Private ruling: Am I in business - developing and selling a phone app
Date of advice: 28 July 2015
Published: July 2015
Ruling period: Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016 | Year ended 30 June 2017
Date scheme commenced: 1 July 2013.

Ruling: Q1: Are you carrying on a business of developing and selling a phone app? | A1: No.

Relevant facts and circumstances: You all have a personal interest in a certain hobby. You are work colleagues and one day you discussed phone apps and how you would like an app to assist in your hobby. You invested a small sum of money to get the app developed. One of you had an interest in design and so you were able to come up with the screen shots etc. for the app. When you had completed the app and went to the on line store you were advised that you were required to have an ABN and be registered for GST, otherwise the on line store would not allow the app to be included in the on line store. This is the reason you applied for an ABN and GST registration for the partnership entity. You had initially hoped to make a profit but given the small audience the app would attract you proceeded with its development with the hope that you could cover the costs of its development. You have had the app available for nearly two years and during this time have had sales of a few hundred dollars only. You have to pay an annual fee to keep the app available online. You are doubtful that you will ever make a profit from the app; however you would like to keep the app available online for hobby enthusiasts to use. The app is only operated as required from a home computer and not as a regular business activity. The app is the only app that you have developed and you have no intention of claiming any of the expenses involved with the app in your personal tax returns. You see the app as a hobby interest and not as a commercial venture. You have recently received a request from the Australian Taxation Office (ATO) to lodge a partnership return for the year ended 30 June 20XX; this has prompted your enquiry about whether or not you are carrying on a business.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 sub-section 6-(1) | Income Tax Assessment Act 1997 section 6-10 | Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 section 995-1

Reasons for decision: Summary: You are not carrying on a business of developing and selling an app for hobby enthusiasts. | Detailed Reasoning - Carrying on a business: Section 995-1 of the ITAA 1997 defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'. The case of Evans v. Federal Commissioner of Taxation 89 ACT 4540; (1989) 20 ATR 922 stated that whether or not an activity amounts to carrying on business for taxation purposes is a question of fact. There is no exhaustive or determinative definition which can be applied to determine this matter. Martin v. Federal Commissioner of Taxation (1953) 90 CLR 470; (1953) 10 ATD 226; (1953) 5 AITR 548, however, provides that the tests for determining whether or not a business is being carried on is both subjective, which considers the individuals purpose at the relevant time, and objective, which considers the nature and extent of the activities undertaken. Taxation Ruling TR 97/11 provides the Commissioner's view of the factors used to determine if you are in business for tax purposes. In the Commissioner's view, the factors that are considered important in determining the question of business activity are: • 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 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 gained. | Detailed Reasoning - Application to your circumstances: In your case you have a personal interest in your hobby. You as partners have worked together to develop an app to assist hobby enthusiasts in their hobby. Whilst you had initially hoped to make a profit, given the small audience the app attracts you have proceeded with its development with the hope of covering its cost of development only. Given you have only had sales of a few hundred dollars in the nearly two years that the app has been available it is not considered a commercial or business venture. You have a desire to keep the app available for hobby enthusiasts simply because of your interest in your hobby, presently the activity is operating at a loss and you have no intention of claiming any of the associated expenses in your income tax returns. The activity is better described as a hobby. Based on the information you have provided we do not consider that the activity has the necessary characteristics of a business for taxation purposes. Therefore, any income you received in relation to this activity for the years ended 30 June 20XX to 30 June 20YY inclusive will not be assessable under section 6-5 of the ITAA 1997 as ordinary income. In addition, any expenses that you incurred in relation to this activity will not be deductible under section 8-1 of the ITAA 1997. This means that if the only activity that your partnership carries out is in relation to the app then you do not need to lodge an income tax return for the years ended 30 June 20XX or 30 June 20YY. You should advise the ATO that income tax returns are not necessary. | Detailed Reasoning - Future years: Your activity has been described as a hobby; however you can change from conducting an activity as a hobby to that of being in business and vice-versa over time, as your level of activity changes. Therefore you should evaluate your level of activity on a regular basis to see whether you are conducting a hobby or carrying on a business. For the years ended 30 June 20ZZ and onwards, provided that your app activity continues in a similar way as in previous years, it will continue to be considered a hobby.