Edited version of private advice

Authorisation Number: 1052355211604

Date of advice: 30 January 2025

Ruling

Subject: Am I in business?

Question

Can you use your estimate of your income from your asset rental activity in the 20YY-YY financial year as a reasonable estimate for your earnings in the 20YY-YY financial year for the purposes of the assessable income test in section 35-30 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 20YY

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

You undertook rental activity through peer to peer platforms for 6 months in the relevant year.

You created a detailed business plan prior to commencing this activity. Your business plan included analysis of your business strategy for your peer to peer rental activity.

Your initial research into this activity included multiple workshops and networking events hosted by peer to peer platforms.

You believed you could make a profit from this activity based on research you undertook in formulating this business plan. Key factors supporting this belief included:

•                     increasing demand by users of these services

•                     scalability and adaptability of the number and type of assets you could offer to meet increases or changes in demand

•                     efficiency of asset use

•                     insights into services valued by prospective clients based on you own previous experience using peer to peer platforms.

You based your understanding of the scale required for your undertaking to achieve commercial viability on your initial research and business planning.

As part of your strategic planning you set clear goals for reinvesting profits into the purchase of further assets for rental activity, and relied on your ability to increase your operational efficiency and the extent of your activity incrementally without overextending your resources.

On commencement of your activity you sought legal advice on the terms and conditions of the peer to peer platforms you intended to use, your liability in this undertaking, and the applicable local regulations.

You also sought advice from other third parties such as insurance companies, peer to peer operators, peer to peer platforms.

You also conducted online research on tools and systems for managing bookings, communication, and operational logistics that would allow you to scale your activity while maintaining service quality.

You conducted market research including information and insights from data held by peer to peer platforms.

You also researched demand and behavioural information relevant to your proposed activity.

In researching the capital requirements for your proposed activity you took into account acquisition costs, insurance costs, maintenance and operating expenses, platform fees, the technology and tools you would need, and the demand you could expect in your local market.

As at DD MM in the relevant year you held X assets you could offer for hire. One of these you already owned, having purchased it for your own use in more than 5 years previously. You had purchased Y further second hand assets in this period.

You initially financed your activity primarily from your own personal savings, but have also gained assistance and contributions from your family to ensure liquidity through the startup phase of your activity and for the purchase of further assets.

You estimate that from commencement in MM until the end of MM in the relevant financial year you were spending Z hours a week on your activity. For most of these Z hours you were cleaning your asset in preparation for your next booking.

In the following financial year you estimate that you spent more than ZZ hours a week on this activity over the 7 calendar days of the week.

Tasks you undertook in these ZZ hours included:

•                     Asset maintenance

•                     Customer communication

•                     Listing and price management

•                     Booking management

•                     Administrative and financial tasks

•                     Customer service and conflict resolution

•                     Marketing and networking

In undertaking your activity you create detailed listings for each asset on the peer to peer platforms you are using.

You then accept or decline bookings made by your clients based on your availability. On acceptance of the booking clients receive details of the rental.

Payment for the rental is processed through the platform at the time of booking or later. This includes the rental fee and any applicable security deposit or insurance coverage. The security deposit is held by the platform until the rental is completed.

While renting your assets clients are responsible for adhering to the platform's terms of service.

Upon return of the asset you perform an inspection for damage and report any issues to the platform through which the rental was arranged.

On completion of the rental activity you leave client ratings and reviews on the platform through which the rental was arranged.

You use standard rental agreements supplied by these platforms for your rental activity.

Payment for the hire of your assets is made through the platform, or where allowed by the platform, by direct payment to yourself.

The peer to peer platforms charge a service or transaction fee that is calculated as a percentage of the total paid for the hire of your asset. The exact fee may vary and depend on the features of the hire agreement such as the level of insurance you select for the hire arrangement.

You also comply with the terms of service set by the peer to peer platforms covering matters such as maintenance and safety.

You ensure your clients are made aware of and agree to the platform terms and conditions.

Since you commenced your rental activity you have been able to maintain your booking rates, positive platform reviews, gain recognition on the peer to peer platforms you use, and increase your revenue.

Your income from your rental activity in the relevant financial year was less than $20,000, and you attribute this to your activity taking place in only 6 of the 12 months of the financial year and the small number of assets you had available for hire through this period.

You record and track your income and expenses for this activity using a spreadsheet you have created for this purpose. This spreadsheet allows you to track revenue, operating costs, and other financial details.

You are in the process of transitioning your financial records over to the Xero accounting platform. You believe this will allow you to streamline your financial management of your activity and ensure greater accuracy.

You use your records to monitor the performance of the assets you are renting and decide if the return on your investment can be improved.

You use your financial records to compare income and expenses and identify opportunities to minimise your expenses and increase your income.

You also use these records to ensure you are complying with your taxation obligations.

You made a loss from this activity in the relevant financial year.

You intend to increase the number of assets you can use in your rental activity in the year following the relevant financial year.

