Edited version of private advice

Authorisation Number: 1052149768641

Date of advice: 4 August 2023

Ruling

Subject: Am I in business - computer part trading

Question 1

Are you required to include income received from the resale of computer equipment and electrical goods as assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Are proceeds from your sale of various pieces of computer equipment and electrical goods considered assessable income as a capital gain under section 102-5 of the ITAA 1997?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2022

Year ended 30 June 2023

The scheme commenced on:

1 July 2021

Relevant facts and circumstances

You began purchasing computer parts and electrical equipment intending to build computers as a recreational activity. You were encouraged to do this by a doctor while undergoing treatment for a mental health issue. You had some prior experience in building computers and had previously enjoyed this activity.

You then became concerned about your finances and resold the parts and equipment through commonly used online auction and social media marketplaces. After purchase costs and other expenses were taken into account you made a loss on this activity.

No money was spent on advertising these products for sale, and no channels for advertising outside of commonly used online marketplaces were engaged.

You kept no records or accounts of the purchase or sale of these items.

You have since then returned to your full-time employment.

The items you purchased all cost less than $10,000 each.

You are not registered for GST.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 section 108-20

Reasons for decision

Question 1

Summary

Your activity is considered a hobby by the Commissioner.

Detailed reasoning

Under section 6-5 of the ITAA 1997 assessable income includes ordinary income. Ordinary income is defined in ITAA 1997 as "income according to ordinary concepts". Typical examples of ordinary income include salary, wages, allowances received as an employee, and proceeds from carrying on a business. Proceeds from a hobby are not considered ordinary income and are not included as assessable income.

The Commissioner's view on whether a taxpayer is carrying on a business is set out in Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? TR 97/11 identifies the following indicators for consideration to determine whether a taxpayer is carrying on a business:

•         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 repetition and regularity of the activity

•         whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business

•         whether the activity is planned, organised, and carried on in a businesslike manner such that it is directed at 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 a sporting activity.

In determining whether a taxpayer is carrying on a business, no one indicator will be decisive. The indicators must be considered in combination and as a whole. Whether a business is being carried on depends on the large or general impressions gained from looking at all the indicators and whether these indicators provide the operations with a commercial flavour.

We have considered the following factors in relation to your activity:

•         Your computer part and electrical equipment purchase and resale activity had no commercial purpose or character. Your activity had no profit-making purpose, was undertaken for recreational purposes, and unplanned. You had previously undertaken this activity for recreational purposes but had not researched or sought expert advice on the commercial aspects of your activity such as the size and scale required for viability as a business. You relied on the convenience of online marketplaces for your sales.

•         You had no intention to engage in business and you only resold these items to recover the cost of their purchase.

•         Your activity had no purpose and little prospect of profit. You had no business plan and in the immediacy of your need to recover the money you had spent on these computer parts and electrical goods you made a loss.

•         Your activity was occasional and sporadic.

•         Your trading activity was on a smaller scale and of a more domestic nature than ordinary trade in this line of business. You had no dedicated shopfront or website and sold through commonly used online marketplaces only.

•         As there was no intent to profit or carry on a commercial venture with this activity there was no business plan or budget. You have no qualifications or certificates in this area and sought no expert advice on how to carry on this activity on a commercial basis. You kept no records of your purchases or sales and had no systematic method of accounting for the monies involved in these.

•         You had invested some capital into the parts and equipment you had purchased, and you did use commercial storage, but your activity lacked permanence.

•         You commenced in this activity for recreational purposes, did not intend to live on the income you generated, and had no organised business structure or process to generate profits. The scale, and nature, of your activity did not allow you to generate any profit. Your activity would more probably be described as a hobby.

Overall the Commissioner considers that you have been carrying on a hobby with your computer part and electrical equipment purchases and sales in the relevant financial years. This being the case you do not have to include income generated from this activity as assessable income for taxation purposes for these years.

Note that your activity 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. You should evaluate your level of activity on a regular basis to determine whether you are conducting a hobby or carrying on a business.

Question 2

Summary

The computer parts and electrical equipment you have purchased and sold are considered personal assets purchased for more than $10,000 or collectables.

Detailed reasoning

A CGT asset is defined in section 108-5 of the ITAA 1997 and includes any kind of property. Paragraph 108-20(2)(a) of the ITAA 1997 states that a personal use asset is a CGT asset (except a collectable) that is used or kept mainly for your personal use or enjoyment. A collectable is specifically artwork, jewellery, an antique, a coin or medallion; a rare folio, manuscript or book, or a postage stamp or first day cover (section 108-10 of the ITAA 1997). Personal use assets that you acquired for $10,000 or less are exempt from CGT (Note 1 to subsection 108-20(2) of the ITAA 1997).

In Favaro v FC of T (1996) 34 ATR 1; 96 ATC 4975 Branson J held that Italian currency which was converted to Australian currency was not a 'personal use asset' as defined in subsection 160B(1) of the Income tax assessment Act 1936 (ITAA 1936). In making this decision Branson J accepted the Commissioner's argument that the expression 'personal use' is used 'in contradistinction to use for business or profit-making purposes'.

The computer parts are not considered to be personal use assets that cost more than $10,000 or collectables. The CGT legislation will not apply to this situation.