Edited version of your private ruling

Authorisation Number: 1012058771789

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Ruling

Subject: Am I in Business?

Questions

1. Were you carrying on a business of selling products on online?

Answer: Yes

2. Is the income you received from your online selling activity assessable?

Answer: Yes

3. Are you entitled to a deduction for expenses you incurred in respect of your online selling activity?

Answer: Yes

This ruling applies for the following periods:

Year ended 30 June 2011

The scheme commenced on

1 August 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.

The arrangement that is the subject of the Ruling is described below. This description is based on the following documents. These documents form part of and are to be read with this description. The relevant documents are the application for private ruling received 16 December 2011 and all attached documentation.

In the 2010-11 financial year you commenced an online store from home using an established online account.

You used a PayPal account which your husband had opened some time ago.

At the time you were a stay at home mother.

Amongst other items you mainly sold Microsoft Office equipment which you believed to be genuine.

Your activity proved very profitable and you sold many items. You have provided a copy of invoices you received from online, which detail your stock listings on online.

You incurred expenses in respect of your online selling activity.

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 8-5.

Income Tax Assessment Act 1997 Section 995-1.

Income Tax Assessment Act 1997 Section 35-10.

Reasons for decision

A taxpayer is liable for tax on their taxable income derived during the income year. Taxable income is calculated by subtracting allowable deductions from the taxpayer's assessable income.

Income is generally assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997).

Under section 6-5 of the ITAA 1997, assessable income is made up of ordinary income and statutory income.

Under section 6-5(1) of the ITAA 1997, ordinary income means income 'according to ordinary concepts'. This phrase is not defined under the legislation, but a large body of case law has developed to identify the factors that indicate if an amount is income according to ordinary concepts.

Deductibility of expenses

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 specific tax provision prevents it.

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 (ATO) 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

· 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; Crow v. FC of T 88 ATC 4620; 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; 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; 20 ATR 1570). 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 [1984] 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'.

Intention of the taxpayer

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, 109 ATR 493).

This indicator is particularly related to:

· whether the activity is preliminary or preparatory to the ultimate activity

· whether there is an intention to make a profit

· whether the activity is better described as a hobby, recreational pursuit or sporting activity.

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; Brajkovich v. FC of T (1989) 89 ALR 408; 89 ATC 5227; 20 ATR 1570).

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. FC of T (1942) 7 ATD 186; 2 AITR 360).

Regularity and repetition

Frequent and regular transactions are the usual feature of business operations. Turnover is maximised if the processes are repeated over a long period. Frequent activity does not necessarily mean a business is carried on but it will support this argument (FC of T v. Radnor 91 ATC 4689; 22 ATR 344).

Regularity, frequency and duration of the activity are considered to be important factors in determining if a business is being carried on. In Inglis v. FC of T 80 ATC 4001 Brennan J, at 4005, said that 'At the end of the day the extent of activity determines whether the business is being carried on'.

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 to have sought advice or done some research

· the activity should be compared to that of a keen amateur - the sales may just fund the future pursuit of a personal interest.

Size or scale of the activity

The larger the scale of the activity the more likely it is that the taxpayer is carrying on a business. This is not conclusive and a person may carry on a business in a small way (Thomas v. FC of T 72 ATC 4094; 3 ATR 165).

Where the scale of the activity is small it may still result in more product than are required for the taxpayer's domestic needs. If the taxpayer also has an intent to profit from the activities and there is a reasonable expectation of doing so, a business may be carried on. The size of the activity is not determinative but the smaller the scale of the activity the more important the other indicators will become.

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 the operation is substantial (Ferguson v. FC of T 79 ATC 4261; 9 ATR 873).

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 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. 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 on a small scale

· the taxpayer intends to carry on a hobby not a business

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

Application to your circumstances

Given regard to the number of sales made over the income year, it is considered your online sales activity had a significant commercial purpose. Objectively must be concluded you had more than an intention to engage in minor online sales as a hobby and sold many items during the 2010-11 financial year.

Your activities were being conducted in a similar manner to that of other sellers on online and in your industry, despite being on a small scale.

Your activities were being planned, organised and carried on in a businesslike manner to maximise your profits.

Therefore your online sales activity is considered to be a business and all income derived from the activity is assessable under section 6-5 of the ITAA 1997. Likewise, expenses relating to the activity may be deductible under section 8-1 of the ITAA 1997.