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Ruling

Subject: Non-commercial losses

Question 1

Were you carrying on a business in the 2011-12 financial year?

Answer

No.

Question 2

Can the Commissioner exercise the discretion in paragraph 35-55(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you to include any losses from your activity in your taxable income for the 2011-12 financial year?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2012

The scheme commenced on

8 February 2012

Relevant facts

You develop software applications.

You operate the activity by yourself and intend to sell the applications you create and develop for other parties.

You developed and sold some copies of an application during the 2012-13 financial year however they proved to be faulty and were withdrawn. Your application is expected to be re-released before the end of the 2012 calendar year.

You satisfy subsection 35-10(2E) of the ITAA 1997 as your adjusted taxable income was less than $250,000.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 995-1
Income Tax Assessment Act 1997 subsection 35-10(2E)
Income Tax Assessment Act 1997 paragraph 35-55(1)(b)

Reasons for decision

Whether you are 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 purposes 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 made your first sales in the first quarter of the 2012-13 financial year when you sold a small number of applications however they were found to have faults and you expect the applications to be available again by the end of 2012.

You do not have a history of earning assessable income via the regular creation and commercialisation of 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 currently carrying on a business of the creation and commercialisation of mobile applications.

Non-commercial loss discretion

Division 35 of the ITAA 1997 will apply to defer a non-commercial loss from a business activity unless certain criteria are met.

As you are not considered to be carrying on a business these provisions do not apply and the Commissioner is unable to exercise any discretion in this matter.