Edited version of private advice

Authorisation Number: 1052201236639

Date of advice: 15 February 2024

Ruling

Subject: Am I in business - company

Issue 1 - Income Tax

Question 1

Are you carrying on a business?

Answer

No

Question 2

Are the surplus National Disability Insurance Scheme (NDIS) amounts received not spent on services assessable income to you?

Answer

No

Issue 2 - Goods and Services Tax

Question 3

Are you carrying on an enterprise for GST purposes?

Answer

No

Question 4

Can you claim input tax credits for purchases made with NDIS or pension funds?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Person A is a National Disability Insurance Scheme (NDIS) participant.

Person B is Person A's parent and is the NDIS nominee for Person A's NDIS plan.

Person A's NDIS plan commenced during the relevant year.

Company X (the company) was registered to manage NDIS amounts received on behalf of Person A.

Person B is the sole director of the company.

The company has an Australian Business Number (ABN) and is registered for GST.

The company commenced its activities during the relevant year.

The company is not mentioned in Person A's NDIS plan.

The company has been lodging Business Activity Statements and claiming input tax credits for purchases made.

The company does not have an intention to make a profit.

The only amounts received into the company's bank account are Person A's NDIS amounts and Person A's disability pension.

The company has no income of its own.

The company pays from the NDIS amounts and the pension received into its bank account for wages and superannuation for care staff, training and support care, and accommodation needs as outlined in Person A's NDIS plan.

Care staff are employed by the company and there are additional temporary contract workers.

The company does not charge any fees to Person A for managing the NDIS amounts.

Neither Person B nor the company receives any remuneration or benefits for the work they perform. NDIS regulations prohibit the use of any of Person A's plan funds as payment to the NDIS nominee.

The company lists assets of a vehicle, a desktop computer, printer and laptop computer, as well as household furnishings for the house Person A resides in.

Person B resides elsewhere from Person A.

The company only provides services directly to Person A, it does not advertise its services, nor does it offer services to any other individual.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 52-180

Income Tax Assessment Act 1997 section 995-1

National Disability Insurance Scheme Act 2013 section 9

National Disability Insurance Scheme Act 2013 section 46A

Social Security (Administration) Act 1999 section 60

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 section 9-20

A New Tax System (Goods and Services Tax) Act 1999 section 11-5

A New Tax System (Goods and Services Tax) Act 1999 section 11-15

A New Tax System (Goods and Services Tax) Act 1999 section 11-20

A New Tax System (Goods and Services Tax) Act 1999 section 23-5

A New Tax System (Goods and Services Tax) Act 1999 section 23-10

A New Tax System (Goods and Services Tax) Act 1999 section 25-10

A New Tax System (Goods and Services Tax) Act 1999 section 25-50

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

A New Tax System (Australian Business Number) Act 1999 subsection 8(2)

A New Tax System (Australian Business Number) Act 1999 section 41

Reasons for decision

Issue 1 - Income Tax

Question 1

Are you carrying on a business?

Summary

You are not carrying on a business.

Detailed reasoning

Taxation Ruling TR 2019/1 Income Tax: when does a company carry on a business? provides the Commissioner's view on when a company carries on a business. The concept of 'carrying on a business' is a longstanding feature of the income tax law and is relevant to various provisions of general and specific application.

Subsection 995-1(1) of the Income Tax Assessment Act 1997 defines 'business' to include 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee'.

It is not possible to definitively state what amounts to a business, however in Commissioner of Taxation (Cth) v Murry [1998] HCA 42 Gaudron, McHugh, Gummow and Hayne JJ observed:

... A business is not a thing or things. It is a course of conduct carried on for the purpose of profit and involves notions of continuity and repetition of actions.

The case law highlights that it is not possible to state a precise test for whether a person is carrying on a business. Whether the activities of an entity constitute the carrying on of a business is a question of fact, and must be answered based on a wide survey, and the overall impression gained, of the activities of the entity having regard to the indicia of carrying on a business as a whole.

Paragraph 21 of TR 2019/1 provides the key indicia considered by the courts in determining whether the activities carried on by an entity amount to the carrying on of a business are:

•                     whether the person intends to carry on a business

•                     the nature of the activities, particularly whether they have a profit-making purpose

•                     whether the activities are

-        repeated and regular

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

•                     the size and scale of a company's activities including the amount of capital employed in them, and

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

In this case, the most notable indicia that is not met by the company, is the nature of the activities and whether it has a profit-making purpose.

