Edited version of private ruling

Authorisation Number: 1011474867423

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Ruling

Subject: Am I in Business

Question 1

Are the proceeds from the sale of gold nuggets found while fossicking, and the sale of jewellery manufactured from gold nuggets found while fossicking, considered assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Are you required to pay capital gains tax (CGT) under section 118-10 of the ITAA 1997 on the disposal of gold nuggets?

Answer

No.

This ruling applies for the following periods:

1 July 2002 to 30 June 2003

1 July 2003 to 30 June 2004

1 July 2004 to 30 June 2005

1 July 2005 to 30 June 2006

1 July 2006 to 30 June 2007

1 July 2007 to 30 June 2008

1 July 2008 to 30 June 2009

1 July 2009 to 30 June 2010

1 July 2010 to 30 June 2011

1 July 2011 to 30 June 2012

The scheme commences on:

1 July 2002

Relevant facts and circumstances

You and your spouse are both employed on a full time basis. During your days off you have fossicked for gold as a hobby.

You use a metal detector and hand tools while fossicking.

The time spent detecting averaged X hours per month. However your spouse injured themselves and as a result you have reduced the amount of gold detecting substantially. Last year you went gold detecting only a number of times in total.

In the future you may be relocating where you live which will limit your detecting further to occasional caravan/camping trips.

During the past few years you have found a quantity of gold, and you expect to find more gold in the future. However it is unlikely that you will ever find a valuable nugget.

You have not sold any gold, however you may sell your gold in the future.

You detect on available 'pending' ground or on 'legal ground' by way of written permission from leaseholders.

In general you have not kept records of gold finds except where the owners/leaseholders of the property have requested the information when using their land.

When gold detecting you sometimes find what is termed "useless gold" which is gold that contains other elements such as quarts or other metals. Some of these finds may look good as jewellery and you are considering having them professionally cleaned/cut/set as jewellery to hopefully increase their value and attractiveness for potential buyers. You are yet to have the jewellery created. You cannot say how many pieces you may have made however you suggested that one out of 10 to 20 may be suitable for this purpose.

You have not found major pieces of gold and nothing individually valued over $10,000 at the time it was found.

You do not consider your fossicking activities as a business, but rather as a hobby.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5,

Income Tax Assessment Act 1997 Subsection 6-5(1),

Income Tax Assessment Act 1997 Section 6-10,

Income Tax Assessment Act 1997 Section 995-1,

Income Tax Assessment Act 1997 Section 102-5,

Income Tax Assessment Act 1997 Subsection 118-10(3),

Income Tax Assessment Act 1997 Subsection 108-20(2) and

Income Tax Assessment Act 1997 Section 108-5.

Reasons for decision

Question 1

Summary

You are not carrying on a business of gold fossicking or jewellery selling.

Detailed reasoning

Assessability of Income on sale of gold nuggets and jewellery

Assessable income

A taxpayer is liable to tax on their taxable income derived during the income year. Taxable income is calculated by subtracting allowable deductions from the taxpayer's assessable income.

Ordinary income

Income is generally assessable as ordinary income under section 6-5 of the ITAA 1997. Under subsection 6-5(1) of the ITAA 1997, ordinary income means income 'according to ordinary concepts'. This phrase is not defined under the legislation, but a large body of case law has developed to identify the factors that indicate if an amount is income according to ordinary concepts.

Statutory income

Under section 6-10 of the ITAA 1997 assessable income also includes statutory income. Statutory income is income that is not ordinary income but is included as assessable income by specific provisions of the tax law.

Carrying on a business

Section 995-1 of the ITAA 1997 defines 'business' as 'including any profession, trade, employment, vocation or calling, but not 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 provides the Commissioner's view of the factors used to determine if you are in business for tax purposes.

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.

No one indicator is decisive. The indicators must be considered in combination and as a whole. Whether a 'business' is carried on depends on the large or general impression gained.

Application to your circumstances

You have conducted your gold fossicking activities over many years. In this respect the activity has elements of repetition and regularity.

You are considering creating some pieces of jewellery from some gold found, but only a small number and only to increase the attractiveness for potential buyers. You will not make a large profit from the process.

Your activities do not have a commercial feel. You commenced the activities as a hobby due to your interest in fossicking.

Your circumstances are not indicative of an operating business structure.

Your activities are conducted on a small scale and you do not devote much time to them. You were only conducting the activity on days off from your full-time work and in the future you will be forced to significantly reduce the frequency of your fossicking activities due to your spouse's health.

Your application indicated that you do not view the activity as a business operation.

Taking all of these factors into consideration, we have determined that your activities are not carried on as a business for taxation purposes and we do not consider the receipts of the activities to be assessable.

Question 2

Summary

The capital gains from the sale of the gold nuggets are not included in your assessable income.

Detailed reasoning

Capital Gains on sale of gold

Section 102-5 of the ITAA 1997 states that your assessable income includes your net capital gain (if any). However, you disregard a capital gain that you make from a personal use asset if you paid, or are required to pay, $10,000 or less in respect of acquiring that asset (subsection 118-10(3) of the ITAA 1997).

A 'personal use asset' is defined in subsection 108-20(2) of the ITAA and includes a CGT asset, except a collectable, that is used or kept mainly for your (or your associate's) personal use or enjoyment. Gold nuggets are a form of property and accordingly are CGT assets (section 108-5 of the ITAA 1997).

In Favaro v FC of T (1996) 34 ATR 1; 96 ATC 4975 the Federal Court held that Italian currency which was converted to Australian currency was not a 'personal use asset' under the equivalent provision of the Income Tax Assessment Act 1936 (ITAA 1936). The Court accepted the Commissioner's submission that 'the expression "personal use" is used in s 160B of the ITAA in contradistinction to use for business or profit making purposes' (subsection 160B(1) of the ITAA 1936 was rewritten as subsection 108-20(2) of the ITAA 1997).

The word 'contradistinction' means distinction by contrast or opposition (The Australian Oxford Dictionary, 1999, Oxford University Press, Melbourne). Therefore, an asset that is not used for business or profit making purposes is, by default, used or kept mainly for personal use and enjoyment. The two categories are mutually exclusive.

In your case, the gold nuggets are found pursuing a hobby and not in the course of carrying on any business or profit making activity. As such, it is considered the gold is used or kept mainly for your personal use and enjoyment and is therefore a personal use asset under paragraph 108-20(2)(a) of the ITAA 1997.

Consequently, the capital gains from the sale of gold nuggets are not included in your assessable income.