Edited version of private ruling

Authorisation Number: 1011580721465

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Ruling

Subject: Am I in business, Assessable income and Allowable deductions

Question

Will you be in a business in relation to the rear windshield advertising activity?

Answer

No.

Question

Will the income you earn from the windshield advertising activity be assessable income?

Answer

Yes.

Question

Will the car expenses incurred in driving your vehicle with the advertising on the rear windshield deductible?

Answer

Yes, in part.

This ruling applies for the following periods:

The year ended 30 June 2011

The scheme commences on:

1 November 2010

Relevant facts and circumstances

A company is offering to pay motorists to carry advertising on the rear windows of their motor vehicles.

Drivers will be paid a certain amount per month to carry the advertisements in the form of an external, semi-transparent mesh window shade. All the driver has to do is to drive normally along their usual routes.

The vehicle must be of a certain age and road worthy.

The driver/owner must be licensed.

A number of displays, for different advertisers, may be displayed during the contract period.

Wherever the vehicle is located or parked, day or night, the advertisement will be displayed.

You are planning on commencing the activity in the relevant month.

You have provided the following two options for working out the allowable deductions, these being

· the logbook method, or

· a percentage of the vehicle taken up by advertising.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 995-1,

Income Tax Assessment Act 1997 Section 15-2 and

Income Tax Assessment Act 1997 Section 8-1.

Reasons for decision

Carrying on a Business

The term business is defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) as 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'.

Whether an activity is carried on as a business is a question of fact. A number of factors have emerged from case law that are considered relevant in determining this question. These factors are outlined in Taxation Ruling TR 97/11 'Income tax: am I carrying on a business of primary production?' and are often referred to as business indicators.

While the ruling and indicators refer to being in a business of primary production they are relevant and applicable to other business situations. As outline in paragraph 13 of TR 97/11 the indicators to consider are:

· whether the activity has a significant commercial purpose or character; this indicator comprises many aspects of the other indicators;

· 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; and

· whether the activity is better described as a hobby, a form of recreation or a sporting activity

In coming to a conclusion as to whether your proposed activities in the undertaking will amount to the carrying on of a business, the above factors have been discussed and analysed below.

Significant commercial purpose or character

This indicator generally covers aspects of all the other indicators. The business should be carried out on such a scale and in such a way as to show it is being operated on a commercial basis and in a commercially viable manner and that the taxpayer's involvement in the activity is capable of producing a tax profit.

Purpose and intention to engage in business and nature of the activities

The taxpayer should be able to demonstrate an intention to derive assessable income from the sale of the produce of the business activity. A taxpayer should also be able to demonstrate that appropriate activities have been carried out by that taxpayer, or on the taxpayer's behalf, to allow this to occur.

Intention to make a profit and prospect of profits

The taxpayer's involvement in the business activity should be motivated by prospect of profit and the taxpayer's activities should be conducted in a way that facilitates this. This will require examining whether objectively there is a real prospect of making such a profit from participating in the business.

Repetition and regularity

The taxpayer's activities should involve repetition and regularity and have an air of permanence about them.

Activities of the same kind and carried on in a similar manner to those of the ordinary trade in that line of business

The taxpayer's activities should, unless circumstances dictate otherwise, be based around business methods and procedures of a type ordinarily used in ventures that would commonly be said to be businesses. In addition the activities should be carried out using accepted practices.

Organisation, systematic, business like manner

The activities conducted by, or on behalf of the taxpayer, should be carried out in a systematic and organised manner. This will usually involve matters such as the keeping of appropriate business records by the taxpayer. If someone else carries out the activities on the taxpayer's behalf, there should be regular reports provided to the taxpayer on the results of those activities.

The size and scale of the activity

The business should be large enough to make it commercially viable.

Hobby or recreational pursuit

An activity or recreational pursuit is usually present when:

· it is evident there is no intention to make a profit from the activity;

· losses are incurred because the activity is motivated by personal pleasure and not to make a profit;

· there is no system to allow a profit to be produced in the conduct of the activity;

· there is an intention by the taxpayer to carry on a hobby, a recreation or a sport rather than a business.

