Private ruling: Am I in business
Published: September 2012
Ruling period: Year ended 30 June 2012 | Year ended 30 June 2013
Date scheme commenced: 1 July 2011

Ruling: Q1: Are you in business of producing a product? | A1: No.

Relevant facts and circumstances: The entity has been producing and selling product A (the product) for approximately one year. No formal research was conducted into the viability of the product, however the partners noticed that there was not much competition for their product in the area they were located and therefore believed it would be a popular product. The entity first produced the product six months after starting the business and sold approximately X number of units. The entity then produced another lot of the product six months later and sold approximately Y number of units. They plan to produce another lot of the product six months after the last one. You have no plans to expand the activity; in fact you are considering only producing one lot of the unit annually due to the large amount of work involved in creating it. The creation of the product is self-funded by the individual partners as capital is required. No agreement was implemented as to who provides funding, or on whether they would be reimbursed the funds invested. The funding was provided by whichever partner had surplus funds at the time. Each lot of the product costs $B to produce, and neither of the previous lots produced and sold have been profitable. Although you have experienced an increase in sales since you started, you do not believe that the product will become profitable. However you do hope that the sales will cover expenses in the future. You receive some donations from the general public and are in the processes of organising financial support from two businesses from your area. These funds are used to pay production costs where required. Friends of the partners created a website where people can purchase the product, you can receive donations, and you run other activities, and support/advertise other related events in the area. You also have a Facebook page from which you carry on the same activities. You do not do any other form of advertising. You do not operate out of an office, and each partner works on the product from their own homes on personal computers. You do not have a business plan, however you have developed a comprehensive budget which provides a breakdown of costs and fees associated with producing the product. You do not keep accounting records such as profit and loss records or a balance sheet. All partners work only part-time on the business, spending approximately 15-20 hours per week on the activity. However this can change dramatically depending on the time of year. You believe that you are not carrying on a business, and that the activity is merely a hobby.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 995-1

Reasons for decision: Summary: Section 995-1 of the Income Tax Assessment Act 1997 defines a 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'. The question of whether a business is being carried on is a question of fact and degree. The courts have developed a series of indicators that are applied to determine the matter on the facts. Taxation Ruling TR 97/11 provides the Commissioner's view of the factors used to determine if you are in business for tax purposes. The factors considered important 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 businesslike 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. | Detailed Reasoning - Application to your circumstances: Although your activity has a commercial character, in that the activity is planned, organised and carried on in a businesslike manner similar to that of ordinary trade in that field, the general impression is that the activity is being carried on as a hobby or pastime, with little or no prospect of profit from the activity. The size, scale, permanency and intention for your activity do not support the argument that you are carrying on a business. In fact you are looking to reduce the frequency that the product is produced, rather than maintaining or expand on your current level of activity. After applying the facts you have provided to the indicators above, we consider that you are not carrying on a business for tax purposes, and that your activity is in the nature of a hobby. As such the income you receive from the sale of your journal is not assessable.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.