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Ruling

Subject: am I in business?

Question

Does the activity of selling clothing online constitute carrying on a business for the purposes of the income tax legislation?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2012

The scheme commences on:

1 July 2011

Relevant facts and circumstances

You are considering selling articles of clothing on an online auction site.

In your leisure time you often visit retail sales, warehouse clearances and end of lease sales. You also shop online and purchase clothing for your family.

You are considering purchasing some extra items of clothing, when you come across them, with the intention of selling them online.

You expect that you will be able to sell a few hundred items over the course of 12 months.

Your main source of income is derived from you employment.

You work part-time in addition to caring for your children.

You would be putting the clothing up for sale on the auction sites in your spare time as a leisure activity.

You estimate you would spend about an hour each evening listing the items.

You could keep receipts of your purchases but would not have a regular supplier or a supply agreement in place with anyone.

There would not be a regular amount of stock held as you would only be purchasing items if or when they were available.

There would not be any regularity to the activity as you only want to sell items seasonally for about 6 or 7 months of the year.

You do not have a separate bank account, premises or a registered business name for this activity.

You have no formal qualifications, specialist knowledge or skills in selling clothing.

You do not have a business plan and do not intend to advertise.

Reasons for decision

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. Therefore, any money earned from the activity is not assessable income and you are not entitled to deduct expenses incurred in earning these amounts.

Detailed reasoning

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 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.

In your case, you have decided to purchase articles of clothing to sell on an online auction site. This activity will be conducted on a small scale as you do not have separate premises which you will operate from and you do not intend to advertise. Also, your main source of income is from your part-time employment.

There is limited regularity and repetition to your activities as you only intend to sell items seasonally for about 6 or 7 months during the year. Also, you will not engage suppliers to regularly provide you with articles of clothing to sell.

The activity is not carried on in a business like manner as you do not have a business plan, separate bank account or a registered business name.

Based on the information you have provided, we do not consider that the activity has the necessary characteristics of a business for taxation purposes. Your proposed activity is more accurately characterised as a hobby. Therefore, any amounts you receive in relation to this activity will not be assessable under subsection 6-5(1) of the ITAA 1997 as ordinary income and you are not entitled to deduct expenses incurred in earning these amounts.

Additional Information

Although we have concluded that your proposed activity is a hobby, you can change from engaging in a hobby to conducting a business (and vice-versa) over time as your level of activity changes. Therefore you should evaluate your level of activity on a regular basis to see whether you are engaging in a hobby or carrying on a business. We have ruled for the 2011-12 financial year but if in a later year your activity becomes more commercial, for example, if your volume of sales, amount of time devoted, or profitability is higher than you originally anticipated then it may be that you are no longer merely engaging in a hobby. You can request a further ruling after the 2011-12 financial year if you are still unsure about this issue.