes of selling them later for a profit.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 (GST Act) section 9-20

A New Tax System (Goods and Services Tax) Act 1999 (GST Act) Section 25-50

A New Tax System (Goods and Services Tax) Act 1999 (GST Act) subsection 25-55(2)

A New Tax System (Goods and Services Tax) Act 1999 (GST Act) section 195-1

Reasons for decision

The issue in this case is determining whether you are carrying on an enterprise.

Among other things subsection 9-20(1) of the GST Act defines an enterprise as an activity, or series of activities, done:

· in the form of a business; or

· in the form of an adventure or concern in the nature of trade.

Furthermore, paragraph 9-20(2)(b) of the GST Act provides that an enterprise does not include an activity or series of activities done as a private recreational pursuit or hobby.

Section 195-1 of the GST Act defines a business as any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

Miscellaneous Tax Ruling MT 2006/1 - provides assistance to entities in determining their entitlement to an Australian Business Number and considers the meaning of certain key words and phrases used to define an enterprise.

Goods and Services Tax Determination GSTD 2006/6 provides that MT 2006/1 has equal application to the meaning of 'entity' and 'enterprise' for the purposes of the GST Act.

In the form of a business

Paragraph 12 of GSTD 2006/6 states the following:

12. The definition of 'business' in section 195-1 is the same as that used in subsection 6(1) of the Income Tax Assessment Act 1936 and in section 995-1 of the ITAA 1997. It follows that the meaning of 'business' should be interpreted in a similar way. As such, it is appropriate to refer to Taxation Ruling TR 97/11 which considers the meaning of 'business'.

Although TR 97/11 deals with carrying on a primary production business, the principles discussed in that Ruling apply to any business.

Paragraph 12 of TR 97/11 makes the point that 'whilst each case might turn on its own particular facts, the determination of the question is generally the result of a process of weighing all the relevant indicators'. There is no single test of whether a business is being carried on.

Paragraph 178 of Miscellaneous Taxation Ruling MT 2006/1 and paragraph 26 of Taxation Ruling TR 97/11 provide the following features below as key indicators of what is considered "carrying on a business";

· a significant commercial activity;

· a purpose and intention of the taxpayer to engage in commercial activity;

· an intention to make a profit from the activity;

· the activity is or will be profitable;

· the recurrent or regular nature of the activity;

· the activity is carried on in a similar manner to that of other businesses in the same or similar trade;

· activity is systematic, organised and carried on in a businesslike manner and records are kept;

· the activities are of a reasonable size and scale;

· a business plan exists;

· commercial sales of product; and

· the entity has relevant knowledge or skill.

All of the above factors should be considered together when determining whether a business is being carried on. There is no single test to determine this.

Importantly, section 195-1 of the GST Act defines the meaning of carrying on an enterprise to include doing anything in the course of the commencement or termination of the enterprise.

Therefore, it is important to note that the indicators above are based on income tax principles which exclude commencement and termination of activities from the definition of a business. The extended meaning of carrying on an enterprise for GST purposes means that the test is broader than income tax principles. This means preparatory activities such as conducting feasibility studies for a potential business might be seen as carrying on an enterprise for GST purposes.

However, the reference to "the" enterprise (rather than "an" enterprise) in the definition in section 195-1 of the GST Act appears to contemplate an enterprise actually coming into existence at some point and further that the activities undertaken should directly relate to the commencement of that specific enterprise.

The definition does not appear to extend to situations where various activities are undertaken that cannot be directly related to a particular enterprise. That is, not all expenses incurred by an entity prior to commencing an enterprise will be in the course or furtherance of the commencement of that enterprise. There needs to be a direct connection between the activities and the enterprise in question.

It will depend on the facts of each case to determine whether the activities conducted by an entity relate to an identified enterprise and further whether those activities can be said to be directly related to commencing that enterprise.

Paragraph 17 of TR 97/11 stresses that where an overall profit motive appears absent and the activity does not look like it will ever produce a profit, it is unlikely that the activity will ever amount to a business. This will apply as equally to activities in the commencement stage as it will to more established activities. More importantly, the absence of a reasonable expectation of profit will also be sufficient to conclude that the entity is not carrying on an enterprise for GST purposes.

Whether a business is being carried on, including the process of commencement will essentially depend on whether the indicators, considered as a whole, provide the activities with a commercial purpose. Whether a business is being carried on depends on the large or general impression gained and the weighting given to each indicator will vary from case to case.

