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Edited version of private ruling
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Ruling
Subject: Deductible of licence fees
Question
Will the Commissioner make a determination under section 177F of the Income Tax Assessment Act 1936 such that the licence fees are not deducible?
Answer
No.
Relevant facts and circumstances
Pursuant to the Agreement, A will agree to operate and maintain ('O&M') the Facility in consideration of B paying periodic payments.
B will grant a non-exclusive licence to A to enter, use and occupy the area of land required for the O&M activities in return for licence fees.
The licence fees will be assigned to C pursuant to a securitisation arrangement.
Part IVA of the ITAA 1936
Part IVA of the ITAA 1936 will apply where a scheme is entered into or carried out for the dominant purpose of enabling a relevant taxpayer to obtain a tax benefit.
While A will enter into a scheme; a tax benefit must arise in connection with the scheme for section 177F of the ITAA 1936 to apply.
Tax benefit
The identification of a tax benefit requires the consideration of the income tax consequences (excluding the operation of Part IVA of the ITAA 1936), of an 'alternative hypothesis' (counterfactual). The counterfactual is what would have happened or might reasonably be expected to have happened if the taxpayer's particular scheme had not been entered into or carried out.
As stated in Commissioner of Taxation (Cth) v Peabody (1994) 181 CLR 382 at 385:-
'A reasonable expectation requires more than a possibility. It involves a prediction as to events which would have taken place if the relevant scheme had not been entered into or carried out and the prediction must be sufficiently reliable for it to be regarded as reasonable.'
C will receive assessable income being the fees assigned to it therefore the transaction produces a tax net neutral result with a deduction available for the fees A will pay to C.
This overall income tax outcome matches that obtained where there is no licence or licence fee, and therefore no relevant tax benefit arises pursuant to the licensing.
Accordingly, the Commissioner will not make a determination under section 177F of the ITAA 1936.