Edited version of your written advice

Authorisation Number: 1051450853832

Date of advice: 2 November 2018

Ruling

Subject: Are you carrying on a business

Question

Were you carrying on a business in the 2017 income tax year?

Summary

You did not carry on a business in the 2017 income tax year.

This ruling applies for the following period:

1 July 2016 to 30 June 2017

The scheme commences on:

1 July 2016

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You were the owner of x% of the shares in Head Co. Head Co was the owner of shares in a number of subsidiary companies (Head Co group).

The Head Co group is a collection of innovative specialised services companies providing highly skilled solutions for all aspects of electrical power projects and hazardous area installations.

Sub Co is a wholly owned subsidiary of Head Co. Head Co engaged your services. These services included:

● the recruitment and location of electrical engineers to be engaged by Sub Co in providing its services throughout Australia;

● facilitating the mobilisation of employees and engineers for Sub Co, including the organisation or immigration and other administrative requirements;

● preparing and negotiating employment contracts on behalf of Sub Co, to be implemented with the employment of engineers; and

● the facilitation of housing and other accommodation for employees of the business when required to live away from home.

Your main business activity may be summarised as facilitating the recruitment and placement of employees in the electrical engineering field.

You engaged only one employee, X, to provide the services. Because your income is mainly a reward for X’s personal efforts or skills, it is personal services income.

X had a number of university level qualifications in relation to applied physics.

Before working for you, X had multiple roles in the energy and resources industry.

You provided the services when Sub Co commenced operations in A income year through to B income year. Monthly invoices were issued to Sub Co for the provision of services as a HR/Office/Procurement/Project Delivery Manager. The invoices show that a flat daily rate, Mondays to Fridays, were charged for the provided services.

Sub Co was your only client.

You state Sub Co is the only client due to the nature of the industry in which you operate, which is highly competitive and very transparent. Any attempts to approach other companies in the same industry (ie Sub Co’s competitors) would have been extremely damaging to the relationship with Sub Co and would have likely resulted in the loss of any continuing work.

Your income fluctuated over the period during which the services were provided. During the downturn in the mining industry, fewer recruitment placements were required. Hence, the need for the services also reduced.

You were required to incur substantial expenses in performing the services for Sub Co and satisfying the obligations under the business services agreement. These expenses included travel and accommodation; motor vehicle costs; and other expenses associated with the identification, recruitment and facilitation of staff.

You maintained records of your activities to enable lodgement of Business Activity Statements and annual financial statements.

After a number of years in a difficult and stressful industry, you decided you would dispose of your interest in Head Co and cease providing services to Sub Co. You disposed of this shareholding during the income year ended 30 June 201A. You continued to provide services to Sub Co up until the date that you sold your shares in Head Co.

Relevant legislative provisions

Income Tax Assessment Act 1997, subsection 87-15(2)

Income Tax Assessment Act 1997, subsection 87-15(3)

Income Tax Assessment Act 1997, section 87-18

Income Tax Assessment Act 1997, section 87-20

Income Tax Assessment Act 1997, section 87-25

Income Tax Assessment Act 1997, section 87-30

Income Tax Assessment Act 1997, subsection 995-1(1)

Public Rulings (including Determinations)

Taxation Ruling IT 2121

Taxation Ruling IT 2330

Taxation Ruling IT 2639

Taxation Ruling TR 97/11

Taxation Ruling TR 2001/7

Taxation Ruling TR 2011/6

Case Law

Tupicoff v. FCT 84 ATC 4851

Reasons for Decision

Question

Were you carrying on a business in the 201A income tax year?

Summary

You did not carry on a business in the 201A income tax year.

Detailed reasoning

The definition of ‘business’ is provided at subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) as:

“…includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee.”

You provided recruitment and placement services to Sub Co, which is a wholly owned subsidiary of Head Co. You had an x% shareholding in Head Co.

