Edited version of private ruling

Authorisation Number: 1011624112728

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Ruling

Subject: Am I in business

Question

Were you carrying on a business of selling products on EBAY?

Is the income you received from your EBAY selling activity assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Yes.

This ruling applies for the following periods:

Year ended 30 June 2008

Year ended 30 June 2009

The scheme commences on:

1 July 2007

Relevant facts and circumstances

During the previous financial year, you read a newspaper article about how the strong Australian dollar was making IT items very cheap. Therefore, you began purchasing IT equipment on EBAY and reselling it again on EBAY.

During the previous financial year, on average you sold three to four items per week. This amounted to a turnover of over $100,000. The profit margin on these items was approximately 10%.

As each IT item was expensive, there was the threat of the item being lost or damaged during postage, and because of the relatively small profit margin, you decided to cease selling IT equipment and changed to another item. With the new item no physical product changed hands.

During the past financial year, on average you sold approximately four new items per week. This amounted to a turnover of less than the IT equipment sales. However, the profit margin for the new items was marginally higher than the IT equipment, at approximately 15%.

You would only purchase items on EBAY where the price you could sell the item was at least $200 (AUS) greater than the purchase price (in AUS dollars). You would often make a profit where you followed this formula, as $200 would be the average cost of EBAY fees, PAYPAL fees and postage costs. The profit was only ever marginal, which is why you did not expand your activity.

As you sold items on EBAY as an auction, you would sometimes not make a profit.

You spent about five hours per week on the activity.

You had no business plan and did not keep records of sales.

You sold your items on EBAY from your home.

You did not think that you were operating a business while you were selling on EBAY as you considered the sales activity a hobby, which enabled you to earn pocket money.

You are currently living on government benefits and working a few hours per week at your family's shop.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5,

Income Tax Assessment Act 1997 Section 8-1,

Income Tax Assessment Act 1997 Section 995-1

Detailed reasoning

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

Income is generally assessable under section 6-5 of the ITAA 1997.

Under section 6-5 of the ITAA 1997, assessable income is made up of ordinary income and statutory income.

Under section 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.

Deductibility of expenses

Under section 8-1 of the ITAA 1997, for an expense to be an allowable deduction it must, either, be incurred in gaining or producing assessable income, or be necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.

You cannot deduct an expense under section 8-1 of the ITAA 1997, if it is of a capital, private or domestic nature. You also cannot claim a deduction if the expense is incurred in producing exempt income or a provision of the Act prevents you from claiming a deduction.

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. The Australian Taxation Office has issued Taxation Ruling TR 97/11 'Income tax: Am I carrying on a business of primary production?' that incorporates the general indicia.

TR 97/11 is of general application. Its principles are not restricted to questions of whether a primary production business is being carried on.

In the Commissioner's view, the factors that are considered important in determining whether a business activity is being carried on 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.

Commercial purpose or character

Generally, it can be said that to carry on business means to 'conduct some commercial enterprise systematically and regularly' with 'features of continuity and system' (Hyde v. Sullivan (1956) 73 WN(NSW) 25; Crow v. FC of T 88 ATC 4620; 19 ATR 1565). The usual aim of business is to maximise profits, this is achieved by organising trading activities as efficiently as possible.

The courts are usually satisfied by a lower level of system and organisation where the activities have a genuine commercial feel. That is, where the activities appear to be ordinary or conventional business dealings, a genuine, but inefficient and disorganised venture may be characterised as a business (Case M67 80 ATC 479; 24 CTBR (NS) Case 41).

Where the activities have the feel of a hobby, the courts generally require stronger evidence of system and organisation (Brajkovich v. FC of T 89 ATC 5227; 20 ATR 1570). An activity may have the feel of a hobby where it is intrinsically personally satisfying.

The weight given to the system and organisation will vary depending on the circumstances. As Richardson J said in Grieve v. Commissioner of Inland Revenue 1 NZLR 101 at 110,

'businesses do 'not cease to be businesses because they are carried on idiosyncratically or inefficiently or unprofitably, or because the taxpayer derives personal satisfaction from the venture'.

Intention of the taxpayer

The intention of the taxpayer in undertaking the activity is important in determining if a business is carried on. Mere intention is not enough, there must be an activity (Inglis v. FC of T 80 ATC 4001, 109 ATR 493).

