Edited version of private advice

Authorisation Number: 1012640359755

Ruling

Subject: Income and expenses in relation to your sporting activities

Question 1

Are money grants, accommodation, sponsors clothing or cash from sponsors you have received, considered assessable income?

Answer

No

Question 2

Are you entitled to a deduction under either section 8-1 (ITAA 1997) or section 40-880 of the Income Tax Assessment Act 1997 for expenses incurred as a competitor?

Answer

No

Question 3

Are you entitled to a deduction for expenses incurred in relation to your business under section 8-1 of the ITAA 1997?

Answer

Yes

This ruling applies for the following periods

Year ended 30 June 2013

Year ending 30 June 2014

The scheme commenced on

1 July 2012

Relevant facts

In past years you were a successful sportsperson.

After being successful you retired from competing and focused on other areas of your life.

At a later date you decided to start a business using your profile as a previously successful sportsperson to attract clients.

You worked part time as an employee during the early stages of the business.

The business involves coaching on a fee for service basis.

You undertake the following activities as part of the business:

• conduct clinics

• organise tours to competitions where you act as a coach to participants; and

• provide advice on training schedules & nutrition.

A relative provides support in your business.

At a later date you decided to resume your sporting activities at a high level. This was done to re-invigorate publicity and thus increase the appeal & marketing for your business and attract business sponsorship.

In the relevant financial year you:

• generated assessable income from the business

• received a cash sponsorship funding from a corporate entity; and

• received an amount of sporting clothing from the same corporate entity.

In the subsequent financial year you received:

• a one-off grant

• a one-off grant

• a one-off grant

• free accommodation at a place where you conduct your coaching clinics;

and

• an amount of sporting clothing.

Some of your relatives receive free accommodation which is provided by sponsors.

You incur expenses for training, competing, travelling to and recovering from your activities

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 40-880

Income Tax Assessment Act 1997 Subsection 995-1(1)

Reasons for decision

Question 1

Taxation Ruling TR 1999/17 discusses receipts and other benefits which are obtained by sportspeople from involvement in sport. Benefits include salary, wages, allowances and cash prizes and benefits received in kind such as prizes received in the form of a motor vehicle or holiday. The ruling does not distinguish between an 'amateur' or 'professional' sportsperson.

A payment or other benefit received by a sportsperson is assessable income if it is:

• income in the ordinary sense of the word (ordinary income); or

• an amount or benefit that through the operation of the provisions of the tax law is included in assessable income (statutory income). Statutory income includes non-cash benefits that may not be ordinary income.

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 following are assessable income:

• payments received from, in respect of, or in connection with employment;

• payments or other benefits received for, in respect of, or in connection with services provided; and

• amounts of a revenue nature or other benefits received, including prizes and awards, from carrying on a business of participating in sport. This includes the exploitation of personal skills in a commercial way for the purpose of gaining reward.

In contrast to the items listed above, money and other benefits received from the pursuit of a pastime or hobby are not assessable income. If follows that any related expenses are not allowable deductions from those receipts.

Payments to sportspeople that do not fall within any of the items listed above are often made in the absence of any legal obligation of the payer to do so. Such payments are referred to as voluntary payments. Typically, voluntary payments are made as either a series of payments, such as under a grant, or as an 'occasional' payment, such as an award or prize. The fact that a payment is voluntary does not mean that it cannot be assessable income.

A payment which is received as a part of a series of voluntary payments, such as under a grant, will be assessable income in the ordinary sense of the word if it has one or more of the following characteristics:

• it is made under an agreement or arrangement to provide financial support in the form of periodical, regular or recurrent payments;

• it is received in circumstances where the sportsperson has an expectation of receiving the payment as part of periodical, regular or recurrent payments, and the sportsperson is able to rely on the payment for his or her regular expenditure; or

• it is part of periodic, regular or recurrent payments made in substitution of income.

Expenses of sports are not allowable deductions against voluntary payments, as these expenses do not relate to the voluntary payment received.

Whether the receipt of an 'occasional' voluntary payment or benefit is assessable income needs to be determined on a case by case basis. An 'occasional' voluntary payment received in relation to sporting activities is:

• considered to be assessable income if paid to the sportsperson in relation to an activity that can be considered to be income-producing e.g. in respect of employment, the provision of services, or a business; or

• not considered to be assessable income if not caught under the above paragraph. Such payments are in the nature of a 'windfall gain'. This includes receipts incidental to a pastime or hobby, and 'occasional' voluntary payments paid and received on purely personal grounds.

