Ordinary Income or Business?

Eddie

Alright, welcome back to the Taxation podcast. I’m Eddie, and today we’re getting into one of those classic law school debates—what’s ordinary income, and when does something cross the line into being a business? Now, if you’re studying Australian tax, you’ll know section 6-5 is the big one for ordinary income, and s 995-1 gives us the definition of “business.” But, honestly, the law’s definition is so broad—“any profession, trade, employment, vocation or calling”—that it’s almost not helpful at all. It doesn’t even include being an employee, which, I mean, is a bit odd, but that’s how it is.

Eddie

So, how do you actually tell if someone’s running a business or just, you know, mucking about with a hobby? The courts look at a bunch of indicators. There’s the profit motive—are you actually trying to make money, or is it just for fun? But you don’t have to actually make a profit, just have the intention. Then there’s how organised you are, how often you do the thing, and the scale of it all. It’s not like there’s a checklist, though. It’s more of a “feel” thing, which is, well, not super satisfying if you like clear answers.

Eddie

I remember back at uni, I had this mate—let’s call him Dave—who started selling handmade furniture online. He’d spend weekends in his garage, making these beautiful tables and chairs, and he’d sell a few every month. At first, he said it was just a hobby, but then he started getting orders, setting up a website, even tracking his expenses. We’d argue about whether he was running a business or just, you know, being a very enthusiastic hobbyist. In the end, it was all about those indicators: he had a profit motive, he was organised, and it was getting pretty frequent. I think, by the time he started worrying about GST, he’d crossed the line into business territory. But, yeah, it’s not always obvious.

Eddie

Now, let’s talk about where things get even messier—hobbies, professions, and investment activities. The courts have had a field day trying to draw lines here. Take professional sportspeople, for example. If you’re playing footy full-time, getting sponsorships, and doing media gigs, the courts are pretty quick to say, “Yep, that’s a business.” Even if you’re not making a profit every year, like in Stone v FCT, it’s the whole package—prize money, endorsements, the lot.

Eddie

Gambling’s a weird one. If you’re just having a punt on the horses every now and then, that’s not a business. But if you’re running it like an operation—systematic betting, using agents, attending races, all that—then, like in Trautwein v FCT, it can be a business. But most people, even if they’re betting a lot, don’t tick enough boxes for the courts to call it a business. I mean, I’m not recommending anyone try to make gambling their business, but, you know, the law’s pretty clear on that.

Eddie

Investment activities are another grey area. If you’re just buying shares and holding onto them for the long term, that’s usually not a business. But if you’re constantly buying and selling, reinvesting, and treating it like a trading operation, then, as in London Australia Investment Co Ltd v FCT, it can be a business. The ATO’s even said that sometimes, a small-scale operation can still count if it’s run in a business-like way. But, say, a self-managed super fund just earning passive income? That’s not a business.

Eddie

There was this case—can’t remember the name off the top of my head, but it was a professional poker player. He was so organised, tracking every hand, keeping records, treating it like a job. The court said, “Yeah, that’s a business.” So, it’s not just about what you do, but how you do it. And with investments, if you’re running it like a business, the tax consequences are different—your shares might be trading stock, not just capital assets. That can make a big difference at tax time.

Eddie

Alright, let’s get into the really tricky stuff—extraordinary or isolated transactions. You might think, “Well, if I just do something once, it can’t be business income, right?” But, actually, the courts say that even a one-off deal can be ordinary income if you had a profit-making intention from the start. This is where the Myer Emporium principles come in. The first strand says, if you enter into a business operation or commercial transaction with the intention of making a profit, and you actually make that profit in the way you planned, then it’s ordinary income—even if it’s just a one-off.

Eddie

I remember reading about this property sale—can’t remember the exact case name, but the seller bought land, developed it, and sold it off in one go. The court said, “Look, this wasn’t just a ‘mere realisation’ of a capital asset. This was a profit-making scheme from the get-go.” So, even though it was a single transaction, it was taxed as ordinary income, not a capital gain. The key is that profit-making intent and the way you go about it.

Eddie

The Myer case itself was about selling the right to interest on a loan—Myer got a lump sum for selling that right, and the court said, “Yep, that’s ordinary income.” The first strand is all about whether there was a business or commercial operation with a profit motive. If you tick those boxes, even a one-off can be taxed as income. And, honestly, the line between capital and income gets really blurry here. Sometimes, if it’s not ordinary income, it might still get caught by capital gains tax or other statutory rules, but that’s a whole other episode.

Eddie

So, that’s a whirlwind tour of how Australian tax law draws the line between ordinary income and business, and what happens when you’ve got those odd, one-off deals. It’s messy, it’s case-by-case, and, honestly, it keeps tax lawyers in business. Next time, we’ll dig into some more of those statutory provisions and maybe look at some crypto examples—because, yeah, that’s a whole new can of worms. Thanks for listening, and I’ll catch you in the next episode.