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Edited version of your written advice
Authorisation Number: 1051286235195
Date of advice: 26 September 2017
Ruling
Subject: Am I in business
Question
Are you carrying on a business during the income year?
Answer
No.
This ruling applies for the following period
Year ended 30 June 2017.
The scheme commences on
1 July 2016.
Relevant facts and circumstances
You have formal qualifications in this service.
You have a business name that it is not registered.
You conduct your services from a room situated in the business of a friend, this room and facilities are provided to you rent free.
Your main client base consists of family members and friends, but on occasions you provide your skills for your friend’s clients when they were unable to fit them in, seeing three unrelated clients.
You are employed full time and only perform the services on weekends.
The main reason for you continuing to perform your services is to keep your provider number active for Medicare and Private Health Insurance (PHI) purposes. Your clients can claim a refund from their private health insurer, for this to happen you have maintained a separate business bank account.
The revenue from your services for the past two income years was approximately $750 - $1,500.
You do not advertise your services.
You do not have a business plan.
You keep a record of your revenue and expenses but do not keep business accounts.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Section 8-1
Income Tax Assessment Act 1997 Section 995-1
Reasons for decision
Summary
You are considered not to have carried on a business in the income year.
Detailed reasoning
Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a taxpayer’s assessable income includes income according to ordinary concepts. Income according to ordinary concepts includes income derived from a business.
Section 8-1 of the ITAA 1997 provides that a taxpayer may deduct an outgoing from their assessable income to the extent that the expense is necessarily incurred in producing that assessable income.
Subsection 995-1(1) of the ITAA 1997 defines ‘business’ as ‘including any profession, trade, employment, vocation or calling, but not occupation as an employee’.
If a taxpayer's activities do not amount to the carrying on of a business in one income year, that will not prevent them doing so in a later income year. Similarly, when the extent of an activity falls below what is required for that activity to be commercially viable, the activity may no longer constitute the carrying on of a business.
Taxation Ruling TR 97/11 (Income Tax: am I carrying on a business of primary production?) provides a guide to the indicators that the courts have held to be relevant as to whether or not a person is carrying on a business. It should be noted that the principles in this ruling apply equally to all businesses. The indicators are:
● Whether the activity has a significant commercial purpose or character,
● Whether the taxpayer has more than 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,
● Whether the activity is of the same kind that is 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 out in a business-like manner,
● The size, scale and permanency of the activity,
● Whether the activity is better described as a hobby, a form of recreation or a sporting activity.
Whether or not a person is carrying on a business is a question of fact, not a question of law. The determination of whether or not a business is being carried on is generally a process of weighing up all of the relevant indicators within the context of a given situation. No one indicator determines whether or not a business is being carried on.
Application to your circumstances
In your case:
● You conduct your services from a room situated in the business of a friend, this room and facilities are provided to you rent free and you do not advertise or seek out any clientele.
● You have no intention to engage in business. You provide your services on the weekend; you have no business plan and only keep records of revenue and expenses but no business accounts.
● The main reason for you continuing to preform your services is to keep your provider number active for Medicare and Private Health Insurance (PHI) purposes. Your clients are able to claim PHI rebates/refunds from your services and this enables your provider number to stay current and not lapse.
● You provide your services for your family members and friends but on occasions you do provided your skills to clients of the business when they are unable to fit them in, this has resulted in you seeing three unrelated clients.
● You have other full time employment during the week and only aim to cover your expenses and not make a profit. During the past two years the revenue you have made is below $2,000, with expenses likely to exceed this.
● You have not demonstrated any repetition and regularity in services.
● You have a business name and formal qualifications but the business name is not registered and you have no contracts to provide your services and can cease doing so at any time with no negative financial consequence.
● Your services would be better described as a hobby, form of recreation or a sporting activity.
Conclusion
Based on the information and documents supplied we consider that you were not carrying on a business. Any earnings you received from this activity are not regarded as income and are therefore not assessable. Expenses incurred in relation to this activity are not considered allowable deductions.
Additional information
Future years
You should note that conducting an activity that has been described as a hobby is a 'status'. You can change from conducting an activity as a hobby to that of being in business and vice-versa over time as your level of activity changes. Therefore you should evaluate your level of activity on a regular basis to see whether you are conducting a hobby or carrying on a business.
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