Unlike individuals, a company's profitable activities are unlikely to be in the nature of a hobby or be undertaken to meet a domestic need. Thus, any profit-making activities a company conducts are unlikely to have a domestic or personal character and are likely to be characterised as being commercial in nature. In some situations, a company's activities may have a non-commercial nature or a purpose inconsistent with a conclusion it is carrying on a business. Paragraph 36 of TR 2019/1 provides examples of companies whose activities would not have commercial nature or purpose of making a profit, and would not carry on a business, include a company that exists solely to:

•                     hold and maintain personal use assets; for example, a boat or holiday house, for the sole use of its members who are the sole source of funding used to cover the running costs of those assets

•                     hold land to secure access to a beach for the company's shareholders, and

•                     provide social and recreation facilities for members without seeking to make a profit to distribute to its members.

In this case, the company was solely formed to manage NDIS amounts received on behalf of Person A. These activities do not have a commercial nature, and are undertaken to meet the domestic and personal needs of Person A.

Companies are typically formed for the purpose of carrying on a business (see American Leaf Blending Co Sdn Bhd v Director-General of Inland Revenue [1979] AC 676 (American Leaf) and Inland Revenue Commissioners v Westleigh Estates Co Ltd [1924] 1 KB 390 (Westleigh)). In Westleigh and American Leaf, it was observed that where a company aims to make, and has a prospect of profit, it is presumed that the company intends to, and does in fact, carry on a business. In American Leaf, Diplock LJ observed that this means any gainful use to which a company puts its assets will, on its face, amount to the carrying on of a business. However, this presumption can be rebutted if it can be shown that, on the facts, the company had no aim or prospect of making a profit.

Section 52-180 of the ITAA 1997 provides that a NDIS amount derived by a participant (within the meaning of the National Disability Insurance Scheme Act 2013) is exempt from income tax. Section 9 of the National Disability Insurance Scheme Act 2013 provides that 'NDIS amount' means an amount paid under the National Disability Insurance Scheme in respect of reasonable and necessary supports funded under a participant's plan.

The NDIS amounts and the disability pension are income of Person A as an individual, as these amounts are absolutely inalienable, whether by way of, or in consequence of, sale, assignment, charge, execution, bankruptcy or otherwise, in accordance with section 46A of the National Disability Insurance Scheme Act 2013 and section 60 of the Social Security (Administration) Act 1999. This means that they cannot be sold, transferred to a third party, legally charged or be subject to bankruptcy proceedings. This gives legal force to the intention that payments are designed to provide income support. A recipient's right to receive a payment or benefit cannot be transferred to another person or entity either by a voluntary act or by the operation of the law. Whilst a payment may be made to another party, this would normally only occur with the consent of the recipient. This does not operate as alienation as the third-party payment is made on behalf of the recipient.

The NDIS amounts and pension amounts received into the company's bank account are Person A's income, not the company's income.

The company has no other income streams, and no plans to create any further income streams.

The company does not have any plans to expand its activities or advertise services to other individuals, it was formed solely with the intention to manage Person A's NDIS amounts and day to day living expenses. Without any income of its own, or plans to start making an income, the company cannot have a profit-making purpose.

The size and scale of the company's activities are small, the only activity engaged in by the company is paying for the supports Person A requires under his NDIS plan, and other day to day living expenses of Person A.

Whilst the company does conduct its activities repeatedly, regularly in an organised business-like manner, this indicator on its own is not enough to show that the company is carrying on a business.

The activities, whilst not a hobby or recreation, are also not a business activity, as it is a voluntary role that is conducted by the entity's director and Person A's NDIS plan nominee, Person B.

As the indicators of business are not satisfied, it is clear you are not carrying on a business.

Question 2

Are the surplus National Disability Insurance Scheme (NDIS) amounts received not spent on services assessable income to you?

Summary

The surplus funds are not assessable income.

Detailed reasoning

The amounts received into the company's bank account are not income of the company.

The NDIS amounts and the disability pension are income of Person A as an individual, as these amounts are absolutely inalienable in accordance with section 46A of the National Disability Insurance Scheme Act 2013 and section 60 of the Social Security (Administration) Act 1999. This means that the payments cannot be reassigned to another person, even if they are received on Person A's behalf by a nominee.

Therefore, as the NDIS amounts, and the disability pension, used to pay for Person A's day to day expenses and NDIS supports are income of Person A, and not of the company, any surplus funds are not assessable income of the company.

Issue 2 - Goods and Services Tax

Question 3

Are you carrying on an enterprise for GST purposes?

Question 4

Can you claim input tax credits for purchases made with NDIS or pension funds?

Summary

You are not carrying on an enterprise for GST purposes and as you are not entitled to be registered for GST, you cannot claim input tax credits for any purchases,

Detailed reasoning

All legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) unless otherwise stated.

