Edited version of private ruling

Authorisation Number: 1011601785367

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Ruling

Subject: Am I in business of horse rug repair and saddlery leatherwork?

Question

Are you carrying on a business of horse rug repair and saddlery leatherwork?

Answer: No.

This ruling applies for the following periods:

Year ended 30 June 2010

Year ended 30 June 2011

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You and a partner are in the process of establishing a horse rug repair and saddlery leatherwork activity.

You are currently only doing a small amount of work for family, friends and horse enthusiasts.

This activity is a personal interest to you and you consider it a hobby. However you are unsure if the tax office will consider you to be operating a business in the future as you are looking to expand, taking on additional work from local horse supply businesses.

You will be advertising in the shop windows of the horse supply businesses.

On average you expect to complete approximately ten items per month. However the work will be seasonal.

The estimated turnover for the activity would not exceed $5,000 per annum.

The expenses relating to the activity include materials, small plant including industrial sewing machines, travel expenses to obtain supplies, telephone and power for the machines, and lighting and heating. The expenses would probably offset the turnover with a break-even result or a small loss.

You operate out of your home.

You have no other earnings, relying on your spouse's income for support.

You do not have a business plan. However you keep financial records regarding your activity.

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, and

Income Tax Assessment Act 1997 Section 995-1 .

Summary

We do not consider that your horse rug repair and saddlery leatherwork activity has the necessary characteristics of a business for taxation purposes. Therefore, income derived from this activity will not be assessable.

Detailed reasoning

Assessable income

A taxpayer is liable to pay 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 Income Tax Assessment Act 1997 (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 case of Evans v. Federal Commissioner of Taxation 89 ACT 4540; (1989) 20 ATR 922. stated that whether or not an activity amounts to carrying on business for taxation purposes is a question of fact. There is no exhaustive or determinative definition which can be applied to determine this matter. Martin v. Federal Commissioner of Taxation (1953) 90 CLR 470; (1953) 10 ATD 226; (1953) 5 AITR 548, however, provides that the test for determining whether or not a business is being carried on is both subjective, which considers the individuals purpose at the relevant time, and objective, which considers the nature and extent of the activities undertaken.

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

In your case you and a partner are doing a small amount of horse rug repair and saddlery leatherwork for family, friends and horse enthusiasts.

This activity is a personal interest to you and you consider it a hobby.

The activity has limited commercial character or purpose. You do not have a business plan, nor do you operate out of business premises. However you do keep records of your transactions.

Based on the information you have provided we do not consider that the activity has the necessary characteristics of a business for taxation purposes. Therefore, any income you received in relation to this activity will not be assessable under section 6-5 of the ITAA 1997 as ordinary income. In addition, any expenses that you incurred in relation to this activity will not be deductible under section 8-1 of the ITAA 1997.