Your sole employee that provided the recruitment services was X. It was through X’s personal efforts or skills that your income was derived. As the income is derived from an individual’s personal efforts, the income is personal services income (PSI). Your only client was Sub Co. Although you view the income derived from X’s personal efforts or skills as PSI, you contend that you were also carrying on a business.

Personal services entity

Division 87 of the ITAA 1997 provides guidance on what a personal services business is and how to determine if an individual or personal services entity (PSE) (company, partnership or trust) is conducting a personal services business.

The object of Division 87 of the ITAA 1997 is to define personal services businesses in a way that ensures that it covers genuine businesses but not situations that are merely arrangements for dealing with the personal services income of individuals.

Subsection 87-15(2) of the ITAA 1997 provides four personal services business tests which are:

● The results test

● The unrelated clients test

● The employment test

● The business premises test

However, subsection 87-15(3) of the ITAA 1997 provides that if 80% or more of an individual’s PSI during an income year is income from the same entity, then the income is not taken to be from conducting a personal services business and the other tests in subsection 87-15(2) do not need to be considered, besides the results test.

You derive your income from the personal efforts and skills of X. All of X’s PSI is derived from the one client, Sub Co.

The results test in section 87-18 of the ITAA 1997 requires at least 75% of the PSE’s personal services income to be from the production of a result, and that the PSE provides the plant and equipment or tools of trade to perform the work to produce the result, and the individual is liable for the cost of rectifying any defect in the work performed.

Invoices issued by you indicate that a flat daily rate was charged for the services of X as a HR/Office/Procurement/Project Delivery Manager. The results test has already been failed as none of X’s PSI can be said to be for the production of a result.

As all of your income is derived from the one client and the results test has been failed, then you are not a personal services business.

Taxation Ruling IT 2639

Taxation Ruling IT 2639 Income tax: personal services income (IT 2639) consolidates the views of the Commissioner on the concept of income derived from rendering personal services and sets out factors for determining whether particular income constitutes income derived from personal services.

IT 2639 provides the following relevant paragraphs:

“3. "Income from personal services" is income that an individual taxpayer earns predominantly as a direct reward for his or her personal efforts by, for example, the provision of services, exercise of skills or the application of labour. The inclusion of predominantly in this definition allows for the situation where personal services involve the use of some equipment, for example the drawing board of an architect.

5. The concept of income from personal services is to be contrasted with the term "income from personal exertion" as defined in subsection 6(1). That definition includes income consisting of earnings, salaries, wages, commissions, fees, bonuses, pensions, superannuation allowances, retiring allowances and retiring gratuities, allowances and gratuities received in the capacity of employee or in relation to any services rendered, the proceeds of any business carried on by the taxpayer either alone or as a partner with any other person,... and so on. As can be seen, the concepts of income from personal services and income from personal exertion may overlap but are not coextensive.

B. Factors for Identifying Income from Personal Services

8. Whether a taxpayer derives income from rendering personal services is a question of fact and degree to be determined in the circumstances of each case. The crucial issue is the extent of the connection between the income concerned and the services rendered by the particular taxpayer involved. The following factors need to be considered in determining whether a taxpayer derives income from personal services, though no one factor is determinative.

a. The nature of the taxpayer's activities

The activities of salary and wage earners and professionals practising on their own account clearly generate personal services income. Radiologists or pathologists who operate on their own account, however, often employ many technical staff and operate an array of technical equipment. Their income is generated from the business structure rather than from their rendering of personal services. The activities of consultants, salespersons, journalists, life insurance agents and tradespersons are also likely to give rise to income from personal services. These examples are far from being exhaustive.

b. The extent to which the income depends upon the taxpayer's own skill and judgment

The more the income producing activities involve the exercise of the taxpayer's own skill and judgment the more probable it is that the income will be derived from personal services rather than from the business structure.

