Edited version of private ruling

Authorisation Number: 1011855101324

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Ruling

Subject: Am I in Business

Question:

Are you carrying on a business of breeding animals?

Answer: No

This ruling applies for the following periods:

Year ending 30 June 2012
Year ending 30 June 2013
Year ending 30 June 2014
Year ending 30 June 2015

The scheme commenced on:

1 July 2011

Relevant facts

You have had a keen interest in animals.

You operated a breeding business (the business).

At any one time the business would breed a large amount of animals and sell the offspring to the general public.

The business's intention during this time was to make a profit from the breeding and sale of the animals.

The business operation ceased and the associated assets were sold as the business was not profitable.

Some assets of the business were transferred to you.

You have kept some animals from the business.

You have retired and your reason for keeping the animals is that you love the animals as they are family pets.

The animals are not for sale.

You do not intend to purchase any more breeding stock.

Some of the animals do not breed as they are past breeding age.

You intend to breed from the remaining breeding animals and sell the offspring to cover the costs of keeping the animals.

You have no expectation of making a profit from selling the bred progeny in the future but where the occasional profit is made these funds will be used to cover the cost of feeding, looking after the animals.

You do not know how many offspring will be for sale from year to year as this depends on the breeding conditions.

You have no intention of increasing the size of the activity.

You may advertise the sale of some of the offspring in the future.

You still keep records in relation to the animals as you like to keep track of the costs for keeping the animals.

You feed, water and clean the animals on a daily basis.

The scale of your activity is similar to other hobbyists that have keen interest in animals.

Relevant legislative provisions:

Income Tax Assessment Act 1997 subsection 6-5(1).

Income Tax Assessment Act 1997 section 8-1.

Income Tax Assessment Act 1997 section 995-1.

Reasons for decision

Subsection 6-5(1) of the Income Tax Assessment Act 1997 (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 incorporates the general factors.

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.

Applying the indicators to your circumstances

In your case, you have kept and bred animals because of a keen interest and a love of animals. Your interest in animals eventually led to a business activity which has now ceased. You have retired and the reason for keeping the animals is that they are family pets. Your intention is to breed from some of the animals with a view to covering the costs of feeding and caring for the animals and not for profit-making purposes.

The activity of breeding some of the animals and selling the offspring has limited commercial character or purpose. There is no business premise to operate out of or a business plan. Although some assets were transferred from your previous business activity there is no indication that any additional capital will be invested into the activity. The ability to breed any future offspring appears to be limited due to the age of some of the animals and the breeding conditions which may negatively impact on any future breeding and selling activity. The size and scale of the activity has decreased significantly since your previous business activity ceased and you do not expect it to increase in the future.

Any prospect of making a profit from this activity appears to be minimal as the expenses of caring, feeding, maintaining the animals exceed the income from the sale of the offspring. This lack of profit-making ability and commercial purpose in conducting your activities are significant features which detract from concluding that your activities constitute the carrying on of a business.

Based on the information you have provided we do not consider that the activity has the necessary characteristics of a business for taxation purposes. The activity could be better described as a hobby or past time which has arisen out of a keen interest in animals. Therefore any income you may receive in relation to this activity will not be assessable under subsection 6-5(1) 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.