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ATO Interpretative Decision

ATO ID 2002/1019

Income Tax

CGT - Creation of contractual rights for the acquisition of a CGT asset
FOI status: may be released

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CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

Can the creation of contractual rights as consideration for the acquisition of a CGT asset under an executory contract cause a capital gain or loss to arise under CGT event D1? (Section 104-35 of the Income Tax Assessment Act 1997 (the ITAA 1997)).

Decision

No. The creation of contractual rights as consideration for the acquisition of a CGT asset will not cause a capital gain or loss to arise under CGT event D1 in section 104-35 of the ITAA 1997. The asset acquired under the contract will not be capital proceeds (property) for the creation of rights (as consideration for the acquisition of the asset) under CGT event D1.

Facts

The taxpayer is a company. Another entity owns an asset which the taxpayer desires to exploit. The parties propose to formalise an arrangement with the licensor agreeing to grant the taxpayer a licence to commercially exploit the asset in return for the taxpayer agreeing to pay a specified percentage of any income derived from this licence to the licensor.

Reasons for Decision

In the circumstances of this case, the character of the transaction for the taxpayer is the acquisition of the licence. This asset is acquired by the taxpayer under section 109-5 of the ITAA 1997. While the licence is clearly property, it is not capital proceeds from creating the right to payment per subsection 104-35(3) and does not meet the requirements in section 116-20 of the ITAA 1997 that the property is received in respect of an event happening .

If a future event does occur in relation to the licence, such as its assignment, CGT consequences will flow from that event.

Date of decision:  13 September 2002

Year of income:  Year ending 30 June 2003

Legislative References:
Income Tax Assessment Act 1997
   section 104-10
   section 104-35
   section 109-5
   Part 3-1

Keywords
Capital gains tax
Capital gains
Intellectual property rights
Acquisition of assets
Disposal of assets
Centres of Expertise
Capital Gains Tax CoE
CGT events
CGT events D1-D3 - bringing into existence a CGT asset

Business Line:  Office of the Chief Tax Counsel

Date of publication:  30 October 2002

ISSN: 1445-2782

history
  Date: Version:
You are here 13 September 2002 Original statement
  5 March 2010 Archived

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