Edited version of your private ruling

Authorisation Number: 1012513962557

Ruling

Subject: Non-commercial losses - Commissioner's discretion

Question 1

Were you carrying on a business of developing software applications in the 2012-13 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 developing a software application in your taxable income for the 2012-13 financial year?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2013

The scheme commenced on

1 July 2012

Relevant facts

You have created and developed one software application.

It is available currently and you expect to expand its release to another platform at a later date.

You intend to earn income from licensing the application and from sales by regular users.

You have released a free version initially to allow the application to gain some momentum.

You intend to market the application to groups and you have proposed a licence fee per user group.

You will be advertising on selected blogs, web pages and through existing contacts.

You state that, once the application gains a significant amount of regular users, advertisements will be feasible.

You believe the application can attract a significant amount of potential income with regular users.

You have provided projected income and expenses for a period of five years showing an expected profit in the 2013-14 financial year.

Relevant legislative provisions

Income Tax Assessment Act 1997 paragraph 35-55(1)(b)

Reasons for decision

Summary

We have determined from the facts provided that you were not carrying on a business of the creation and commercialisation of software applications in the 2012-13 financial year.

As you were not carrying on a business, the non-commercial loss provisions in Division 35 will have no application. Therefore the Commissioner is unable to exercise his discretion to allow you to include any losses from your activity in your taxable income for the 2012-13 financial year.

Detailed explanation

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 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 expect to make your first income from licensing the application for selected events in the 2013-14 financial year.

You do not have a history of earning assessable income via the regular creation and commercialisation of software 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 software 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.