c. The extent of the income producing assets used to derive the income

The more substantial the income producing assets employed within a practice the more likely it is that the income of the practice will be derived from the business structure rather than from the rendering of personal services. For example, the array of equipment used by radiologists and pathologists may often suggest that their income is being derived from the business structure. However, minor equipment such as the drawing board of an architect or the heart monitor/blood pressure machine of a medical practitioner would not suffice to change what would otherwise be personal service income into income from the business structure. The expression "income producing assets" is used in this context to include any investment of the practice in tangible business assets such as premises, fixtures and fittings, plant, equipment and industrial or intellectual property (whether owned or leased). However, the significance of these assets would have to be weighed against their relevance to the derivation of income - given the other factors mentioned in this paragraph.

d. The number of employees and others engaged

The more substantial the number of employees, practitioners or technicians used in a practice the more probable it is that the income is derived from the business structure rather than from the rendering of personal services (see Henderson v. F.C. of T. 70 ATC 4016; (1970) 1 ATR 596). For example, large accounting and legal firms with tens, or even hundreds, of practitioners but without extensive or substantial equipment would also be considered to be generating their income from their business structure.

The factors in paragraph 8 of IT 2639 illustrate how you derive all your income from X’s personal efforts or skills rather than from a business structure. Examples of this include:

● X operated on his own account and did not employ anyone to assist in the derivation of income.

● Your income is derived entirely from X’s personal efforts or skills.

● You did not have any substantial income producing assets.

Taxation Ruling TR 2001/7

TR 2001/7 Income tax: the meaning of personal services income (TR 2001/7) explains the meaning of personal services income contained in Division 84 of Part 2-42 of the ITAA 1997.

You have quoted paragraph 34 of TR 2001/7 which states:

“34. Section 84-10 ensures that the application of the alienation measure (Part 2-42) to an individual does not make the individual an employee. The application of the alienation measure does not result in a change in the nature of contractual relationships between parties to an arrangement involving the rendering of personal services. Nor does the operation of Part 2-42 affect an individual's or a personal services entity's entitlement to an Australian Business Number, or entitlement to be registered for the purposes of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).”

You have relied on paragraph 34 of TR 2001/7 to demonstrate that an entity’s activities can still constitute a business even if that business results in the derivation of PSI.

This paragraph is not applicable to your circumstances. As discussed earlier, although you had a contract to provide X’s services to Sub Co, it is considered that the substance of this arrangement was such that you were not carrying on a business. It has been established that you were not a personal services business as the income was all derived from X’s personal efforts and skills, and it was all sourced from one client who was associated with X and you.

TR 2011/6

TR 2011/6 Income tax: business related capital expenditure - section 40-880 of the Income Tax Assessment Act 1997 core issues (TR 2011/6) sets out the Commissioner's views on the interpretation of the operation and scope of section 40-880 of the ITAA 1997. One of the requirements is that a business is being carried on before section 40-880 of the ITAA 1997 expenditure can be deducted. You have relied on paragraph 56 of TR 2011/6 which states:

“56. However, a taxpayer that is a 'personal services entity' (company, partnership or trust) which carries on business and is in receipt of personal services income may be entitled to a deduction under section 40-880, even though it does not meet any of the 'personal services business tests' and has not received a 'personal services business determination'.”

However, it is considered that this paragraph is not applicable as whether a personal services entity (You) is carrying on a business, is a question of fact. As explained earlier, it is considered that you were not carrying on a business so this paragraph is not applicable to you.

The facts of this case, where you were providing the services of X to a single client, is discussed in Taxation Ruling IT 2121 Income Tax: family companies and trusts in relation to income from personal exertion (IT 2121).

Taxation Ruling IT 2121

IT 2121 was issued as a result of the decision by the Federal Court of Australia handed down on 21 November 1984 in the case of Tupicoff v. FCT 84 ATC 4851.

IT 2121 provides the following relevant paragraphs:

“2. In recent times there has been a significant increase in the creation of family companies and trusts designed to obtain the income tax advantages flowing from the splitting of income derived from the personal exertion of a family member. The practice has extended to most industries and many taxpayers who were formerly deriving income from the rendering of personal services in the mining, computer, insurance, motor vehicle, real estate and entertainment industries are now purporting to be employees of a family company or trust. In a number of cases drawn to the attention of this office a taxpayer has ceased employment on one day and arrived at the former employer's premises the following day to do the same work, not as an employee of the former employer but as an employee of a family trust that has contracted to provide the taxpayer's services to the former employer.

