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Ruling

Subject: Am I In Business

Question

Are you carrying on a business?

Answer:

Yes

This ruling applies for the following period

Year ended 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts

You have been engaged in an activity for a number of decades.

You provide products to various clients and organisations,

You obtained additional clients as a result of your association with various clients and organisations in the 2011-12 financial year.

You do not hold any formal qualifications in relation to your activity.

You are self-taught and have always had an interest in your activity.

You do not have a business plan.

Your intention is not to make a profit from your activity as you just want to make enough money to cover your costs but you also charged an additional amount in case anything goes wrong with making the finished products.

Sometimes you make a small profit.

You also produced some products for no charge.

In an earlier financial year your turnover was small and your expenses were defrayed against this amount.

You sold a small amount of products in the earlier financial years.

Except for the 2011-12 financial year you have been conducting the activity at the same level for a large number of financial years.

You had undertaken a large number of jobs during the 2011-12 financial year.

You advised your level of activity increased in the current financial year and your turnover was significant.

You paid for expenses for materials and postage.

You travelled to gather materials from suppliers and to drop off the finished products to your customers.

You travelled a large number kilometres during the current financial year and incurred travel costs.

You did not invest any capital into the activity in current financial year.

You use equipment to make your finished products.

You did not employ anybody in the current financial year.

You do not advertise your activity.

You previously had a website but this no longer operating.

You undertake the activity at home.

You issue your clients an invoice when required.

You have kept some business records.

For the current financial year you were off work on sick leave from your employment. You received sick leave payments while you were off work.

You spend a number of hours on this activity.

You had an Australian Business Number but it has been cancelled.

Relevant legislative provisions:

Income Tax Assessment Act 1997 subsection 6-5(1).

Income Tax Assessment Act 1997 section 8-1.

Taxation Administration Act 1953 subsection 12-190(1)

Taxation Administration Act 1953 paragraph (c) 12-190(3)

Reasons for decision

Subsection 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states that your assessable income includes income according to ordinary concepts. This means '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.

Taxation Ruling TR 97/11 provides criteria established by the courts that would need to be satisfied in order to be considered to be carrying on a business. It should be noted that TR 97/11 specifically deals with the carrying on of a business of primary production, but the criteria established can be applied to most activities.

The list of criteria includes, but is not limited to:

· whether the activity has a significant commercial purpose or character

· whether there is more than just an intention to carry on a business

· whether there is the purpose and prospect of making a profit

· whether there is repetition or regularity involved

· whether the activity has the same characteristics as other businesses in the

· same field

· whether the activity is carried on in a business-like manner; and

· the size and scale of the activity

No one indicator is decisive. They should be considered in combination and as a whole. Generally, whether a business is carried on depends on the large or general impression given.

Does the activity have significant commercial purpose?

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, the repetition and regularity of activity and the profit indicators.

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 and to consider any knowledge, previous experience or skill of the taxpayer in the activity and/or any advice taken by the taxpayer in the conduct of the business.

Your activity is providing finished products to various organisations and clients. While you may not hold any qualifications, your interest in the activity has provided you with the necessary skills to undertaken the production and selling of the finished products to various organisations for a large number of years. Your level of activity has increased as you have devoted additional time and effort into the activity which resulted in a profit in the current financial year.

Intention of the Taxpayer

The intention of the taxpayer in engaging in the activity is a relevant indicator; however, a mere intention to carry on a business is not enough. There must be activity. The extent of activity determines whether a business is being carried on. It is a question of fact and degree, as stated by Brennan J in Inglis v. Federal Commissioner of Taxation 80 ATC 4001 at 4004-4005; (1979) 10 ATR 493 at 496-497 (Inglis Case).

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.

Your activity is not preparatory or preliminary as you have carried out this activity for a large number of years. You indicate that your intention was not to make a profit as you wanted to make enough money to cover your expenses. However, as your trading activity has increased in the current financial year you made a profit from this activity.

Do you have a purpose of profit as well as a prospect of profits?

The taxpayer's involvement in the business activity should be motivated by wanting to make a tax profit and the taxpayer's activities should be conducted in a way that facilitates this. This will require examining whether objectively there is a real prospect of making such a profit from participating in the business of the taxpayer.

In Hope at CLR 8-9; ATC 4390; ATR 236, Mason J indicated that the carrying on of a business is usually such that the activities are:

'... engaged in for the purpose of profit on a continuous and repetitive basis.'

In Smith v. Anderson (1880) 15 Ch D 247 at 258, Jessell MR said that:

'... anything which occupies the time and attention and labour of a man for the purpose of profit is business.'

However, it is not necessary for the activities to make a profit in every year of income in order to classify the activities as a business. Thus, a taxpayer may be carrying on a business even though he/she is making a small profit or a loss in any given year of income.

