Edited version of private advice

Authorisation Number: 1051650764234

Date of advice: 3 April 2020

Ruling

Subject: Am I in business

Question 1

During the 20XX to 20XX financial year were you considered to be carrying on a business in relation to your activity?

Answer

No

Question 2

Will the Commissioner exercise the discretion in paragraph 35-55(1)(a) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your activity in your calculation of taxable income for the 20XX to 20XX financial year?

Answer

Not applicable

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

On 1 July 20XXyou commenced an operation in the AAA, BBB and CCC Districtsof State A.

You also hold employment as a DDD.

You are the sole owner, manager and operator of the operation.

You have composed a business plan and performed market research which has identified a gap in the industry in your region,

You predict a net loss for your operation for the year ending 30 June 20XX of $X,XXX.

You have not had any sales/clients since the commencement of your operation.

You do not expect any sales for the remainder of the income year due to the COVID19 virus.

You predict your expenses in the 20XX to 20XX financial year to be 25% to 50% of the previous year.

You anticipate XX regular jobs per month in the 20XX to 20XX financial year. Each job will yield sales of $XXX to $XXX.

You have determined pricing for your work through market research across other similar businesses.

You also expect to receive income from specialist work.

You anticipate meeting the assessable income test in the 20XX to 20XX income year.

You initially worked on your operation in your spare time.

Over many weekends and evenings you built the necessary components required for your operation, including a website, obtaining permits and advertising.

You have advised us that since the creation of your website, you have spent very little time on the operation.

Apart from your website, you advertise your operation on XX business and social media platforms:

You anticipate future advertising will also include another two business platforms.

You are currently restricted with your work as the majority of the AAA region is located within a controlled area, thus most work within the AAA region is subject to approval from authorities.

In order to request approval to operate a business of this type in these controlled areas you are required to pay fees of between $XXX and $XXX.

The authorities are currently re-defining the restrictions within these controlled areas.

Your operation has invested in equipment which will allow you to operate without the need for an application (or application fee) to authorities if this review is approved. You anticipate this change would open up the business client opportunities significantly.

You use accounting software for your business bookkeeping needs.

Relevant legislative provisions

Income Tax Assessment Act 1997subsection 35-10(1)

Income Tax Assessment Act 1997 subsection 35-10(2)

Income Tax Assessment Act 1997 subsection 35-10(2E)

Income Tax Assessment Act 1997 paragraph 35-55(1)(a)

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Summary

The Commissioner will not allow you to apply a loss from your drone activities to your assessable income as you are not currently in business.

Detailed reasoning

For the 2009-10 and later financial years, Division 35 of the Income Tax Assessment Act 1997 (ITAA 1997) will apply to defer a non-commercial loss from a business activity unless:

·         you satisfy the income requirement and you pass one of the four tests,

·         the exceptions apply, or

·         the Commissioner exercises his discretion.

However, for this division to apply, you must be carrying on a business.

In your case, you are not considered to be carrying on a business at this time as you have failed to meet with a number of indicators identified in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production (TR 97/11), which are relevant when considering if a business is being carried on. It is considered your activities for the 20XX to 20XX financial year with relation to your XXXX services activity are not presently operating in line with what is expected of a business of this type, and does not currently show that you are required to put in the time and effort expected of a business.

Detailed reason for decision

As discussed above, for Division 35 of the ITAA 1997 to apply, your activity should be carried on as a business.

Section 6-5 of the ITAA 1997 provides that a taxpayer's assessable income includes income according to ordinary concepts. Income according to ordinary concepts includes income derived from a business.

'Business' is defined in section 995-1 of the ITAA 1997 as including 'any profession, trade, employment, vocation or calling but does not include occupation as an employee'. However, this definition simply states what activities may be included in a business. It does not provide guidance for determining whether the nature, extent and manner in undertaking those activities amount to the carrying on of a business.

Where it is not clear that a business is being carried on, consideration must be given to a number of indicators which have been distilled from case law.