Applying the indicators to your circumstances

Significant commercial purpose or character

Paragraph 29 of TR 97/11 explains the following;

'29. The phrase 'significant commercial purpose' is referred to by Walsh J in Thomas v. FC of T 72 ATC 4094; (1972) 3 ATR 165, (refer to paragraph 81) and discussed further by Gibbs CJ and Stephen J in Hope . The 'significant commercial purpose or character' indicator is closely linked to the other indicators and is a generalisation drawn from the interaction of the other indicators. It is particularly linked to the size and scale of activity (refer to paragraphs 77 to 85), the repetition and regularity of activity (refer to paragraphs 55 to 62) and the profit indicators (refer to paragraphs 47 to 54). A way of establishing that there is a significant commercial purpose or character is to compare the activities with those of a taxpayer who is carrying on a similar activity that is a business. Any knowledge, previous experience or skill of the taxpayer in the activity, and any advice taken by the taxpayer in the conduct of the business should also be considered but are not necessarily determinative: see Thomas. In that case, Walsh J found that the taxpayer's activities in growing macadamia nut trees and avocado pear trees amounted to the carrying on of a business. The court was influenced by the scale of the activity, and the taxpayer's expectation of an ongoing financial return. Consideration should also be given to whether the taxpayer is a pioneer in the activity or has developed a new method of undertaking the activity, whether successful or not.'

In showing that a business is being carried on, it is important that you are able to provide evidence there is a significant commercial purpose or character to your activity, i.e., the activity is carried on for commercial reasons and in a commercially viable manner.

As stated at paragraph 29 of TR 97/11 the 'significant commercial purpose or character' indicator is closely linked to the size and scale of activity, the repetition and regularity of activity and the profit indicators.

Your director has informed that you do not have a business/marketing plan; existing or potential customers.

You have been registered for GST for some time and to date you have not been able to demonstrate any of the characteristics associated to the 'significant commercial purpose or character' indicator to your activities.

The intention of the taxpayer

Paragraphs 39 and 40 of TR 97/11 explain;

'39. The intention of the taxpayer in engaging in the activity is a relevant indicator: see Thomas . However, a mere intention to carry on a business is not enough. There must be activity. Brennan J in Inglis v. FC of T 80 ATC 4001 at 4004-4005; (1979) 10 ATR 493 at 496-497 said that:

'The carrying on of a business is not a matter merely of intention. It is a matter of activity. ... At the end of the day, the extent of activity determines whether the business is being carried on. That is a question of fact and degree.'

40. This indicator is particularly related to:

· whether the activity is preparatory or preliminary to the ultimate activity;

· whether there is an intention to make a profit; and

· whether the activity is better described as a hobby or the pursuit of a recreational or sporting activity.'

As stated at paragraph 39 above, the carrying on of a business is not a matter merely of intention; it is a matter of activity.

Your director has informed that:

· your market is a subset of what was the associated entity and that the fact situation is very similar

· if the associated entity has no potential customers, then you would also not have any potential customers

· based on activity statements, there has been no business activity whatsoever for you.

As mentioned above at the end of the day, the extent of activity determines whether the business is being carried on. In your case the absence of activity indicates that no business is being carried on.

Prospect of profit

Paragraph 48 of TR 97/11 explains;

'48. We believe it is important that the taxpayer is able to show how the activity can make a profit. Stronger evidence of an intention to make a profit occurs when the taxpayer has conducted research into his/her proposed activity, consulted experts or received advice on the running of the activity and the profitability of it before setting up the business. This was the situation in FC of T v. JR Walker 85 ATC 4179; (1985) 16 ATR 331.'

In determining whether a business is being carried on it is proper to consider, as one of the elements, whether the activities under consideration could ever result in a profit.

We are told that you are operating at a loss; that there is a purpose of profit as well as a prospect of you making a profit and that your activities are not inherently unprofitable.

To date all the activity statements you have lodged from the time of registration reveal that no taxable supplies have ever been made except, for the supplies made to the associated entity in 20xx. That too could not be substantiated as being genuine taxable supplies.

Furthermore, the input tax credit you claimed in an activity statement was disallowed. All this indicate that you never made any profit in any of those tax periods.

Repetition and regularity

Paragraph 55 or TR 97/11 explains;

'55. It is often a feature of a business that similar sorts of activities are repeated on a regular basis. The repetition of activities by the same person over a period of time on a regular basis helps to determine whether there is the 'carrying on' of a business. For example, in Hope the 'transactions were entered into on a continuous and repetitive basis', such that the taxpayer's activities 'manifested the essential characteristics required of a business'. Similarly, in JR Walker the court held that there was repetition and regularity in the taxpayer's activities directed to the breeding of high quality Angora goats and to keeping up with the latest information on Angora goats.'