Conclusion on whether a business is being conducted

The information you have provided demonstrates that your activity does not have a significant commercial purpose or character. You have advised that you may be paid a certain amount per month to carry the advertisements in the form of an external, semi-transparent mesh window shade. You will only need to drive normally along your usual routes, and not required to travel any further. Wherever the vehicle is located or parked, day or night, the advertisement will be displayed.

It has not been demonstrated that a business will be carried on if the offer is undertaken. We have based this ion the following:

You do not have a detailed business plan showing estimates of projected income and expenditure.

The activity has no elements of repetition and regularity.

You have not operating business structure.

You have not advertised your leasing service to the public.

You have not demonstrated your intention to engage in business.

You have not conducted research into your proposed activity, consulted experts or received advice on the running of the activity and the profitability of it.

The size and scale of the proposed operation is too small for a commercial enterprise.

Accordingly, we consider that leasing the rear windshield of your car to a marketing firm would not amount to the carrying on of a business.

Income from rendering personal services

The courts have held that payments for providing personal services, whether as employees or otherwise, are income according to ordinary concepts, even if the services are provided, and the payments received, irregularly.

Section 15-2 of the ITAA 1997 includes as assessable income the value to a taxpayer of all allowances paid to them in respect of, or for or in relation directly or indirectly to services rendered by the taxpayer.

Taxation Ruling TR 92/15 provides the Commissioner's view of the law in relation to the meaning of allowances. According to paragraph 2 of TR 92/15, states that a payment is an allowance if a person is paid a fixed, predetermined amount to cover an expense. The amount is paid irrespective of whether the recipient incurs the expense.

An allowance paid to a taxpayer in relation to services they provide is assessable income, even though the taxpayer did not provide those services as an employee or in carrying on a business (Brent v. Federal Commissioner of Taxation (1971) 125 CLR 418; 71 ATC 4195; (1971) 2 ATR 563).

Conclusion

We consider that monies received for 'leasing' the rear window of your car fall within the meaning of 'allowance' under section 15-2 of the ITAA 1997, and will need to be included in your assessable income.

Deductibility of car expenses

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income. Accordingly, motor vehicle expenses are deductible if they are incurred in the course of deriving assessable income.

In addition, motor vehicle expenses incurred by employees and self-employed persons must generally comply with special substantiation rules (Division 28 of ITAA 1997).

Deductions for car expenses, being based on usage or trips made, mean that the purpose of the travel has always been the major factor in determining deductibility.

In the case Berrett v FC of T (1999) 41 ATR 1262; 99 ATC 2127, the car expense claimed was disallowed on the basis of a lack of nexus to earning assessable income. Accordingly, a claim for motor vehicle expenses must be related to the use of the car and the trips made.

The mere carriage of signage, of itself does not change the above application of interpreted law regarding car use. For instance, in Taxation Determination TD 92/162 the mere fact that a corporate box carried advertising was not sufficient to make the whole cost of the box deductible as an advertising expense. The corporate box constituted the provision of entertaining and was therefore denied deductibility under former subsection 51AE (4) of the Income Tax Assessment Act 1936 (ITAA 1936) (This section is now covered by section 32-5 of the ITAA 1997 of the ITAA 1997). Similarly, the carriage of signage on the car cannot of itself overcome the dominant private aspect of a trip, regardless of the advertising intent.

Assessable income and disproportionate expenses

Taxation Ruling TR 95/33 provides the Commissioners view on the deductibility of expenses incurred in earning assessable income that is disproportionate to the outgoing.

While TR 95/33 refers to subsection 51(1) of the ITAA 1936 it is still has application to the deductibility of the expenses under section 8-1 of the ITAA 1997.

As outlined in paragraph 2 of the TR 95/33 the essential character of an expense is a question of fact to be determined by reference to all the circumstances.

According to paragraph 4 of TR 95/33, it may be necessary to examine all the circumstances surrounding the expenditure to determine its deductibility wholly if the outgoing produces no assessable income or is less than the amount of the outgoing. This may include an examination of the taxpayer's subjective purpose, motive or intention in making the outgoing.

If after considering all the circumstances, including the direct and indirect objectives and advantages, it can be concluded that the expenditure is genuinely used in an assessable income producing activity, a deduction is allowable. This consideration requires a commonsense approach and a direct relationship between the expenditure and income earned.