3. A form of the arrangements commonly encountered involves a taxpayer who had been deriving salary and wage income forming a family company of which he and his wife are directors and the company becoming a trustee of a family trust of which the taxpayer's wife and children are beneficiaries. The family company, in the capacity of trustee, engages the taxpayer as an employee. The trustee will then negotiate with the taxpayer's former employer for the provision of the taxpayer's services to the former employer. The amount which would otherwise be paid to the taxpayer as salary and wages will be paid to the trustee who, in turn, will pay the taxpayer a salary which is generally much lower than he had previously received and distribute the balance to family members according to the trust arrangements

10. Moreover, looking at the substance of these arrangements, the interposed entity is not itself carrying on a business. The income which it purports to derive comes wholly, or almost wholly, from the work done by the taxpayer and that work is largely confined to work for the employing firm. In a practical sense, to say nothing else, the taxpayer works as an employee of the former employer…

14. The above views have been expressed in relation to situations where a family company or trust is interposed between a taxpayer and a former employer and the taxpayer continues to work for the former employer. The same view would be taken if, when arrangements are made for a taxpayer's personal employee-like services to be provided to a firm, the taxpayer has in, or brings into existence and works through an interposed company or trust that is a vehicle by which the resulting remuneration is split with family members.”

The principle behind this is that having an interposed entity does not of itself, mean the interposed entity is carrying on a business. The form of the arrangement may indicate as such but the substance of the arrangement needs to be evaluated to determine if the interposed entity is carrying on a business. Although the interposed entity is contracted with the service acquirer, it needs to be determined who is providing the service. It is less likely that the interposed entity is carrying on a business if the income being derived entirely, or almost entirely, is from the services provided by an individual and that is mostly confined to services to the service acquirer, and not from income producing assets or goodwill.

You are an example of this arrangement. Your income is derived from the services provided by X. You did not utilise any income producing assets to derive your income. X’s services were provided to the one client, Sub Co. Although you contracted to provide services to Sub Co, the substance of this arrangement was such that you were not carrying on a business as all the income was derived from X’s personal services.

The Commissioner is of the view that X’s role was more of an employee to Sub Co and that you did not derive any income apart from X’s personal efforts and skills provided to Sub Co. As a consequence, the Commissioner is of the view that you were not carrying on a business in your own right.

Taxation Ruling IT 2330

IT 2330 Income Tax: Income Splitting (IT 2330) restates the Commissioner’s approach in determining the income tax consequences attaching to arrangements which seek to avoid income tax through the splitting of income. There is a section in IT 2330 which summarises IT 2121. In addition it contrasts income derived from the rendering of personal services as opposed to income derived from the use of income producing assets, or income produced from staff employed in a business. IT 2330 includes the following relevant paragraphs:

“33. Taxation Ruling No. IT 2121 deals particularly with the use of family trusts and companies as a means of splitting income from the rendering of personal services and of reducing the amount of income tax which might otherwise have been payable. It is stated in the Ruling that arrangements of this nature would attract the operation of either section 260 or Part IVA depending upon whether the arrangements were entered into prior to or subsequent to 27 May 1981.

34. The decisions in the doctors' cases provide strong support for the views expressed in the Ruling. Gibbs C.J. has made it clear that the Income Tax Assessment Act does not permit a taxpayer the opportunity to have his own income from personal exertion taxed as though it were income derived by a trust and held for the benefit of a number of beneficiaries, i.e. the choice principle does not extend to arrangements for the splitting of income from personal services. Furthermore, the doctors' cases and the Millard and Hollyock cases illustrate that, where the income of a business is produced predominantly by the personal services of one person, any arrangement entered into for the splitting of the income will not involve a simple disposition of income producing assets in the sense contemplated in the Purcell case. The reason for this is, of course, that where a person's remuneration is the product of his or her personal services, all that can be disposed of are future receipts - there are not any income producing assets of the nature of those in the Purcell case.

