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Ruling

Subject: Proposed deed of assignment

Question 1

Will the entry into the proposed Deed have the effect and result of the occurrence of CGT event D1?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

1. On 1 July 2005, Aus Co entered into an agreement (the "2005 Agreement") with Red Co whereby Aus Co would receive an income stream from Red Co.

2. On 1 July 2007, Aus Co entered into an agreement (the "2007 Agreement") to assign part of its right to the income stream to Blue Co.

3. Blue Co provided cash consideration for the assignment.

4. The assignment was effective in equity but not at law.

5. Aus Co and Blue Co propose to enter into a deed (the "proposed Deed") to legally perfect the assignment that took place on 1 July 2007.

6. No proceeds or considerations will be received by Aus Co for entering into the proposed Deed.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 104-35(1)

Income Tax Assessment Act 1997 Subsection 104-35(2)

Income Tax Assessment Act 1997 Subsection 104-35(3)

Property Law Act 1969 (WA) Section 20

Reasons for decision

Question 1

Summary

Entry into the proposed Deed will not trigger CGT event D1 because perfecting an equitable assignment that took place in 2007 does not create a new right in the assignee.

Detailed reasoning

Capital gains tax

Subsection 104-35(1) states:

"CGT event D1 happens if you create a contractual right or other legal or equitable right in another entity."

Subsection 104-35(2) states:

"The time of the event is when you enter into the contract or create the other right."

Subsection 104-35(3) states:

"You make a capital gain if the *capital proceeds from creating the right are more than the *incidental costs you incurred that relate to the event. You make a capital loss if those capital proceeds are less."

Choses in action

A chose in action was defined by Channell J in Torkington v Magee [1902] 2 KB 427, at 430, as:

"… a known expression used to describe all personal rights of property which can only be claimed or enforced by action, and not by taking physical possession."

A right to receive royalties is a chose in action.

Legal assignment

Section 20 of the Property Law Act 1969 (WA) sets out the requirements for a valid assignment of a legal chose in action, i.e. an assignment of an abstract form of property such as a right to royalties, in Western Australia.

Section 20 states:

"(1)         Any absolute assignment by writing under the hand of the assignor (not purporting to be by way of charge only) of any debt or other legal chose in action, of which express notice in writing has been given to the debtor, trustee, or other person from whom the assignor would have been entitled to receive or claim that debt or chose in action, is effectual in law (subject to equities having priority over the right of the assignee), to pass and transfer from the date of the notice -

            (a)        the legal right to that debt or chose in action;

(b)        all legal and other remedies for the debt or chose in action; and

(c)        the power to give a good discharge for the debt or chose in action, without the concurrence of the assignor.

(2)       Where the debtor, trustee, or other person liable in respect of the debt or chose in action referred to in subsection (1) has notice -

(a)        that the assignment so referred to is disputed by the assignor, or any person claiming under him; or

(b)        of any other opposing or conflicting claims, to the debt or chose in action,

he may, if he thinks fit, either call upon the persons making claim thereto to interplead concerning the debt or chose in action, or pay the debt or other chose in action into court, under the provisions of the Trustee Act 1962.

For the purposes of this section any debt or other legal chose in action includes a part of any debt or other legal chose in action."

If the formalities in section 20 are observed (namely, the assignment is in writing, is signed by the assignor personally and notice of the assignment is given to the debtor or trustee), no consideration is required for a valid assignment of the chose in action.

Section 20 allows an assignee of a legal chose in action to sue an assignor's debtor for breach of the chose in the assignee's own name.

Equitable Assignment

Where valuable consideration is given for an assignment or an agreement to assign, equity will give effect to the transaction despite the assignor's failure to comply with the requisite formalities. Part of a chose in action can be assigned in equity if there is a clear expression of intention by the assignor to make an immediate disposition.

Agreements to Assign Part of a Chose in Action

An agreement to assign part of an interest in a royalty agreement is an agreement to assign part of a chose in action; Shepherd v Commissioner of Taxation (1965) 113 CLR 385.

A legal assignment of part of a royalty agreement is permissible in Western Australia pursuant to section 20 of the Property Law Act.

Application of Law to Facts

Because Aus Co agreed to assign to Blue Co legal title to part of the income stream, and Blue Co paid cash consideration for that agreement, there was a valid equitable assignment of a legal chose in action (being a part of the income stream). Blue Co, being the equitable assignee, cannot sue for recovery at law without joining the assignor as a party to the suit.

The additional right that Blue Co will obtain upon perfecting the equitable assignment is that Blue Co will have pursuant to section 20 of the Property Law Act (WA) the right to sue Red Co for breach of the 2005 Agreement in Blue Co's own name.

Former subsection 160M(6) of the Income Tax Assessment Act 1936, predecessor to section 104-35, applied where a person disposes of an asset that did not exist (either by itself or as part of another asset) before the disposal, but is created by the disposal; Replacement Explanatory Memorandum to Taxation Laws Amendment Act (No.4) 1992. The signing of the proposed Deed would allow the parties to exercise and fulfill their rights and obligations that already existed under the 2007 Agreement. CGT event D1 would not happen because there is no creation of a new asset that did not exist (either by itself or as part of another asset).

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