Private ruling: Income or capital derived from the sale of a personal use asset
Date of advice: 24 January 2018
Published: June 2018
Ruling period: Year ending 30 June 2017
Date scheme commenced: 1 July 2014

Ruling: Q1: Are the proceeds you received from the sale of the asset assessable as ordinary income? | A1: No | Q2: Are the proceeds you received from the sale of the asset taxable as a capital gain? | A2: No

Relevant facts and circumstances: You joined an existing syndicate to buy a part ownership interest in an asset (the asset). Your Q% ownership interest in the syndicate was purchased for the sum of $X,XXX. You do not have an ownership interest in any other assets. You were also required to make monthly payments for the ongoing costs of maintaining, housing and using the asset. The syndicate was managed by another entity (management entity). The management entity produced a video profiling the asset and received your completed application form and purchase price from you and other members who joined the syndicate. At the time of becoming a member of the syndicate and paying your Q% interest you did not have any financial projections of the income or expenses relating to the syndicate. At the time of joining the syndicate the asset was not being trained to race. A trainer was appointed and the asset generated minor profits. . You did not enter into any contract to purchase your Q% ownership interest in the asset. The management entity made all decisions in relation to training and events in which the asset would race in. Members of the syndicate did engage in some decisions such as naming the asset and auctioning the asset. Members of the syndicate also socialised together when attending asset racing events involving the asset. You received from the management entity information relating to prize money and expenditure each month. The asset was sold and you $XX,XXX in sale proceeds.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 108-20 | Income Tax Assessment Act 1997 Section 108-30 | Income Tax Assessment Act 1997 Section 118-10

Reasons for decision: Summary: Asset racing alone is not considered to be a business, as any profits are based largely on chance rather than a systematic business approach. The gross proceeds from asset racing will not amount to assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997). Therefore, the income received by you as a result of the sale of the asset will not be considered assessable income. | Detailed Reasoning - Detailed reasoning: TR 2008/2 relies on the indicators set out in Taxation Ruling 97/11 Income tax: am I carrying on a business of primary production? (TR 97/11) to determine whether a taxpayer's activities amount to the carrying on of a business. Factors that are considered important in determining whether a business is being carried out include: ● whether the activity has significant commercial purpose or character (this comprises aspects of some of the other indicators) ● 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 ● whether there is repetition and regularity of activity ● whether the activity is similar in kind and manner to those of the ordinary trade in that line of business ● whether the activity is planned, organised and carried on in a businesslike manner 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. The commissioner considers that if a taxpayer conducts racing activities alone, it is not likely to amount to a commercial activity. This was considered in Case E22 73 ATC 168 at 172, where the Taxation Board of Review No. 2 said: From observation and general knowledge, racing of animals is usually indulged in by owners as a hobby or pastime or for the sake of interest in spite of the fact that owners are anxious for their assets to win and want the money which the winning stakes provide. Again from general knowledge, the cost of racing in most cases exceeds what is won and this is particularly so if the owners do not bet. The likelihood that racing will result in losses rather than profits tends against a ready inference that it is conducted as a business. | Detailed Reasoning - Application to your situation: Your ownership interest in the asset was Q% and was part of a larger syndicate operated and managed by the management entity. You never had what could be described as a "controlling" interest in the operations of the asset and relied on the expertise of the management entity to organise a trainer and pay all outgoings connected with the asset from the monthly fees it received from syndicate members. No financial projections were provided to the syndicate members at the time of completing the application form to join the syndicate and syndicate members relied on monthly information compiled by the management entity in relation to prize money and expenditure. There was no written agreement between the syndicate members or agreement between the management entity and the syndicate members to define the relationship between them or how decisions would be made. There was no business like activities or business systems that were established by the syndicate members aimed at generating a profit. No breeding or training activities were undertaken by the syndicate. The syndicate members did vote informally on non- commercial matters relating to the asset’s name and agreed on auctioning the asset. The member’s relationship with each other was for sociable purposes, not as co-owners jointly operating a profit making business. | Summary: As the purchase price of your share in the syndicate which purchased the asset was less than $10,000, any capital gain tax (CGT) will be disregarded. | Detailed Reasoning - Detailed reasoning: An asset that is not used in a business or not otherwise used for the purpose of producing the taxpayer’s assessable income, is used or kept mainly for personal use or enjoyment. Consequently, it will be a personal use asset as defined in section 108-20(2((a) of the ITAA 1997. | Detailed Reasoning - Application to your situation: A capital gain you make from a personal use asset or part of the asset is disregarded if the first element of the asset’s cost base is $10,000 or less. Therefore, you can disregard any capital gain made on the sale of your share in the asset.