35. In the light of the various decisions there appears to be only one test for determining whether arrangements entered into for the splitting of income from personal services attract the operation of section 260, i.e. whether the arrangements are explicable by reference to ordinary business or family dealing and any avoidance of tax is an inessential or incidental feature of the arrangements. The various decisions indicate, however, that it is not possible in the generality of arrangements for the pre-tax splitting of income from personal services to discern any significant business or commercial purpose for them and that, in fact, the one significant discernible purpose for them is the reduction or avoidance of tax which follows from the splitting of the income.

36. In this context income derived from the rendering of personal services means what it says, i.e. it is income which flows directly or predominantly from skills, services, etc. personally rendered. The use of the word "predominantly" is necessary to provide for the situation where the personal services involve the use of some equipment, e.g. the drawing board of an architect. The equipment involved in these cases is not of the same significance as the income producing assets in the Purcell case. Salary and wages is the clearest example of income derived from the rendering of personal services. Income derived by a professional person who practises on his or her own account without professional assistance is another example.

37. Not all income derived by professional people from the conduct of their professions can be said to be derived from the rendering of personal services. There are many large professional firms, e.g. accountants, engineers, architects, solicitors, etc. whose income is produced by the staff employed by them. In Henderson v. FCT 70 ATC 4016: 1 ATR 596, for example, Barwick C.J. drew a distinction between the income of a professional practice carried on by a taxpayer personally and the professional firm of which Henderson was a partner and which employed some 295 persons. In FCT v. Everett 80 ATC 4076: 10 ATR 608 the majority of the High Court expressed the view that the income of the taxpayer from a large legal partnership was not income from personal exertion in the same sense as the expression has been used in cases such as the doctors' cases, etc…

38. The Court went on to say in the Everett case that it is not true of partners in general that they derive their income from personal exertion. On the other hand, in the doctors' cases the Court was clearly of the view that the character of the income involved in each case was income from personal exertion notwithstanding that there were partnerships involved. For the purposes of this Ruling partnership income will be treated as income from the rendering of personal services where it results from the personal services of the partners and not from the efforts of employees and/or income producing assets of the type illustrated by the Purcell case. In practice it is expected that it will be partnerships providing professional services which will be affected by this Ruling.

39. It is not practicable at this time to state with any greater precision the circumstances in which a taxpayer may be said to be in receipt of income from the rendering of personal services. It cannot be said, for example, that the income of a business or profession will be considered to be income from the rendering of personal services if there are less than x number of employees or if there is a certain ratio between proprietorship and staff. Questions of degree, the nature of the business activity, etc. must enter into consideration.

40. There is nothing in the cases to suggest that a person who is carrying on business, the income of which is derived from the person's personal services, cannot incorporate the business. Where incorporation is explicable as an ordinary commercial or business step to take and does not result in any splitting of the income from personal services, and the incorporated business activity is conducted along normal business lines (see paragraph 13), it will be acceptable for income tax purposes. The fact that the company may be able to obtain greater income tax concessions in providing superannuation benefits than would have been the case if the business had not been incorporated would not attract the operation of section 260 or Part IVA.”

Your income is derived from the personal services provided by X. X’s services as a HR/Office/Procurement/Project Delivery Manager did not involve any significant income producing assets. Additionally, X was your only employee, so you did not derive income from a business structure involving a number of employed staff.

You have relied on parts of paragraph 40 of IT 2330 to contend that a taxpayer can carry on a business which results in them deriving personal services income and have quoted the following:

“40. There is nothing in the cases to suggest that a person who is carrying on business, the income of which is derived from the person's personal services, cannot incorporate the business. (Emphasis added by you)”

Paragraph 40 of IT 2330 in its entirety states:

“40. There is nothing in the cases to suggest that a person who is carrying on business, the income of which is derived from the person's personal services, cannot incorporate the business. Where incorporation is explicable as an ordinary commercial or business step to take and does not result in any splitting of the income from personal services, and the incorporated business activity is conducted along normal business lines (see paragraph 13), it will be acceptable for income tax purposes. The fact that the company may be able to obtain greater income tax concessions in providing superannuation benefits than would have been the case if the business had not been incorporated would not attract the operation of section 260 or Part IVA.”

