Private ruling: Non-commercial losses
Date of advice: 23 March 2018
Published: June 2018
Ruling period: Year ended 30 June 2015 | Year ended 30 June 2016 | Year ended 30 June 2017 | Year ending 30 June 2018 | Year ending 30 June 2019 | Year ending 30 June 2020
Date scheme commenced: 1 July 2014

Ruling: Q1: Were you carrying on a business of developing mobile applications (apps) in the 2014-15 to 2019-20 financial years? | A1: No. | Q2: Will the Commissioner exercise the discretion in paragraph 35-55(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A2: Not applicable.

Relevant facts and circumstances: Your activity involves the creation of mobile phone apps. You have created and developed one mobile phone application, but plan on developing other apps in the future. The app is available for mobile applications. The app was released in 2016. Prior to this release you conducted several years of research and development before deciding where you wanted it to fit within the market. The activity is run by you and your partner. You do not employ staff; however you contract freelancers for work outside your skillsets.

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 paragraph 35-55(1)(b) | Income Tax Assessment Act 1997 Division 40 | Income Tax Assessment Act 1997 Section 40-95 | Income Tax Assessment Act 1997 Subsection 40-95(7)

Reasons for decision: Summary: Non-commercial losses and the Commissioner’s discretion 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 satisfy the income requirement and you pass one of the four tests ● The exceptions apply ● The commissioner exercises his discretion However for this division to apply the Commissioner must be satisfied that your activity was being carried on as a business. Are you carrying on a business? The question of whether a business is being carried on is a question of fact and degree to be determined on a case by case basis. The courts have developed a series of indicators to determine the matter, which are summarised in Taxation Ruling TR 97/11. Although TR 97/11 specifically refers to primary production, the same principles apply to all businesses. Some indicators of carrying on a business which the courts have considered to be relevant include: ● whether the activity has a significant commercial purpose or character ● whether the taxpayer has more than just an intention to engage in business ● 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 one indicator is decisive. The indicators must be considered in combination and as a whole. Whether a 'business' is carried on depends on the large or general impression. In your case, you have created only one product with the intention to commercialise it. You have made some sales of the app. You do not have a history of earning assessable income via the regular creation and commercialisation of mobile applications. The volume of your operations, capital employed, and repetition and regularity of the activities are not consistent with a business and your potential for profit is currently speculative. In applying the facts of your case to the indicators outlined above, the general impression gained is that you are not carrying on a business of the creation and commercialisation of mobile phone apps. As you are not considered to be carrying on a business, Division 35 of the ITAA 1997, including the Commissioner’s discretion under section 35-55 of the ITAA 1997, does not apply. Further information Deductions for capital assets A creator of a mobile application automatically becomes the owner of copyright to the application. 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 of 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 is the shorter of 25 years or the period until the copyright ends.