Edited version of private ruling

Authorisation Number: 1011677976132

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Ruling

Subject: Capital gains tax

Question

For the purposes of section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), will you be carrying on a business or deriving assessable income from an isolated transaction in relation to the sale of your collection of CGT collectibles?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2010

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

Relevant facts and circumstances

You advise that the assets which are the subject of this ruling request consist of CGT collectibles.

You acquired a small portion of the items after 19 September 1985, however, the majority were gifted to you by your father during his lifetime. He had been collecting the items since the 1940's and passed away prior to the above date.

You advise that you too were mainly interested in collecting these items and have sold very few up to this point. You have not been actively marketing them. The items were kept at your home or in a bank vault.

You derived income from separate occupations during the whole period of ownership.

Instead of leaving the collection to your family, who have no knowledge of the value of the various items, you have decided to use your own expert knowledge to research the market. You indicate that it is your opinion that you are not intending to commence a business but to simply dispose of the collection in the most effective manner possible.

You state that you don't have a realistic idea of the overall value of the collection and indicate this may only be obtained via a public auction which, with a collection of this size, may take some time to complete.

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 8-1

Income Tax Assessment Act 1997 subsection 104-10(5)

Income Tax Assessment Act 1997 section 108-15

Income Tax Assessment Act 1997 section 118-10

Income Tax Assessment Act 1997 subsection 118-10(2)

Income Tax Assessment Act 1997 section 995-1

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA of the ITAA 1936 to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA of the ITAA 1936 applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA of the ITAA 1936, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: Part IVA: the general anti-avoidance rule for income tax.

Reasons for decision

Subsection 6-5(1) of the ITAA 1997 states that your assessable income includes income according to ordinary concepts. This ordinary income includes amongst other things, income from salary and wages and business operations.

Section 8-1 of the ITAA 1997 allows you to claim a deduction for a loss or outgoing that is incurred in gaining or producing your assessable income, or necessarily incurred in carrying on a business to gain or produce assessable income. These deductions are limited by the exclusion of losses or outgoings that are capital, private or domestic in nature.

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 is entitled 'Am I carrying on a business of primary production?' However, it is of general application, as 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 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.

Taxation Ruling TR 92/3 discusses whether profits on isolated transactions are income (and TR 92/4 discusses whether losses are deductible). In relation to 'profit-making purpose' Paragraph 9 of TR 92/3 states that 'The taxpayer must have the requisite purpose at the time of entering into the relevant transaction or operation. If a transaction or operation involves the sale of property, it is usually, but not always, necessary that the taxpayer has the purpose of profit-making at the time of acquiring the property.'

Applying the indicators to your circumstances

In your case you maintained and collected the CGT collectibles because of your personal interest and also because you were continuing on a family collection commenced by your father. You consider your collection activities a hobby or pastime and not for profit-making purposes.

We find that the activity has little commercial character or purpose. You do not have a business plan or operate out of business premises. You were gifted most of the items from your father prior to when he passed away.

Whilst your own interest lay predominantly in the collection of a specific type of CGT collectible, time in this regard was mainly spent in the pursuit of new items. You had little interest in disposing of any if your collection.

You have invested relatively small amounts of capital into the activity over a long period of time. Very few of the items were marketed or placed in the public domain. The items were generally stored away in a bank vault and at your home.

To date you have disposed of only a few of these items, and whilst the size and scale of the collection is such that an auction may take some time to complete, there has been no repetition or regularity and no purpose of profit behind your activities up to this point.

You had a genuine interest in the maintenance and furtherance of your collection which was nurtured by your father from a young age and now that no other family members share your interest you are attempting to dispose of them in a manner which realises the assets to their best advantage. You point out that no other family members possess the necessary knowledge pertaining to the values of these items so as to ensure that, in your absence, they would be capable of obtaining a realistic price upon disposal.

In addition, you have been constantly employed over this period. The collection activities have only been undertaken in your spare time. It would be expected that a business engaged in the sale of CGT collectibles would devote many hours to the activity thus forming regular income, business and sales patterns.

Based on the information you have provided we do not consider that the activity has the necessary characteristics of a business for taxation purposes. It was undertaken as a hobby or interest which has now wound down to its natural conclusion.

In terms of TR 92/3 (and TR 92/4) it is evident that there was no requisite profit-making purpose at the time that any of the items were acquired by either your father or yourself. In fact, due to the current state of the market you indicate that there is minimal prospect of actually realising a profit upon disposal.

It follows that any income you may receive in relation to the disposal of these items will not be assessable under section 6-5 of the ITAA 1997 as ordinary income. In addition, any expenses that may be incurred in relation to this activity will not be deductible under section 8-1 of the ITAA 1997.

Other information - CGT

The assets in question are all CGT collectables under Subdivision 108-B of the ITAA 1997. However, under subsection 104-10(5) of the ITAA 1997 any capital gain you make upon disposal will be disregarded if you had acquired the particular asset on or before 19 September 1985.

Further, under section 118-10 of the ITAA 1997 any collectables acquired on or after 19 September 1985 for $500 or less are CGT exempt.

Note however that collectables that comprise a set and would normally be disposed of as a set cannot be disposed of in more than one transaction for the purpose of trying to obtain the $500 exemption. Under section 108-15 the set of collectables is itself taken to be a single collectable and each disposal is taken to be a disposal of part of that collectable. Likewise, under subsection 118-10(2) of the ITAA 1997 an interest in an item of under $500 will not attract the exemption if the overall market value of the item is over $500.