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Edited version of your written advice

Authorisation Number: 1012658808765

Ruling

Subject: Carrying on business

Question

For the year ended 30 June 201X, were you a small business entity?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 201X

The scheme commences on:

30 June 201Y

Relevant facts and circumstances

You are a specialist consultant who previously carried on businesses using corporate structures. Unless working in the premises of your clients, you work from your home office.

One of your private companies had a long term investment asset, which comprised of over 80% of the company's market value.

Prior to 1 July 201Y, you ceased to conduct your historical corporate business activities to devote your time exclusively to the development and sale of your private company's long term investment asset. In addition, during the year ended 30 June 201X, you registered yourself as a sole trader.

During the year ended 30 June 201X, you sold your shares in the private company for a significant sum, far in excess of your historical business income.

For the year ended 30 June 201X, you had three sources of income:

After providing the required services to the purchaser of your shares for the stipulated period, you did not earn any business income for the remainder of the year ended 30 June 2014.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 328-110

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Carrying on a business

Section 328-110 of the Income Tax Assessment Act 1997 (ITAA 1997) provides to be a small business entity for an income year (the current year), you must carry on a business in the current year and your aggregated turnover for the previous year was less than $2 million or your aggregated turnover for the current year is likely to be less than $2 million.

Section 995-1 of the ITAA 1997 defines the term 'business' in the following way:

Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? explains, at paragraphs 13 and 26, the courts have held that the following indicators are relevant to whether an entity is carrying on a business:

The indicators must be considered in combination and as a whole. 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.

About repetition and a permanent character, continuity the High Court of Australia case of Hope v. Bathurst City Council 80 ATC 4386 at p. 4390; (1980) 144 C.L.R. 1 at p. 9, stated:

About repetition and regularity, paragraph 55 of TR 97/11 explains:

About whether a business 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:

Paragraph 64 of TR 97/11 states, in considering this indicator, factors that might be compared with the characteristics of others engaged in the same type of business include:

In your case, we consider, for the year ended 30 June 201X, you were not carrying on a business for reason of the following reasons:

In summary, we consider your relationship with your fellow shareholder was intrinsically for the realisation of your shares investment and your relationship with the purchaser of your shares was similar to the seller of a business who continues to work for that business, as a consultant, for a short period, to ensure a smooth transition. Such relationships do not have the nature of carrying on a business.

Employee vs contractor

Taxation Ruling TR 2005/16 contains the Commissioner's view on whether a person is engaged as an employee or an independent contractor.

The relationship between an employer and employee is a contractual one. It is often referred to as a contract of service. Such a relationship is typically contrasted with the principal/independent contractor relationship that is referred to as a contract for services. An independent contractor typically contracts to achieve a result whereas an employee contracts to provide their labour (typically to enable the employer to achieve a result).

Paragraph 7 of TR 2005/16 explains that whether a person is an employee of another is a question of fact to be determined by examining the terms and circumstances of the contract between them having regard to the key indicators expressed in the relevant case law. It follows TR 2005/16 employs six tests that have been regarded by the courts as key indicators of whether an individual is an employee or independent contractor at common law.

Paragraph 21 of TR 2005/16 makes it clear that contractual arrangements that contain clauses that purport to characterise the relationship between the parties as that of principal and independent contractor (and not that of employer and employee) cannot simply deem the relationship between themselves to be something that is not. It follows a worker holding an ABN and contract clauses specifying the worker is to pay the own tax, insurance, etc, will not in themselves determine a contractor relationship or hold any weighting in determining the status of the worker for tax purposes.

The six tests that have been regarded by the courts as key indicators of whether an individual is an employee or independent contractor are:

1. The control test. The classic 'test' for determining the nature of the relationship between a person who engages another to perform work and the person so engaged is the degree of control which the former can exercise over the latter. A common law employee is told not only what work is to be done, but how and where it is to be done. With the increasing usage of skilled labour and consequential reduction in supervisory functions, the importance of control lies not so much in its actual exercise, although clearly that is relevant, as in the right of the employer to exercise it.

2. The organisation or integration test, concerned with the fundamental question of whether the worker is operating their own business or is operating within the business of the payer. This includes: (i) the nature of the services rendered by the worker; (ii) whether they are an integral part of the business activities carried on by the payer; (iii) whether the worker would be perceived (by a third party) to carry on their own business or enterprise and; (iv) whether the worker could be expected to generate business goodwill in their own right.

3. The results test. The phrase 'the production of a given result' means the performance of a service by one party for another where the first-mentioned party is free to employ their own means (such as third party labour, plant and equipment) to achieve the contractually specified outcome. Satisfactory completion of the specified services is the 'result' for which the parties have bargained. The consideration is often a fixed sum on completion of the particular job as opposed to an amount paid by reference to hours worked. If remuneration is payable when, and only when, the contractual conditions have been fulfilled, the remuneration is usually made for producing a given result.

Where the substance of a contract is to achieve a specified result, there is a strong (but not conclusive) indication that the contract is one for the services of an independent contractor. In the Supreme Court of New South Wales case of World Book (Aust) Pty Ltd v. Federal Commissioner of Taxation 92 ATC 4327, Sheller JA said:

For an employee, the basis of payment is: (i) for the time worked, such as paid on an hourly basis; (ii) a price per item or activity (e.g. a fruit picker), particularly when they are not providing major assets to the task (such as a truck owner/driver, who would not be an employee); and (iii) on a commission/percentage basis (e.g. a real estate sales agent).

4. The delegation test is the test to whether the work can be delegated or subcontracted (with or without the approval or consent of the principal). An employee cannot delegate or subcontract work. Where as an independent contractor can delegate or subcontract work.

5. The risk test is the test about whether the worker bears the legal responsibility and expense for the rectification or remedy in the event of unsatisfactory performance. An employee generally does not bear the legal responsibility and expense for the rectification or remedy in the case of unsatisfactory performance. Where as an independent contractor generally does bear the legal responsibility and expense for the rectification or remedy in the case of unsatisfactory performance.

6. The last test is which party provides tools, equipment and payment of business expenses. Unlike an employee, an independent contractor will generally provide tools, equipment and payment of business expenses.

In your case, we consider your status in relation to the purchaser of your shares (the 'Purchaser') was in the nature of an employee, for the following reasons:

In conclusion, the six indicators are heavily weighted towards a relationship having the nature of an employee.

In summary, your relationship with the Purchaser was similar to the seller of a business that continues to work for that business, as a consultant, for a short period, to ensure a smooth transition. Such a relationship cannot be deemed to be an independent contractor that is carrying on a business.

In addition, we regard your assertion about a downturn in your industry to not be relevant because you devoted your time and efforts from around 1 January 2011 to the realisation of your significant investment, which had a value incomparable to the income earned previously by your companies.


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