Private ruling: Am I in business?
Date of advice: 18 August 2017
Published: December 2017
Ruling period: Income year ended 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Were you engaged in a business of animal grooming in the 20XX income year? | A1: No

Relevant facts and circumstances: In mid-2017 you decided to set up an animal grooming service. Your motivation for starting this activity was to provide your child with the means of earning a small amount of income as an alternative to finding a part time job after school. You are not undertaking the activity for commercial purposes, or with the intention to make a profit. You used your credit card to purchase equipment and products used for animal grooming. You applied for an ABN but the business name you chose was not available for registration. You outlaid approximately $7,000 on set up costs. Your child receives half the fee from each service and you apply the other half of the fee to paying off the debt incurred in purchasing the products and equipment, or to purchase more supplies for the activity. You charge below industry average fees for your services. You do not believe the activity has the potential to produce a steady income, due to the low population and economic conditions in your location. Your hours of operation are after school and on weekends. You have undertaken a flyer drop in your local area to approximately 400 houses and maintain an Electronic page which features contact details and photos of your clients. Up until the end of the financial year you provided services to approximately 20 clients (some with multiple animals) and generated a small amount of income. You estimate that from start up until mid-2017, your child had been paid approximately $50 per week. Your child plans to leave home in approximately 18 months and you do not expect to have recovered the start-up costs of the activity by the time this occurs. When your child leaves home, you plan to train your second child to do the grooming, or have your first child train him to do it before they leave home.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 995-1 | Income Tax Assessment Act 1997 Section 6-5

Reasons for decision: Summary: You are not considered to have been carrying on a business of animal grooming in the income year ended 30 June 20XX. | Detailed Reasoning - Detailed reasoning: Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) defines '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 Income tax: am I carrying on a business of primary production? provides that the following factors are relevant: ● 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 ● whether the activity is better described as a hobby, a form of recreation or a sporting activity. The above indicators are considered in combination and as a whole. Whether a business is being carried on depends on the general impression gained from looking at all of the indicators, and whether the indicators provide the activity with a 'commercial flavour'. The pursuit of a hobby 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 is therefore not assessable. Expenses incurred in relation to a hobby are also not allowable deductions. Application to your circumstances You commenced the activity for the purpose of providing an after school job for your child, rather than for commercial purposes or with the intention of producing a profit. Because you are training your child, the activity is carried on in an organised and business-like manner. However, you do not expect to recoup the costs of commencing the activity by the time your child plans to leave home in 18 months’ time. While there is repetition to providing your services, the time spent pursuing the activity is small, based around your child’s availability after school and on weekends. You maintain a social media page which provides contact details and photos of your clients, however you do not believe that there is prospect for the activity to become profitable due to low population and economic conditions in your location. You charge below industry average fees and the income generated to date is low. In weighing up of the relevant indicators it is considered that your animal grooming activities is being carried out without a profit intention, and does not have a commercial flavour. You activity would be considered to be a hobby. | Detailed Reasoning - Future years: You should note that conducting an activity that has been described as a hobby is a 'status'. You can change from conducting an activity as a hobby to that of being in business and vice-versa over time as your level of activity changes. Therefore you should evaluate your level of activity on a regular basis to see whether you are conducting a hobby or carrying on a business.