Edited version of private advice

Authorisation Number: 1052189743579

Date of advice: 27 November 2023

Ruling

Subject: Assessable income deductions

Question 1

Is the income that you earn from your sporting activities considered to be assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Are you entitled to claim a deduction for expenditure incurred in relation to your sporting activities (professional athlete) under section 8-1 of the ITAA 1997?

Answer

No.

This ruling applies for the following period:

30 June 20YY

The scheme commenced on:

1 July 2022

Relevant facts and circumstances

You compete in regular sporting events on a seasonal basis.

Sport is not your primary source of income.

You aim to win prize money from competing.

Your prize money is never guaranteed.

You don't rely on the prize money to fund your activities.

Your costs for equipment and event participation in this financial year are greater than your total earnings from sporting events.

You competed in a minimum of competitive races in the last financial year. Of those races, at least five were in Victoria.

You incur the expenses when travelling to events.

You travelled to competitions in the city on DD, DD February DD and DD April YYYY.

In the last financial year, you earned a total of $XX in prize money.

The total expenses you incurred in the last financial year on race entries, racing licenses, the sports parts/equipment and maintenance costs, was $XX.XX

You explained that medals are often presented for the first three places instead of prize money and races with big amounts of prize money are incredibly difficult to win, hence your small winnings in the previous financial year.

You are sponsored by an Organisation in selected events. Sponsorship may include subsidised or free race entries through the racing season.

Your expenses to compete in sporting events, have been greater than your total prize winnings.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

Reasons for decision

As you are not considered to be carrying on a business earning assessable income, the expenses incurred are not deductible in accordance with section 8-1 of the Income Tax Assessment Act 1997.

Detailed reasoning

Taxation Ruling TR1999/17 discusses benefits received by individuals from involvement in sport. The Ruling sets out the Commissioner's view as to whether these benefits are assessable income under the ITAA 1997.

Paragraph 8 of TR 1999/17 explains the payments or other benefits received by a sportsperson is assessable income if it is:

•         income in the ordinary sense of the word (ordinary income); or

•         an amount or benefit that through the operation of the provisions of the tax law is included in assessable income (statutory income). Statutory income includes non-cash benefits that may not be ordinary income.

Under section 6-5(1) of the ITAA 1997 an amount is assessable income if it is income according to ordinary concepts (ordinary income).

Paragraph 9 of TR 1999/17 provides that the following are assessable income:

•         payments received from, in respect of, or in connection with employment;

•         payments or other benefits received for, in respect of, or in connection with services provided; and

•         amounts of a revenue nature or other benefits received, including prizes and awards, from carrying on a business of participating in sport. This includes the exploitation of personal skills in a commercial way for the purpose of gaining reward.

Paragraph 14 of TR 1999/17 states, an award in medal or trophy form will not be assessable income as it is given and received on purely personal grounds, recognising and recording a particular achievement of the person.

Paragraph 16 of TR 1999/17 explains what principles the courts have established when determining whether an amount is ordinary income, they include the following:

•         what receipts ought to be treated as income must be determined in accordance with the ordinary concepts and usages of mankind, except in so far as a statute dictates otherwise;

•         whether the payment received is income depends upon a close examination of all relevant circumstances; and

•         it is an objective test.

Paragraph 17 continues to state what relevant factors in determining whether an amount is ordinary income include:

•         whether the payment is the product of any employment, services rendered, or any business;

•         the quality or character of the payment in the hands of the recipient;

•         the form of the receipt, that is, whether it is received as a lump sum or periodically; and

•         the motive of the person making the payment. Motive, however, is rarely decisive as in many cases a mixture of motives may exist.

Determining whether or not an activity amounts to carrying on a business is a matter of fact and degree.

Subsection 995-1(1) of the ITAA 1997 defines 'business' to include '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 any guidance for determining whether the nature, extent, and manner of undertaking those activities amount to the carrying on of a business.

Taxation Ruling TR 97/11 Income tax: Am I carrying on a business of primary production? provides indicators that the courts have concluded are relevant when determining whether a business is being carried on. These indicators are no different in principle, from the indicators as to whether activities in any other area constitute carrying on a business.

The indicators provided in TR 97/11 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 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;

•         the size, scale, and permanency of the activity;

•         whether the activity is better described as a hobby, a form of recreation or a sporting activity.

The indicators are discussed in detail in Taxation Ruling TR 97/11. Although the ruling refers to primary production, the indicators are no different, in principle, from the indicators as to whether activities in any other area constitute the carrying on of a business. No one indicator is decisive, and all indicators should be considered in combination and as a whole.

The following is an analysis of your sporting activities against the business indicators.

Significant commercial activity

For an activity or venture to be a business, it is necessary that it be carried on for commercial reasons and in a commercially viable manner. Commercial purpose or character is an overall impression gained by the activities as a whole. A strong indicator to there being a business is when the operations are similar to that of other professionals in the industry.

You do not pay for advertising, engage staff, or maintain business premises. Your largest source of income comes from employment income. As a result, this factor indicates that you are not carrying on a business.

An intention to engage in business

An intention to carrying on a business is an important but not determinative indicator. As well as an intention, there must also be activities which indicate that the person concerned is carrying on a business.

You claim that your intention in engaging in your sporting activities is a professional athlete as a sole trader. The reason for you to include your prize money as a sole trader, are due to your expenses to compete in events have significantly outweighed your prize money. As a result, this factor indicates that you are not carrying on a business, but merely want to claim deductions due to your outgoing being higher than your incoming.

