Private ruling: Non commercial loss
Published: February 2014
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Will the Commissioner exercise the discretion in paragraph 35-55(1)(b) of the ITAA 1997 to allow you to include any losses from your business activity in your calculation of taxable income for the relevant financial year? | A1: No.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You were employed for the first six months of the relevant financial year and then you received a termination payment. You commenced activities to develop software for mobile devices. You state that you are in business (as a sole trader) and you submit Business Activity Statements. You received approximately $X in sales from the software in the relevant financial year. You satisfy the <$250,000 income requirement set out in subsection 35-10(2E) of the ITAA 1997.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 35-10(1). | Income Tax Assessment Act 1997 subsection 35-10(2). | Income Tax Assessment Act 1997 subsection 35-10(2E). | Income Tax Assessment Act 1997 paragraph 35-55(1)(b).

Reasons for decision: Summary: We do not consider that there is a lead time between the commencement of your activity and the production of any assessable income. Your business was able to generate income in your first financial year in operation. | Detailed Reasoning - Detailed reasoning: For the 2009-10 and later financial years, Division 35 of the ITAA 1997 will apply to defer a non-commercial loss from a business activity unless: · you meet the income requirement and you pass one of the four tests; · the exceptions apply; or · the Commissioner exercises his discretion. In your situation, you satisfy the income requirement (that is, your taxable income, reportable fringe benefits and reportable superannuation contributions but excluding your business losses, does not exceed $250,000) but you do not come under any of the exceptions. Your business losses are therefore subject to the deferral rule unless the Commissioner exercises his discretion. The relevant discretion may be exercised for the financial year in question where: · it is in the nature of your business activity that there will be a period before a tax profit can be produced; and · there is an objective expectation your business activity will produce a tax profit within the commercially viable period for your industry. Having regard to your full circumstances, it is not accepted that it is in the nature of the business activity that has prevented you from making a profit. This discretion is intended to cover a business activity where there is an inherent period of time between the commencement of the activity and the production of assessable income. For example, an activity involving the planting of hardwood trees for harvest, where many years would pass before the activity could reasonably be expected to produce income. For the discretion to be applied there needs to be an inherent or innate feature of the activity resulting in an inability to make a profit in the year of commencement and (in most cases) a number of years thereafter. Further examples that fall into this category are forestry, viticulture and certain horticultural activities. The note above does not support any view that the discretion should be exercised for any start-up activity that is yet, for example, to satisfy the assessable income test in section 35-30 of the ITAA 1997, simply because of the small scale on which it was started, or because a client base is being built up. We do not consider that there is a lead time between the commencement of your activity and the production of any assessable income. Your business was able to generate income in your first financial year in operation. Therefore we do not consider that there is anything inherent or innate in the nature of your business activity that it has not yet been able to make a profit. Your activity is of a type that is able to produce assessable income quite soon after its commencement and you have demonstrated this. | Detailed Reasoning - Further information: Deferred losses Where you cannot offset your business loss against any of your other assessable income in a financial year, your loss is simply deferred to future years. If your business makes a profit in a following year, you can offset the deferred loss against the amount of this profit. Alternatively, if you earn income, meet the income requirement and you pass one of the four tests in a following year, you can offset the deferred loss. Deductions for capital assets A creator/author of digital material automatically becomes the owner of copyright to the material. As an item of intellectual property, copyright (not including a licence relating to a copyright) is a depreciating asset. Capital expenses incurred in developing a copyright may qualify for a deduction under Division 40 of the ITAA 1997. The deduction is allowable from the year that the copyright is first used for the purpose of producing assessable income. Section 40-95 of the ITAA 1997 outlines the choices available in determining the effective life for depreciating assets. There is an exception for intangible depreciating assets in subsection 40-95(7) of the ITAA 1997, which provides that taxpayers do not have the option of determining the effective life of copyright (except copyright in a film). The effective life of copyright (except copyright in a film) is the shorter of 25 years or the period until the copyright ends.