There is nothing preventing a person carrying on a business deriving income from their own personal services, from incorporating their business. Notwithstanding the income splitting concept, the question is whether the person was actually carrying on a business.

You were not carrying on a business as the income derived was from the services provided by X. X’s services were provided to the one client, Sub Co. Furthermore, the income was not derived from income producing assets nor a business structure involving a number of employed staff.

TR 97/11

TR 97/11 Income tax: am I carrying on a business of primary production (TR 97/11) considers the meaning of ‘business’ of ‘primary production’ in the Income Tax Assessment Act 1997. It provides a guide to the indicators that are relevant to whether or not a person is carrying on a business of primary production. Although this ruling is targeted to primary production activities, it is accepted that these indicators are no different, in principle, from the indicators as to whether activities in any other area constitute the carrying on of a business.

The indicators of whether a business is being carried on, as provided by TR 97/11, are:

● Significant commercial purpose or character

● Intention of the taxpayer

● Prospect of profit

● Repetition and regularity

● Is the activity of the same kind and carried on in a manner that is characteristic of the industry

● Organisation in a businesslike manner and the use of system

● Size or scale of the activity

● Hobby or recreation

Significant commercial purpose or character

You contend that the level of income derived by you in each income year from A to B was substantial. Substantial expenses were also incurred in these income years in performing the required services.

The Commissioner is of the view that X was an employee of Sub Co, and that you did not generate any income outside of that derived from X. The Commissioner considers the following to support this view:

● The income derived from X’s services was entirely from his personal efforts and skills.

● There were no substantial income producing assets used to derive the income.

● X was your only employee.

● Sub Co and you are related parties. You had an x% shareholding in Head Co, which Sub Co is a subsidiary of.

● Income was derived from only the one client, being Sub Co. You contend that you had already reached capacity in servicing Sub Co and that it would be damaging to the relationship with Sub Co if additional work was sought from other clients, being Sub Co’s competitors and that continuing work with Sub Co could be lost as a result.

The above indicate that there was no commerciality in your activities. Although you had a contract to provide X’s services to Sub Co, it is considered that the substance of this arrangement was such that it was X’s personal services that derived the income, rather than any commercial business structure that is contended by you to be.

Intention of the taxpayer and Prospect of profit

You contend that you commenced a business facilitating the recruitment and placement of employees in the A income year until sometime in the B income year when the business ceased. You contend the level of income and length of time for your activities confirms that there was more than a mere intention to carry on a business.

You contend that your intention was clearly to make profits from the services you provided. Profits were made by you in each year of operation.

It is acknowledged that you engaged in activities, being X’s services provided to Sub Co. However, the Commissioner is of the view that X was an employee of Sub Co and the profit you contend that the you made was used as a vehicle to distribute X’s PSI, and was merely X’s salary less expenditure X incurred.

Repetition and regularity

You contend that you provided your services on a continuous, regular and repetitive basis from the A income year to the B income year. You contend that you engaged in the activities with the purpose of making a profit on a continuous and repetitive basis.

The Commissioner acknowledges you provided your services on a continuous, regular and repetitive basis as evidenced by the monthly invoices issued.

