Edited version of private advice

Authorisation Number: 1052318414761

Date of advice: 22 October 2024

Ruling

Subject: Am I in business?

Question

Is the money you earn from the sale of X assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No, your activities are considered to be a hobby.

We have weighed up the indicators of carrying on a business outlined in Taxation Ruling TR 97/11 Income Tax: Am I carrying on a business of primary production? and have determined that you were not carrying on a business during those years because your activities did not have a significant commercial purpose or profit intention, you did not intend to engage in business and your activities were not carried on in a businesslike manner.

Therefore, any income received from your activity is not assessable income and you are not entitled to deduct any expenses incurred in earning these amounts.

This ruling applies for the following period:

X July 20XX to XX June 20XX

The scheme commenced on:

20 July 2024

Relevant facts and circumstances

You started making X as a creative outlet in your spare time.

You conduct the activities from your home.

You purchase supplies to make X using funds from your own personal bank account. You do not have a separate bank account for your activity.

You accumulate a lot of X from conducting the activity in your spare time.

You were unsure what to do with the accumulation of X.

In previous years you have sold pieces to friends and family.

You had your first market stall to sell some of the X and use up some of the supplies you had purchased over the years.

You did not start the market stall with an intention to make a profit.

You started the market stall with the intention to get rid of the X you had accumulated over the years.

You hold one market stall a month. The markets in your area only run a market once per month.

You do not keep track of or document specific pieces that sell to restock certain products based off popularity and sales.

You create the pieces based on your own personal preference and sell whatever you make.

You don't keep track of how many pieces you sold.

You sell X at low price compared to those in the X business.

You have business insurance.

You have an ABN and registered business name.

All profits from selling the X goes into your personal bank account.

You do not keep records of cost of production, seasonal conditions affecting sales, growth or market conditions.

You do not know how much you have spent to date to determine if a profit has been made.

You work full time and receive salary and wages from a separate job.

Relevant legislative provisions

Income Tax Assessment Act 1997, section 6-5

Income Tax Assessment Act 1997, section 8-1

Relevant ATO view

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

Reasons for decision

The ITAA 1997 defines assessable income in section 6-5 as income according to ordinary concepts. Assessable income includes the ordinary income derived directly or indirectly from all sources. If you are carrying on a business, most income you receive is assessable for income tax purposes.

Taxation RulingTR 97/11 Income Tax: Am I carrying on a business of primary production? provides the Commissioner's view of the factors that are considered important in determining if you are in business for tax purposes. The factors 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.

•                     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.

•                     Whether the activity is better described as a hobby, a form of recreation or a sporting activity.

These factors are considered in combination, no one factor is decisive. Whether a business is being carried on depends on the large or general impression gained.

Significant Commercial Purpose

When establishing whether there is a significant commercial purpose or character the activities are compared with the activities of a taxpayer who is carrying on a business conducting similar activities. Any knowledge, previous experience, or skill of the taxpayer in the activity and any advice taken by the taxpayer in the conduct of the business should also be considered.

You have no apparent intention to make a profit.

You create X based on your own personal preference and have made X on an ad-hoc basis in your spare time.

You do not keep track of or document specific pieces that sell to restock certain products based off popularity and sales.

Your activity lacks the degree of organisation and system that would be found in the activities of people who normally would be regarded as carrying on a business in this industry.

The scale of your activity is small and whilst you sell to the wider public this does not outweigh the hobby aspect of your activity.

Intention to engage in business

As you do not have a business plan and do not keep records you have not demonstrated that you have an intention to engage in business.

You have a registered business name and ABN. This does not show an intention to engage in business as you thought it was a requirement for selling you products at the market.

Purpose of Profit

The carrying on of a business is usually such that the activities are engaged in for the purpose of profit on a continuous and repetitive basis. The taxpayer must be able to show how the activity can make a profit.

In your circumstances, you are unable to show that the activity has or will make a profit as you do not look at the full costs of production and distribution to determine if a profit is made.

You receive salary and wages from a separate job.

Regularity and repetition

It is a feature of a business that similar sorts of activities are repeated on a regular basis. They should be undertaken at least the minimum activities necessary to maintain a commercial quantity and quality of product for sale.

You do not undertake activities necessary to maintain a commercial quantity and quality of your activity as you make it sporadically in your spare time from your home.

Whilst you attend X to sell the excess you make there is only one per month in the area that you reside. You do not travel to other locations to sell X.

We do not consider there is significant repetition and regularity to your activities.

Is the activity of the same kind and carried on in a manner that is characteristic of the industry?

An activity is more likely to be a business when it is carried on in a manner that is similar to other participants in the same industry. The following factors are compared with the characteristics of others engaged in the same type of business:

•                     The volume of sales.

•                     Types of customers.

•                     Sort of expenses incurred by the taxpayer.

•                     The amount invested in capital items.

•                     Previous experience of the taxpayer.

You do not keep track of sales or expenses and conduct your activity in an ad-hoc basis rather than in a systematic and organised manner that is characteristic of a business.

The customers you sell to are friends, relatives and those who attend your market stall.

You conduct the activity because you enjoy in your spare time rather than to make a profit like other participants in the same industry.

Size and scale of the activity

The larger the scale of the activity the more likely it will be that you are carrying on a business. This is not a determinative test.

The scale of your activity is small as you conduct it from your own home and whilst you sell to the wider public at market stalls this is not characteristic of a commercial business.

Hobby or recreation

The pursuit of a hobby is not the carrying on of a business.

Your X making activities amount to a hobby for the following reasons:

•                     The size and scale of your activity is small.

•                     You have no plan or intention to make a profit.

•                     You only sold excess items that you made.

•                     You do not have a plan in place to show how a profit can be made and there is no record keeping to determine if profits are being made.

•                     The activity is not carried on in the same manner as that of the ordinary business activity of a X.

After considering the facts and circumstances of your application, we do not consider that you have the necessary characteristics of a business for taxation purposes.

Therefore, any income received from your activity is not assessable income under section 6-5 of the ITAA 1997 and you are not entitled to deduct any expenses incurred in earning these amounts.

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