An entity should undertake at least the minimum activities necessary to be able to commercially provide their services/products for sale.

We have been informed that there is no repetition and regularity of your activities.

Is the activity of the same kind and carried on in a manner that is characteristic of the industry?

Paragraph 64 of TR 97/11 provides indicators where it would be considered that the activity is carried on in a similar manner to others in the industry. They are;

· the volume of sales. If there is a small number of sales it is less likely that a business is being carried on.

· the types of customers the taxpayer sells his/her product to - wholesalers, retailers, the public at large, or friends or relatives - and the manner in which this marketing takes place;

· the sort of expenses incurred by the taxpayer;

· the amount invested in capital items;

· previous experience of the taxpayer; and

· the activity should also be compared with that of a keen amateur. The sales of a keen amateur may only be a way of obtaining 'new' funds to continue with the personal interest.

In your case, to date no sale has been made. There is no marketing plan in place. You have not demonstrated any apparent significant commercial purpose or character to your activities or an intention to make a profit or a repetition and regularity of the activity.

Therefore, we are of the view that you have not been able to establish that your activities are carried in a manner that is characteristic of the industry.

Organisation in a businesslike manner and the use of system

Paragraphs 68 and 69 of TR 97/11 explain the following;

"68. In Newton v. Pyke the court suggested that business should be conducted systematically. A business is characteristically carried on in a systematic and organised manner rather than on an ad hoc basis. An activity should generally conform with ordinary commercial principles to amount to the carrying on of a business.

69. In Ferguson the Full Federal Court was influenced by the systematic and organised nature of the taxpayer's activities. Fisher J said at FLR 324-325; ATC 4271; ATR 884:

'... the venture as a whole had a commercial flavour, was conducted systematically and, ... in a business like manner. It could not be said that there was anything haphazard or disorganised in the way in which he carried out the activity.'"

In this case we have been informed that you have no plan or marketing strategy in place and that your activities are a subset of what the associated entity has done or had intended to do prior to its activities being disproved as an enterprise by the Tax Office.

In you situation your venture as a whole does not have a commercial flavour and lacks an element of commerciality.

Small Scale Activities

Paragraph 180 of MT 2006/1 explains;

'180. An enterprise can be conducted in a small way. The size or scale of the activities, although important, is not the sole test of whether they amount to an enterprise. The larger the scale of the activities the more likely it is that they are an enterprise. However, if the activities are carried on in a small way, other indicators become more important in determining whether they amount to an enterprise.

The size or scale of an activity is not a determinative test. In this case we are informed that there are no regularity and repetition of the activities. In fact to date it does not seem you have made any supply.

(b) In the form of a business of an adventure or concern in the nature of trade

Goods and Services Tax Determination GSTD 2006/6 considers the meaning of the terms 'entity' and 'enterprise' for the purposes of the A New Tax System (Australian Business Number) Act 1999 (ABN Act).

Paragraph 13 of GSTD 2006/6 provides that an adventure or concern in the nature of trade includes a commercial activity that does not amount to a business but which has the characteristics of a business deal.

Paragraph 234 of MT 2006/1 mentions that the term 'business' ordinarily encompass trade engaged in, on a regular or continuous basis. However, an adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business but which has the characteristics of a business deal.

Paragraph 237 of MT 2006/1 provides that the term 'profit making undertaking or scheme' like the term 'an adventure or concern in the nature of trade' concerns transactions of a commercial nature which are entered into for profit-making, but are not part of the activities of an on-going business. Both terms require the features of a business deal.

Paragraphs 237-239 and 243-244 of MT 2006/1 have been reproduced below:

237. The term 'profit making undertaking or scheme' like the term 'an adventure or concern in the nature of trade' concerns transactions of a commercial nature which are entered into for profit-making, but are not part of the activities of an on-going business. Both terms require the features of a business deal, see McClelland v. Federal Commissioner of Taxation , in which Lord Donovan, delivering the opinion of the majority, said:

It seems to their Lordships that an 'undertaking or scheme' to produce this result must - at any rate where the transaction is one of acquisition and resale - exhibit features which give it the character of a business deal. It is true that the word 'business' does not appear in the section; but given the premise that the profit produced has to be income in its character their Lordships think the notion of business is implicit in the words 'undertaking or scheme'.

