Edited version of your written advice

Authorisation Number: 1012706223236

Ruling

Subject: Craft hobby vs. craft business

Questions and Answers:

1. For the current financial year, is your craft activity a business (which results in any profits you earn being taxable income)?

No.

2. For the years ending 30 June 2016 to 2019, inclusive, will your craft activity be a business?

The Commissioner declines to rule on this question.

This ruling applies for the following period:

Year ending 30 June 2015

The scheme commences on:

1 July 2014

Relevant facts and circumstances

You are skilled at a certain craft, which you have taught in your paid work and do in your spare time. You are also currently looking for paid employment.

In the past, you have sold your smaller crafts to friends and for charities for an average of $2 each and also at an annual fair. A friend has also sold some of your crafts at their market stall. In the past, you have also sold 2 of your larger crafts for $X each. However, to date, you have not done any regular market stall or other commercial selling activity.

To make 4 smaller crafts would probably take you 1 hour and to make 1 larger craft takes 4 hours. You believe by selling your self-produced crafts at craft markets you may make a profit of $Y to $Z per year. However, at this time, you have not drawn up a business plan or defined a clear marketing strategy in terms of which markets you will attend on a regular basis.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Reasons for decision

Carrying on a business

Under section 6-5 of the Income Tax Assessment Act 1997, an amount is assessable income if it is income according to ordinary concepts, which is called 'ordinary income'.

Amounts received from transactions carried out in the ordinary course of business, such as, the proceeds from the sale of trading stock, are normally considered to be ordinary income.

However, the pursuit of a hobby is not the carrying on of a business for taxation purposes and therefore money derived from the pursuit of a hobby is not regarded as income and therefore is not assessable.

Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? is a public ruling the Commissioner can use in all cases about determining whether a taxpayer is carrying on a business. Paragraph 39 of TR 97/11 states:

…a mere intention to carry on a business is not enough. There must be activity. Brennan J in Inglis v. FC of T 80 ATC 4001 at 4004-4005; (1979) 10 ATR 493 at 496-497 said that: 'The carrying on of a business is not a matter merely of intention. It is a matter of activity. ... At the end of the day, the extent of activity determines whether the business is being carried on. That is a question of fact and degree.'

In relation to 'activity', paragraphs 55 and 56 of TR 97/11 state:

The repetition of activities by the same person over a period of time on a regular basis helps to determine whether there is the 'carrying on' of a business. For example, in Hope the 'transactions were entered into on a continuous and repetitive basis', such that the taxpayer's activities 'manifested the essential characteristics required of a business'.

The taxpayer should undertake at least the minimum activities necessary to maintain a commercial quantity and quality of product for sale…. Where there are minimum levels necessary for this activity which the taxpayer fails to maintain, it may be that for a period the taxpayer has ceased to carry on a business…

TR 97/11 lists the following general indicators which have been developed by the courts of law, and are used to determine whether an activity constitutes the carrying on of a business:

• whether the activity has a significant commercial purpose or character;

• whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity;

• whether there is repetition and regularity of the activity;

• whether the activity is planned, organised and carried on in a businesslike manner;

• the size, scale and permanency of the activity; and

• whether the activity is better described as a hobby or form of recreation.

Paragraph 87 of TR 97/11 includes the following as indicators of a hobby:

• it is evident that the taxpayer does not intend to make a profit from the activity;

• losses are incurred because the activity is motivated by personal pleasure and not to make a profit and there is no plan in place to show how a profit can be made;

• the transaction is isolated and there is no repetition or regularity of sales;

• any activity is not carried on in the same manner as a normal, ordinary business activity;

• there is no system to allow a profit to be produced in the conduct of the activity;

• the activity is carried on a small scale;

• there is an intention by the taxpayer to carry on a hobby, a recreation or a sport rather than a business; and

• any produce is sold to friends and relatives and not to the public at large.

The above indicators are considered in combination and as a whole. Whether a business is being carried on depends on the general impression gained about the operations having a 'commercial flavour'.

In your case, based on the information you provided, the general impression is, at least for the current financial year, you are/will not be carrying on a business. This is because your activity appears to not have a significant commercial purpose (based on your profit projections) and because you appear to not have formulated a clear business plan about how much product you will produce and where and how often you will sell your craft (which does not demonstrate repetition and regularity of the activity and organisation in a businesslike manner). Further, you are looking for paid employment, which may affect the amount of activity you may undertake, if and when you find employment.

In short, the impression gained is your activity has features of a hobby (which you have conducted in the past, which included selling your craft to family, friends and for charity). Although your craft may be able to make a profit, the profit it can make in respect to your labour provided is far less than what you can earn in ordinary employment. Therefore, it appears highly likely you would choose employment over your craft. Whilst the financial return on your labour, alone, does not preclude your activity from being a business, your activity would need to display clear repetition and regularity of production and organised selling in defined markets to be a business.

To conclude, if your craft activity, in terms of both production and selling, becomes regular, organised and more certain (including having financial records that show the commerciality of your activity) you may apply for another private ruling in the future for those relevant future years.

Decline to rule

The Commissioner may decline (refuse) to make a private ruling (section 359-35 of Schedule 1 of the Taxation Administration Act 1953) where the Commissioner considers that correctly making a private ruling would depend on making an assumption about a future event or other matter.

In your case, for the years ending 30 June 2016 to 2019, inclusive, we consider there is insufficient information to correctly make a private ruling about your future craft activity. It follows if we did make a ruling, it would depend on making an assumption about a future event or other matter.

Australian Business Number

The Australian Business Register (ABR) allows you to apply for an Australian business number (ABN) and other tax registrations such as goods and services tax (GST). The best way to register for an ABN is via the ABR website at www.abr.gov.au.

The Australian Business Register does not impose a fee for applying for an ABN online or by paper application. If you consult a tax agent to complete an application for you they may charge a fee for their services. Otherwise, there is no cost (http://abr.business.gov.au/Faq.aspx#cost).

You must register for GST if you run a business or other 'enterprise' and your GST turnover is $75,000.

You are entitled to have an ABN if: (a) you are carrying on an enterprise in Australia; or (b) in the course or furtherance of carrying on an enterprise, you make supplies that are connected with Australia. A hobby activity is excluded from being an enterprise.

In your case, we consider your current craft activity is not a business or an enterprise and still has certain features of a hobby. It follows, for the year ended 30 June 2015, you are not entitled to have an ABN.