Private ruling: Am I in business
Published: September 2013
Ruling period: Year ended 30 June 2009 | Year ended 30 June 2010 | Year ended 30 June 2011 | Year ended 30 June 2012 | Year ended 30 June 2013
Date scheme commenced: 30 June 2008

Ruling: Q1: 1. Are you in the business of property development? | A4: No.

Relevant facts and circumstances: You commenced a development project to build a number of units. You have some knowledge of the building industry as you are also employed in the industry. The land was purchased in 200X. No formal business plan was made, however you made a number of enquiries into expected costs and time needed with acquaintances in the building industry. Work did not commence until 200Y when council approval was granted and you had sufficient funding in place to start the initial stages of construction. You already held the licence required to perform the construction work. You have contracted out work to others, such as surveyor, architect, engineer, builder, plumber and electrician. You have only worked the project yourself sporadically, instead giving priority to other work. Significant financial constraints have delayed the project as your other work was used to progressively fund the construction and this work has decreased since 200Y. The construction is completed in stages with each stage started only once sufficient funding has been obtained. Health problems have also delayed the project. Your intention has always been to sell most of the units on completion; holding one unit for personal use. As at 30 June 20XX, none of the units have been completed. You expect to complete and sell the first of the units in the relevant financial year, with the remaining units expected to be completed and sold in the subsequent financial year, assuming sales can be made in a timely manner. The total amount spent on the project to date is $X for the land and for construction. The estimated future costs, to complete all units, are $X. The estimated sale price of each unit is $X given the current local market, resulting in an overall profit.

Relevant legislative provisions: Income Tax Assessment Act 1997 - Section 6-5 | Income Tax Assessment Act 1997 - Section 8-1 | Income Tax Assessment Act 1997 - Division 35

