Edited version of private ruling

Authorisation Number: 1011884128499

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Ruling

Subject: Am I in business

Question

Do the activities undertaken by the partnership constitute the carrying on of a business?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You are an Australian resident partnership.

The original activity conducted by the partnership was training and racing thoroughbred animals on behalf of unrelated clients.

For this purpose, animals were either obtained from the clients or purchased at sale on behalf of the clients.

The training and track work facilities have moved to several different locations.

From 1 July 20XX, the partnership ceased training in its own right but continued its ownership (racing) interests in the animals trained by other trainers.

The partnership was responsible for the organisational matters and maintenance of accounts and records in relation to the animals trained by independent trainers. This included paying all accounts, receiving all monies earned, issuing invoices or distributing funds according to the ownership interest in each animal.

The partnership is registered for GST.

The partnership utilises the services of a competent bookkeeper and a computer based accounting system to record all transactions.

The partnership generates some receipts on animals, bred or purchased, by selling shares in the animals to independent owners. However, this is not an on-going form of income. It is intended that most of the receipts of the partnership would be in the form of prize money.

During the 20XX-XX financial year there are three animals in work and trained by independent trainers. There were also three studs and two calves.

Of the three animals in training, one has been leased with the partnership retaining a 15% stake in the animal. The two other animals are owned jointly by the partnership and other owners.

There was no business plan prepared when the partnership started this new activity.

Business Activity Statement figures provided for the 20XX/20XX financial year show a loss for the first two quarters. The third quarter shows a profit, however the income figure includes an insurance recovery amount of $xxxxx for the death of a broodmare.

One partner enters all transactions into a spreadsheet (including income, expenses and animal records), prepares the Business Activity Statements and arranges payment of all accounts (that is, training fees, vet fees, etc). The spreadsheet is then given to a bookkeeper who enters all the information into MYOB. It takes this partner approximately 1 day each week to attend to the bookkeeping and administration related activities.

The other partner devotes 2 hours per day attending to animal racing activities (attending trainers, trials etc.) This would equate to 1.5 days per week. He also travels to the animal breeding property usually for a period of 3 days each visit. This is for the purpose of calves's assessment, breeding programs and property maintenance. This would equate to 1 day per week over a year.

Of the three studs, the partnership owned a one seventh share in an animal that died during the 20XX financial year. The partnership owns a one seventh share in another broodmare which was bred by the partnership and a one third share in the other broodmare which was also bred by the partnership. Ownership for the calves follows that of the broodmare.

The partnership has a minor ownership share in the breeding property.

Some of the studs are serviced annually.

Some of the calves are sold, but generally they are raced.

One partner is quite active in the selection of the animals.

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

After applying the indicators of Taxation Ruling TR 97/11 to your situation, it is considered that your animal breeding and ownership activities do not constitute carrying on a business.

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.

Taxation Ruling TR 2008/2 considers whether animal-related activities are carried on as a business. The ruling states that in deciding whether a business is being carried on, regard should be had to the factors contained within Taxation Ruling TR 97/11.

TR 97/11 provides the Commissioner's view of the indicators used to determine if you are in a business for tax purposes. These indicators include:

· whether the activity has a significant commercial purpose or character

· whether the taxpayer has more than just an intention to engage in business or to commence in the future

· whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity

· whether there is repetition and regularity of the activity

· whether the activity is of the same kind and carried on in similar manner to that of the ordinary trade in that line of business

· whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit

· the size, scale and permanency of the activity

· whether the activity is better described as a hobby, a form or recreation or a sporting activity.

Every case must be decided on its own particular facts. In considering whether the breeding of animals amounts to the carrying on of a business, specific industry factors would include:

· the quality and number of animals

· whether the taxpayer is actively selling stock on a regular basis to generate a cash flow

· whether the mares are being serviced

· whether the taxpayer is using their animal rights

· whether the taxpayer maintains geldings, barren female animals or other animals which are inappropriate for breeding.

In essence, whether a business is being carried out will depend upon whether the indicators, as a whole, provide the activities with a commercial flavour. In Ferguson v. Federal Commissioner of Taxation (1979) 37 FLR 310; 79 ATC 4261; (1979) 9 ATR 843 the Full Federal Court recognised that every business has to begin, and even isolated activities may evidence the commencement of a business for income tax purposes, notwithstanding the limited or preparatory nature of those activities.

To determine whether your activities constitute a business, and in turn determine whether your income is assessable and deductions allowable, it is necessary to review your activities against the relevant guidelines.

Significant commercial purpose or character

This indicator generally covers aspects of all the other indicators. A business is generally carried out on such a scale and in such a way as to show it is being operated on a commercial basis and in a commercially viable manner and with an intention of producing a significant commercial gain. The existence of a business plan or consideration of viability using projected income and expenses are factors that would support a commercial purpose.

You currently have two studs which you own a share in and twocalves, both of which you own a share in. You have an ownership interest in two animals, and have leased a third. This is considered a small number in terms of an activity that would be significantly commercial.

