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Edited version of your private ruling

Authorisation Number: 1012613936493

Ruling

Subject: Active asset: right to use intellectual property

Question

Was your contractual right granted to Company A to use your intellectual property an active asset for the purposes of Division 152 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

This ruling applies for the following period:

Year ending 30 June 20YY

The scheme commences on:

30 June 20XX

Relevant facts and circumstances

After 20 September 1985, you entered into an agreement with an unrelated company, giving them the right to use, manufacture, market and sell your intellectual property (copyrights and patents).

During the year ended 30 June 20XX, deed of termination was entered into by you and the company, whereby you received a termination payment.

Although the original agreement states you were expected hereafter to become possessed of further knowhow and improvements in relation to your intellectual property, the original agreement also only provides for you to receive annual royalty payments based on sales turnover and also states the company shall be entitled to make use of improvements you make to your intellectual property, during the term of the agreement, without payment of any additional fees.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 40-30

Income Tax Assessment Act 1997 Section 104-35

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Section 152-35

Income Tax Assessment Act 1997 Section 152-40

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Section 995-1 of the 1997 provides a patent, a registered design or a copyright is an item of intellectual property. Paragraph 40-30(2)(c) of the ITAA 1997 provides an item of intellectual property is a depreciating asset (if it is not trading stock).

Section 108-5 of the ITAA 1997 includes a right to enforce a contractual obligation as an example of a CGT asset. Section 104-35 of the ITAA 1997 states CGT event D1 happens if you create a contractual right or other legal or equitable right in another entity.

To help small business, capital gains can be reduced by the various concessions in Division 152 of the ITAA 1997. Section 152-10 of the ITAA 1997 provides one of the basic conditions for relief is the CGT asset that is subject to the CGT even must satisfy the active asset test in section 152-35.

Sections 152-35 and 152-140 of the ITAA 1997, combined, provide a CGT asset satisfies the 'active asset test' if you have owned the asset for more than 15 years and the asset was used, or held ready for use, in the course of carrying on a business by you (or your affiliate, your spouse or child under 18 years or an entity connected with you) for a total of at least 7½ of those 15 years.

However, paragraph 152-40(4)(e) of the ITAA 1997 states a CGT asset whose main use by you is to derive royalties cannot be an active asset unless:

In your case, the contractual right you granted to exploit your intellectual property was an intangible CGT asset that was not an active asset under paragraph 152-40(4)(e) of the ITAA 1997. The reasons for this are: (a) your agreement shows your CGT asset's main use by you was to derive royalties, in that you were not entitled to receive any payments apart from a percentage of sales; (b) your agreement shows if your intellectual property was developed, altered or improved by you there would be no change to the market value of your CGT asset since you would not receive payment of any fees in addition to the royalty payments set out in the agreement; and (c) if your intellectual property was developed, altered or improved by you in a way to substantially enhance its market value, this enhancement of market value would occur to a depreciating asset rather than to a CGT asset.

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