If it is concluded that the disproportion between the outgoing and the relevant assessable income is explained by reference to the independent pursuit of some other objective (for example in deriving exempt income or obtaining of a tax deduction), then the outgoing must be apportioned between the pursuit of assessable income and the other objective.

For example in Fletcher & Ors v FC of T 91 ATC 4950 (Fletcher), the taxpayers entered into a complex annuity partnership scheme in 1982. The scheme was to run over a 15 year period and was structured to create the following:

· substantial tax deductions for the partnership from interest incurred on moneys borrowed to purchase the annuity in the first five years,

· small deductions in the next five years and

· very large taxable receipts over the last five years.

However, the scheme provided a default mechanism whereby the adverse tax consequences of the last five years could be avoided.

The Full High Court unanimously held that the partnership was entitled to interest deductions to the extent of the assessable income received under the annuity agreement in each tax year. However, their Honours remitted the matter to the Administrative Appeals Tribunal to make the further finding of fact whether the taxpayers had entered into the scheme with the intention that it would run its full course of 15 years. The answer to that question would then determine whether the excess of the adjusted partnership outgoings of interest over assessable income was deductible.

The Tribunal subsequently held that the taxpayers did not enter into the scheme with the expectation that it would run its full course and disallowed the interest deductions to the extent that they exceeded the partnership's assessable income. The Tribunal's decision was upheld by the Full Federal Court in Fletcher & Ors v FC of T 92 ATC 4611.

Apportionment of losses and outgoings

As outlined in paragraph 14 of TR 95/33 when it is necessary to apportion a loss or outgoing, the appropriate method of apportionment will depend on the facts of each case. However, the method adopted in any particular case must be both 'fair and reasonable' in all the circumstances (Ronpibon Tin (1949) 78 CLR 47 at 59; 8 ATD 431 at 437). In Fletcher it was 'fair and reasonable' to limit the amount of the deduction to the amount of the assessable income actually received in that year.

Conclusion

You may be paid a certain amount per month to carry the advertisements in the form of an external, semi-transparent mesh window shade. It would appear that the amount expected to be earned per month is disproportionate to the expenses expected to be incurred. It may be concluded that the motive behind the arrangement is the generation of a tax deduction for what would ordinarily be private or domestic expenditure. Accordingly, the purpose of the trips made must be examined to ascertain their true and dominant purpose.

However the company's website advises that you are not required to undertake any additional driving, other than your normal travel routine. Your normal travel routine would be considered private or domestic in nature, irrespective of any ancillary consideration or purpose. Such travel is not considered to be undertaken in gaining the assessable income and is therefore not deductible.

However given that if the offer is accepted and you have the advertising material placed on your rear window, will be receiving money for undertaking the trips that you already undertake there will be a dual purpose. Consequently there will be a link between the expenses you incur and the income you receive. These expenses would include the running expenses of the vehicle as well as the other expenses such as registration and insurance.

Apportionment of the expenses

However given that there will be dual purpose for the trips undertaken, private travel and advertising, an apportionment method is required for the expenses. Some of the methods that can be used to apportion a deductible amount are:

· distance

· area, and

· time.

The apportionment method of 'distance' would be inappropriate as you will be travelling everywhere with the advertising on the rear window. In addition the apportionment method of 'time' would also be inappropriate as the advertising on the rear window will be on your car 100% of the time for the trips undertaken.

Consequently area would be the most appropriate out of the above methods. You have outlined that perhaps the area of the vehicle taken up the advertising would be an appropriate method of apportionment. The Commissioner would accept the surface area of the vehicle taken up by the advertising material as an appropriate method of apportionment.

Restriction on the total amount of deductions claimed

As outlined above you will be entitled to deduct an amount for car expenses which will include running expenses in addition to expenses for insurance and registration etc.

However according to the provisions of Taxation Ruling TR 95/33, if the expenses incurred in relation to the proposed activity exceed the income earned from the activity by a significant amount, a deduction provided they are not private or domestic nature, will only be allowable to the extent of the income earned from the activity.

As a result any deductions you are entitled to claim will be limited to the amount of income you receive from the activity. Therefore you are not entitled to claim car expenses in excess of the income you earn from the activity.