Intention of the taxpayer

The intention of the taxpayer in engaging in the activity is a relevant indicator. However, a mere intention to carry on a business is not enough. There must be activity. The extent of activity determines whether a business is being carried on. It is a question of fact and degree, as stated by Brennan J in Inglis v. FC of T 80 ATC 4001 at 4004-4005; (1979) 10 ATR 493 at 496-497.

This indicator is particularly related to:

 - whether the activity is preparatory or preliminary to the ultimate activity;
- whether there is an intention to make a profit, and
 -  whether the activity is better described as a hobby or the pursuit of a recreational or sporting activity.

In your case, the actions being undertaken by the partners are not preparatory or preliminary to the ultimate activity. You are engaging in your activity.

However, the income derived from your activities does not suggest that the activity is conducted on a viable scale. Therefore, it is difficult to show more than a mere intention to engage in business

Prospect of profit

Taxpayers conducting business activities should be able to show how their activities will be able to make a profit, even if it is not in the short term.

This may be demonstrated by showing a realistic and achievable plan of how they expect their activities to grow and generate more income. Consideration is also given to whether the plan enables a point to be reached where income exceeds expenses.

Stronger evidence of an intention to make a profit occurs when the taxpayer has conducted research into his/her proposed activity, consulted experts or received advice on the running of the activity and the profitability of it before setting up the business. This was the situation in FC of T v. JR Walker 85 ATC 4179; (1985) 16 ATR 331.

You have provided the figures shown on the Business Activity Statements for the 2010/2011 financial year. Only one quarter shows a profit, however the income figure includes an insurance recovery amount without which, there would have been no profit.  Although the activity has failed to make a profit in the short term, this is not a decisive factor.

Repetition and regularity

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.

You have been engaged in your breeding and ownership activities since the beginning of the 2011 financial year; however your partnership has been involved in racing and training activities since 1977. The partners spend approximately 2 and a half days per week on animal racing and breeding activities and approximately one day per week on the administrative activities. This evidences regularity and repetition of your activities.

Activities of the kind carried on in a similar manner to those of ordinary trade

It is relevant to compare whether your activities are consistent with industry norms or with business in the same industry. In this regard, it would be relevant to compare your activities with similar agents or independent representatives who are carrying on a business.

The factors to take into account include:

· the level of your activities;

· the level of your income; and

· the level of your expenses.

It is considered that your activities are quite small compared with other owner/breeders that engage in the business of animal breeding and ownership.

Planned, organised and carried on in a businesslike manner

In Newton v. Pyke (1908) 25 TLR 127, the court suggested that business should be conducted systematically. A business is characteristically carried on in a systematic and organised manner rather than on an ad hoc basis, that is, with no method or plan. An activity should generally conform with ordinary commercial principles to amount to the carrying on of a business.

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.

You actively keep records for your activities and do your own bookkeeping. However, you do not have a business or profit-making plan of your own. As such, you do not have projected profits and plans for future growth that are based on a systematic or organised method.

You have expenses in relation to your animal breeding and ownership activities which outweigh your income. It does not appear that your activities are commercial in nature.

The size and scale of the activity

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 always the case. The size or scale of the activity is not a determinative test, and a person may carry on a business though in a small way (Thomas v. FC of T 72 ATC 4094; (1972) 3 ATR 165, at 72 ATC 4099; (1972) 3 ATR 171).

However, if the scale of the activities is small, and not commercially viable, then it is unlikely to be a business. It is more likely to be a business, however, if the activities are growing rather than static or declining.

You currently have two studs which you own a share in and twocalves, both of which you own a share in. This is considered a small number in terms of an activity that would be significantly commercial.

You have three animals in training with independent trainers. Of these animals, one is leased and two are partially owned by the partnership. You do not operate on a scale that would be considered to be commercially viable.

Hobby, a form of recreation or a sporting activity.

If the manner in which you undertake your activity shows that it is merely a hobby then it will not constitute a business. Likewise, if your activities are predominantly for purchasing goods for self consumption or selling goods to family and friends, then you would not be carrying on a business.

Some factors which are taken into account include:

· profit motive;

· scale of activity;

· whether ordinary commercial principles are applied characteristic of the line of business in which the venture is carried on;

· repetition and a permanent character; and

· continuity.

These factors are to be considered as a whole, although the absence of any one will not necessarily result in the conclusion that no business is carried on.

You have three partially owned animals currently trained by independent trainers. You have two studs, both of which you own a share in, and two partially ownedcalves. Although you have a profit motive and aspects of repetition and regularity, the size and scale of your activities and the income derived does not indicate a commercial business.

The way in which you conduct your overall activities indicates that your animal breeding and ownership activities are more aligned with a hobby or a form of recreation.

On balance, when applying the indicators to your circumstances it is considered that your animal breeding and ownership activities do not constitute carrying on a business. The receipts from your activities are not assessable under section 6-5 of the ITAA 1997. Furthermore, your expenses will not be deductible under section 8-1 of the ITAA 1997.

Further Information

If the nature of your activities changes in terms of size, scale and commercial character, you can apply for a private ruling in the future to determine whether your activities constitute carrying on a business.