This indicator is particularly related to:

· whether the activity is preliminary or preparatory to the ultimate activity

· whether there is an intention to make a profit, and

· whether the activity is better described as a hobby, recreational pursuit or sporting activity.

Profit making purpose

The commercial reality of business means that it is ordinarily carried on for the purpose of profit. A profit making motive is a common feature of business activities.

Profit motive is only one factor to consider. A business may be carried on where there is no profit motive and vice versa (IR Commissioners v. Incorporated Council of Law Reporting (1888) 22 QBD 279; Brajkovich v. FC of T (1989) 89 ALR 408; 89 ATC 5227; 20 ATR 1570).

It is less likely a business will be found to be carried on where there is no reasonable prospect of profit from the activity in question. This is a matter to be considered in the circumstances. A short term lack of profit making potential may not be fatal (Tweedle v. FC of T (1942) 7 ATD 186; 2 AITR 360).

Regularity and repetition

Frequent and regular transactions are the usual feature of business operations. Turnover is maximised if the processes are repeated over a long period. Frequent activity does not necessarily mean a business is carried on but will support this argument (FC of T v. Radnor 91 ATC 4689; 22 ATR 344).

Regularity, frequency and duration of the activity are considered to be important factors in determining if a business is being carried on. In Inglis v. FC of T 80 ATC 4001 Brennan J, at 4005, said that 'At the end of the day the extent of activity determines whether the business is being carried on'.

Business-like manner

An activity that is carried on in a similar manner to others in the particular industry is more likely a business. To determine if the activity is in the nature of trade, it is necessary to see if the operations are of the same kind and carried on in the same way as those in the same line of business (IR Commissioners v. Livingston (1927) 11 TC 538).

Some factors that are useful to compare include:

· the volume of sales or trade - the smaller the number the less likely a business is being carried on

· the types of customers the taxpayer trades with - retailers, wholesalers, the public at large or friends and relatives

· the manner in which the product is marketed

· the sort of expenses incurred by the taxpayer

· the amount invested in capital items

· the previous experience of the taxpayer - if the taxpayer lacks experience then it is expected they would have sought advice or done some research, and

· the activity should be compared to that of a keen amateur - the sales may just fund the future pursuit of a personal interest.

Size or scale of the activity

The larger the scale of the activity the more likely it is that the taxpayer is carrying on a business. This is not conclusive and a person may carry on a business in a small way (Thomas v. FC of T 72 ATC 4094; 3 ATR 165).

Where the scale of the activity is small, it may still result in more product than is required for the taxpayer's domestic needs. If the taxpayer also has an intent to profit from the activities and there is a reasonable expectation of doing so, a business may be carried on. The size of the activity is not determinative but the smaller the scale of the activity, the more important the other indicators will become.

Hobby or recreation

Money derived from the pursuit of a hobby is not regarded as income and is therefore, not assessable. If the activity is more properly described as the pursuit of a hobby, recreation or sport, then it will not be regarded as a business even where the operation is substantial. (Ferguson v. FC of T 79 ATC 4261; 9 ATR 873)

This is not to say that an activity characterised as a hobby can never become a business. The matter will always depend on the facts and a weighing of the indicators.

Often a hobby is being carried on when:

· it is evident that the taxpayer does not intend to make a profit from the activity

· losses are incurred because the activity is motivated by personal pleasure. There is no plan in place (business plan) that shows how a profit can be made

· the transactions are isolated and do not show regularity or repetition

· the activity is not carried on in the same manner as an ordinary business activity

· there is no system to allow a profit to be made

· the activity is carried out on a small scale

· the taxpayer intends to carry on a hobby not a business, and

· the taxpayer transacts with friends and relatives not the public at large.

Application to your circumstances

Your EBAY sales activity had a significant commercial purpose. You had more than an intention to engage in EBAY sales as you sold many items during the previous and past financial years.

You have identified that you made a net profit of approximately 10% for the previous financial year, and in fact changed your sales product during the past financial year as it returned a greater profit.

You had frequent and regular sales on EBAY, which increased in number during the past financial year.

Your activities were being conducted in a similar manner to that of other sellers on EBAY and in your industry, despite being on a small scale.

Your activities were being planned, organised and carried on in a businesslike manner to maximise your profits.

Therefore, your EBAY sales activity is considered to be a business and all income derived from the activity is assessable under section 6-5 of the ITAA 1997. Likewise, expenses relating to the activity may be deductible under section 8-1 of the ITAA 1997.