ATO Interpretative Decision

ATO ID 2003/834 (Withdrawn)

Income Tax

• This ATO ID is withdrawn from the database because it contains a view in respect of provisions of the Income Tax Assessment Act 1997 that were repealed with effect from 1 July 2001. Despite its withdrawal from the database, this ATO ID continues to be a precedential view in respect of decisions relating to the former provisions.'
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Where there is a partial change in ownership of an item of intellectual property, is there a partial realisation under the former subdivision 373-C of the Income Tax Assessment Act 1997 (ITAA 1997) or is a balancing adjustment required under the former subdivision 373-D of the ITAA 1997?

Decision

Where there is a partial change in ownership of an item of intellectual property, a balancing adjustment is required under the former subdivision 373-D of the ITAA 1997 and there is no partial realisation under subdivision 373-C of the ITAA 1997.

Facts

Company A holds an item of intellectual property as the owner of a copyright. On 1 June 2001, Company A disposes of 50% of its interest in the item to Company B. The outcome of the transaction is that each of the two companies has a 50% interest in the intellectual property previously held by Company A. Company A and Company B do not hold the items of intellectual property resulting from the transaction as a partnership.

Reasons for Decision

Situations which give rise to a partial realisation under Subdivision 373-C of the ITAA 1997 include:

•

where a part interest in the item is disposed of

•

where a licence is granted in respect of a patent, copyright or registered design

•

where an amount is received for the exploitation of a patent, or

•

where an amount is received due to an infringement of a patent, copyright or registered design.

Where a partial realisation occurs, a taxpayer's unrecouped expenditure is reduced by the amount received in respect of the partial realisation. If the amount received exceeds a taxpayer's unrecouped expenditure, assessable income will arise.

Situations where balancing adjustments arise are set out in Subdivision 373-D of the ITAA 1997. This includes where an item of intellectual property:

•

is disposed of or ceases to exist

•

is subject to a partial change of ownership, or

•

where an item of intellectual property is a licence, and that licence is surrendered.

The effect of a balancing adjustment event is to either include an amount in the taxpayer's assessable income, or allow a deduction. The amount so included or allowed as a deduction is calculated by comparing the item's termination value with its written down value, although roll-over relief is available in certain circumstances.

Section 373-45 of the ITAA 1997 (amount arising from a partial realisation of the item) can apply where an owner passes to another entity a discrete part, or parts, of the entirety of rights making up its item of intellectual property. After the passing, the item left in the hands of the owner does not consist of the same entirety of rights as before.

Subsection 373-60(2) of the ITAA 1997 (when balancing adjustment is required) can apply where an owner passes to another entity the whole, or a proportion, of the rights making up the item of intellectual property. After the passing, the item remains the same. However, ownership interests in that item have changed.

Item 1 in the table in section 373-45 of the ITAA 1997 does not apply to company A. Item 1 in the table in subsection 373-60(2) of the ITAA 1997 applies. The result of the disposal is that there has been a change in ownership to the extent of 50% in the intellectual property, being the entirety of rights held by Company A under Commonwealth law, as the owner of a copyright. For the purpose of applying subdivision 373-D of the ITAA 1997, the item of intellectual property disposed of by Company A, and acquired by Company B, is the 50% interest in the intellectual property held by Company A before the transaction occurred.

Year of income:  Year ended 30 June 2001

Legislative References:
Income Tax Assessment Act 1997
   section 373-45
   subsection 373-60(2).

Keywords
Capital Allowances CoE
Copyright
Economic rights & entitlements
Intellectual property rights
Ownership, interests, control & rights

Business Line:  Effective Life and Capital Allowances Centre of Expertise

Date of publication:  12 September 2003

ISSN: 1445-2782