Edited version of your private ruling

Authorisation Number: 1012463653627

Ruling

Subject: Am I in business?

Question 1

Are your carrying on a business for taxation purposes in relation to your activities?

Answer

No.

Question 2

Is the income from your activities regarded as assessable income?

Answer

No.

Question 3

Are the associated assets regarded as trading stock?

Answer

No.

Question 4

Are you entitled to a deduction for the decline in value for your co-ownership of the depreciating asset?

Answer

Yes.

Question 5

Will Division 35 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to defer any allowable depreciation until future income is derived from the asset?

Answer

No.

Question 6

Are you entitled to deductions for any other of the associated expenses?

Answer

No.

Question 7

Are you entitled to a deduction for the catering costs incurred?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts

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 and

additional information.

You own a share of a depreciating asset.

The asset was available in 20XX.

You contributed money in relation to the asset.

The only income earned during the 20YY-XX income year relating to the activity was from donations.

Negotiations have begun to use the asset. It is expected that this will generate further income which will be shared between the relevant parties.

No business plan was created.

Other income generating activities will come from the associated assets.

A business plan and finance plan were created for other assets.

An initial budget was created. However, this budget did not include subsequent expenditure.

You later conducted a budget estimate based on expenditures you knew had taken place.

As many of the associated expenses were donated, you were attempting to estimate the real costs.

Minor assets were also purchased for the activity.

You redrew money on a personal loan to pay for your contribution to the asset.

You have kept records of your own expenses incurred.

The purpose of the activity was to generate additional assets which would generate cash flow.

Secondary to this, was also to gain experience.

The asset had both commercial and professional development objectives.

You have been looking for opportunities to commercially exploit the asset.

You spent between 7 to 14 hours a week on activities for some weeks.

Another week you were full-time on the relevant activities.

You have been employed in related areas for several years.

Related activities took place in previous years. You made investments of both time and money into various activities.

You have also worked part-time in an unrelated field as well as working in related fields.

You also operated an unrelated business.

Several years ago you also carried out similar activities

You have qualifications in the relevant field.

You maintained contact with the relevant industry over the years.

You wish to continue with associated activities.

You are currently enrolled to do further study in a relevant area.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.

Income Tax Assessment Act 1997 Section 8-1.

Income Tax Assessment Act 1997 Division 32.

Income Tax Assessment Act 1997 Division 35.

Income Tax Assessment Act 1997 Division 40.

Income Tax Assessment Act 1997 Section 70-10.

Reasons for decision

Carrying on a business

Under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997), the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources during the income year.

Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business.

The donation received for the 2011-12 income year is not considered to be in relation to personal services or income from property. Therefore it is necessary to consider whether your activities are regarded as a business and whether the income is assessable.

Business is defined in section 995-1 of the ITAA 1997 to be 'any profession, trade, employment, vocation or calling, but does not include 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.

Taxation Ruling TR 2005/1 provides guidance on the principles to be applied in determining whether a professional artist is carrying on a business. The ruling recognises that there are special factors affecting artists. However, a professional arts business must be distinguishable from a hobby or recreation. Paragraph 10 of TR 2005/1 states that the courts have held that the following indicators are relevant to the question of whether a taxpayer's activities amount to the carrying on of a business:

· 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, and

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

No individual factor is determinative, but should be weighed up in conjunction with the other factors.

The guidelines in TR 2005/1 were applied by the Administrative Appeals Tribunal (AAT) in Re VBF and Federal Commissioner of Taxation [2005] AATA 226 58 ATR 1332; 2005 ATC 144 to find that the taxpayer was carrying on business as a graphic artist in the 1999-2000 income year but not in the 2 preceding years. The AAT decided that the appropriate level of commercialisation was not reached until 1999-2000 when his work was in a commercially exploitable format and he actively promoted himself (for example, by holding an exhibition, pursuing gallery owners and hiring a public relations consultant). Other relevant factors were that the taxpayer used an accountant, registered for GST and submitted business activity statements. It was held that, at this stage, his activity and output were beyond what was needed to satisfy his personal needs in the sense of conducting a hobby or pastime.

Applying the relevant indicators to your circumstances

Your activities do not have a significant commercial purpose. Although you have spent considerable time on various activities throughout the year, you have not shown an intention to make a profit. In fact you have made an overall loss from your activities.

Although you have records of your income and expenses, your activities are not considered to be carried on in a business like manner. The size and scale of your activity is not large enough to be a commercially viable business. Although you spent one week full time on the activities, others weeks you have not spent a substantial amount of time on the film activities.

You have a long history of showing an interest in associated activities, however the time spent on such activities have been sporadic. The activities carried out in the 2011-12 do not show an intention to carry out a commercial and profitable business. Your business plan has not demonstrated a reasonable expectation of profit.

Your activities are not sufficiently distinguishable from a hobby or recreational pursuit. The receipt of donations does not affect the characterisation of your activity.

After weighing up the relative business indicators and objective facts surrounding your case it is considered that you are not carrying on a business for taxation purposes. Therefore the donations received are not regarded as assessable income.

Trading stock

Trading stock is defined as including anything produced, manufactured or acquired that is held for the purpose of manufacture, sale or exchange in the ordinary course of business under section 70-10 of the Income Tax Assessment Act 1997 (ITAA 1997).

