Edited version of private advice

Authorisation Number: 1052076027839

Date of advice: 11 January 2023

Ruling

Subject: Am I in business - hobby

Question 1

Does the activity of entering open-source contests to compete in discovering bugs/issues constitute carrying on a business?

Answer

No.

Question 2

Are the value of the prizes received for winning open-source contests included in your assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) at the time of being received?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You take part in open-source contests to determine if there are other bugs or other issues involved in smart contracts, an application on the blockchain.

The smart contract involves a piece of code available for security review for a fixed amount of time.

Participants can access the code to try to detect any potential bugs or issues in the code.

The bugs and issues are not known to the participants or the entity that releases the code, and in some contests, there may be no bugs or issues to detect.

You enter the contests on a sporadic basis with sometimes months between entering competitions depending on your other commitments.

Contests generally run weekly but this is not guaranteed. Sometimes there are weeks when no contests are available.

Based on the issues discovered an independent party will determine how severe the bugs/issues are and allocate points to a collective leader board for other participants to determine the share of the prize pool.

The prize pool is pre-determined although there is no guarantee on the awarding of the prize.

Prizes are typically paid in crypto assets.

Each contest will take between 5 to 10 hours to complete.

You are likely to compete in less than 20 contests in a year

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

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

Ordinary income

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a taxpayer includes income according to ordinary concepts.

Ordinary income has generally been held to include 3 categories, namely income from rendering personal services, income from property and income from carrying on a business.

Other characteristics of income that have evolved from case law include receipts that are earned, expected, relied upon and have an element of periodicity, recurrence or regularity.

We do not consider that the prizes received were earned or expected. The receipt of crypto assets cannot be said to have an element of periodicity, recurrence or regularity. The receipt of the crypto assets is unrelated to your current employment activities. Further we do not consider that you entered the competitions with the intention or purpose of making a profit.

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'.

Taxation Ruling TR 97/11 Income Tax: Am I carrying on a business of primary production? provides the Commissioner's view of the factors that are considered important in determining if you are in business for tax purposes. The factors 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.

Application to your circumstances

After considering the facts and circumstances of your application, we do not consider that you have the necessary characteristics of a business for taxation purposes for the following reasons:

Significant commercial purpose

There is no evidence of significant commercial purpose the size and scale of your activity is small. You have not made any purchases specifically for the purpose of participating in the contests. The activity lacks the degree of organisation and system that would be found in the activities of people who would normally be regarded as carrying on a business of entering contests.

Intention to engage in business

As you are entering the contests on a sporadic basis, you have not demonstrated an intention to engage in business.

Purpose of profit

There is no evidence to show that there is purpose of profit as you are entering contests and may not take a share of the prize pool.

Regularity and repetition

You enter competitions on a sporadic basis. You commit your own time to the contests to possibly succeed in winning a prize. We do not consider there is significant repetition and regularity to your activities.

Therefore, you are not required to include the value of the prizes received in your assessable income.