Edited version of private ruling

Authorisation Number: 1011812227396

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Ruling

Subject: Am I in business

Question

Will your receipts from selling a particular product be assessable income?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 2011

Year ending 30 June 2012

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You are an Australian resident.

You are considering becoming a particular product demonstrator.

You will demonstrate at 2-3 parties a week that will generate up to approximately $500 in commissions on a weekly basis.

You will spend 5 to 10 hours per week on this activity.

You will drop one day a week from your current job for the activity.

A product demonstrator receives commission of X% of the value of goods sold.

A demonstrator may receive up to another Y% on top of the X%.

A demonstrator is not reimbursed by the product owner for the cost of travel and must also purchase their own catalogues, etc on an ongoing basis.

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

Summary

Based on the facts you have provided, your selling activity would constitute the carrying on of a business. Therefore, your receipts from this activity would be assessable income.

Detailed reasoning

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a taxpayer's assessable income includes income according to ordinary concepts. Income according to ordinary concepts includes income derived from a business.

Section 8-1 of the ITAA 1997 provides that a taxpayer may deduct an outgoing from their assessable income to the extent that the expense is necessarily incurred in producing that assessable income. 

Business is defined in section 995-1 of the ITAA 1997 as including any profession, trade, employment, vocation or calling but does not include occupation as an employee.

Where it is not clear that a business is being carried on consideration must be given to a number of factors.  

Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production, sets out the Commissioners' view on whether a person is carrying on a business of primary production. The indicators in this ruling can be equally applied to non primary production activities. It states that the following indicators are relevant when considering whether a business is being carried on:

a)  whether the activity has a significant commercial purpose or character;

b)  whether there is more than just an intention to engage in business;

c)  whether there is a purpose of profit as well as a prospect of profit;

d)  whether there is repetition and regularity to the activity;

e)  whether the activity is of the same kind and carried on in a similar manner to businesses in the industry;

f)   whether the activity is planned, organised and carried on in a business-like manner;

g)  the size, scale and permanency of the activity; and

h)  whether the activity is better described as a hobby or recreation.

No one indicator is decisive, and all indicators should be considered in combination and as a whole:  Evans v. FC of T 89 ATC 4540; (1989) 20 ATR 922. Whether a business is being carried on will depend on the 'large or general impression gained' (Martin v. FC of T (1953) 90 CLR 470 at 474; 5 AITR 548 at 551) from looking at all the indicators, and whether those indicators provide the operations with a 'commercial flavour' (Ferguson v. FC of T 79 ATC 4261; (1979) 9 ATR 873).

Applying the relevant cases and indicators to your circumstances

Significant commercial purpose

The 'significant commercial purpose or character' indicator is closely linked to the other indicators and is a generalisation drawn from the interaction of the other indicators. It is particularly linked to the size and scale of activity, the repetition and regularity of activity and the profit indicators.

Your activity is selling a particular product. You do not have a business plan but you and your spouse have undertaken research before you decide to commence the activity. If you are predominantly selling to arm's length customers, then this indicates your activities are commercial. On the other hand, if you sell predominantly to family at cost or for less then the retail price, this indicates that your activities are not commercial and that you are not carrying on a business.

You have indicated that you will be demonstrating at 2-3 parties per week.

Intention of the taxpayer

The carrying on of a business is not a matter merely of intention; it is a matter of activity. It is appropriate to look at when the activities started and whether they add up to more than a mere intention to conduct a business.

To be considered to be in business you need to have:

· decided to commence a business;

· purchased items you require to start your business; and

· actually commenced 'business operations'.

It is necessary to satisfy all of these three tests together before your business activities could be said to have commenced. If your activities satisfy one test, but not the others, your business activities would not be considered to have commenced.

These three tests concern only the commencement of business operations; it is still necessary to consider whether your activities in fact constitute a business.

A taxpayer who has decided they may commence a business of direct selling and has even purchased the demonstration kit will not yet be in business if they have not started to demonstrate the products.

On the other hand, if a taxpayer has purchased the kit and booked some demonstrations, it is likely they will be considered to have commenced business.

Your intention is that you will be able to reduce your fulltime job by one work day a week in order to look after your activity. Your intention is to run this activity as profitably as possible.

Prospect of profits

The taxpayer's involvement in the business activity should be motivated by wanting to make a tax 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 of the taxpayer.

