Private ruling: Depreciation; Investment in Australian film
Published: December 2011
Ruling period: Year ended June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Are you entitled to depreciation for the cost of investing in an Australian film, where your investment entitles you to co-ownership of the copyright? | A1: Yes | Q2: Will Division 35 of the Income Tax Assessment Act 1997 (ITAA 1997) apply to defer any allowable depreciation on the copyright until future income is derived from the asset? No


Relevant legislative provisions: Income Tax Assessment Act 1997 Division 35 Income Tax Assessment Act 1997 Division 376 Income Tax Assessment Act 1997 subsection 40-45(6)

Reasons for decision: Detailed Reasoning - Depreciation on copyright: If you acquire copyright in a film, or an exclusive licence relating to copyright in a film, from 1 July 2004 you can choose to claim your capital allowance deductions under the Uniform Capital Allowances (UCA) rules. The Commissioner has made a determination that the effective life of copyright in a feature film (not including a licence relating to the copyright in a feature film) is five years. The effective life write-off applies to copyright in a film acquired on or after 1 July 2004. The effective life of a depreciating asset is the period the asset can be used by anyone for income producing purposes and if relevant for the asset assuming: · wear and tear on a reasonable basis, and · maintenance in reasonably good order and condition and having regard to likely scrapping practices. You can choose to use either the 'prime cost' or 'diminishing value' methods to calculate the decline in value of copyright in all types of films. The effective life of a copyright in the film, and of an exclusive licence relating to copyright in a film, can be recalculated on a prospective basis if there is a change in circumstances relating to the nature of use of the asset. This might occur, for example, if there is an unexpected demand or lack of success for a film that is the subject of the copyright. For example: On the release of a feature film, the holder of the copyright in the film chose to use the Commissioner's estimate of effective life of five years. It became evident within a very short time of release, however, that the film was unsuccessful in that it was unable to attract public patrons. It was, consequently, withdrawn from public viewing with no prospects of alternative viewings. The holder of the copyright would be able to recalculate the effective life of their copyright taking into account the unsuccessful nature of the film. In your case, you have incurred capital expenditure in acquiring an interest in the copyright of a feature film. You expect to receive income from the commercial exploitation of your copyright interest in the film. As a holder of copyright in a feature film (not including a licence relating to copyright in a feature film), you can choose to: o use the Commissioner's determined effective life of five years, or o self-assess the effective life of the copyright yourself. Division 376 of the ITAA 1997 provides three tax offsets for certain Australian production expenditure incurred by a production company in making a film where a minimum level of expenditure has been incurred. The company is only entitled to one of the three tax offsets in relation to a film. Additionally, to ensure that the production company is only entitled to one tax benefit in relation to the production expenditure, the cost of the depreciating asset (the copyright in the film) to that entity is to be reduced by the amount of the producer offset to which the production company is entitled (subsection 40-45(6) of the ITAA 1997 ). Further, the company is not entitled to the producer offset if the company or someone else claims a deduction in relation to a unit of industrial property that relates to copyright in the film under former Division 10B of Part III of the Income Tax Assessment Act 1936 (ITAA 1936). Former Division 10B of the ITAA 1936 allowed a deduction for expenditure of a capital nature on the production or acquisition of copyright in an Australian film. The 2009-10 financial year was the last year in which a deduction under former Division 10B of the ITAA 1936 was available. As an investor, where your investment entitles you to an interest in the copyright of a film, your claim for depreciation is not affected by the producer's offset. | Detailed Reasoning - Division 35 of the ITAA 1997: Division 35 of the ITAA 1997, relating to deferral of losses from non-commercial business activities, only applies to business activities. Taxation Ruling TR 97/11 sets out the following factors or indicators that the courts and tribunals have taken into account in determining if a business exists for tax purposes: · Whether your activity has a significant commercial character, that is, whether your activity is carried on for commercial reasons and in a commercially viable manner. · Whether you have more than just an intention to engage in business. You need to have made a decision to commence business and have done something about it. If you are still setting up or preparing to go into business, you might not yet have commenced business. · Whether you have a purpose of profit as well as a prospect of profit. You need to be able to demonstrate a genuine belief that you will make a profit, even if you are unlikely to do so in the short term. · Whether there is repetition and regularity to your activity, as businesses usually repeat similar types of activities, although one-off transactions can constitute a business in some cases. · Whether your business is operated in a way that is similar to other businesses in your industry. · Whether the size or scale of your activity is consistent with other businesses in your industry or is sufficient to allow you to make a sustainable profit. · Whether your activity is planned, organised and carried on in a business-like manner. This may be indicated by business records and books of accounts, a separate business bank account, business premises, licences or qualifications and a registered business name. · whether the activity is better described as a hobby or recreational activity. · While no one factor can be used to determine whether you are carrying on a business, taken together they should indicate whether your activity is a business. · Where an investor contributes capital towards the production of one film, the repetition and regularity required to be considered to be carrying on a business is not present. The element of risk in film investment combined with an investment in one film also does not lend itself to a reasonable expectation of profit. You also did not demonstrate any involvement in the day to day operations of the film activity. On the facts provided, we do not consider that your activities constitute the carrying on of a business for tax purposes. Therefore, losses arising from investing in the film are not within the scope of Division 35 of the ITAA 1997.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Relevant facts: The arrangement that is the subject of this ruling is described below. The following documents have been relied upon to reach a decision: | o your application for private ruling; and | o further information provided by you. | You invested a significant amount in an Australian film by entering into a joint venture agreement as an investor. | You we made aware of this investment by a financial advisor and you made further investigations of your own as to the nature of the investment and the market to which it was directed. | The parties agreed to enter into the joint venture agreement to facilitate the creation of the Project and promotion. | The film was completed during the 2010-11 financial year. | Pursuant to the agreement, the 'Asset' is all copyright created and associated with the materials produced as part of the Project as well as all films, DVD's and other digital or electronic copies of materials comprising stock-in-trade for sale as part of the Project. | 'Investor's Entitlement' in the agreement means a share as co-owner in the Asset and a percentage share in the receipts from the film. | The percentage share entitlement as co-owner of the 'asset' is less than five percent. | You are not in partnership with the co-owners. | The agreement provides that the provision of contributions by any party represents risk capital. | You do not currently hold any other film investments not have you held any film investments in the past. | You have provided a copy of the investment memorandum, claiming that an investor can recoup their initial investment in full within two years, taking into account an entitlement to a tax deduction under Division 10B of Part III of the Income Tax Assessment Act 1936 (ITAA 1936). | You have not claimed any deductions pursuant to Divisions 10B or 10BA of Part III of the ITAA 1936 as the film was not completed for screening until the 2010-11 financial year.