Edited version of your written advice

Authorisation Number: 1012843176510

Date of advice: 17 July 2015

Ruling

Subject: Am I in Business - making certain items out of a wood product

Question 1:

Are you carrying on a business of making certain items out of a wood product?

Answer 1:

No.

This ruling applies for the following periods:

Year ended 30 June 2015

Year ended 30 June 2016

Year ended 30 June 2017

Year ended 30 June 2018

Year ended 30 June 2019

Year ended 30 June 2020

The scheme commences on:

1 January 20XX.

Relevant facts and circumstances

Sometime in 20XX you commenced a hobby interest of making certain items out of a wood product.

You are older and your main source of income is a government pension. You have no intention of increasing your activity as this would jeopardise your entitlement to your pension.

You have no intention to engage in business so as to make a living. Your interest in making the items is about keeping you busy.

You have always considered your activity as a hobby, however you had a home visit from an Australian Taxation Officer sometime in 20XX and that person advised you that as soon as you commenced selling your items to members of the public that you were conducting a business. Based on that advice you obtained an ABN and started lodging income tax returns including information (income and expenses) in relation to your activity.

Your activity is carried out on a small scale; you have either made losses or made a small profit in all of the years since the year ended 30 June 20XX.

You only plan to continue the activity for either another two or five years given your current age. It is best described as something to keep you busy whilst on your pension.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 sub-section 6-(1)

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Question 1

Summary

You are not carrying on a business of making certain items from a wood product.

Detailed reasoning

Carrying on a business

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 case of Evans v. Federal Commissioner of Taxation 89 ACT 4540; (1989) 20 ATR 922 stated that whether or not an activity amounts to carrying on business for taxation purposes is a question of fact. There is no exhaustive or determinative definition which can be applied to determine this matter. Martin v. Federal Commissioner of Taxation (1953) 90 CLR 470; (1953) 10 ATD 226; (1953) 5 AITR 548, however, provides that the tests for determining whether or not a business is being carried on is both subjective, which considers the individuals purpose at the relevant time, and objective, which considers the nature and extent of the activities undertaken.

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 gained.

Application to your circumstances

In your case you have a personal interest, a passion for making certain items out of a wood product. It is undertaken in your own home and has never been carried out as business activity. You have never carried out the activity to make a profit but rather for something to keep you busy whilst on your pension.

The activity has made consistent losses apart from a small profit in the year ended 30 June 20YY. It is carried out on a small scale.

Based on the information you have provided we do not consider that the activity has the necessary characteristics of a business for taxation purposes. Therefore, any income you received in relation to this activity for the years ended 30 June 20ZZ will not be assessable under section 6-5 of the ITAA 1997 as ordinary income. In addition, any expenses that you incurred in relation to this activity will not be deductible under section 8-1 of the ITAA 1997.

Future years

Your activity has been described as a hobby; however you can change from conducting an activity as a hobby to that of being in business and vice-versa over time, as your level of activity changes. Therefore you should evaluate your level of activity on a regular basis to see whether you are conducting a hobby or carrying on a business. For the years ended 30 June 2016 to 30 June 2020 inclusive, provided that your activity continues in a similar way as in previous years, it will continue to be considered a hobby.