Common Law Rules Regarding a Determination of whether an Enterprise Is a Business - Case Study Example

Name: Lecturer: Course name: Course code: Date Common law rules regarding a determination of whether an enterprise is a business A 'business' for tax purposes entails 'any profession, trade, vocation or calling but does not include occupation as an employee'. Business income is income that is derived from transactions entered into in carrying on a business[Mon11]. Initially it is necessary to determine what constitutes a business. The income derived through carrying on a business is ordinary income under s 6-5 of the 1997 Act. It is imperative to discern a hobby from the business because it affects whether any income received from the activity are taxable income. And if the taxpayer is carrying on a business, then he is entitled to an Australian business number (ABN), and can or must register for goods and services tax (GST).(ATO, 2008[1]) The common law has acknowledged a number of relevant indicators in determining whether a taxpayer's activities comprise the carrying on of a business activity. The subject of whether the taxpayer's activities should be characterized as a business is principally a matter of common intuition and degree as in the case in the [Ferguson ATR 884; ATC 4271]. As distinguished in the Federal Court verdict in case of Evans v. FC of T 89 ATC 4540; (1989) 20 ATR 922, the adverse indicators is determinative; rather all of the indicators must be considered[Raw05]. Whether a business is being carried on is based on the general intuition gained after looking at the activity in general and the taxpayer's intention in undertaking it. Under the common law, an enterprise should also conform to the following to be considered a business; the activity done should be repetitive, business activities operate on a repetitive basis, a business has the basic foundation before its operation i.e. An intention should be established before the commencement of the business. This intention includes the formation of the business plan, business premises with identical business name and also registration under the Australian tax office for the tax purposes. Statutory rules and exceptions regarding whether an enterprise qualifies as a business An enterprise incorporates activities, or series of activities that have longstanding underpinning business concepts[Mon11]. According to the Australian courts and laws paragraph 180, an enterprise amounts to the activities done in small scale. Australian tax office provides define measures key activities of the enterprise. The enterprise is considered a business by the statutory law if it operates under the aim of making a profit in both long term and short term activities that are commercially viable. The businesses are usually clandestinely owned sole proprietorship partnership or corporation carried for the purpose of surpluses. The business is constituted by the by the government tax regulations instituted by the statutory rules. The Australian Fair work Act of 2009 distinguishes different types of the business according to the statutory requirements. The act stipulates the requirement of the rules conjoining the enterprise and business. Statutes accentuate on the material aspects of commissioners that considers that the main features of a business such as the entities capacity to earn and distribute earnings need to be available before an activity forms a business[Raw05]. Additionally, section 5 the smaller superannuation cremations that arguably are not utilize carrying the business were conversely intended to be enclosed by the original enterprise definition as a form of business. In FCT v. Swansea Services Pty Ltd, McKerracher critically observed that the words according to paragraph 99 in the form that do not conform to the suggestion prevailing in the essence of the enterprise activities in the form of business. However, the ordinary enterprise activities must still be reasonably anticipated being profit making in the case of the business. The exception to the statutory rules is found in the salomon vs salomons case (Gooley 1995: 125-133). This case point out that Salomon's case, the larger percentage of Australian jurisdictions have desires to ameliorate the legal facilities for business enterprises as initiate in the provisions for statutory corporate law. Salomon's case acknowledges that there was no grounds why the business liability benefits should considerably apply only to business enterprises. The Act retakes its logical conclusion and sanctions by significantly observing the registration considerations that define a business. The decision adversely established assumption defined on the business that exemplifies itself from the general exception of the enterprise. The leading cases regarding the status of an enterprise as a business or hobby Enterprise integrates series of activities that have withholding foundation and concepts that defines their status[Kil10]. Most of the enterprises constitute different activities that distinguish the accessibility of the income generated from the enterprise. The nature of a private recreational pursuit or hobby is considered in a New Zealand Goods and Service Tax case of 1991. In Case N27 (1991) 13 NZTC 3229, Bathgate DJ described a private recreational pursuit to be 'in essence, an activity carried on private basis to pastime or for the personal refreshment[Mon11]. Paragraph 87 describes the enterprise activities as hobby based on the incentives such as; the activity is carried on a small scale and not for profit making