Aspects of your operation in the year following the financial year that you believe differentiate your operation from that of other individuals using peer to peer platforms to make additional income from their own unused assets include:

•                     Managing multiple assets enabling you to use economies of scale not available to most individuals who only offer one for hire through peer to peer platforms. These economies of scale allow you to reduce costs and increase your profitability.

•                     Increased accessibility allowed by the use of multiple assets across a number of locations.

•                     Increased availability as your assets are dedicated solely to your rental activity.

•                     Platform listings that are based on higher presentation standards, competitive pricing, and prompt attention to queries and reviews.

•                     Monitoring of rental asset performance so you can use this information to make decisions on asset purchasing, pricing, and replacement.

•                     Regular asset maintenance to maintain a professional image and to meet customer expectations.

You generally make projections for your income each year in MM but are reluctant to make longer term forecasts as the market conditions, including demand, you are operating in are dynamic and constantly changing.

You have, however, provided tentative projections of your income and expense for the 2 years following the relevant year that show you expect to make a profit in these years.

Your gross income from your peer to peer rental activity in the 6 months you were operating in the relevant financial year was over $5,000.

You took, on average, YY bookings a month with the one asset you were renting out in this time and the average duration of these bookings was MM days.

In the first 6 months of the year following the relevant financial year you took an average of NN bookings a month with the X assets you were renting out in this period.

The average gross payment for these bookings in this time has been under $250 and the average duration PP days.

Based on historical data and insights provided by and gained from the peer to peer platforms you are using you are expecting YY bookings a month over 6 months for another asset you are leasing in the year following the relevant year, and the same number of bookings a month over 3 months for another second hand asset you are planning to purchase. You are expecting the average duration of these bookings will be PP days.

You expect the average payment for each booking for these additional assets will be under $200.

In the year following the relevant financial year you have moved to agreements with the platforms you are using under which you are charged less for fees or commissions but have fewer options for insurance. On commencing your activity in the relevant year you had opted for platform agreements with higher fees and commissions as you were unsure of what to expect.

You are also making use the peer to peer platform dynamic pricing tools to adjust the rates you are charging for the hire of your assets to ensure that they are competitively priced through periods of varying demand.

You have increased the hours you are spending each week on this activity as you have become more confident in your ability to make a profit from it and are investing more resources.

You were employed on a full time basis in the relevant year but have reduced your working hours to part time to accommodate the increased time you are currently spending on your peer to peer rental activity.

You are currently contemplating the possibility of moving away from full time employment so you can engage in this activity on a full time basis.

Your other income in the relevant financial year was less than $250,000.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 35

Income Tax Assessment Act 1997 subsection 35-5(2)

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

Income Tax Assessment Act 1997 paragraph 35-10(1)(a)

Income Tax Assessment Act 1997 subsection 35-10(4)

Income Tax Assessment Act 1997 paragraph 35-30(a)

Income Tax Assessment Act 1997 paragraph 35-30(b)

Income Tax Assessment Act 1997 section 35-55(1)

Reasons for decision

Division 35 of the ITAA 1997 prevents losses from a non-commercial business activity carried out by an individual taxpayer (alone or in partnership) from being offset against other assessable income in the year in which the loss is incurred, unless:

•                     the individual meets the income requirement and the business activity satisfies one of the 4 stipulated tests (paragraph 35-10(1)(a));

•                     an exception in subsection 35-10(4) applies; or

•                     the Commissioner exercises the discretion in subsection 35-55(1) for the business activity for one or more income years.

The 4 tests referred to in paragraph 35-10(1)(a) of the ITAA 1997 are:

•                     The assessable income test

•                     The profits test

•                     The real property test

•                     The other assets test.

The conditions for meeting the assessable income test are set out in paragraph 35-30(a) of the ITAA 1997. To meet the assessable income test the income from an activity must be at least $20,000 in the year that the test is to be applied. If an individual commences or ceases an activity part way through a year they may use a reasonable estimate of the income for that activity for that whole year for the assessable income test under paragraph 35-30(b) of the ITAA 1997.

Further guidance on factors that might be taken into consideration in making a reasonable estimate can be found in Taxation ruling TR 2001/14 Income Tax: Division 35 - non-commercial business losses. A list of these factors is given in paragraph 62 of TR 2001/14:

(a)         the cyclical nature of the particular business activity which may result in variations in the pattern of receipts;

(b)         any orders received and/or forward contracts entered into;

(c)         the amount that could have been derived for a full income year based on a pro rata calculation of the assessable income already derived for the part of the year. The amount derived for the part of the year must be typical of the income derived in a full year;

(d)         the type of business activity undertaken, considering the nature and type of income receipts of similar activities typical of the industry; and

(e)         current size and investment in the activity.

You have asked if you can use your estimate of your assessable income from your peer to peer rental activity for the relevant year for the purposes of paragraph 35(30)(b).

For the provisions of Division 35 to apply, however, you must be carrying on a business with your activity.

