Edited version of your private ruling

Authorisation Number: 1012566451596

Ruling

Subject: am I in business

Question 1

Are you carrying on a business in the 2012-13 income year?

Answer

No.

Question 2

Are you entitled to a deduction for the expenses incurred in the 2012-13 income year relating to your activities?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2013

The scheme commenced on

1 July 2012

Relevant facts

You were employed.

You were advised that you would be made redundant. You were also advised that a position as a contractor would be made available to you.

You contacted entity A and applied for an ABN in May 2013.

You signed an independent contract agreement with entity A.

It was your intention to start work with entity A as soon as possible.

You bought some equipment in June 2013.

Entity A offered contractor employment and you were sent information on the requirements and what was needed to set up.

Your passwords took several weeks to arrive.

You purchased more equipment on 30 June 2013.

Some work was done between August 2013 and October 2013. Entity A advised that all work passed and you would commence work in October 2013.

Your first invoice was sent to entity A in October 2013.

Your work is done at your home with your own equipment. You operate as a sole trader.

You intend to make a profit and as initial issues are resolved, you expect the volume and profitability of your work will increase.

Your work time is increasing as familiarisation with manuals improves.

You have not advertised your services to others to date as you are still organising the entity A workload. You will then expand your work by actively approaching other entities.

You do not have a formal business plan. You intend to remain small and not employ others. You aim to keep expenses to a minimum to ensure the desired profit is achieved. You expect to make a profit in the 2013-14 income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.

Reasons for decision

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. These factors equally apply to other types of businesses. 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 your case, you have an intention to engage in business and to make a profit. You have spent considerable time in your various activities. However, it needs to be determined if your business had commenced in the 2012-13 income year.

In determining when a business commences, there are three indicators that must be present before it can be said that a business has commenced. These are:

§ purpose, intention and decision,

§ acquisition of a business structure and

§ commencement of business operations.

Purpose, intention and decision

It is clear from the information you have provided that you have the necessary skills for your proposed business activity and have committed yourself to it. Your intention is to receive a fee for your services.

Acquisition of a business structure

Most business activities have a structure that provides the framework of the business.  It is usually a collection of capital assets.  What the particular capital assets are will depend on the particular business activity.

You intend to operate as a sole trader and base your activities at home. You purchased equipment on 30 June 2013, that is, you only acquired the business assets needed to commence your business activity on 30 June 2013.

As the equipment was not completely ready until 2013-14 income year, you could not start to provide your services until after 30 June 2013.

Commencement of business operations

As noted by Brennan J in Inglis v Federal Commissioner of Taxation (1979) 10 ATR 493; 80 ATC 4001, the level of activity is important in deciding whether a business is being carried on.  Brennan J stated at ATC 4004-4005; ATR 496-497 that:

The carrying on of a business is not a matter merely of intention. It is a matter of activity. Yet the degree of activity which is requisite to the carrying on of a business varies according to the circumstances in which the supposed business is being conducted.

It is accepted that, prior to July 2013, you had gone beyond merely having an intention to engage in business and there has been some activity. For example, you signed a contract with entity A and purchased items necessary for the conduct of your business. 

However, as your business is to provide services, it is considered that the business was not fully set up and ready for your income-earning activities to commence in the 2012-13 income year.

For the 2012-13 income year, your activities were preliminary to the carrying on of your intended business. When you started providing services for a fee, then the activities of your business commenced. This occurred in the 2013-14 income year. We consider that before 30 June 2013, you were still in the course of establishing and setting up your business.

Although you intended to start work as soon as possible, the income earning activities of the business did not commence in the 2012-13 income year.

After weighing up the relative business indicators and objective facts surrounding your case it is considered that you were not carrying on a business for taxation purposes in the 2012-13 income year.

Deductions

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income or are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income, or a provision of the ITAA 1997 prevents it.

Expenses associated with the establishment of a business are generally incurred at a point too soon to be regarded as being incurred in carrying on the business (see FC of T v Maddalena (1971) 2 ATR 541; 71 ATC 4161).

Also, the costs associated with the establishment of a business are capital in nature as they relate to the structure of the business rather than the daily activities from which the business gains its assessable income (Sun Newspapers Ltd and Associated Newspapers Ltd v. Federal Commissioner of Taxation (1938) 61 CLR 337; (1938) 5 ATD 87; (1938) 1 AITR 403). Therefore, such costs are not an allowable deduction under section 8-1 of the ITAA 1997.

The expenses you incurred in the 2012-13 income year relate to the setting up and establishing of the business. It is not regarded as an operating or working expense of the business. The expenses are regarded as being capital in nature. Therefore no deduction is allowable under section 8-1 of the ITAA 1997.

As your activity had not commenced to be carried on as a business in the 2012-13 income year, the non-commercial loss provisions of Division 35 of the ITAA 1997 have no application.

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