Edited version of private advice

Authorisation Number: 1052238023197

Date of advice: 12 April 2024

Ruling

Subject: GST - running a business?

Question

Was I running a business for the purpose of accessing CGT small business concessions?

Answer

No. You do not appear to be running a business based on the information provided, as stated in Taxation Ruling (TR) 97/11:

•         There did not appear to be a system to allow for a profit to be made while performing this activity.

•         The activity was carried out on a small scale and was conducted on a seemingly sporadic schedule.

•         You did not have any framework in place that would classify you as running a business such as an Australian Business Number (ABN), a business plan or a business budget.

This ruling applies for the following periods:

XX of X 20XX to XX of X 20XX

Relevant facts and circumstances

You sold your cottage (the property) which was used as a studio for over XXyears. This property was on an island off the Australian coast.

The property was owned by you for over XX years.

The property was a rental before you used it as a studio.

The property was jointly owned by you and your partner with equal ownership between you both.

You used the property as a location to make product and no other purposes. The product made at the property was then sold through a local gallery. The gallery is owned by the local council and is managed and staffed on a voluntary basis, and there was no commercial gallery located near you.

Your first record of income from the activity was in the 20XX financial year, and you declare your losses and profit on your individual income tax returns.

Your activity made a profit in only two out of the twelve years, including nil income in four of the last five income years, that you conducted the activity from your cottage.

Your intention for the business was to, at a minimum, cover the cost of materials. It was your plan to increase your prices as your work improved and your reputation grew.

You have provided a list of the number of sales and their sources for the years you have been conducting this activity.

Tourism was one of your sources of sales. The tourism on the island is seasonal and is constrained by limited access.

There is only one gallery for exhibitions and sales.

You are mainly self-taught in creating art with a minimal amount of formal training.

You do not have a registered ABN.

You do not have a business budget.

You do not have a trading name.

Relevant legislative provisions

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

ATO view documents

Taxation Ruling TR 97/11: Income Tax - Am I carrying on a business of primary production?

Taxation Ruling TR 2015/11: Income Tax - Carrying on a business as a professional artist.

Reasons for decision

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

While there are no strict criteria for determining whether an activity carried on by an individual is a business, there are characteristics that can be considered that help to determine if you are carrying on a business.

Taxation Ruling TR 97/11 provides the Commissioners view of the factors that are considered important in determining if you are in a business for tax purposes. While the ruling is stated to be for primary production, its principles can be applied for all situations. The indicators under the ruling include:

•         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 planned, organised and carried on in a businesslike manner such that 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.

Taxation Ruling TR 2005/1 specifically address the situation of professional artists, which include 'an author of literary, dramatic, musical or artistic work. Paragraph 9 of this TR cites Evens v Federal Commissioner of Taxation (1989) in which the court ruled that no single indicator is determinative; rather all of the indicators must be considered. Whether a business is baring carried on is based on the overall impression gained after looking at the activity as a whole and the intention of the taxpayer undertaking it.

Significant commercial purpose or character

Your business was carried on in a manner that could not be considered significant commercial activity. The product of your activity was sold in a gallery that has no commercial interest and is also run on a volunteer basis. The gallery in which you sold your product is owned by the areas local council and its purpose is to sell product by locals at minimal cost.

More than an intention to engage is business

There appears to have been an intention to run a business as you have reported all of your losses and profit in the relevant income years on your individual income tax return statements and you kept a record of your sales. However there does not appear to have been a strategy put in place to increase size and profit of the activity by increasing the number of clients that you could potentially sell your product to.

Purpose & prospect of profit

You claim that you planned to, at a minimum, cover the cost of your materials from the sale of your pieces. So, the purpose of the business did not appear to be to make profit. The income information that you provided also show that you only made a profit two out of the twelve years that you were conducting this activity and nil income in four of those years. The prospect of profit was also limited based on the small population and limited tourism that you say hindered the potential market size.

Regularity and repetition of the activity

Based on the number of sales and events provided by you, they appear irregular and reliant on unreliable factors such as volunteers and tourism availability. The art exhibition in which you sold your art operated on average only once a year, and individual sales appear random and inconsistent, varying in number of sales and number of times per year.

Activity is planned, organised, and carried on in a businesslike manner such that it is directed at making profit

There was not any business plan or budget in place to increase the size and profit of the activity by increasing the number of clients that you could potentially sell your product to. While the location of your activity restricted the number of potential clients, there did not appear to be any strategy to overcome this obstacle, and the activity appears to be inherently unprofitable.

The size, scale, and permanency of the activity

The size and scale of the activity was small, and the only potential customers were a small population of locals and the limited number of tourists. Additionally, the size and heavy weight of the art pieces you created deterred tourists from purchasing your art pieces, decreasing your potential client size.

Whether the activity is better described as a hobby

Based on the assessment of your activity using the criteria above, your activity would be better described as a hobby and could not be considered a business.

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