The first GST question asked is whether the company is carrying on an enterprise. This question is critical for the following GST purposes:

•                     An entity is required to be registered for GST if it is carrying on an enterprise and its GST turnover meets the registration turnover threshold (section 23-5).

•                     An entity not being required to register for GST can nevertheless voluntarily register if it is carrying on an enterprise or if it intends to carry on an enterprise from a particular date (section 23-10). If the latter is the case, the date of effect of registration must not be a day before the day specified in the entity's application as being the day from which the entity intends to carry on an enterprise (paragraph 25-10(1)(c)).

•                     An entity is treated as making a taxable supply if, among other things, the supply is made in the course or furtherance of an enterprise that it carries on, and the entity is registered for GST or required to be registered (section 9-5).

•                     An entity is entitled to input tax credits in respect of its creditable acquisitions (section 11-20). The entity is treated as having made a creditable acquisition if, among other things, it acquired the thing solely or partly for a creditable purpose and the entity is registered for GST or required to be registered (section 11-5). The creditable purpose test is met to the extent the entity acquires the thing in carrying on its enterprise (subsection 11-15(1)).

As can be gleaned from the above, if the answer to the first question is 'No', the answer to the second GST question can only be 'No' as well.

Is the company carrying on an enterprise?

Pursuant to section 195-1, 'carrying on' an enterprise is defined to include doing anything in the course of the commencement or termination of the enterprise. On the facts presented, this inclusive component of 'carrying on' is not relevant.

Also pursuant to section 195-1, 'enterprise' has the meaning given by section 9-20. Subsection 9-20(1) in turn states that

An enterprise is an activity, or series of activities, done:

(a)           in the form of a business; or

(b)           in the form of an adventure or concern in the nature of trade; or

(c)           on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property; or

(d)           by the trustee of a fund ... to which deductible gifts can be made; or

(da) by a trustee of a complying superannuation fund or, if there is no

trustee of the fund, by a person who manages the fund; or

(e)           by a charity; or

(f)            [Repealed]

(g)           by the Commonwealth, a State or a Territory, or by a body corporate, or corporation sole, established for a public purpose by or under a law of the Commonwealth, a State or a Territory; or

(h)           by a trustee of a fund covered by item 2 of the table in section 30-15 of the ITAA 1997 or of a fund that would be covered by that item if it had an ABN.

None of paragraphs (c) to (h) above apply to the company.

This leaves only two possibilities to consider:

•                     Is the company engaged in an activity, or series of activities, done in the form of a business?

•                     Is the company engaged in an activity, or series of activities, done in the form of an adventure or concern in the nature of trade?

The fact that the company has an ABN is not determinative of a business being carried on. This is because, pursuant to subsection 8(2) of the A New Tax System (Australian Business Number) Act 1999 (ABN Act), a company is automatically entitled to an ABN. As pointed out in paragraph 95 of Miscellaneous Taxation Ruling MT 2006/1 The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian Business Number this is the case regardless of whether or not the company is carrying on an enterprise.

For current purposes, we can accept that the company is not dormant and is engaged in some form of activity. However, the fact an activity is being engaged in is also not determinative of an enterprise being carried on, as outlined in paragraphs 153 and 154 of MT 2006/1.

Thus, the focus for GST purposes is on determining whether the company's activity is done in the form of a business, adventure, or concern in the nature of trade. For the sake of completeness, it is noted that none of the exclusions to an enterprise being carried on, pursuant to subsection 9-20(2) of the GST Act apply to the company.

At this point it should be noted that the factors that need to be taken into account in determining that question are identical to the factors that need to be taken into account for income tax purposes and which also forms part of the notice of private ruling.

Accordingly, for GST purposes, the Commissioner's view for any test of the application of paragraphs 9-20(1)(a) and 9-20(1)(b) remains MT 2006/1 and TR 97/11.

Is a business being carried on?

As stated in TR 97/11 at paragraph 13, the courts have held that the following indicators of a business being carried on are relevant:

a)            whether the activity has a significant commercial purpose or character; this indicator comprises many aspects of the other indicators;

b)            whether the taxpayer has more than just an intention to engage in business;

c)            whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity;

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

e)            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;

f)             whether the activity is planned, organised and carried on in a businesslike manner such that it is directed at making a profit;

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

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

We consider the prospect of profit to be a very important indicator, per paragraph 47 of TR 97/11. As is the case with this company, when an activity is carried on and the objective evidence is that it is unlikely a profit will ever be made, this fact in itself does not necessarily mean a business is not being carried on if the taxpayer believes that the activity willbecome profitable, but taxpayers need to show that the other indicators of business are present in sufficient strength to outweigh any objective view that the activity may be inherently unprofitable, per paragraph 50 of TR 97/11.