Reasons for decision: Summary: Proceeds from the sale of property for tax purposes are treated as either: § income according to ordinary concepts under section 6-5 derived: 1. in the course of carrying on a business, or 2. from an isolated transaction for the purpose of profit making, or § subject to capital gains tax. Whether the proceeds are treated as income or capital depends on the situation and circumstances of each particular case. | Detailed Reasoning - Carrying on a business: Whether a business is being carried on depends on the large or general impression gained ( Martin v. Federal Commissioner of Taxation (1953) 90 CLR 470; (1953) 10 ATD 226; (1953) 5 AITR 548) from looking at all the indicators of carrying on a business, and no one indicator will be decisive ( Evans v. Federal Commissioner of Taxation 89 ATC 4540; (1989) 20 ATR 922). Taxation Rulings TR 97/11 and TR 2005/1 provide the indicators established by the courts that would need to be considered when determining whether a business is being carried on. It should be noted that TR 97/11 and TR 2005/1 specifically deal with carrying on a business of primary production and carrying on a business as a professional artist, respectively, but the indicators established can be equally applied to most other activities. The list of indicators discussed in these rulings include, but are not limited to: a) whether your activity has a significant commercial purpose or character, b) whether you have more than just an intention to engage in business, c) whether you have a purpose of profit as well as a prospect of profit, d) whether there is repetition and regularity to your activity, e) whether your activity is of the same kind and carried on in a similar manner to businesses in your industry, f) whether your activity is planned, organised, and carried on in a business-like manner, g) the size, scale and permanency of your activity, h) whether your activity is better described as a hobby, or recreation. The following is an analysis of your activities against the business indicators: | Detailed Reasoning - (a) Significant commercial activity: This indicator is closely linked to the other indicators and is a generalisation drawn from the interaction of the other indicators. It is particularly linked to the size and scale of activity, the repetition and regularity of activity and the profit indicators. A way of establishing that there is a significant commercial purpose or character is to compare the activities with those of a taxpayer who is carrying on a similar activity that is a business and to consider any knowledge, previous experience or skill of the taxpayer in the activity and/or any advice taken by the taxpayer in the conduct of the business. In your case, you have some knowledge of the building industry as you are also employed in the industry. However, after purchasing the land in 200X, council approval was not granted until 200Y and work on the project since then has been sporadic. As a result, your activities lack a significant commercial purpose or character. | Detailed Reasoning - (b) An intention to engage in business: The intention of the taxpayer in engaging in the activity is a relevant indicator; however, a mere intention to carry on a business is not enough. There must be activity. A taxpayer will have the intention (determined objectively) to carry on a business if they make the decision to commercially exploit the skills they may have developed pursuing the same activity as a hobby or pastime and this is reflected in their overt and planned activities. In your case, you have now held the property for over seven years and the development is not yet complete. Your activities to date do not show the necessary intention to engage in a construction/development business. | Detailed Reasoning - (c) Purpose of profit and prospect of profit: It is important that the taxpayer is able to show how the activity can make a profit. Stronger evidence of an intention to make a profit occurs when the taxpayer has conducted research into his/her proposed activity, consulted experts or received advice on the running of the activity and the profitability of it before setting up the business. In other words, it is not enough for the taxpayer to merely assert that they hold the requisite intention. Where it is clear from the objective evidence that the taxpayer cannot show the existence of a genuine belief that their activity can be profitable, they will usually not be found to have the requisite motive of profit-making. In your case, you have provided actual and estimated costs to complete the project and your expected return in the current market which suggests an overall profit will result from the activity. | Detailed Reasoning - (d) Repetition and Regularity: Repetition is a significant characteristic of business activities. Repetition refers to the frequency of transactions, or the number of similar transactions. However being in business is not the same as just being 'busy' (see Hill J in Goodman Fielder Wattie Limited v. FC of T 91 ATC 4438 at 4447). What may be critical in borderline cases is just what acts are being done regularly and repetitively. In your case, this is the only project you are working on and you have only worked the project yourself sporadically. The project has now been running for over seven years and is not yet complete. It can not be said that work on the project has been regular or repetitious to date. | Detailed Reasoning - (e) Activities carried on in a similar manner to other businesses in your industry: It is relevant whether the manner of operation is consistent with industry norms or with businesses in the same field. An activity is more likely to be a business when it is carried on in a manner similar to that in which other participants in the same industry carry on their activities. In your case, the delays and sporadic activity on your project are not consistent with industry norms. | Detailed Reasoning - (f) Whether activity is planned, organised, and carried on in a business-like manner: For example, this may be indicated by: · business records and books of accounts · business premises · licences or qualifications, and · a registered business name. Having a registered business name is not compulsory for tax purposes; having a business name does not necessarily mean you are in business. In your case, you have no formal business plan however you made a number of enquiries into expected costs and time needed with acquaintances in the building industry. | Detailed Reasoning - (g) Size, scale and permanency of the activity: This factor, of itself, is not decisive. According to TR 97/11 the larger the scale of the activity the more likely it will be that the taxpayer is carrying on a business. However, this is not always the case. A taxpayer can carry on business in a small way. In your case, there is no suggestion that you have undertaken a project of this type before and your current activity is carried on in a small way. | Detailed Reasoning - (h) Whether the activity would be better described as a hobby, or recreation.: The pursuit of a hobby (or recreational pursuit, or pastime), is not the carrying on of a business for taxation purposes. Money derived from the pursuit of a hobby is not regarded as income and therefore is not assessable. Similarly, expenses incurred in relation to a hobby or recreational pursuit or pastime, are not allowable deductions. There is no suggestion that your activity is the pursuit of a hobby, recreational pursuit, or pastime. | Detailed Reasoning - CONCLUSION: Based on the factors discussed above, your property construction/development activity does not constitute a business. This is, in part, because it does not have a commercial character, there is no regular or repetitious activity and the activity is not carried on in a manner similar to other businesses in your industry. | Detailed Reasoning - Isolated profit making transaction: Profits arising from an isolated business or commercial transaction will be ordinary income if the taxpayer's purpose or intention in entering into the transaction is to make a profit, even though the transaction may not be part of the ordinary activities of the taxpayer's business ( FC of T v. Myer Emporium Ltd 1987 163 CLR 199; 87 ATC 4363; 18 ATR 693) (Myer Emporium). Taxation Rulings TR 92/3 and TR 92/4 consider the principles outlined in the Myer Emporium case and provide guidance in determining whether profits from isolated transactions are assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) as ordinary income or losses on isolated transactions are deductible under section 8-1 of the ITAA 1997. TR 92/3 should be read in conjunction with TR 92/4. TR 92/3 defines the term 'isolated transactions' as: · transactions outside the ordinary course of business of a taxpayer carrying on a business, and · transactions entered into by non business taxpayers. It is not necessary that the intention or purpose of profit-making be the sole or dominant intention or purpose for entering into the transaction. It is sufficient if profit-making is a significant purpose. If a taxpayer makes a profit from a transaction or operation, that profit is income if the transaction or operation is not in the course of the taxpayers business but: · the intention or purpose of the taxpayer in entering into the profit-making transaction or operation was to make a profit or gain, and · the transaction or operation was entered into, and the profit was made, in carrying out a business operation or commercial transaction. You have stated that your intention at all times was to make a profit or gain from the sale of the properties once completed. Based on your projected sale figures, you will make a profit from the activity once completed. As a result, while your activities do not constitute a business, they are considered to be part of an isolated profit making transaction. Therefore, any profits from the sale of the properties will be assessable under section 6-5 of the ITAA 1997 and any losses will be deductible under section 8-1 of the ITAA 1997. | Detailed Reasoning - Division 35 of the ITAA 1997: Under Division 35 of the ITAA 1997, a loss made by an individual from a business activity will not be deductible in the income year in which it arises unless certain conditions are met. If an individual is not considered to be carrying on a business in the income year, Division 35 will not apply (Taxation Ruling TR 2001/14, paragraph 10). As discussed above, as you are not considered to have been carrying on a business, Division 35 of the ITAA 1997 does not apply. | Detailed Reasoning - Further issues for you to consider: As you intend to hold one of the units for your personal use, all costs incurred for the development will need to be apportioned to reflect this when calculating any overall profit or loss from the project.

2. Will any profit or loss from the activity be assessable on revenue account? | 3. Will any profit or loss from the activity be assessable on capital account? | 4. If on revenue account, will the non-commercial loss provisions apply?