Edited version of your written advice

Authorisation Number: 1012703679552

Ruling

Subject: Assessable income

Question 1

Are you carrying on a business?

Answer

No.

Question 2

Will the proceeds from the sale of the art be considered profits from an isolated transaction?

Answer

No.

Question 3

Will the sale of the art be considered the disposal of a collectable?

Answer

Yes, however any capital gain or loss can be disregarded.

Question 4

Will the sale of the art be considered the disposal of a personal use asset?

Answer

No.

This ruling applies for the following period

Year ending 30 June 2014

The scheme commences on

1 July 2013

Relevant facts and circumstances

You created a piece of art.

A gallery approached you to purchase the one off piece.

You have never advertised or offered the art for sale.

You have full time salaried employment and do not use your artistic expertise in a profit making exercise.

The cost base of the art is less than $500 as you obtained the materials for no consideration.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 subsection 108-10(2)

Income Tax Assessment Act 1997 subsection 108-20(2)

Income Tax Assessment Act 1997 subsection 118-10(1)

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Question 1

Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'.

The question of whether you are carrying on a business is a question of fact and degree. There are no rigid rules for determining whether the activity amounts to the carrying on of a business. The facts of each case must be examined. In Martin v FC of T (1953) 90 CLR 470 at 474; 5 AITR 548 at 551, Webb J said:

The test is both subjective and objective; it is made by regarding the nature and extent of the activities under review, as well as the purpose of the individual engaging in them, and, as counsel for the taxpayer put it, the determination is eventually based on the large or general impression gained.

However, the courts have developed a series of indicators that can be applied to your circumstances to determine whether you are carrying on a business.

Taxation Ruling 2005/1: 'Income tax: carrying on business as a profession artist' summarises these indicators. 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.

Application to your circumstances

Having regards to your circumstances and the factors outlined above we do not consider that you are carrying on a business. Your activities do not demonstrate a repetition or regularity and are not carried on in a businesslike manner. Your activities are better described as a hobby or a form of recreation.

Question 2

Profits arising from an isolated business or commercial transaction will be ordinary income if the taxpayer's purpose or intention in entering into the transaction is to make a profit, even though the transaction may not be part of the ordinary activities of the taxpayer's business (FC of T v. Myer Emporium Ltd 1987 163 CLR 199; 87 ATC 4363; 18 ATR 693) (Myer Emporium). 

Taxation Ruling TR 92/3 considers the principles outlined in the Myer Emporium case and provides guidance in determining whether profits from isolated transactions are assessable under section 6-5 of the ITAA 1997 as ordinary income.

If a taxpayer makes a profit from a transaction or operation, that profit is income if the transaction or operation is not in the course of the taxpayers business but:

• the intention or purpose of the taxpayer in entering into the profit-making transaction or operation was to make a profit or gain, and

• the transaction or operation was entered into, and the profit was made, in carrying out a business operation or commercial transaction.

Whether an isolated transaction is business or commercial in character will depend on the circumstances of each case.  TR 92/3 lists the following factors to be considered:

a) the nature of the entity undertaking the operation or transaction

b) the nature and scale of other activities undertaken by the taxpayer

c) the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained

d) the nature, scale and complexity of the operation or transaction

e) the manner in which the operation or transaction was entered into or carried out

f) the nature of any connection between the relevant taxpayer and any other party to the operation or transaction

g) if the transaction involves the acquisition and disposal of property, the nature of that property, and

h) the timing of the transaction or the various steps in the transaction.

Application to your circumstances

In this case, you did not create the artwork with the intention to sell if for a profit or gain. Although you have produced several pieces of artwork previously, they have not been sold for financial gain. Therefore, the proceeds from the sale of the carving will not be assessable as profits from an isolated transaction.

Question 3

Subsection 108-10(2) of the ITAA 1997 defines a collectable as:

(a) artwork, jewellery, an antique, or a coin or medallion; or

(b) a rare folio, manuscript or book; or

(c) a postage stamp or first day cover;

that is used or kept mainly for your (or your associate's) personal use or enjoyment.

Subsection 118-10(1) of the ITAA 1997 states that a capital gain or loss you make from a collectable is disregarded if the first element of its cost base is $500 or less.

Application to your circumstances

We consider the item to be a work of art that is kept mainly for your personal use or enjoyment and therefore a collectable under subsection 108-10(2) of the ITAA 1997. As you acquired the artwork for less than $500, you are entitled to disregard any capital gain (or loss) made from the sale.

Question 4

Under subsection 108-20(2) of the ITAA 1997, a personal use asset is:

a) a capital gains tax (CGT) asset (except a collectable) that is used or kept mainly for your (or your associate's) personal use or enjoyment; or

b) an option or right to acquire a CGT asset of that kind; or

c) a debt arising from a CGT event in which the CGT asset the subject of the event was one covered by paragraph (a); or

d) a debt arising other than:

(i) in the course of gaining or producing your assessable income; or

(ii) (ii) from your carrying on a business.

Any personal use asset you acquired for less than $10,000 is disregarded for CGT purposes.

Application to your circumstances

As discussed above, we consider the item to be a collectable. Therefore, under paragraph 108-20(2)(a) of the ITAA 1997, it is specifically excluded from being a personal use asset.