On the facts, there is no evidence that the company will ever be profitable. There is no evidence of any intention to derive a profit, and, moreover, the purposes of the company inherently prevent it from seeking to derive a profit. There will always be a 'matching' of NDIS funds against expenses because those funds are expected to be fully expended. There is no evidence of any income being derived by the company, either now or in the future, and deriving a profit fundamentally requires income to be derived. The purpose for which the company was established - to facilitate the provision of NDIS supports to the disabled child of the company's director - is not a commercial activity.

Of the remaining indicia of a business, only d) above can be said to be possibly satisfied. It is difficult, however, to consider how regularity of the activity engaged in by the company can, alone, outweigh the company's failure to satisfy any of the indicia relating to profit and commerciality of the activity to rebut a conclusion that it is not engaged in a business.

Is the company engaged in any activity in the form ofa business?

As noted, the relevant test in the definition is not strictly focused on whether activities carried on by an entity amount to carrying on a business, but whether the entity is engaged in an activity, or series of activities, done in the form of a business. This distinction was noted and discussed in MT 2006/1, as follows:

170. An enterprise includes an activity, or series of activities, done in the form of a business (paragraph 9-20(1)(a)). The phrase 'in the form of a business' is broad and has as its foundation the longstanding concept of a business. The meaning of this phrase has not been considered in significant detail by Australian courts. See AAT case Body Corporate Villa, Edgewater Cts 23092 v. FC of T 2004 ATC 2056; 55 ATR 1162. Toyama Pty Ltd v. Landmark Building Developments Pty Ltd 2006 ATC 4160; [2006] NSWSC 83 involved civil litigation (regarding the proper exercise of a trustee's duty of care). The Commissioner of Taxation was not a party to the matter. While some reference was made to GSTD 2000/8, this was incidental to the ratio of the decision.

170A. In FCT v. Swansea Services Pty Ltd [2009] FCA 402; 2009 ATC 20-100; 72 ATR 120 at paragraph 99, McKerracher J. observed that the words 'in the form of' do not support a suggestion that form alone may prevail over substance. However, he said that they do 'have the effect of extending the reach of 'enterprise' to those activities which are in the form of a business but would not, in the ordinary meaning of 'business' be considered such. But the activity must still be reasonably intended to be profit making in the case of an individual and cannot for any entity simply be a private recreational pursuit or hobby.'

170B The definition clearly includes a business and the use of the phrase 'in the form of' indicates a wider meaning than the word 'business' on its own. In the case of non-profit entities, the Commissioner considers that not all of the main features of a business such as a capacity to earn and distribute profits need to be present before an activity has the form of a business. However, while a profit-making purpose would normally be a feature of a business this is not necessarily always the case. See The Queen v. Trade Practices Tribunal: ex parte St. George County Council (1973) 130 CLR 533; (1974) 48 ALJR 26; (1974) 2 ALR 371. In addition, smaller superannuation funds that arguably are not carrying on a business were however intended to be covered by the original definition of enterprise (that is, 'in the form of a business') and this was put beyond doubt by an amendment to section 5.

The company is not a non-profit entity as that term is understood for the purposes of MT 2006/1. The above discussion in that ruling thus provides no scope for ignoring the absence of a profit motive or, more fundamentally, the absence of any ability to derive a profit given no income is received (or potentially receivable), and the absence of commerciality in the activity it does carry on. This extends to the company's status as an employer and withholder of PAYG. That 'activity' is of a compliance nature, and the relevant employees are engaged solely to provide some of the supports funded, not by the company, but by Person A's NDIS plan. The same can be said of the company's ownership of various assets, all of which have been funded, not by the company, but by the NDIS and can only be used to provide Person A's funded supports and for no other purpose.

Is the company engaged in any activity done in the form of an adventure or concern in the nature of trade?

As noted in MT 2006/1 at paragraph 234, the term 'business' would ordinarily encompass trade engaged in, on a regular or continuous basis. Thus, this test is designed to cover an isolated or one-off transaction that does not amount to a business but which has the characteristics of a business deal. That is not the case with this company.

Furthermore section 25-50 provides that if you are registered and you are not carrying on any enterprise, you must apply to the Commissioner in the approved form for cancellation of your registration. You must lodge your application within 21 days after the day on which you ceased to be carrying on any enterprise.

As you are not entitled to be registered for GST, you cannot claim input tax credits for any purchases.