Income Tax Liability Case. Before advising Ian Smith we need to perceive following technical questions whether any of the proceeds from the sale of his furniture on 14th, 25th, 27th and 30th January 2009 should be included in his assessable income.
(a) Before advising Ian Smith we need to perceive following technical questions whether any of the proceeds from the sale of his furniture on 14th, 25th, 27th and 30th January 2009 should be included in his assessable income. As per section 6-1(1) Income Tax Assessment Act 1997 Assessable income consist ordinary income and statutory income and under subsection 6-5(1) ITAA 1997 an amount is assessable income if it is income according to ordinary concepts (ordinary income). Ordinary income can be income from personal exertion, income from property and income from business. Statutory income is defined in section 6-10 (2) ITAA 1997as amounts that are not ordinary income but are included in assessable income by the operation of a provision of the law about assessable income. We can see that above proceeds not the income from a personal exertion as Ian is working fulltime as a policeman with NSW police and not the income from property as well. Now the question is that these proceeds from Designer Furniture sales is income or not or putting into other words is Ian carrying on business or not. Under 995-1 Income Tax Assessment Act 1997 business is defined that ‘business includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee’. Application of the indicatorsThere is no simple answer to whether you are in business or not, it depends upon the facts in each case. However, we can use the following indicators to help us determine
whether Ian’s above activities amounted to carrying on a business or not.Is there repetition and regularity to above activity?In Ian case the transaction has been commenced not before then 14 Jan 2009 and after 30 Jan and till April 2009. Therefore it is come into view that Ian is playing a role irregularly as the work is not as much as profitable hours and he is not undertaking a minimal level of activities appropriate to his designing and there is no repetition and regularity of activities that would produce a commercial quantity. With reference of Case P67, Case R96, Case ...
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whether Ian’s above activities amounted to carrying on a business or not.Is there repetition and regularity to above activity?In Ian case the transaction has been commenced not before then 14 Jan 2009 and after 30 Jan and till April 2009. Therefore it is come into view that Ian is playing a role irregularly as the work is not as much as profitable hours and he is not undertaking a minimal level of activities appropriate to his designing and there is no repetition and regularity of activities that would produce a commercial quantity. With reference of Case P67, Case R96, Case L57 and Ferguson v. FCT Repetition and regularity of the activities is important. Therefore it should consider as that the activities are not a business in this indicator.Do these activities have a significant commercial purpose or character and purpose of profit as well as a prospect of profit?If the significant commercial purpose or character exists, indicates business being carried on but when we look at Ian’s activities which were sold through eBay or online trade there is unclear intention by the taxpayer to try and make a profit from the application of their skills so Ian nonetheless expected to begin making a commercial profit from his skills as he did few above proceeds. Refer the case of Brooke & Anor v. Commissioner of Taxation [1999] AATA 603, assuming that Ian would not expected profit that the activities are still not a business.What are the size, scale and permanency of these activities?The larger the scale of the activity the more likely it will be that the taxpayer is carrying on a business of primary production. However, this is not always the case. The size or scale of the activity is not a determinative test, and a person may carry on a business though in a small way (Thomas at ATC 4099; ATR 171). Therefore it is unclear that in this indicator that Ian’s activities are hobby of a business but usually the smaller the scale of activity the more likely it will be mere hobby.Do you have more than just an intention to engage in business?If you are still setting up or preparing to go into business, you might not have actually begun business yet. So, we can see that these activities were only of a 'preliminary or preparatory' nature and did not amount to the carrying on of a business. In Softwood Pulp and Paper Ltd v. FC of T 76 ATC 4439; (1976) 7 ATR 101, expenses relating to the establishing of a paper production facility were not deductible, as they were held to be entirely preliminary and directed at deciding whether or not an undertaking would be established to produce assessable income. In view of Case D69 72 ATC 409 we can say that Ian is not carrying on business. ATO Data Matching"If you are running a business through online selling sites, or you have an existing business and are making additional sales through these sites, then you need to include this income in your activity statement or tax return," ATO senior assistant commissioner Chris Barlow said.(Herald Sun, September 13, 2011)The ATO is launching a data matching program focusing on individuals and businesses who have sold more than $20,000 in goods and services on the online selling sites, eBay and The Trading Post in any of the last three financial years. If we see Ian’s case the sale data is not clear but it easy to assume that these proceeds would not be more than $20,000 based on few proceeds and figures as these should not be include in Ian assessable income referring to ATO data matching program.RecommendationSubject to all above indicators, legislation, ruling, and cases and where an overall profit motive appears absent and the activity does not look like in size and regular manner, it is unlikely that the above activities will amount to a business. The indicators must be considered in combination and as a whole. Whether a business is being carried on depends on the 'large or general impression gained' Martin v. FCT 1953 from looking at all the indicators, and whether these factors provide the operations with a 'commercial flavour' Ferguson v. FCT 1979. However, the weighting to be given to each indicator may vary from case to case but t is more likely that an activity that is conducted in accordance with these above factors would be considered a hobby. Therefore, money derived from the pursuit of a hobby is not regarded as income and therefore is not assessable. As was said in Ferguson at ATC 4265; ATR 877: if what he is doing is more properly described as the pursuit of a hobby or recreation or an addiction to a sport, he will not be held to be carrying on a business, even though his operations are fairly substantial.' Hence, the sale of his furniture on 14th, 25th, 27th and 30th January 2009 should not be included in his assessable income, is more likely.(b)As earlier given and discuss legislation reference and definition of Assessable income, ordinary income, Statutory income and the definition of a business, $73,500 (210 x $350) should be included in Ian’s assessable income in relation to the sale of his furniture in the income year ended 30 June 2010 Now in this year all the circumstances are changed and we can see the application of following indicators.Purpose and intention of the taxpayer in engaging in the activity - purpose being to carry on business (see Case C1 (1952) 3 TBRD 1An intention to make a profit from the activity (Case C1, Case P67 82 ATC 317; (1982) 25 CTBR (NS) 867, Case R96 84 ATC 637; (1984) 27 CTBR (NS) 1159,Case L57 (1989) 11 NZTC 1326)Repetition and regularity of activity ( Case P67, Case R96, Case L57 )Activity organised and carried on in a businesslike manner and systematically – e.g. records are kept ( Case N30, Case P67, Case R96 )References:www.austlii.edu.au/au/journals/JCULRev/2005/6.htmllaw.ato.gov.au/atolaw/view.htm?docid=TXR/TR9711/nat/ato/00001law.ato.gov.au/atolaw/view.htm?docid=TXR/TR9711/nat/ato/00001#P86law.ato.gov.au/atolaw/view.htmCPA Australia, http://www.beyondtax.com.au/pages/taxinfo/hobby.htmlaw.ato.gov.au/atolaw/view.htm?locid='PAC/19970038/6-5'#6-5http://www.heraldsun.com.au/businessold/ebay-the-trading-post-under-australian-tax-office-scrutiny/story-e6frfh4f-1225898309620Woellner, Barkoczy, Murphy, Evans and Pinto. Australian Taxation Law. 21st ed., 2011www.ato.gov.au/corporate/content.aspx?doc=/content/00250674.htm
