Private ruling: Am I in business
Date of advice: 22 September 2015
Published: September 2015
Ruling period: Year ending 30 June 20YY
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are you carrying on a business for taxation purposes in relation to your entertainment activity? | A1: No. | Q2: Are the production costs of bringing your entertainment film activity into existence deductible under Division 40 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A2: Yes.

Relevant facts and circumstances: You have made a number of films. You have written your first film. You hold the copyright licence to the film script. You will be the writer, director, and one of the producers and financiers of the film. The film will be shot entirely in Australia by a local crew. Shooting of the film will begin during the 20XX-YY financial year. You will contribute approximately 60% of the production budget. It is projected that the film will be available for release in a few years. You spend approx. 30 hours per week on this film activity. You plan to quit your permanent job and take up part time employment in the next few months to enable you to spend more time on your activity.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5. | Income Tax Assessment Act 1997 Section 8-1. | Income Tax Assessment Act 1997 Division 40. | Income Tax Assessment Act 1997 Section 40-25. | Income Tax Assessment Act 1997 Section 40-60. | Income Tax Assessment Act 1997 Section 40-170. | Income Tax Assessment Act 1997 Section 40-180. | Income Tax Assessment Act 1997 Section 40-185. | Income Tax Assessment Act 1997 Subsection 995-1(1).

Reasons for decision: Summary: After weighing up the relative business indicators and objective facts surrounding your case it is considered that you are not carrying on a business for taxation purposes. You are eligible to depreciate the production costs of the copyright for the film under Division 40 of the ITAA 1997. | Detailed Reasoning - Carrying on a business: Taxation Ruling TR 2005/1 provides guidance on the principles to be applied in determining whether a professional artist, which includes the activity of making a film, is carrying on a business. The ruling recognises that there are special factors affecting artists. However, a professional arts business must be distinguishable from a hobby or recreation. Paragraph 10 of TR 2005/1 states that the courts have held that the following indicators are relevant to the question of whether a taxpayer's activities amount to the carrying on of a business: • 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 regularity and repetition of the activity • whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business • whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit • the size, scale and permanency of the activity, and • whether the activity is better described as a hobby, a form of recreation or sporting activity. No individual factor is determinative, but should be weighed up in conjunction with the other factors. After weighing up the relative business indicators and objective facts surrounding your case it is considered that you are not carrying on a business for taxation purposes. | Detailed Reasoning - Costs included in cost base: The deduction for the decline in value of a depreciating asset provided for under section 40-25 of the ITAA 1997 is based on the cost of the depreciating asset worked out under Subdivision 40-C of the ITAA 1997. In calculating the cost of a depreciating asset and the associated deduction under Division 40 of the ITAA 1997, it is only capital expenses that are included. Expenses are characterised as being capital in nature where they are incurred for the purpose of bringing into existence an enduring asset such as copyright. Section 40-170 of the ITAA 1997 states that your cost of a depreciating asset is a component in working out the amounts you can deduct for it and there are 2 elements of the cost of a depreciating asset. Where paragraph 40-180(1)(b) of the ITAA 1997 applies, the first element of cost of a depreciating asset includes all capital amounts paid to hold the depreciating asset and is worked out under section 40-185 of the ITAA 1997. Therefore in your circumstances when calculating the cost base of the film copyright all costs incurred including, for example but not limited to, lighting equipment, dolly/tracks/hazer, stunt coordinator, make-up, wardrobe and catering should be included. Your share of the costs then forms your allowable deduction over the effective life of the film copyright against any film income. The deduction is allowable from the year that the copyright is first used for the purpose of producing assessable income. The inclusion of costs incurred to bring into existence an asset is clarified in example 2 of subsection 40-185(1) of the ITAA 1997. It shows that the costs such as accommodation and travel expenses are included in the cost of the asset because they are "in relation to starting to hold" an asset. | Detailed Reasoning - Effective life of a depreciating asset: Intellectual property is defined in subsection 995-1(1) of the ITAA 1997 and includes the owner of a copyright. A copyright protects intellectual property for a determined number of years as stipulated by the copyright documentation and the value of the copyright is then deductible over its effective life. The Commissioner has made a determination that the effective life of copyright in a specific type of film is five years. The effective life write-off applies to copyright in a film acquired on or after 1 July 2004. As a holder of copyright in a feature film, you can choose to: • use the Commissioner's determined effective life of five years, or • self-assess the effective life of the copyright yourself. Section 40-60 of the ITAA 1997 states a depreciating asset starts to decline in value from when its start time occurs. The start time of a depreciating asset is when you first use it, or have it installed ready for use, for any purpose. That is, a deduction for the decline in value is only available when the specific item has come into existence in a marketable form. For Division 40 of the ITAA 1997 purposes, copyright in a film does not come into existence until the film is completed.