Edited version of your private ruling

Authorisation Number: 1011949291424

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Ruling

Subject: Am I in business - online selling

Question 1

Were you carrying on a business of selling items online?

Answer

No.

Question 2

Is the income you received from your online selling activity assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2011

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.

Your parent has a business and as a secondary activity to the business they purchased multiple items.

You were not involved in the purchasing of the items and are not aware of how many items were purchased altogether.

Your parent purchased a large amount of items from overseas.

Your parent also purchased items locally.

Your parent was going to give some of these items to friends and sell the rest.

Your parent no longer wished to sell the items and gave you permission to sell the remaining items online.

Your intention was to sell the left over items and split the profits after expenses equally between you and your parent

You wanted to help your parent get rid of the remaining items as they were taking up space in the garage.

You created an online account for yourself to sell the remaining items.

Most items sold online were new, however a small number were second hand.

You do not keep any records of transactions and do not monitor money that comes in and out.

You did not have a business plan or operate out of a business premises.

In the year ended 30 June 2011 you estimate that you made $XX in revenue. This is because of the high cost of the individual items you were selling which was between $XX and $XX.

During the year ended 30 June 2011 you estimate you made XX transactions selling not only the items purchased by your parent but other personal items also.

You estimate the profit on the $XX revenue would only be between XX% and XX%.

You were only selling the items to cover losses online fee and PayPal fees. You estimate these fees would have totalled between $XXX and $XXX.

You contend that all the money made from selling onlnie was just to cover the fees, time and effort involved in sending the items.

You already had an online trading account open and wanted to build up your profile and get more feedback. Your parent did not have an online trading account.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5 and

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Question 1

Summary

Based on the information you have provided we do not consider that the activity has the necessary characteristics of a business for taxation purposes.

Detailed reasoning

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 case of Evans v. Federal Commissioner of Taxation 89 ACT 4540; (1989) 20 ATR 922 stated that whether or not an activity amounts to carrying on business for taxation purposes is a question of fact. There is no exhaustive or determinative definition which can be applied to determine this matter. Martin v. Federal Commissioner of Taxation (1953) 90 CLR 470; (1953) 10 ATD 226; (1953) 5 AITR 548, however, provides that the test for determining whether or not a business is being carried on is both subjective, which considers the individuals purpose at the relevant time, and objective, which considers the nature and extent of the activities undertaken.

Taxation Ruling TR 97/11 provides the Commissioner's view of the factors that are considered important in determining if you are in business for tax purposes. The factors 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

· 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 gained.

Application to your circumstances

In your case your parent had a large number of items and asked you to sell them online. You did not have a business plan, nor did you operate out of business premises. You did not keep records of your transactions or monitor the money that was coming in from sales. You had no intention to engage in business.

Although there has been constant trading activity with approximately XXX items being sold over the financial year, there is no significant regularity and repetition of the purchase of items to sell online.

The activity was conducted on a small scale and without permanency as you only intended to continue listing items online until all the items originally purchased by your parent were sold. Also, your main source of income is from your full time employment.

Based on the information you have provided we do not consider that the activity has the necessary characteristics of a business for taxation purposes.

Question 2

Summary

The proceeds from your online selling activities are considered profits from isolated transactions and should be included in your assessable income under section 6-5 of the ITAA 1997.

Detailed reasoning

Profits on isolated transactions

Under section 6-5 of the ITAA 1997, your assessable income includes the ordinary income you derived directly or indirectly from all sources, during the income year.

Taxation Ruling TR 92/3 provides guidance in determining whether profits from isolated transactions are income and therefore assessable as ordinary income.

The term 'isolated transactions' refers to transactions outside the ordinary course of business of a taxpayer carrying on a business and to those entered into by non-business taxpayers.

Paragraphs 6 of TR 92/3 sets out the general principles that a profit from an isolated transaction is generally income when

· the intention or purpose of a taxpayer in entering into the transaction was to make a profit or gain

· the transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying on a business operation or commercial transaction.

Paragraph 10 of TR 92/3 details that if a transaction is outside the ordinary course of a taxpayer's business, the intention or purpose of profit-making must exist in relation to the transaction. It is not the subjective intention or purpose but rather the intention or purpose discerned from an objective consideration of the facts and circumstances.

Commercial transaction

If a taxpayer enters into a transaction in the course of carrying on a business, it is not necessary to consider whether it is a business operation or commercial transaction.

However, it is necessary to consider this issue if the taxpayer is not carrying on a business or if the transaction or operation is not in the course of the taxpayer's business.

For a transaction to be characterised as a business operation or a commercial transaction, it is sufficient if the transaction is business or commercial in character. This depends very much on the circumstances of the case.

Some of the factors to consider when looking at whether an isolated transaction amounts to a commercial transaction are shown in paragraph 13 of TR 92/3:

· the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained

· the manner in which the operation or transaction was entered into or carried out

· the nature of any connection between the relevant taxpayer and any other party to the operation or transaction

· if the transaction involves the acquisition and disposal of property, the nature of that property

· the timing of the transaction or the various steps in the transaction.

Application to your circumstances

In your case, when you and your parent agreed that you would sell the remaining items online you also agreed to split the profits after expenses evenly between each of you. This indicates a profit making purpose or intention in relation to the transactions carried out online. However, we do not consider that you are carrying on a business; therefore the character of the transaction must be assessed.

Your parent purchased the items from overseas with an intention to resell them to make a profit. When they no longer wished to sell them, you made the items available online. The acquisition and subsequent disposal of the property took place of a short period of time. The holding of the property for a short period indicates that the transaction was of a commercial nature. Although some items were given or sold to friends, most were disposed of online to independent parties, also indicating the transactions were of a commercial nature. Also, the magnitude of profit obtained from the sales was sufficient to cover the expense of purchasing the items and provide both you and your parent with proceeds from the sales.

It is considered that you entered into the transactions with the intention to make a profit and that the transactions were commercial in nature. Therefore, the proceeds from your online selling activities are considered profits from isolated transaction and should be included in your assessable income under section 6-5 of the ITAA 1997.