| Disclaimer This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law. You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4. |
Edited version of your written advice
Authorisation Number: 1051461012467
Date of advice: 29 November 2018
Ruling
Subject: Royalty payments
Question 1
Are you carrying on a business for tax purposes?
Answer
No.
Question 2
Are the royalty payments assessable income?
Answer
Yes.
Relevant facts
You own a small property. The property was purchased after 1985.
You have never used the property for a business.
During the 2017-18 income year you sold materials sourced from your property to an entity and received royalty payments.
You have no involvement in the extraction of the materials.
You did not advertise to sell and materials and had no intention to operate a business.
The materials sales will not continue in any future income years.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 995.
Reasons for decision
Carrying on a business
Business is defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) to be ‘any profession, trade, employment, vocation or calling, but does not include occupation as an employee’.
The question of whether a business is being carried on is a question of fact and degree. The courts have developed a series of indicators that are applied to determine the matter on the particular facts.
Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? outline some factors that indicate whether or not a business is being carried on. No individual factor is determinative, but should be weighed up in conjunction with the other factors.
In the Commissioner's view, the factors that are considered important in determining whether a business is being carried on 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.
In your case, the activities do not have a commercial purpose with an intention to operate a business. You are not involved in the material extraction activities.
After weighing up the relative business indicators and objective facts surrounding your case it is considered that you are not carrying on a business for taxation purposes.
Royalties
Under section 15-20 of the ITAA 1997 your assessable income includes an amount that you receive as or by way of royalty within the ordinary meaning of “royalty” (disregarding the definition of royalty in section 995-1) if the amount is not assessable as ordinary income under section 6-5.
In your case the royalty payments for the extracted materials are not regarded as ordinary assessable income, however the payments are assessable income under section 15-20 of the ITAA 1997.
Therefore you will need to lodge a tax return for the 2017-18 income year.