TR 97/11sets out the Commissioners' view on the indicators of whether a person is carrying on a business of primary production. The indicators in this ruling can be equally applied to non-primary production activities. It states that, whilst each case will turn on its facts, the determination of the question is the result of a process of weighing all the relevant indicators. The following indicators are relevant when considering whether a business is being carried on:

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

b)    whether there is more than just an intention to engage in business;

c)    whether there is a purpose of profit as well as a prospect of profit;

d)    whether there is repetition and regularity to the activity;

e)    whether the activity is of the same kind and carried on in a similar manner to businesses in the industry;

f)     whether the activity is planned, organised and carried on in a business-like manner;

g)    the size, scale and permanency of the activity; and

h)    whether the activity is better described as a hobby or recreation.

No one indicator is decisive, and all indicators should be considered in combination and as a whole: Evans v. FC of T 89 ATC 4540; (1989) 20 ATR 922. Whether a business is being carried on will depend on the 'large or general impression gained' (Martin v. FC of T (1953) 90 CLR 470 at 474; 5 AITR 548 at 551) from looking at all the indicators, and whether those indicators provide the operations with a 'commercial flavour' (Ferguson v. FC of T 79 ATC 4261; (1979) 9 ATR 873).

Applying the relevant cases and indicators to your circumstances

Significant commercial purpose

The 'significant commercial purpose or character' indicator is closely linked to the other indicators and is a generalisation drawn from the interaction of the other indicators. It is particularly linked to the size and scale of activity, the repetition and regularity of activity and the profit indicators. A way of establishing that there is a significant commercial purpose or character is to compare the activities with those of a taxpayer who is carrying on a similar activity that is a business. Any knowledge, previous experience or skill of the taxpayer in the activity, and any advice taken by the taxpayer in the conduct of the activity should also be considered.

Your operation is providing services to the general public with the aid of equipment that the operation has purchased for use in its activities. Your operation has a business plan that contains financial predictions that extends to the year 20XX with business services provided at market rate. Your operation complies with the legal requirements of operating this service.

Your professional experience is limited; you feel you have acquired the experience required for this operation through your hobbyist interests. You have set yourself milestones, as evident in your business plan to obtain certifications and licencing by the end of the 20XX calendar year.

You have performed market research on your competitors to find their strengths and weaknesses. You have advertising across a number of business related sites and social media. Running this type of business as the sole employee and operator in a regional area is typically not a large scale business.

We do not feel this factor is determinative at this time due to the above arguments being both for and against this indicator. An example of this is that although you have planned and researched with regards to your operation, the milestones in your business plan do not look past 2020. You lack the experience and certification compared with the activities of a taxpayer who is carrying on a similar activity and considered to be in business.

Intention of the taxpayer

You intend to acquire a basic living wage from your business. Your current wage is approximately $XX,XXX per annum after tax. You intend on the income from this operation to equal or exceed this figure. This shows you are entering into your operation with a view to profit.

Prospect of profits

This is a critical factor. A taxpayer's stated intention for profit may not align with the activity actually undertaken. This factor requires an examination of whether objectively there is a real prospect of making a profit from the relevant activity.

A business will not be found to be carried on where there is no reasonable prospect of profit from the activity in question. However, if an activity is not profitable, it does not necessarily prevent that activity from being a business, if there is a genuine belief that your business will become sustainably profitable. (Tweddle v. Federal Commissioner of Taxation (1942) 180 CLR 1; 7 ATD 186; (1942) 2 AITR 360).

Your operation has been in operation since 1 July 20XX. Your milestones reflect an expectation of at least XX clients in September 20XX. To date you have yet to record a sale in your operation. Your forecast for the remaining months of the 20XX income year show that you do not expect to record further sales in this year.

Your operation predominately operates within the AAA Region and surrounding areas. The vast majority of AAA is within controlled areas. Currently, in order to operate within controlled areas, your operation incurs significant costs associated with approval requests lodged with authorities.

You have advised us that authorities are currently re-defining the restrictions in these areas. This change will enable you to operate without the need for approval from authorities. We have not yet been advised if this review has been completed.

You have also advised us that most of the work requested by potential clients for services up to this date has been located significantly out of town or located within 5.5km of a controlled area.

You anticipate XX regular jobs per month in the 20XX to 20XX financial year. Each job will yield sales of $XXX too XXX. You have determined pricing for your work through market research across other similar businesses.

You support this claim by providing us with an email from EEE which examines the activity you have had in the time you have subscribed to their service. This analysis predicts an increase on inquiries and views of your page in the coming year.

You also expect to receive income from specialist work.

At this stage, it appears that although you forecast meeting the assessable income test in the coming year, we are unable to see any evidence of sales or potential sales at this time.

