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:

• % of your total income from services provided to the private company, to prepare the long term investment asset for sale (prior to the share sale).

• % of your total income from services provided to the other shareholder of your private company, to prepare the long term investment asset for sale (prior to the share sale).

• %% of your total income from services provided to the purchaser of your shares (after the share sale), to ensure a smooth transition of the asset's ownership. The consultancy agreement stipulated your payment on a monthly basis, you're working for a specified amount of days and your provision of a wide range of broad and general consultancy services related to your intimate knowledge of the long term investment and its various stakeholder relationships.

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:

…business includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

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:

• whether the activity has a significant commercial purpose or character; this indicator comprises many aspects of the other indicators;

• 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 repetition and regularity of the activity… i.e., how often is the activity engaged in? How much time does the taxpayer spend on the activity?

• whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business;

• whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at 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 a sporting activity.

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:

Although it has been common ground that "business'' is used in its ordinary meaning in sec. 118(1), the Courts below have refrained from saying what that meaning is. This is perhaps understandable because, as a glance at the Shorter Oxford Dictionary will show, the word has many meanings. Ironically it is the last meaning given by the Shorter Oxford Dictionary, ``19. A commercial enterprise as a going concern.'', that comes closest to the popular meaning which the Courts appear to have acted on in the present case. In truth it is the popular meaning of the word as used in the expression ``carrying on a business'', rather than the popular meaning of the word itself, that is enshrined in the statutory definition. It is the words ``carrying on'' which imply the repetition of acts (Smith v. Anderson (1880) 15 Ch. D. 247, at pp. 277-278) and activities which possess something of a permanent character.

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

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. For example, in Hope the 'transactions were entered into on a continuous and repetitive basis', such that the taxpayer's activities 'manifested the essential characteristics required of a business'

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:

... 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.'

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:

…the types of customers the taxpayer sells his/her product to - wholesalers, retailers, the public at large, or friends or relatives - and the manner in which this marketing takes place;

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:

• You did not carry on an activity of the same kind and carried on in a similar manner to that of the ordinary trade (such as you carried on with your companies), namely, to the industry in general. You did not have the same type of clients as others engaged in the same type of business. Instead, you only provided services that directly related to your realising of an investment, in that your payers were your fellow shareholder and director of your private company and the company you sold your shares to. As stated in your Consultancy Agreement, you were to provide services to assist in the transfer of your existing information and knowledge about the asset and to assist with introduction to current consultants, consultants and services providers of the asset to aid a seamless transfer of the asset. This shows your services provided were intrinsically related to the disposal of your investment rather than related to services provided to the market in general.

• Your activity of providing personal services did not exhibit the character of 'permanency' and repetition and regularity of activities. Instead, you only provided the amount of services necessary related to the realisation of your investment. Your Consultancy Agreement with X was for a period of a few months, after which, until 30 June 2014, you did not earn any business income from any other sources. In other words, considering your obvious reputation in the industry, you did not show an intention to carry on a business after your service period, with the purchaser of your shares, ended. Considering your age and your incomparable financial opportunity, the impression gained is you registered yourself as a sole trader for the purpose of performing the responsibilities required for realising your shares investment and for the purpose of being deemed a small business for the purpose of the CGT small business concessions.

• The impression gained is your activity of providing personal services did not have the 'intention' of carrying on a business. Instead, the impression gained is the intention of your provision of personal services was for the purpose of realising an investment. Your related personal and company tax returns lodged show you did not generate any business income in the previous financial year. The tax invoices you provided showed your company issued its last invoice on 31 December 2011. Considering your age and your incomparable financial opportunity, you dedicated your time and efforts solely towards the realisation of your shares investment. Your share sale agreement of gives indication of the extensive scope and amount of work undertaken on the asset in the years immediately prior to the sale.

• The general impression gained is your activities did not have a commercial flavour, in that you did not conduct a business activity that generated goodwill in relation to the industry in general. Your engagement by your two primary payers was not related to any objective commercial process of a client appraising your reputation and goodwill or as a result of an objective commercial tendering process. Instead, your engagement by your two primary payers was solely related to your ownership of and associated intimate knowledge of the related asset.

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:

Undertaking the production of a given result has been considered to be a mark, if not the mark, of an independent contractor.

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:

• Per paragraph 21 of TR 2005/16, the clause of your Consultancy Agreement, deeming you not an employee, is not determinative.

• The control test shows you were placed on a retainer basis and had to perform work when, where and as required by the Purchaser, for only a few days per month. In other words, your contract was of service rather than for services. Your Consultancy Agreement states: "The Consultant agrees to perform the services as during the Term in a manner and form agreed by the parties. The Consultant will liaise directly with the Company's GM or a nominee of his". This shows you were working under the control, direction and supervision of the Purchaser rather than merely performing a specified task for a result.

• The integration test shows you were working as a representative of and for the Purchaser to ensure a seamless transition rather than for yourself. Your engagement was not based on any goodwill you created (in the industry) as a 'business' and was not generative of goodwill on your behalf as a 'business'. You were engaged to ensure a smooth transition based on your intimate knowledge of the assets you sold and based on your pre-existing relationship with the relevant stakeholders (rather as a result of an objective competitive selection or tendering process).

• The results test shows you were not working for a result but working for pay on a monthly basis, regardless of the amount of work you did or the result you achieved. Similar to an employee, you only performed the amount of work the employer has available rather than like an independent contractor completing a specific task. Your Consultancy Agreement merely lists general services to be provided, similar to a duty statement of an employee. The fact that your Consultancy Agreement stipulates you work for a minimum period demonstrates you were not working for a result.

• For the delegation test, your Consultancy Agreement may give an impression of being able to delegate your work, when referring to your "agents". However, given the salient criteria for your services was your pre-existing knowledge of the asset and your pre-existing relationships with the various stakeholders, it is considered that in practise the provision of the required services would be personal to you and could not be delegated.

• The risk test shows, per your Consultancy Agreement, you bore no risk.

• The last test shows you were to bear your own costs, unless the costs were requested by the Purchaser. However, apart from travel expenses, these costs were not expected to be anything significant, as shown in your financial statements, where your costs for the year, apart from accounting expenses, did not amount to much. Your Consultancy Agreement states: "The Company must provide the Consultant with access to the Company's property, personnel, equipment and resources as is reasonably required by the Consultant to perform the Services in accordance with this Agreement.

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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