Edited version of your written advice

Authorisation Number: 1012958693271

Date of advice: 8 February 2016

Ruling

Subject: Non-commercial business losses and the Commissioner's discretion

Question 1

Were you carrying on a business of developing mobile applications (apps) in the relevant financial year?

Answer

No.

Question 2

Will the Commissioner exercise the discretion in paragraph 35-55(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Not applicable.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You have created and developed one mobile application ('app').

The app is available for a mobile phone.

You earn income from sales of the app.

The app can be purchased from your website and from the phone app store.

You have made a small number of sales for the relevant financial years.

Due to the high initial costs involved in the creation of the app and relatively low sales volume, the activity has incurred losses since it started in the 20XX-XX financial year.

You have not been involved in the creation of mobile apps previously.

You do not expect to pass one of the four tests of commerciality or make a profit from the activity for a number of years.

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 Subsection 35-10(2E)

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

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

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.