Whether a taxpayer, in performing certain activities, is carrying on a business is important in many ways, for example, in determining whether certain deductions related to the earning of business revenue apply. This article examines some of the factors relevant in determining whether a taxpayer is carrying on a business.
Relevant factors
Factors relevant to whether a business exists include :
- The intention and purpose of the taxpayer (determined on the facts or evidence)
- Size and scale of the taxpayer’s pursuits
- Whether the activities are repeated and regular
- Whether the taxpayer has a business plan
- Whether the activities are performed in a businesslike way which is conventional for that type of business
- Whether the taxpayer has the intention to make a profit (even if a loss is made or the profit is small)
Each factor is not necessarily decisive, but should be weighed in the whole of the circumstances. Not all factors need necessarily apply on the facts.
An activity is more likely to be a business if
- there are employees
- the activity has been conducted for a long time
- there is a large amount of capital
- it is conducted full-time
- it is connected with other activities that the taxpayer carries on commercially
- it involves particular knowledge and skills
- there are business premises
- if there is a business name
Again, not all of these factors need necessarily be present for there to be a business.
Hobbies distinguished
Whether the activity is a hobby rather than a business particularly applies to activities such as gambling, horse-racing/training and quiz contests. The Administrative Appeals Tribunal (AAT) and the Courts would consider factors of the type listed above. And the fact a taxpayer enjoys the activity does not always mean it is merely a hobby.
Trading Stock
If the taxpayer carries on a business, anything produced, manufactured or acquired for purposes of manufacture, sale or exchange in the ordinary course of the business is trading stock. This can include real estate, and other property such as shares. Certain financial instruments, such as options, are not trading stock.
Approach of the AAT and the Courts
Where the matter of whether a business is carried on arises in the AAT or the Courts, the evidence is usually examined with great care. Items such as accounts and records are carefully scrutinised, as is the evidence of the taxpayer/s and their associates as well as that of professional advisers in some instances. Any business plans are likely to be required to be presented, together with evidence as to whether the plans were realistic and as to whether they were adhered to and revised if necessary. Related contracts, such as of agency, and any franchise agreements, will be examined and the evidence considered as to whether commercial activities were carried out in accordance with them. Where the structure of an undertaking is more like a managed capital investment than a business, the evidence as to whether a business is conducted may be treated with suspicion.
Comment
Whether a business is carried on is not always easy to determine. There are no ‘black and white’ determinants such as set dollar amounts or set periods of time. Often it may be necessary for a taxpayer, in borderline cases, to obtain a binding private ruling from the Tax Office about the taxpayer’s circumstances. Any application for such a ruling should be addressed to the result the taxpayer seeks to achieve (eg. whether an amount is a capital loss or a revenue loss, or whether the non-commercial loss provisions apply to the taxpayer) rather than directly asking whether a business is carried on. This ensures the taxpayer is asking about a matter of law than a matter of fact only.
This article has been reproduced from Issue 17 – 2007/2008 of The Taxpayer, a Journal published by Taxpayers Australia.
Warren Kruger is an Australian Tax Specialist and Advisor. For a FREE Report "7 Essential Strategies to Reduce Your Taxation NOW!" Sign Up RIGHT NOW in the Opt-In box on the top right hand side
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Warren Kruger is an Australian Tax Specialist and Advisor. For a FREE Report “7 Essential Strategies to Reduce Your Taxation NOW!”,enter your name and email address in the Opt In Box located on the top right hand side of this article.
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