Private ruling: CGT - small business concessions
Published: July 2014
Ruling period: Year ending 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Q1: Were you carrying on a business for the purposes of qualifying as a small business entity? | A1: Yes | Q2: Is the asset, an active asset as defined in section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A2: Yes.

Relevant facts and circumstances: You were employed in an industry. You also derive income as a consultant in the same industry. You personally held two assets. It was your intention to undertake activities in relation to the asset to attract other entities to enter into options to undertake activities in relation to the asset and pay you royalties. You entered into an option (the Option) with X allowing them to conduct activities in relation to the asset. The Option required X to pay to you the following amounts: • An initial amount within 14 days of entering into the Option • A monthly amount (the Monthly Payment) to maintain the right to conduct the activities; and • Royalties in relation to products produced from the activities. Following unsatisfactory performance by the Option holder you terminated the Option and legal proceedings ensured during which time you conducted activities on the asset. While you received the Monthly Payments, no products were ever produced from the activities and accordingly, you never received any royalty payments under the Option. You sold the asset in the 2013-14 financial year.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 108-5 | Income Tax Assessment Act 1997 Section 152-40 | Income Tax Assessment Act 1997 Section 328-110 | Income Tax Assessment Act 1997 Section 995-1

Reasons for decision: Detailed Reasoning - Carrying on a business: You are a small business entity if you carry on a business and your business turnover (aggregated turnover) is less than $2 million (section 328-110 of the ITAA 1997). Your turnover includes all income earned in the ordinary course of business for the income year. Section 995-1 of the ITAA 1997 defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'. In Evans v. Federal Commissioner of Taxation 89 ACT 4540; (1989) 20 ATR 922 it was determined that whether or not an activity amounts to carrying on business for taxation purposes is a question of fact. There is no exhaustive or determinative definition which can be applied to determine this matter. Martin v. Federal Commissioner of Taxation (1953) 90 CLR 470; (1953) 10 ATD 226; (1953) 5 AITR 548, however, provides that the test for determining whether or not a business is being carried on is both subjective, which considers the individuals purpose at the relevant time, and objective, which considers the nature and extent of the activities undertaken. Taxation Ruling TR 97/11 provides the Commissioner's view of the factors used to determine if you are in business for tax purposes. In the Commissioner's view, the factors that are considered important in determining the question of business activity 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 regularity and repetition of the activity • whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business • whether the activity is planned, organised and carried on in a business like manner such that it is described as 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 sporting activity. No one indicator is decisive. The indicators must be considered in combination and as a whole. Whether a 'business' is carried on depends on the large or general impression gained. Application to your circumstances Although the scale of the activity was relatively small and was not carried on by you full time, we consider that the activities were carried on in a business like manner, assisted by your industry knowledge. You invested a significant amount of funds into the activities, and the activities could not be described as a hobby or form of recreation. Additionally, the activities had a real prospect of generating a profit, although in some years losses were incurred as a result of circumstances beyond your control. After considering the above factors in relation to your activities, we consider that you were carrying on a business in the relevant year. | Detailed Reasoning - Active Asset: A capital gains tax (CGT) asset is an active asset if it is owned by you and is used or held ready for use in a business carried on (whether alone or in partnership) by you, your affiliate, your spouse or child, or an entity connected with you (section 152-40 of the ITAA 1997). A CGT asset is defined in section 108-5 of the ITAA 1997 as any kind of property or a legal or equitable right that is not property. In your case, the asset meets the definition of a CGT asset and as it was used in your business, it also meets the definition of an active asset.