As your activities are not regarded as a business, the trading stock provisions do not apply. That is, the assets from your activities are not trading stock for taxation purposes.

Depreciation

Division 40 of the ITAA 1997 outlines that you can deduct an amount equal to the decline in value of a depreciating asset that you hold. A deduction for the decline in value of a depreciating asset is allowable to the extent the asset is used for a taxable purpose.

Subsection 40-30(1) of the ITAA 1997 states that a depreciating asset is an asset with a limited effective life and that can reasonably be expected to decline in value over the time it is used.

Paragraph 40-30(2)(c) of the ITAA 1997 provides that depreciating assets include items of intellectual property.

The effective life of a depreciating asset is the period the asset can be used by anyone for income producing purposes and if relevant for the asset assuming:

wear and tear on a reasonable basis, and

maintenance in reasonably good order and condition and having regard to likely scrapping practices.

You can choose to use either the 'prime cost' or 'diminishing value' methods to calculate the decline in value amount.

Section 40-60 of the ITAA 1997 states a depreciating asset starts to decline in value from when its start time occurs. The start time of a depreciating asset is when you first use it, or have it installed ready for use, for any purpose. That is, a deduction for the decline in value is only available when the specific item has come into existence in a marketable form.

The deduction for the decline in value of a depreciating asset provided for under section 40-25 of the ITAA 1997 is based on the cost of the depreciating asset worked out under Subdivision 40-C of the ITAA 1997. The first element of cost of a depreciating asset includes all capital amounts paid to hold the depreciating asset.

In calculating the cost of a depreciating asset and the associated deduction under Division 40 of the ITAA 1997, it is only capital expenses that are included (section 40-220 of the ITAA 1997). Expenses are characterised as being capital in nature where they are incurred for the purpose of bringing into existence an enduring asset.

Capital expenses for the purchase of separate depreciating assets such as a computer, do not form part of the cost of the asset. Deductions for these items are calculated over the respective effective lives of the items. You can claim these deductions from when the items were installed ready for use, to the extent they were used for the purpose of producing future assessable income from your asset.

In your case, you have incurred capital expenditure in acquiring an interest in the depreciable asset. However expenses that are revenue in nature do not form part of the cost of your depreciating asset under Division 40 of the ITAA 1997. Expenses incurred by others do not form part of the cost of your depreciating asset for Division 40 of the ITAA 1997. Also, notional costs (such as your own labour) are not considered a payment for Division 40 of the ITAA 1997 purposes.

Division 35 of the ITAA 1997

Division 35 of the ITAA 1997 outlines the deferral of losses from non-commercial business activities. That is, these provisions only apply to business activities.

As your activities do not constitute the carrying on of a business for tax purposes, Division 35 of the ITAA 1997 does not apply to your activities.

Allowable deductions

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income or are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income, or a provision of the ITAA 1997 prevents it.

A number of significant court decisions have determined that for an expense to be an allowable deduction:

· it must have the essential character of an outgoing incurred in gaining

· assessable income or, in other words, of an income-producing expense

· (Lunney v. FC of T; (1958) 100 CLR 478 (Lunney's case)),

· there must be a nexus between the outgoing and the assessable income so

· that the outgoing is incidental and relevant to the gaining of assessable

· income (Ronpibon Tin NL v. FC of T, (1949) 78 CLR 47), and

· it is necessary to determine the connection between the particular outgoing

· and the operations or activities by which the taxpayer most directly gains or

· produces his or her assessable income (Charles Moore Co (WA) Pty Ltd v.

FC of T, (1956) 95 CLR 344; FC of T v. Hatchett, 71 ATC 4184).

To be deductible under section 8-1 of the ITAA 1997, a loss or outgoing must have a sufficient connection with the derivation of the taxpayer's assessable income, which is determined on the facts of the case.

As you are not carrying on a business for taxation purposes, and the associated donation is not regarded as assessable income, you cannot claim a deduction for the expenses under section 8-1 of the ITAA 1997.

Catering expenses

Under Division 32 of the ITAA 1997 you can not deduct the costs of providing entertainment. Entertainment is defined in section 32-10 of the ITAA 1997 to include entertainment by way of food, drink or recreation. You are taken to provide entertainment even if business discussions or transactions occur. Business lunches are regarded as entertainment for Division 32 purposes. Taxation Ruling TR 97/17 provides guidance on determining whether food and drink constitutes entertainment.

Division 32 of the ITAA 1997 overrides the general deduction section 8-1 of the ITAA 1997 with respect to entertainment. Section 32-5 of the ITAA 1997 provides that, to the extent that you incur a loss or outgoing in respect of providing entertainment, you cannot deduct it under section 8-1 of the ITAA 1997.

Subdivision 32-B of the ITAA 1997 contains exceptions to the general rule. An income tax deduction is allowed if one of the exceptions in Division 32 is satisfied or if Fringe Benefits Tax is paid on meal entertainment, as outlined in section 32-20 of the ITAA 1997. The exceptions relate mainly to employers providing food or drink to employees in an in-house dining facility, but the exception does not apply if the food or drink is provided at a party, reception or other social function.

In your situation, the catering expenses incurred would be denied under Division 32 of the ITAA 1997. It is acknowledged that catering is a standard budget item and food is required for all, however, you are not an employer and none of the exceptions outlined in Division 32 apply to your specific circumstances. Therefore no deduction is allowed for your catering expenses.