Repetition and regularity

The taxpayer's activities should involve repetition and regularity and have an air of permanence about them. Frequent and regular transactions are the usual feature of business operations. In Hope v. The Council of the City of Bathurst (1980) 144 CLR 1; 80 ATC 4386; (1981) 12 ATR 231, transactions were entered into on a continuous and repetitive basis which was one factor that supported that the activity in question was a business.

You have informed us that you originally spent every weekend and most week nights working on your operation. In this time you created a website and worked on advertising. Once this website was completed, the time required to put into the operation decreased dramatically.

You have commenced your operation whilst continuing your full time employment. You do not keep usual business hours and have few clients. Your funding is limited and you are currently running at a loss. At this point in time, we do not feel your operation is run with repetition and regularity.

Activities of the same kind and carried on in a similar manner to those of the ordinary trade in that line of business

If a taxpayer carries out their activity in a manner similar to other taxpayers in the industry, it is more likely that their activity amounts to the carrying on of a business. That is, the taxpayer's operations are of the same kind and carried on in the same way as those characteristic of ordinary trading in that particular line of business (IR Commissioners v. Livingston 11 TC 538).

This indicator requires a comparison between the activities of the taxpayer in question and those undertaken by a person in business in the same type of industry. Where the taxpayer's activities are similar in nature to your business, further support is given to a conclusion that a business exists.

Some factors that are useful to compare include:

·         The volume of sales or trade. The smaller the number the less likely a business is being carried on;

·         The types of customers the taxpayer trades with for example wholesalers, retailers, the public at large or friends and relatives;

·         The manner in which the product is marketed;

·         The sort of expenses incurred by the taxpayer;

·         The amount invested in capital items; and

·         Previous experience.

Your operation does not yet meet with a number of these factors. We have not identified any sales or customers at this time and cannot see that you have previous experience in this field. We do acknowledge your website and marketing through advertising on a number of social media and business sites. At this time your expenses and capital investment are of a small scale.

We do not feel you are operating in line with other businesses of this type at this time.

Organisation in a business-like manner, the keeping of books, records and the use of a system

The activities conducted by, or on behalf of the taxpayer, should be carried out in a systematic and organised manner. This will usually involve matters such as the keeping of appropriate business records by the taxpayer. If the activities are carried out on the taxpayer's behalf by someone else, there should be regular reports provided to the taxpayer on the results of those activities.

Commercial businesses generally operate in an orderly fashion, including organised sales bookings, reliable client base, consistent income stream, continuous commercial activity, control of business expenses and a plan for future growth.

You have provided us with a business plan that denotes milestones to the year 20XX and financials that do not exceed past the 20XX calendar year. Your plan is to advertise and cold call in order to obtain future sales. You have not advised us of any success resulting from these actions. You do appear to be keeping your business records on accounting software however as your transactions are few and your sales have not yet commenced, we do not feel this is of a large enough scale to denote a business-like manner.

The size and scale of the activity

The larger the scale of the activity, the more likely it is that the taxpayer is carrying on a business. However, this is not conclusive as a person may carry on a business in a small way. As the size or scale of the activity is not determinative, it is important that this indicator not be considered in isolation, but rather in conjunction with the other indicators.

An activity conducted on a small scale may constitute the carrying on of a business if the taxpayer has the purpose of making a profit, there is repetition and regularity in the taxpayer's activities, the taxpayer informs itself of market conditions and the taxpayer organises its activities in a business like way through the keeping of books of account.

Your operation operates on a small scale. The running of this type of business by one person is typically not on a large scale. An activity conducted on a small scale can constitute the carrying on of a business if the taxpayer has a purpose and genuine prospect of a profitable commercial venture.

The scale of the activity here is not fatal to a finding of a business. Rather, as has been discussed, your business plan, lack of income stream, repetition and regularity and prospects of profits denote the activity is not yet operating on a scale conducive to obtaining a commercially viable profit in the near future.

In conclusion

Although you have commenced your business with the intention of generating enough sales to supply you with an income, the Commissioner feels that at this time your operation is not presently operating in line with what is expected of a business of this type and does not currently show that you are required to put in the time and effort expected of a business.

On balance, when applying the indicators to your circumstances it is considered you have not demonstrated your activity amounts to the conduct of a business.