An award, in medal or trophy form, will not be assessable income as it is given and received on purely personal grounds, recognising and recording a particular achievement of the person.

In your case you received sponsorship in the form of clothing, accommodation and grants.

The payments received were not received in respect of, or in connection with employment, with services provided, or from carrying on a business of participating in sport. Your activities are considered a pursuit of a pastime or hobby and payments are therefore not assessable income. The payments/benefits you received do not fall within any of the items listed above and were made in the absence of any legal obligation of the payer to do so. The payments/benefits you received are considered voluntary payments. The payments you received were paid as a lump sum, and as such were not periodical, regular or recurrent payments. None of the payments/benefits you received are considered assessable income.

Question 2

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 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.

For expenditure to be deductible there must be a nexus between the expenditure and the assessable income so that it is incidental and relevant to the gaining of assessable income or carrying on a business. The expenditure must also have the essential character of an outgoing incurred in gaining assessable income or, in other words, of an income producing nature.

Expenses incurred in keeping fit (e.g. gym memberships) are generally considered to be of a private nature, unless strenuous physical activity is an essential and regular element of performing the employee's duties. For example a police academy physical training instructor, a member of the SAS and a circus trapeze artist would be entitled to claim expenses incurred in keeping fit. Applying the same principles, a professional sportsperson is entitled to a deduction for gymnasium fees and similar keep-fit expenses.

In your case you are not considered a professional sportsperson. Even though you have competed at a high level you are not paid or endorsed to compete at those levels therefore you are considered a very keen amateur sportsperson.

You incur expenses in training, competing and recovering from your activities. You are not carrying on a business of a professional sportsperson but you are carrying on a business of a sports coach. Expenses incurred in relation to your coaching business are allowable deductions however any expenses in relation to your activities as a competitor are not closely enough linked to your coaching business to be deductible. It is considered that in order to run your coaching business it is not imperative that you are still competing at the highest level. Many professional athletes' coaches no longer compete but are still able to impart their knowledge on to their mentees and operate a successful coaching business. It is not considered essential that you continue to compete in order to be a successful coach or mentor. There is an insufficient nexus between the incurring of expenses in order for you to train, compete and recover so that you can personally compete in events and the derivation of income which you receive from your coaching business.

Therefore any expenses incurred in order for you to train, compete or recover are not deductible as they are personal in nature.

Section 40-880 of the ITAA 1997 allows certain business capital expenditure to be deducted over 5 years. As discussed above you are not in the business of a professional sportsperson therefore any expenses incurred in order for you to train, compete or recover are not business expenses and are therefore not deductible under section 40-880.

Question 3

Section 8-1 of the 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 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.

For expenditure to be deductible there must be a nexus between the expenditure and the assessable income so that it is incidental and relevant to the gaining of assessable income or carrying on a business. The expenditure must also have the essential character of an outgoing incurred in gaining assessable income or, in other words, of an income producing nature.

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.

Taxation Ruling TR 97/11 provides the Commissioner's view of the factors used to determine if you are in business for tax purposes.

In the Commissioner's view, the factors that are considered important in determining the question of business activity 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, and

• 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.

In your case your activities as a coach have a commercial purpose, you have more than an intention to engage in business, there is a prospect of a profit from your activities, there is repetition and regularity, your activities are planned, organised and carried on in a similar manner to other businesses, therefore it is considered that you are operating a coaching business.

As you are in business of coaching you are entitled to claim a deduction for expenses incurred in relation to your business. All activities undertaken above are considered to have a close enough nexus with the income produced from the activities of your business that they are considered to be deductible.

Section 40-880 of the ITAA 1997 allows certain business capital expenditure to be deducted over 5 years. As discussed above you are considered to be in the business of coaching/mentoring however, all expenses above are deductible under section 8-1 of the ITAA 1997 therefore there is no need to consider whether they are deductible under section 40-880.

Conclusion

Your activities as a competitor are considered to be that of a very keen amateur. All payments/benefits received are not considered assessable income and associated expenses are not deductible.

Your activities as a coach are considered a business and you are entitled to claim a deduction for expenses incurred in relation to your business. Any income received from your business activity is considered assessable income.

The activities you undertake as an amateur competitor and as a coach are completely separate activities as the first is an active pastime and the second is a business. Income and expenses related to the pastime do not have a close enough nexus with the business you run.