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Ruling

Subject: Am I in business of internet trading

Question:

Does the activity of selling goods 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 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

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

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

You purchase extra items and sell them on an online auction site. You do not have an online auction store.

You have sold close to 500 items since 1 July 2011, however approximately one quarter of these are private sales of household items.

You sell twice a year, the period leading up to Christmas, and during the winter months. You estimate you would spend about an hour to an hour and a half each evening on the activity during these periods.

You have some winter stock that you will sell next year however you don't think you will be doing the summer months this year.

You will be decreasing your selling activity as it takes up a great deal of time, and may consider ceasing the selling activity completely next year.

You use a combination of buy now and auction sales methods. With buy now you usually put a margin of about 40%. However often they do not sell and you must drop the price, sometimes below cost.

You have kept receipts of your purchases but do not have a regular supplier or a supply agreement in place with anyone. You do not order from overseas suppliers.

You do not keep a regular amount of stock at your house, as you only purchase suitable items when you see them.

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 goods.

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

After fees and other expenses such as travel and home office running costs you do not think the activity is profitable.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-5(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 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 purchase goods to sell on an online auction site. This activity is conducted on a small scale as you do not have separate premises which you will operate from and you do not 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 sell items seasonally for about five months during the year. Also, you will not engage suppliers to regularly provide you with items 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. Further you are considering reducing the amount of sales activity you do, and may consider ceasing it completely in the future.

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.