Edited version of your private ruling

Authorisation Number: 1012564106078

Ruling

Subject: Property renovation

Question 1

Are you carrying on a business for taxation purposes?

Answer

Yes.

Question 2

Are your properties purchased for renovation and sale regarded as trading stock?

Answer

Yes.

Question 3

Is the sale of the property disregarded for capital gains tax purposes?

Answer

Yes.

Question 4

Is the income from the activities assessable as ordinary income?

Answer

Yes.

Question 5

Are you entitled to a deduction for the costs incurred for your activities?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2014

The scheme commenced on

1 July 2013

Relevant facts

You took leave from your regular employment to renovate and sell a property.

The fittings and fixtures in the kitchen and bathrooms were replaced, the house was painted inside and outside and the floorboards were sanded.

The property was sold. You made a profit from this property transaction. The profit from the sale was used to meet your family expenses.

You registered for an Australian Business Number.

Because of the success of the above project, you resigned from your employment. You plan to continue renovating properties as a full-time occupation.

After researching the market and attending open homes, you purchased another property. You renovated this property including replacing the kitchen and bathrooms, painting the property inside and outside and sanding floorboards.

This property was sold for a profit. The profit is being used to meet your family expenses.

You are currently seeking finance to secure your next property for renovation.

You keep business records of your income and expenses. You have a profit and loss statement.

You work everyday on your renovating activities. The hours spent are similar to a full-time job.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 995.

Income Tax Assessment Act 1997 Section 70-10.

Income Tax Assessment Act 1997 Section 118-25.

Income Tax Assessment Act 1997 Section 6-5.

Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision

Carrying on a business

Business is defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) to be 'any profession, trade, employment, vocation or calling, but does not include 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 outlines some factors that indicate whether or not a business of primary production is being carried on. Although you are not carrying on a primary production business, the principles in this ruling are relevant. No individual factor is determinative, but should be weighed up in conjunction with the other factors.

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.

TR 97/11 states the indicators must be considered in combination and as a whole and whether a business is being carried on depends on the 'large or general impression gained' (Martin v. FC of T (1953) 90 CLR 470 at 474; 5 AITR 548 at 551) from looking at all the indicators, and whether these factors provide the operations with a 'commercial flavour' (Ferguson v. FC of T (1979) 37 FLR 310 at 325; 79 ATC 4261 at 4271; (1979) 9 ATR 873 at 884). However, the weighting to be given to each indicator may vary from case to case, and no one indicator will be decisive (Evans v. FC of T 89 ATC 4540; (1989) 20 ATR 922).

In this case, the activities have a commercial purpose with an intention to produce a profit. Considerable time is spent on the related activities each week.

You have prepared a profit and loss statement for your activities and have made a profit on your initial activities. Research is carried out and the activities are carried out in a business-like manner.

After weighing up the relative business indicators and objective facts surrounding your case it is considered that you are carrying on a business for taxation purposes.

Trading stock

Trading stock is defined in section 70-10 of the ITAA 1997 as including anything produced, manufactured or acquired that is held for the purpose of manufacture, sale or exchange in the ordinary course of business.

In your case, the properties purchased for renovating and sale are regarded as trading stock.

Section 118-25 of the ITAA 1997 provides that a capital gain or capital loss is disregarded if the asset is trading stock.

Therefore the net capital gain from the sale of your renovated property is disregarded under the capital gains tax provisions.

Business income and expenses

As you are considered to be carrying on a business of renovating and selling properties, the profits are assessable as business income under section 6-5 of the ITAA 1997 and the outgoings are allowable deductions under section 8-1 of the ITAA 1997.

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