You have made a net profit from this activity in current financial year by taking on additional work for a number of additional organisations and clients. As a result of doing this, you have devoted additional time and labour to the activity which has resulted in an increased turnover.

Is there repetition and regularity of activities?

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. The taxpayer should undertake at least the minimum activities that are necessary to maintain a commercial quantity and quality of product. It is a feature of a business that similar sorts of transactions are repeated on a regular basis.

You have undertaken a large number of jobs during the 2011-12 financial year.

Is the activity of the same kind and carried on in a similar manner as other business in that trade? 

It is relevant whether the manner of operation is consistent with industry norms or with businesses in the same field. An activity is more likely to be a business when it is carried on in a manner similar to that in which other participants in the same industry carry on their activities. Lord Clyde in IR Commissioners v. Livingston at TC 542 said that:

... the test, which must be used to determine whether a venture ... is, or is not, "in the nature of trade", is whether the operations involved in it are of the same kind, and carried on in the same way, as those which are characteristic of ordinary trading in the line of business in which the venture was made.

The following factors may be taken into account:

· the manner and volume of sales

· the types of customers the taxpayer sells their product to

· the sorts of expenses incurred by the taxpayer

· the amount invested in capital items

· previous experience of the taxpayer

It is evident from the information provided that your activities are consistent in nature with other individuals engaged in this activity who provided finished products to the general public. That is; you have undertaken work for various organisations and clients to produce your products for sale, you order materials from various suppliers and used your own equipment to produce the finished products.

You have incurred expenses for the materials to produce the finished products and travelling expenses to distribute the products to your clients. You have been undertaking this type of activity for a large number of years.

Are the activities carried on in a business like manner?

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. For example, this may be indicated by:

· business records and books of accounts

· business premises

· licences or qualifications, and

· a registered business name.

Having a registered business name is not compulsory for tax purposes; having a business name does not necessarily mean you are in business. 

You do not hold any qualifications or operated from business premises and only kept limited records for the current financial year.

The size and scale of the proposed activities

This factor, of itself, is not decisive. According to TR 97/11 the larger the scale of the activity the more likely it will be that the taxpayer is carrying on a business. However, this is not always the case. A taxpayer can carry on business in a small way: Thomas v FC of T 72 ATC 4094; Ferguson v Federal Commissioner of Taxation 79 ATC 4261. However, as was said by Brennan J in Inglis Case at 4005: 'At the end of the day, the extent of the activity determines whether the business is being carried on.'

The size and scale of your activity has increased in the current financial year. This is evident by the fact that you have taken on additional clients and as a result you have increased your annual turnover significantly in the 2011-12 financial year.

Is the activity better described as hobby, recreational or sporting pursuit or a business?

If a person is not engaged in a business but pursuing a hobby, the following factors may be evident: 

· the taxpayer does not intend to make a profit from the activity

· losses are incurred because the activity is motivated by personal pleasure and not to make a profit and there is no plan in place to show how a profit can be made.

· the transactions are isolated and there is no repetition or regularity of activity.

· there is no system to the conduct of a hobby

· the activity is carried out on a small scale

· any produce is sold to friends and relatives and not to the public at large.

Your activity may have exhibited some of the characteristics of a hobby in earlier financial years. For example, in the past the activity had been carried out on a small scale which resulted in a small turnover. The level of activity was constant as there was no prospect of making a profit as you expected your expenses to defray any income earned. However, for the current financial year the level of your activity has increased significantly resulting in a larger turnover. While your intention was not to make a profit, clearly from your own actions of devoting additional time and effort to produce your finished products for sale and engaging with additional clients and organisations, these factors add weight to the activity in the current financial year of not being a hobby.

Conclusion

Whether a business is carried on depends on the large or general impression given and the facts of each case. Based on the information you have provided we consider that the activity has the necessary characteristics of a business for taxation purposes in the current financial year. In brief, you have carried on this activity for a large number of years and during this time have built up your knowledge and expertise in your activity.

You have established a client base over this period and as a result of illness you were off work which allowed you to devote additional time and effort to produce products for your existing clients and additional clients in the current financial year. The fact that you do not have an ABN, keep sufficient business records or advertise your activity does not mean your activity is not being carried on in a business like manner.

The increase in the size and scale, repetition and regularity of your activity, the manner in which it is carried out and the additional time and effort devoted to the activity has increased the turnover and provided you with a large net profit for the current financial year. These are significant features which detract from finding that your activities constitute a hobby.

Therefore, any income you may receive in relation to this activity will be assessable under section 6-5 of the ITAA 1997 as ordinary income. In addition, any expenses that may be incurred in relation to this activity will be deductible under section 8-1 of the ITAA 1997.

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