Edited version of private ruling

Authorisation Number: 1011679983555

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Ruling

Subject: Am I in business - Author

1. Are you carrying on a business as an author?

Yes.

2. Are the research and preparation expenses you incur in relation to writing your book considered deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes.

This ruling applies for the following periods:

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

Year ended 30 June 2014

The scheme commences on:

1 July 2010

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You have worked in the medical industry for a number of years as a consultant, lecturer and author.

You are a pioneer in a particular type of medical therapy, and for years you have written about your therapy in treating various conditions.

You are involved in various medical committees and federations.

In recently ceased salaried employment. However, you have since been asked to be a consultant to a hospital on your area of expertise. Although you will rarely consult at the hospital, you still need to keep up-to-date with current work in your field.

During your career you have written a number of books on the topic of medical therapy, some of which have been translated into other languages. You have also written papers, articles and other publications on the topic.

In your industry, it's not uncommon for authors to publish only one or two books in their entire lives. However, those books may be remembered for generations because of the influence they had upon medical treatment.

You have not published a book in a number of years. However you have spent years reading, studying, communicating through letters and emails, and travelling to and attending seminars and conferences in preparation for writing a new book.

You believe that the topic of the new book will be more appealing to a greater audience than your previous books, and therefore you will make more sales.

You are unhappy with the success of your last book, which was the fault of the publisher. You are changing the publisher of the next book to maximise the markets the book will be exposed to and you hope that you will make more sales.

You receive a small amount of income in royalties from book sales, and occasional lecture fees for special occasions. You also receive educational lending right income from the national library, which are monetary payments relative to the total number of times your books are loaned during the year.

When you first publish a book the income is higher, however the income diminishes over time.

You hope to make a reasonable profit from the book, as this will finance the travel and research for your future books.

You advised that you cannot make a living from writing medical books. In fact, the biggest selling medical author, who has written 12 books in 25 years, is an associate professor.

Your motivation for writing books is not just financial, you also believe that the books need to be written for people with diseases, and therefore through the authorship of books you offer a service to humanity.

You do not have a formal business plan. However, you believe that you are operating a business as an author.

You keep records of all income and expenses. In previous income years you have declared the income from the books.

You plan to keep writing as long as you are able.

You do not personally advertise your books, as this is done by your publisher.

You do not know the actual number of sales for each book you have written, as the publishers have not provided you with the information. As the books are medical texts the sales volume is not as great as novels.

You incurred expenses relating to your research and preparation, including computer costs and repairs, PO box hire, attending conferences, and subscriptions and membership of professional medical associations.

You believe you will make a profit from your next book.

Your main income is derived from investments.

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.

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

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; Crowe v. FC of T 88 ATC 4620; (1988) 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; (1980) 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; (1989) 20 ATR 1570 (Brajkovich)). 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.

To be an author in business, it is expected that efforts be directed towards making sales and hopefully making a profit.

You have stated that you have dual purposes for writing your books; one being to desire to make a reasonable profit which will finance the travel and research required for your future books, and the other being non-financial, in that you believe that the books need to be written for people with diseases and therefore through your books you offer a service to humanity.

Your intention to make a profit is evidenced where you have changed from the publisher of your previous book (as you were not happy with their performance), to a publisher that will maximise your market coverage and hopefully your sales volume.

Other books you have written have been published with a degree of success and some can be found in the National Library in Canberra.

You are writing the current book on a topic that you believe will be more appealing to a greater audience than your previous books, and therefore you hope to make more sales.

It is considered that your activities do show significant commercial purpose and character.

Purpose and intention to engage in business

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; (1979) 10 ATR 493).

The taxpayer should be able to demonstrate an intention to derive assessable income from the business activity, and demonstrate that appropriate activities have been carried out by that taxpayer to allow this to occur.

What distinguishes a professional artist from a hobby or pastime activity is the intention to carry on a business by making a decision to commercially exploit the skills they have and this is reflected in their overt and planned activities.

You have written numerous pieces of work and are in the process of writing another. This indicates that a decision has been made to commercially exploit the skills and knowledge that you have.

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 and Brajkovich.

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. Federal Commissioner of Taxation (1942) 180 CLR 1; (1942) 7 ATD 186; (1942) 2 AITR 360).

As advised previously, you believe you will make a profit from your books to fund research for future books.

It is significant that, after the poor sales performance of your previous book, you have changed the likely publisher of your next book to maximise market coverage and sales volume.

Further, you are known in your industry to have the specialist knowledge and qualification for writing a book on this topic. It appears you have the ability, contacts and popularity in your industry to ensure an expectation of a reasonable number of sales.

Regularity and repetition

The taxpayer's activities should involve repetition and regularity and have an air of permanence about them. The repetition of activities by the same person over a period of time on a regular basis helps to determine whether there is the 'carrying on' of a business (paragraph 55 TR 97/11).

You spent a great deal of time researching and writing numerous books, papers and articles, and have done so for many years. This shows repetition and regularity in your author activities.

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.

In your case, we consider that your activities are being conducted in a similar manner to that of other authors. As such, we consider that your activity is carried on in a business like manner.

Size or scale of the activity

The business should be large enough to make it commercially viable. The larger the scale of the activity the more likely it will be that the taxpayer is carrying on a business. However, this is not a determinative test, and a person may carry on a business though in a small way: refer Thomas v. FC of T 72 ATC 4094; (1972) 3 ATR 165 (paragraph 77 TR97/11).

Although the number of books you will sell may be considered small in comparison to sales of a novel, the scale of your activity is considered relatively large for an author of medical type books.

Hobby or recreational pursuit

An activity is more likely to be a hobby 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.

Although you obviously have an interest in medical therapy, we consider that your writing of medical books does not constitute a hobby but is more related to your employment and area of expertise.

After applying the above indicators and the views expressed in the taxation rulings to your writing activity, the overall impression gained is that you are carrying on a business as a professional author for income tax purposes.

Incurred in gaining or producing your assessable income from your occupation

Since the 1960's you have written on the topic of your area of expertise, and you continue to write on that topic after semi-retirement.

Income Tax Ruling IT 131 indicates that expenses incurred in producing a specialised work which is associated with a taxpayers day-to-day occupation, such as a university lecturer producing a text book or a political commentator writing on current political subjects, would generally qualify as deductions under section 8-1 of the ITAA 1997 (formerly subsection 51(1) of the Income Tax Assessment Act 1936).

In IT 131, the Commissioner takes the view that the writing of books in the taxpayer's specialised field is often just as much a part of his career as the duties for which he is paid a salary. Expenses incurred in the writing of books in this situation are incidental to the totality of the income producing activities carried on, and it is considered that the character of the expenditure does not necessarily change from revenue to capital simply because the taxpayer enjoys the protection of copyright. At the same time, it is not suggested that all outgoings incurred by a taxpayer in this category are automatically deductible as some could be capital or partly private, for example, an overseas trip undertaken partly for business purposes and partly for holidaying. The writing activity must be viewed as an essential part of the taxpayer's career to be deductible.

In your case, although you have semi-retired from paid employment, you are still on the committee of a medical association, and you consult at a hospital.

Further, you receive income from royalties and will receive educational lending right income from the national library. You will also receive occasional lecture fees for special occasions.

Summary

After reviewing the business indicators against the facts of your case, we consider that you are carrying on a business as an author. As such, the research and preparation expenses you incur in relation to authoring your book is considered deductible under section 8-1 of the ITAA 1997.