Edited version of private advice

Authorisation Number: 1051998356096

Date of advice: 18 August 2022

Ruling

Subject: Carrying on a business

Question 1

Am I carrying on a business as defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) during the relevant income years?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You began earning income during the relevant income year. You bought equipment and paid for other related expenses.

You completed the necessary training and licencing requirements prior to commencing this income producing activity.

You produced an income from this activity with expenses during the relevant income years.

You conducted this activity on the occasional weekend initially however, the activity increased to every weekend and on occasion a weekday when you are not required to work the next day.

You are usually required to travel to conduct this activity.

You collect the product from this activity and sell them to a buyer who pays you. You have delivered products to buyers.

You keep basic records of the products. You also collect tax receipts from the buyers.

You earn your primary income from other sources.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 995-1(1)

Summary

You are carrying on a business as defined by subsection 995-1(1) of the ITAA 1997.

Reasons for decision

Determining whether or not an activity amounts to carrying on a business is a matter of fact and degree.

Subsection 995-1(1) of the ITAA 1997 defines 'business' to include 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'.

However, this definition simply states what activities may be included in a business. It does not provide any guidance for determining whether the nature, extent, and manner of undertaking those activities amount to the carrying on of a business.

Taxation Ruling TR 97/11 'Income tax: Am I carrying on a business of primary production?' provides indicators that the courts have concluded are relevant when determining whether a business is being carried on. These indicators are no different in principle, from the indicators as to whether activities in any other area constitute carrying on a business.

The indicators provided in TR 97/11 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 repetition and regularity of 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;

•         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.

Each case must be judged on its own particular facts and the determination of the question is generally a result of a process of weighting all the relevant indicators together to form a general opinion of whether a business is being carried on.

Application of the indicators to your circumstances

Whether the taxpayer has the purpose of profit as well as the prospect of profit from the activity

It's clear that the activity has transitioned from recreation to commercial as you have made a significant profit in the relevant income years despite a large outlay of expenses. You have made a profit in X consecutive income years despite a considerable sum being spent on expenses in the relevant income years. These factors indicate that the primary purpose of the activity is not just the prospect of profit but for the purpose of profit.

Whether there is repetition and regularity

You have stated that when you originally began the activity you only participated infrequently on every other weekend. This activity has now increased to almost every weekend and includes some weekdays. This is a clear, significant increase in repetition and regularity which in turn also significantly increased profits.

Whether the activity is of the same kind and carried on in a similar manner that of the ordinary trade in that line of business

The activity is very similar to other activities in the same line of business and is carried on in a similar manner.

Whether the activity is planned, organised, and carried on in a business-like manner such that it is directed at making a profit.

Although you do not have a business plan, you do keep basic records. This indicates that there is a level of planning involved that could be used in future decision-making processes to increase profits. You also keep receipts from the sales and have records of expenses or costs which indicates there was a basic understanding that there may be tax implications involved. These actions overall demonstrate that the activity is carried out in a business like manner and could be directed at making or increasing profits in the future.

The size, scale, and permanency of the activity.

It is common for the size, scale and permanency, and repetition and regularity indicators to be intricately linked. As the repetition of an activity increased so does the amount of work that is completed and subsequently the income that is received. In your case, there was a significant increase in repetition and regularity of the activity which has resulted in an increase to the size and scale of the operation. This meant that considerably more time was spent on the activity and more product was sold for profit.

Conclusion

After weighing up the relevant business indicators and objective facts surrounding this case and based on the information and documentation provided, it is the Commissioner's view that the overall impression is that you are carrying on a business in the relevant income years.

In any year that you are carrying on a business you can claim a deduction for the expenses that are necessary for you to incur in that business.

Note: your activity 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. 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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