Is the activity of the same kind and carried on in a manner that is characteristic of the industry

Paragraph 64 of TR 97/11 states:

“64. In considering this indicator the following factors might be compared with the characteristics of others engaged in the same type of business:

- the volume of sales. If there is a small number of sales it is less likely that a business is being carried on. The volume of sales should be capable of producing a profit at some time. However, allowance is made for droughts, fires and other uncontrollable events which may effect the volume of sales. We also accept that in the early stages of an activity, sales may be low;

- the types of customers the taxpayer sells his/her product to - wholesalers, retailers, the public at large, or friends or relatives - and the manner in which this marketing takes place;

- the sort of expenses incurred by the taxpayer;

- the amount invested in capital items;

- previous experience of the taxpayer. A taxpayer who does not have any knowledge or experience may be expected to have sought advice from experts. However, it is recognised that a taxpayer may be a pioneer in the industry. The taxpayer may have conducted research into the activity, decided that the traditional approach is wrong. He/she may be trying to conduct the activity with a view to profit in a new but businesslike way; and

- the activity should also be compared with that of a keen amateur. The sales of a keen amateur may only be a way of obtaining 'new' funds to continue with the personal interest.”

You contend that you provided your services in a manner that is consistent and customary with other entities operating similar service businesses. You stated that your income fluctuated over the period during which the services were provided. An example of this is during the downturn in the mining industry, fewer recruitment placements were required by Sub Co. Because the need for your services was reduced, the activities and income also reduced during this downturn period. You were required to incur substantial expenses in performing the services for Sub Co and satisfying the obligations under the business services agreement.

The Commissioner is of the view that the relationship between you with X’s personal services, and Sub Co, is a factor that your activities were not of the same kind nor carried on in a manner that is characteristic of the industry. You had an x% shareholding in Head Co which Sub Co is a subsidiary of. X, through you, was providing services to a related party. X’s role is more of an employee of Sub Co. There is further support for this view by the fact that your activities and income are tied to the activity levels of Sub Co.

Organisation in a businesslike manner and the use of system

Paragraph 68 of TR 97/11 provides that a business is characteristically carried on in a systematic and organised manner rather than on an ad hoc basis. You contend that you had record keeping systems that would be consistent with a business. This includes such things as:

● Having an ABN and being registered for GST

● Raising tax invoices on a regular basis

● Retaining records of expenditure

● Preparing and lodging Business Activity Statements and remitting the net GST amounts to the ATO

● Preparing full and accurate financial statements on an annual basis

● Lodging tax returns disclosing all business income and expenses

The Commissioner acknowledges the prudent and systematic organisation of your activities in regards to your record keeping and lodgement obligations.

Size or scale of the activity

Paragraph 77 of TR 97/11 provides that a person may carry on a business though in a small way. You contend that you derived substantial income and incurred substantial expenditure in operating its business.

The Commissioner acknowledges that substantial income and expenses were generated from your activities. However, a critical factor is that you generated the income and expenses from the one client, Sub Co, and all the income was generated from the personal efforts and skills of X. There were no substantial income producing assets or business structure in place to generate your income. The Commissioner is of the view that you were used as a vehicle to distribute X’s PSI and you were not carrying on any business in your own right.

Hobby or recreation

You contend that your activities are not consistent with a hobby or similar personal pursuit. The Commissioner agrees with this contention.

Conclusion

Paragraph 16 of TR 97/11 states that the indicators of whether a business is being carried on must be considered in combination and as a whole. It is considered the key indicator of those listed above is ‘significant commercial purpose or character’.

You did not exhibit any significant commercial purpose or character. You provided services for the facilitation of the recruitment and placement of employees in the electrical engineering field. The services were provided to the one client, Sub Co, as approaching other clients, being Sub Co’s competitors, would damage the relationship with Sub Co and likely resulted in the loss of continuing work. Additionally, Sub Co and you were related parties. You had an x% shareholding in Head Co, which Sub Co is a subsidiary of.

The restriction of you being unable to source other clients as it would damage your relationship with Sub Co, which coupled with the fact that Sub Co is a related party, indicates there was no commerciality in your activities to provide services.

You are not considered to have carried on a business as you did not exhibit any commerciality in your activities. This is in addition to the fact that all of the income is derived from X’s personal services. Although the legal form of the arrangement was for you to provide services to Sub Co, the substance of this was that you were not carrying on a business.