Edited version of your written advice

Authorisation Number: 1012730135187

Ruling

Subject: Gold fossicking

Question 1

Are you carrying on a business of fossicking?

Answer

No.

Question 2

Are items found when conducting a hobby assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 3

Will any capital gain you make on the disposal of an item found, where the first element of the cost base of the item exceeds $10,000, be disregarded under subsection 118-10(3) of the ITAA 1997?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 2015

The scheme commenced on

1 July 2014

Relevant facts and circumstances

For the past few years you have taken two or three weeks leave from your regular occupation to holiday and fossick.

You have current miner's rights which enable you to fossick on crown land and keep what is discovered.

On one of these holidays you located and recovered large amounts of items some of which may exceed $10,000 in value.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-5

Income Tax Assessment Act 1997 Section 108-5

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

Income Tax Assessment Act 1997 Section 109-5

Income Tax Assessment Act 1997 subsection 112-20(1)

Income Tax Assessment Act 1997 Subsection 118-10(3)

Income Tax Assessment Act 1997 Section 960-400

Income Tax Assessment Act 1936 Section 160B

Reasons for decision

Am I in business?

The question of whether a business is being carried on is a question of fact and degree to be determined on a case by case basis. The courts have developed a series of indicators to determine the matter, which are summarised in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11). Although this ruling specifically refers to primary production, the same principles apply to all businesses. Some indicators of carrying on a business which the courts have considered to be relevant include:

• 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, although some of the indicators above are affirmative the overall impression gained is that your fossicking is a hobby.

Consequently it is considered that your activities amount to that of a hobby and the income from that activity is not assessable under section 6-5 of the ITAA 1997 and any loss or outgoing is not deductible under section 8-1.

Capital gains tax (CGT) Asset

A capital gain or capital loss is made when a CGT event happens to a CGT asset you own section 102-20 of the ITAA 1997. A capital gain is made if the amount received (called capital proceeds) from the disposal exceeds the cost base (the cost of the asset and certain other costs associated with acquiring, holding and disposing of the asset) of the CGT asset. The capital gains provisions may apply whenever a CGT event happens.

CGT event A1 occurs when a disposal contract is entered into, or if there is no contract, when an entity stops being an asset's owner (section 104-5 of the ITAA 1997). The time of the event is when you enter into the contract for the disposal of the asset, or if there is no contract, when the change of ownership occurs.

A CGT asset is defined in section 108-5 of the ITAA 1997 and includes any kind of property or a legal or equitable right that is not property.

CGT assets fall into one of three categories:

• collectables

• personal use assets, or

• other assets.

All assets are subject to the CGT rules unless they are specifically excluded. Capital assets acquired before 20 September 1985 are exempt assets. 

Personal use asset

A personal use asset is:

• a CGT asset, other than a collectable, that you use or keep mainly for your personal use or enjoyment

• an option or a right to acquire a personal use asset

• a debt resulting from a CGT event involving a CGT asset kept mainly for your personal use and enjoyment, or

• a debt resulting from you doing something other than gaining or producing your assessable income or carrying on a business.

ATO Interpretative Decision ATO ID 2003/451 concludes that some items are 'personal use assets' under subsection 108-20(2) of the ITAA 1997, if they are collected while pursuing a hobby and not used in the course of carrying on a business or profit making activity.

This is confirmed in Favaro v. FC of T (1996) 34 ATR 1; 96 ATC 4975 (Favaro) when Branson J held that Italian currency which was converted to Australian currency was not a 'personal use asset' as defined in subsection 160B(1) of the Income Tax Assessment Act 1936 (ITAA 1936). In making this decision Branson J accepted the Commissioner's argument 'that the expression "personal use" is used in section 160B of the ITAA 1936 in contradistinction to use for business or profit making purposes'.

The word 'contradistinction' means distinction by contrast or opposition (The Australian Oxford Dictionary, 1999, Oxford University Press, Melbourne). Therefore, an asset that is not used for business or profit making purposes is, by default, used or kept mainly for personal use and enjoyment. The two categories are mutually exclusive.

CGT event for a personal use asset

If the first element of the cost base of a personal use asset is $10,000 or less, any capital gain is disregarded (subsection 118-10(3) of the ITAA 1997). Capital losses from personal use assets are also disregarded.

Acquisition of a CGT asset

Section 109-5 of the ITAA 1997 provides the acquisition rules for CGT assets and sets out the specific rules that apply to each event number. In general you acquire a CGT asset when you become its owner or as a result of a CGT event happening.

Market value substitution rule

The market value substitution rule in subsection 112-20(1) of the ITAA 1997 states, that where an asset is acquired by you and you did not incur expenditure to acquire it, the first element of the cost base is the market value of the asset at the time of acquisition.

The term 'market value' is defined by section 960-400 of the ITAA 1997 which states that the term has its ordinary meaning.

Ownership of minerals

At common law, the surface owner's rights extend downwards sufficiently to permit extraction of minerals, and to preclude others from interfering with minerals and geothermal resources. Usually, the Crown reserves the rights to minerals when granting land.

Application to your circumstances

Personal use asset

In your case it is considered that you found the items pursuing a hobby and not in the course of carrying on any business or profit making activity.

As such, in accordance with the reasoning found in Favaro, it is considered that the items you found are personal use assets under paragraph 108-20(2)(a) of the ITAA 1997. If the first element of the cost base of the items is less than $10,000 any capital gain you may make on disposal of that item is disregarded under subsection 118-10(3) of the ITAA 1997.

Cost base of the item

The Crown owns the rights to the items. When you found the items, a change of ownership occurred. You therefore acquired the items from the Crown when you found them.

You did not incur any expenditure in acquiring the items rather any expense that you did incur was either in the purchase of a fossicker's license or in relation to your hobby activities. The market value substitution rule therefore applies to your acquisition of the items. You have to establish the market value of the items at the time of finding them:

• If this value is $10,000 or less the exemption for personal use assets will apply and there will be no capital gains tax payable when those items are sold.

• If this value is greater than $10,000 the exemption for personal use assets will not apply and these sales will be subject to capital gains on the difference between the cost base (the value at the time of finding) and the sale price.