Purpose of profit and prospect of profit

A person who is carrying on a business normally has an intention to make a profit in the pursuit of their activity or venture.

You have in previous years incurred considerably more expenditure on your sport than you have won in prize money, sponsorships, etc. You participate in sporting activities with the intention of winning prize money. You don't rely on the prize money to fund your activities. You claimed that events with big amounts of prize money are incredibly difficult to win, hence the small amount of prize money in previous years. This indicates that you may not be in a position at present, for your intention to make a profit be reached from the pursuit of your sporting activity.

Aspects of your activities may or may not be profitable (eg. you may enter competitions carrying large monetary prizes, but you may not win any significant prize money). As a result, this factor indicates that you are not carrying on a business.

Repetition and Regularity

It is a common feature of a business that similar activities are repeated on a regular basis. However, this is true also of hobbies, so this indicator is not considered in isolation, but is considered together with all other indicators. The taxpayer should undertake at least the minimum level of activities necessary to maintain a commercial quantity and quality of product appropriate to the industry.

In the past, you have competed in a minimum of 38 events within a year. You reside in A You would travel to and from domestic events within A. It is only as regular as your active participation in events. Consequently, this factor is not at a level that would be considered to be a commercial quantity or quality to indicate that you are carrying on a business.

Activities carried on in a similar manner to other in business in your industry

Your activities do not seem to be those of a professional sportsperson in that you do not receive large amounts of prize money for your activities (you find the events with big amounts of prize money are incredibly hard to win) or large amounts of sponsorship (XX races were fully funded by Australian Defence Force, which may be subsidised or free race entries). Your costs usually outweigh any prize money earned.

Whether activity is planned, organised, and carried on in a business-like manner

You have kept records showing the date and amounts of your expenses. This is not indictive of carrying on a business.

Size, scale and permanency of the activity

The larger the scale of the activity the more likely it will be that the taxpayer is carrying on a business. However, the size or scale of the activity is not a determinative test and a person can carry on a business in a small way. However, the smaller the activity, the more important the other indicators become when deciding whether a person is carrying on a business or not.

Although, you have stated that you have a profit-making motive behind your sport, it may be consistent with that of a business, it is not of the required size or scale to ensure a profit. You make the choice which events you want to participate in each year which indicate a lack of permanency. Therefore, these factors also indicate that you are not carrying on a business.

Whether the activity would be better described as a hobby, or recreation.

The expenses associated with travelling to the competitions and participating in them has usually outweighed any prize money. As a majority of the above conditions indicate that you are not carrying on a business, your current sporting activities would be best described as a hobby or recreation.

Participation in activities generating pastime or hobby receipts is a social or personal pursuit of a non-commercial nature. Pastime receipts are not intended to, nor do they usually, cover expenses. Even regular receipts obtained from a pastime or hobby are still characterised as receipts from a pastime or hobby and accordingly are not assessable income.

You should note though that if your level of activity changes in the future, that the status of your activity may change from one of a hobby to one of a business. You should continually reassess this status on an annual basis by:

•         considering if your level of activity has changed and if this has changed

•         whether the status of your activity has changed from one of a hobby to one of a business.

Allowable deductions

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income, or a provision of the ITAA 1997 prevents it.

You can deduct from your assessable income any loss or outgoing to the extent that:

•         it is incurred in gaining or producing your assessable income; or

•         it is necessarily incurred in carrying on a * business for the purpose of gaining or producing your assessable income.

However, you cannot deduct a loss or outgoing under this section to the extent that:

•         it is a loss or outgoing of capital, or of a capital nature; or

•         it is a loss or outgoing of a private or domestic nature; or

•         it is incurred in relation to gaining or producing your * exempt income or your * non-assessable non-exempt income; or

•         a provision of this Act prevents you from deducting it.

For a summary list of provisions about deductions, see section 12-5.

A loss or outgoing that you can deduct under this section is called a general deduction.

A deduction is only allowable if an expense:

•         is actually incurred,

•         meets the deductibility tests, and

•         satisfies the substantiation rules.

A number of significant court decisions have determined that for an expense to be an allowable deduction:

•         it must have the essential character of an outgoing incurred in gaining assessable income or, in other words, of an income-producing expense (Lunney v. FC of T; (1958) 100 CLR 478,

•         there must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income (Ronpibon Tin NL v. FC of T, (1949) 78 CLR 47), and

•         it is necessary to determine the connection between the particular outgoing and the operations or activities by which the taxpayer most directly gains or produces his or her assessable income (Charles Moore Co (WA) Pty Ltd v. FC of T, (1956) 95 CLR 344; FC of T v. Hatchett, 71 ATC 4184).

As we have come to conclude that your sporting activities have minimum characteristics of a business and is not employment income, they would be more regarded as a hobby or recreation, therefore a deduction for your expenses is not allowable.

Conclusion

Most of the above factors point to your activity as a sportsperson/competitor in competitions being a hobby rather than constituting a business. This is because it is of quite a small scale, does not have a commercial character, there are no regular revenue generating transactions being carried on and you cannot demonstrate a reasonable belief of profit from the activities in the future.

Given your current level of activity, you would not be regarded as having carried on a business at this present time. Instead, we consider that your personal sporting activities (as a sportsperson/competitor) constitute the vigorous pursuit of a hobby. As such, your income from this activity will not be assessable and your expenses not deductible in accordance with section 8-1 of the Income Tax Assessment Act 1997.