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

Ruling: Q1: Do you pass the other assets test of section 35-45 of the Income Tax Assessment Act 1997 (ITAA 1997) allowing losses to be offset against your other assessable income in the 2012-13 financial year? | A1: No.

Relevant facts and circumstances: You were employed for the first six months of the relevant financial year and then you received a termination package which was paid in the relevant year. You used this money to start your own business. You have created mobile applications (apps) and launched some. You consider the apps to be trading stock and you value them in excess of $100,000. You satisfy the 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 35-45(1) | Income Tax Assessment Act 1997 subsection 35-10(2E)

Reasons for decision: Summary: For the 2009-10 and later income years, Division 35 of the ITAA 1997 will apply to defer a non-commercial loss from a business activity unless: • you satisfy the income requirement and you pass one of the four tests • the exceptions apply • the Commissioner exercises the discretion. To pass the other assets test of section 35-45 of the ITAA 1997 subsection 35-45(1) states that the total values of assets that are counted for this test and that are used on a continuing basis in carrying on the activity in that year is at least $100,000. The table at paragraph 22 Taxation Ruling TR 2001/14 Income tax: Division 35 - non-commercial business losses identifies the assets and their value when considering section 35-45 of the ITAA 1997. Item 2 in the table provides the value of an item of trading stock on hand is its cost or its market value or its replacement value. Paragraphs 49 and 50 of Taxation Ruling TR 93/20 Income tax: computer software (TR 93/20) provide that when you produce software for licence rather than sale then where title to the software remains with the software developer and the developer carries on a business of trading in software licences, the licences are considered to be trading stock. In your situation you produce apps for licence to use rather than selling the title to the software. The copyright of the apps remains with you and the licence to use the apps is that of the purchaser. Therefore the licences for the apps that you have sold are considered to be your trading stock. You have valued the apps in excess of $100,000 based on the market value of their future sales. However the future sales of the licences are not stock because the licence does not exist until the licensing agreement is made. TR 93/20 provides a licensing agreement only comes into existence when the apps are purchased. Therefore you do not pass the other asset test of subsection 35-45(1) as the taxation method of valuing trading stock of using cost or its market value or its replacement value values your trading stock is less than the required $100,000.