Subsection 35-5(2) of the ITAA 1997 specifies that Division 35 is not intended to apply to activities that do not amount to carrying on a business.

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 impression gained from looking at all the indicators and whether these indicators provide the operations with a commercial flavour.

We have assessed your peer to peer rental activity against the indicators for being in business as set out below.

Does the activity have significant commercial purpose or character?

In undertaking your peer to peer rental activity in the relevant financial year you researched the market for these services, the legal requirements for undertaking this activity, sought expert advice, and wrote a business plan. The size and scale of your investment from the date you commenced this activity until the end of the relevant financial year, however, was not commercially significant.

Essentially, commencing DD MM YYYY you had one asset available to rent. If you took an average of YY bookings a month for this asset over these 6 months and the average duration of these bookings was for MM days then the asset was in use for BB of the 183 days in the relevant financial year. This means your asset was rented for CC% of the time it was available to rent. The renting of one asset for BB out of the 183 days it was available to rent does not demonstrate the activity had a significant commercial purpose or character.

Does the taxpayer have more than a mere intention to engage in business and is there activity?

For a business to be carried on there must be activity and more than a mere intention to engage in business. You listed your own asset for hire for 6 months of the relevant year and another second hand asset for 3 days at the end of that year.

Your intention to engage in business in the relevant financial year however is questionable as you were either unwilling or unable to commit funds to the purchase of further assets from the commencement of your activity and ensure the size and scale of that activity was sufficient for a commercial enterprise.

Does the activity have a purpose and prospect of profit?

You made a loss in the relevant financial year from your initial peer to peer rental activity but have become more confident in your belief that you can make a profit from this activity as you believe your gross income has increased in the following financial year.

You are reluctant to make forecasts beyond the end of the current year as you are operating in a dynamic and constantly changing marketplace but have provided tentative projections of your income and expenses for this activity for the next 2 financial years.

In these years you have been using dynamic pricing that responds to demand on the peer to peer platforms you are using and the amount you are charging for use of your assets on a daily basis is significantly less than the amount you originally believed you could charge. This decrease in the amount you can charge per day for the hire of your assets at competitive rates calls into question the reliability of the forecasts you have provided.

The tentative nature of your forecast income and expenses, the dynamic and changeable nature of demand in the marketplace you are operating in, and the questionable reliability of your forecast income and profit from your activity contribute to uncertainty on the future profitability of this activity.

The prospect of you making a profit from this activity is uncertain.

Is the activity regular and repeated?

You spent 3 hours a week on your peer to peer rental activity in the relevant financial year, and the single asset you were renting out was hired CC% of the time it was available. This was not a commercial level of rental activity.

Is the activity of the same kind and carried on in a similar manner to that of ordinary trade in that line of business?

In the 6 months you were operating in the relevant financial year you provided one pre-owned asset for rental through established peer to peer platforms, adding another second hand asset you had purchased for this purpose for the final 3 days of the relevant financial year. In undertaking this activity you complied with the standard terms and conditions of the platforms you were using to offer your assts for hire. Your rental activity over this period generated over $5,000 in income.

While you undertook detailed planning and analysis before commencing this activity the manner in which it was conducted, the volume of your trade, and the nature of your expenses through this period were consistent with those of any other individual seeking to generate income by offering their otherwise unused asset for hire through peer to peer platforms.

You have differentiated yourself from other such individuals in the year following the relevant financial year through the use of multiple assets allowing some scope for economies of scale, better coverage of high demand pick up locations, access for a more diverse range of clients, and increased availability. These aspects of your rental operation, however, were not present in your activity in the relevant financial year as it was based on the use of a single asset.

Your rental activity in the relevant financial year was not commercially significant.

Is the activity systematic, organised, and carried out in a business-like manner?

You have advertised your assets since commencing your activity in MM in the relevant financial year through peer to peer platforms, used standard rental contracts and invoicing procedures offered by those platforms, and their promotional systems. You have also been able to track income and expenses and strategically plan your rental activity.

Size and scale, including capital invested in the activity?

While you have now acquired a further asset and have plans to take on more to offer for hire as part of your rental activity in future years the size and scale of your activity in the relevant financial year was small. The use of your own single asset through this period cannot be seen as carrying on a business.

The activity cannot be described as a hobby, a form of recreation, or a sporting activity?

As you intended to profit from this activity it is not a hobby.

Conclusion

Your rental activity in the relevant financial year was planned and organised but otherwise carried on in a manner and on a scale consistent with other individuals generating income from unused assets through peer to peer platforms Your activity in this financial year did not have significant commercial significance, your intention to engage in business was questionable, your prospect of profit uncertain, and the activity was not carried on at a commercial level. You were not carrying on a rental business in the relevant financial year.

As you are not in business the provisions of Division 35 of the ITAA 1997 will not apply. You will not be required to apply, or able to except yourself from, these provisions for your rental activity in the relevant financial year. Your estimate of your full year earnings for this activity will have no bearing on your taxation obligations or entitlements for this activity in the relevant financial year.