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Ruling

Subject: Am I in business

Question

Are you carrying on a business of selling item X?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

You are an Australian resident.

You are employed full time.

You have an interest in item X.

You began a commission based sales activity (the activity) as a sales 'consultant'.

Your activity earns commission from the supplier of item X.

You invested an amount of money in a starter kit of the product when you started your activity and have purchased more items as you progressed.

During the year you have conducted a small number of meetings with clients each month and earned commission based on the sales you achieved.

You have a small number of meetings booked in future months and you expect the level of your activity to increase leading up to Christmas.

You plan to hold only one or two meetings per month, and spend no more than approximately X hours per month on your activity.

You have no intention to expand your activity.

You have not received special training on how to conduct your activity

Your main customers are friends, family members and the general public.

You have printed and delivered advertising fliers promoting your activity. You have not advertised the activity through any other means.

You do not maintain a separate bank account for the transactions relating to the activity.

You do not maintain records such as profit and loss statements or ledgers. However you receive receipts for the items purchased, and a monthly payment summary listing the commissions you earn. You also have credit card statements which list the expenses you incur while conducting the activity.

You do not have a home office, and only use a spare room for a small amount of storage of paper files.

Other expenses you incur conducting the activity are vehicle expenses, the purchasing of stationery, items for sale through the activity, and costs associated with the printing of order forms (printer, ink and paper). After taking these expenses into consideration you believe that you are making a loss from the current level of your activity.

You believe that your activity is a hobby which you enjoy in your spare time.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

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.

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 test 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 that are considered important in determining if you are in business for tax purposes. The factors 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 an interest in item X and have begun a commission based sales activity.

It can be expected that a business engaged in the selling of a product would devote many hours to that activity thus forming regular income, business and sales patterns. However, you are employed full time and only perform your activity for approximately X hours per month during your spare time.

The activity has limited commercial character or purpose. You do not have a business plan, nor do you operate out of business premises or office.

You do not keep adequate financial records in a similar manner to that of ordinary trade in that line of business.

With your current level of sales activity and the costs involved, your activity is not profitable.

You consider your activity a hobby.

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 receive 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 incur in relation to this activity are not deductible.

Future years

Although your activity has been described as a hobby, you can change from conducting a hobby to that of being in business (and vice-versa) over time as your level of activity changes. Therefore you should evaluate your level of activity on a regular basis to see whether you are conducting a hobby or carrying on a business. You can request a further ruling after the 2013 financial year if you are still unsure about this issue.

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