Edited version of your private ruling

Authorisation Number: 1012520650642

Ruling

Subject: Film copyright

Question 1

Are you carrying on a business for taxation purposes in relation to your film activity?

Answer

No.

Question 2

Are the production costs of bringing the copyright of a film into existence deductible under Division 40 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 3

Can you determine the effective life of film copyright?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts and circumstances

A joint venture agreement was created with the aim of producing a short film. No business plan was created for the film however a plan for production and production schedule was created.

The purpose of the film was to create an audio-visual asset that could be exploited in the marketplace at film festivals around the world, broadcast and that could generate additional intellectual property assets which would generate cash flow.

Secondary to this, was to build and develop a portfolio of films and awards that could be used as proof of creative skills and experience, proof of concept, raise the profile of the key creative and gain production experience.

The joint venture states that the film rights, the net profit and the costs will be shared equally between the three parties of the agreement and you own the rights to 100% of the screenplay.

The cost of creating the film included camera and lens, lighting equipment, dolly/tracks/hazer, stunt coordinator, make-up, wardrobe, catering, armourer, music, motor vehicle expenses, postage, freight, employee expenses, and production design.

You spent between up to 14 hours a week on film activities including production planning, casting, rehearsals, budgeting and re-writes of script. For six days after this you were in full time production usually putting in 16 hour days.

During post production you spent approximately seven hours a week on administrative activities along with a period of editing and review, providing feedback on the rough cut of the film. At this stage you were also responsible for the ongoing publicity, involving the writing and sending of media releases.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 40

Income Tax Assessment Act 1997 Section 40-25

Income Tax Assessment Act 1997 Section 40-170

Income Tax Assessment Act 1997 Paragraph 40-180(1)(b)

Income Tax Assessment Act 1997 Section 40-185

Income Tax Assessment Act 1997 Subsection 995-1(1)

Reasons for decision

Carrying on a business

Taxation Ruling TR 2005/1 provides guidance on the principles to be applied in determining whether a professional artist, which includes the activity of making a film, is carrying on a business. The ruling recognises that there are special factors affecting artists. However, a professional arts business must be distinguishable from a hobby or recreation. Paragraph 10 of TR 2005/1 states that the courts have held that the following indicators are relevant to the question of whether a taxpayer's activities amount to the carrying on of a business:

· 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 individual factor is determinative, but should be weighed up in conjunction with the other factors.

After weighing up the relative business indicators and objective facts surrounding your case it is considered that you are not carrying on a business for taxation purposes.

Costs included in cost base

The deduction for the decline in value of a depreciating asset provided for under section 40-25 of the ITAA 1997 is based on the cost of the depreciating asset worked out under Subdivision 40-C of the ITAA 1997.

In calculating the cost of a depreciating asset and the associated deduction under Division 40 of the ITAA 1997, it is only capital expenses that are included. Expenses are characterised as being capital in nature where they are incurred for the purpose of bringing into existence an enduring asset such as copyright. Revenue expenses are characterised as those expenses incurred in operating the asset after it has been brought into existence.

Section 40-170 of the ITAA 1997 states that your cost of a depreciating asset is a component in working out the amounts you can deduct for it and there are 2 elements of the cost of a depreciating asset.

Where paragraph 40-180(1)(b) of the ITAA 1997 applies, the first element of cost of a depreciating asset includes all capital amounts paid to hold the depreciating asset and is worked out under section 40-185 of the ITAA 1997.

Therefore in your circumstances when calculating the cost base of the film copyright all costs incurred including, for example but not limited to, lighting equipment, dolly/tracks/hazer, stunt coordinator, make-up, wardrobe and catering should be included. Your share of the costs then forms your allowable deduction over the effective life of the film copyright against any film income.

The inclusion of costs incurred to bring into existence an asset is clarified in example 2 of subsection 40-185(1) of the ITAA 1997. It shows that the costs such as accommodation and travel expenses are included in the cost of the asset because they are "in relation to starting to hold" an asset.

Effective life of a depreciating asset

Intellectual property is defined in subsection 995-1(1) of the ITAA 1997 and includes the owner of a copyright.

A copyright protects intellectual property for a determined number of years as stipulated by the copyright documentation and the value of the copyright is then deductible over its effective life.

Taxation Ruling TR 2012/2 stipulates the effective life of depreciating assets and states:

The entries for the effective life of assets listed under a particular industry in Table A must only be used by members of that industry. If an asset is listed in Table A under a particular industry heading and also in Table B, then you must use the industry table if you are a member of that industry. Taxpayers not in that industry must use Table B.

If an asset used by an industry member is not listed under its industry heading, either specifically or under the general functional group/class, then the member should use the effective life of the asset listed in Table B.

If an asset is not listed in either Table A or B then the Commissioner has not made a determination of its effective life and you will need to work out its effective life yourself.

In your circumstances a short film copy right is not shown in either Table A or B and therefore you will need to work out the effective life of the film's copyright yourself.