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. However, if an activity is not profitable, it does not necessarily prevent that activity from being a business, if there is a genuine belief that the business will become profitable. (Tweddle v. Federal Commissioner of Taxation (1942) 180 CLR 1; 7 ATD 186; (1942) 2 AITR 360).

Your intention is to make $500 per week in commission from your party demonstrations. This would amount to about $2,000 - $2,500 in sales every week making the yearly sales total somewhere in the vicinity of $100,000.

Repetition and regularity

The taxpayer's activities should involve repetition and regularity and have an air of permanence about them. Frequent and regular transactions are the usual feature of business operations. In Hope v. The Council of the City of Bathurst (1980) 144 CLR 1; 80 ATC 4386; (1981) 12 ATR 231, transactions were entered into on a continuous and repetitive basis which was one factor that supported that the activity in question was a business.

The taxpayer should undertake at least the minimum activities necessary to maintain a commercial quantity and quality of product for sale.

Sales of between $2,000 and $2,500 per week would indicate numerous transactions on a continuous and repetitive basis.

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

If a taxpayer carries out their activity in a manner similar to other taxpayers in the industry, it is more likely that their activity amounts to the carrying on of a business. That is, the taxpayer's operations are of the same kind and carried on in the same way as those characteristic of ordinary trading in that particular line of business (IR Commissioners v. Livingston 11 TC 538).

This indicator requires a comparison between the activities of the taxpayer in question and those undertaken by a person in business in the same type of industry. Where the taxpayer's activities are similar in nature to the business, further support is given to the fact that a business exists.

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 for example wholesalers, retailers, the public at large or friends and relatives;

· The manner in which the product is marketed;

· The sort of expenses incurred by the taxpayer; and

· The amount invested in capital items.

The venture shows similarity to the size and activity that would be expected in a venture established to generate profits.

Organisation in a business-like manner, the keeping of books, records and the use of a system

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 the activities are carried out on the taxpayer's behalf by someone else, there should be regular reports provided to the taxpayer on the results of those activities.

Commercial businesses generally operate in an orderly fashion, including organised sales bookings, reliable client base, consistent income stream, continuous commercial activity, control of business expenses and a plan for future growth.

If on the other hand:

· your expenses consistently increase relative to your income and you continue to make losses;

· your sales are on a spontaneous basis;

· your activity is predominantly non-income generating;

· there is no organised business activity, no growth plans or actions;

· and profit is not your clear intention;

· then we would consider that you are not carrying on a business. 

You have a plan for future growth of your activity (so that you can reduce the number of days that you currently work at your job), and profit is your clear intention.

The size and scale of the activity

The larger the scale of the activity, the more likely it is that the taxpayer is carrying on a business. However, this is not conclusive as a person may carry on a business in a small way. As the size or scale of the activity is not determinative, it is important that this indicator not be considered in isolation, but rather in conjunction with the other indicators.

An activity carried on a small scale may constitute the carrying on of a business if the taxpayer has the purpose of making a profit, there is repetition and regularity in the taxpayer's activities, the taxpayer informs himself of market conditions and the taxpayer organises his activities in a business like way through the keeping of books of account.

You will operate your activity on a significant scale and you have a motive to make a profit.

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 an operation is substantial.

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 applicable 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;

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 or plan to allow a profit to be made;

The activity is carried out on a small scale;

The taxpayer intends to carry on a hobby and not a business; and

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

Your venture has been set up to make a profit.

Conclusion

In your case, you intend to grow your business to a size and scale where you can roll back the number of days you work at your current fulltime job. You intend to make a profit of approximately $500 per week.

On balance, when applying the indicators to your circumstances it is considered that your demonstrating activities constitute the carrying on of a business. As a result, your receipts from selling the product will be assessable income.

Additional information

This ruling is based on the facts stated in the description of the scheme that is set out above. If you don't demonstrate at 2-3 or more parties per week and you don't turn over at least $2,000 - $2,500 per week in sales, then this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You should also note that taxpayers who carry on a business which makes a loss may be required to defer the loss rather than being able to offset it against their other income. This is due to the operation of the non-commercial loss provisions. More information about the non-commercial loss provisions can be found on our website: ato.gov.au

You asked for the private ruling to apply indefinitely. The Commissioner does not rule for indefinite or extended periods as there may be changes to the facts of the arrangement or the law in question. Also, a public ruling may issue which affects the private ruling. Therefore, we have only ruled for the 2010-11 and 2011-12 financial years.