enterprise motive, the transaction is isolated, and there is no repetition or regularity of sales, there is no system to allow a profit to be produced in the conduct of the activity, the products produced is mostly sell to friends and relatives and not to the public at large. A hobby is neither an activity nor series of activities carried on as a business. As stated by Bowen CJ and Franki J in Ferguson v. FC of T : “...If what he is doing is more appropriately described as a hobby or an addiction to a sport, he will not be held liable to be carrying on a business, despite the fact that his operations are fairly substantial.” The business activity is considered by the indicators of a business established by case law. Business enterprise is significantly a commercial activity with the purpose and intention generating a profit from the business activity, the activity is recurrent, and it is carried on in systematic and organized manner. Guidelines or issued by the ATO on whether an activity might qualify as a business There has to be instituted business structures according to Australian Tax Office (ATO) to be categorized into the following; sole trader, partnership, trust, and company. Consequently, these structures may affect the tax liability of the business, asset protection, continuous costs and the clients[San09]. The business activity must be registered to meet a number of tax obligations. The business is required to lodge applications and complete for tax obligations some common business transactions. These are 1) The Australian Business Number (ABN) 2) Goods and Service Tax (GST) 3) Pay As You Go withholding tax 4) Fuel tax credits. In order to edify the business regarding the filing of the tax obligations, the act explains the policies determining if the business activities qualifies to business. In case of any limitation from the policies the activities ceased being taxable and qualifies as a hobby. There are other non-tax business registrations which a business must consider such as business licenses, permits or operational registrations certificates[Kil10]. These certificates are usually issued by the state government. The government determines whether an activity amounts to a business, the Business activity is regarded against the indicators of a business recognized by case laws that includes: i. Presents of the business plan. ii. The activity is or will be profitable iii. The recurrent or regular nature of the activity iv. The activity should be systematic, organized and should be carried on in a businesslike state and records are kept v. The activities should be of a reasonable size and scale vi. Commercial sales of product; and the entity have relevant knowledge or skill. Paragraph 12 of the statutory law stipulates that the relevant measures of Internal Revenue Service IRS and Australian Tax office which induces suitable rules in determining whether an enterprise activity is a business. Advantages and disadvantages in terms of tax in being classified as a business Development of business policies that is consistent and reliable by the statutory government’s arms design long-term strategic procedures that helps maintain the economic growth through advancement of the business that participation and define rules that enables the tax authorities to collect tax from the business. Having consideration of the impacts of policy instituted in small business is a key element in ensuring that the outcome returns in the Australia Tax Office ATO. The small business is of the essence to the development process through the country’s economy. Australian Tax Office ATO act recognize income from any activity of the business carried on the reason of profit making therefore the business taxation is controls the marginal returns for purposes of the growth government. This shown in the Case law: Kelsall v Parsons ([1938] 21 TC 608[Mon11]. An agent acting for many manufacturer received compensation for early termination from one of their agreement. This was the compensation received formed part of taxable profit and should be subject to taxation The tax implication concerning the income receipt from business income is that, the treated of the business income gains should have endorsed from the enterprise entails involved in the business that are subject to taxation because this the designated source of income to the business. The tax systems to the business activities might be suppressing the growth and advancement since the business income generated from the activities is waived as a result of the taxation acts[Jam07]. Business activities marginal income that could have used for expanding the business suffers the withholding tax compulsory thus enlighten the business process. The business defines a basic income that is deemed with the deal of the saving percentage of their earning for taxes purposes. The business handle taxes for the amount earned and they withhold the necessary advancement. Cases where Division 35 provisions apply to negative gearing Negative gearing is a legal anomaly allowed to individuals, and based on the criteria that the long term capital gain more than recoups the short term losses to make "commercial sense". If the leasing entity is carrying on a business, Division 35 must be considered - i.e. even individuals may be denied negative gearing if they are carrying on a business. Merely being entirely permitted to the net income of a trust does not mean losses can be distributed. Work Cited Mon11: , (Monsenego), Raw05: , (Rawal), Kil10: , (Kilesh), San09: , (Sandler), Jam07: , (Jamison), Read More