Edited version of your written advice

Authorisation Number: 1051192624080

Date of advice: 28 February 2017

Ruling

Subject: are you in business

Question 1

Are you carrying on a business in relation to your collection of items?

Answer

No.

Question 2

Are the amounts received from the sale of your items regarded as ordinary assessable income?

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 2018

Year ending 30 June 2019

Year ending 30 June 2020

Year ending 30 June 2021

The scheme commenced on

1 July 2017

Relevant facts

You have a collection of collectible items.

The collection was commenced by your parent who died in 197X.

The majority of the items were gifted to you.

You have no receipts in relation to the purchase price of some of the items.

You have sold many items over the past few years at a loss.

You have not recently purchased any items for your collection.

It was your original intention to pass the collection on to your children; however, they have not shown any interest.

The majority of items have now been sold; some are taking longer to sell.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 108-10

Income Tax Assessment Act 1997 section 118-10

Reasons for decision

Summary

You are not considered to be carrying on a business for taxation purposes. The income from selling your collection is not regarded as ordinary assessable income.

Detailed reasoning

Under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997), the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources during the income year.

Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business.

To determine whether your activities are assessable, we need to consider if you are carrying on a business.

Business is defined in section 995-1 of the 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).

Applying the relevant indicators to your circumstances

Your activities do not have a significant commercial purpose. Although you have spent considerable time over the years with your collection, you did not carry on your collection activities with an intention to make a profit.

Although you have some receipts and records, the records are not regarded as true business records. Your activities are not considered to be carried on in a businesslike manner. The size and scale of your activity is not large enough to be a commercially viable business.

Your activities are more in the nature of a recreational pursuit or hobby.

After weighing up the relative business indicators and objective facts surrounding your case it is considered that you are not carrying on a business for taxation purposes. The money received from selling your collection is not regarded as ordinary assessable income.

Other information

Where a person carries out a hobby and the amounts received are not regarded as assessable income, no deductions are allowed in relation to the hobby.

However, when certain assets are sold, the capital gains tax (CGT) provisions may apply. However, not all assets are subject to CGT. For example, there is a general exemption which applies to assets that you acquired before 20 September 1985.

In addition, certain types of assets are only subject to CGT if certain conditions are satisfied. Collectables are such an asset. 

However, you disregard any capital gain or capital loss you make from a collectable if any of the following apply:

● you acquired the asset before 20 September 1985

● you acquired the collectable for $500 or less (section 118-10 of the ITAA 1997)

● you acquired an interest in the collectable for $500 or less before 16 December 1995

● you acquired an interest in the collectable when it had a market value of $500 or less.

Where a capital loss is made from collectables, the loss can be used only to reduce capital gains from collectables (subsection 108-10(1) of the ITAA 1997).

Further information about CGT in relation to collectables can be found in the Tax Office publication Guide to capital gains tax which is available on our website www.ato.gov.au.

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