238. A similar view was expressed by Foster J in AB v. FC of T 97 ATC 4945 at 4961; 37 ATR 225 at 242 where he said:

See also the discussion in R W Parsons, Income Taxation in Australia, The Law Book Company Limited, Sydney, 1985, p 159-63 in which the learned author expresses the view that 'an adventure in the nature of trade' is equivalent to an 'isolated business venture' as opposed to a continuing business. I respectfully agree. I also accept that such a transaction must 'exhibit features which give it the character of a business deal' ( McClelland v. FCT (1970) 120 CLR 487 at 495; 2 ATR 21 at 26; 70 ATC 4115 at 4120).

239. The commercial nature of an adventure or concern in the nature of trade can also be shown from the following passage by Gibbs J in Federal Commissioner of Taxation v. NF Williams :

Turning now to the Commissioner's argument that the case comes within s 25(1) of the Act, it seems to me that the co-owners did no more than realise their asset in an ordinary and prudent way. There are no circumstances that could enable it to be said that in so doing they carried on a business or engaged in an adventure in the nature of trade. The Commissioner placed some reliance upon the decision of the House of Lords in Edwards (Inspector of Taxes) v. Bairstow , [1956] AC 14; [1955] 3 All ER 48. That case shows that the fact that a transaction is an isolated one does not necessarily prevent it from being an adventure in the nature of trade, but it has otherwise little bearing on the present question. There the taxpayers bought machinery with the intention, not to use or hold it, but to resell it quickly and make a profit on the deal (see at [1956] AC, pp. 36-37; [1955] 3 All ER, p. 58). The transaction was a commercial one, and nothing but a commercial one, from beginning to end. The case is thus quite distinguishable from the present, where it is impossible to say that the taxpayer began an adventure in the nature of trade when she received her interest in the land. The proceeds which the taxpayer derived from the sale were not income within the ordinary understanding of the term.

Characteristics of trade, including the 'badges of trade'

243. Trade takes its ordinary meaning. This term was described by Bowen CJ in Re Ku-ring-gai Co-operative Building Society (No. 12) Ltd as meaning:

The word 'trade' is used with its accepted English meaning: traffic by way of sale of exchange or commercial dealing ( Commissioners of Taxation v. Kirk (1900) AC 588, at p 592 per Lord Davey; W. & A. McArthur Ltd. v. State of Queensland (1920) 28 CLR 530). The commercial character of trade was mentioned more recently by Lord Reid in Ransom v. Higgs (1974) 1 WLR 1594. His Lordship there said: 'As an ordinary word in the English language 'trade' has or has had a variety of meanings or shades of meaning. Leaving aside obsolete or rare usage it is sometimes used to denote any mercantile operation but is commonly used to denote operations of a commercial character by which the trader provides to customers for reward some kind of goods or services (1974) 1 WLR, at p 1600'. Moreover, the word covers intangibles, such as banking transactions, as well as the movement of goods and persons, for historically its use has been founded upon the elements of use, regularity and course of conduct ( Bank of New South Wales v. Commonwealth (1948) 76 CLR 1, at p 381).

244. An adventure or concern in the nature of trade includes a commercial activity that does not amount to a business but which has the characteristics of a business deal. Such transactions are of a revenue nature. However, the sale of the family home, car and other private assets are not, in the absence of other factors, adventures or concerns in the nature of trade. The fact that the asset is sold at a profit does not, of itself, result in the activity being commercial in nature.

To date you have made no sale. We have also been informed that you do not have a business/marketing plan in place. You have not demonstrated any apparent significant commercial purpose or character to your activities. Your intention to make a profit has not been established.

There is no repetition and regularity of activities. You do not have existing customers and no funding for your business activities.

Therefore, your activities are not considered to be an adventure or concern in the nature of trade.

In conclusion you are not conducting an enterprise for GST purposes.

Cancellation of GST registration

Section 25-50 of the GST Act provides that if an entity is registered and is not carrying on an enterprise it must apply to the Commissioner for cancellation of its registration. The entity must lodge its application within 21 days after the day on which it ceased to be carrying on an enterprise.

Subsection 25-55(2) of the GST Act mentions that the Commissioner must cancel an entity's registration (even if the entity has not applied for cancellation of its registration) if the Commissioner is satisfied that the entity is not carrying on an enterprise and the Commissioner believes on reasonable grounds that the entity is not likely to carry on an enterprise for at least 12 months.

Consequently, you must lodge an application to cancel your registration.

Additional information

Your director has also informed that he does not register companies like you for the purposes of selling them later for a profit. Therefore, your director is not carrying on an enterprise of registering, setting up and selling companies like you.

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