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Ruling

Subject: Capital Expenditure - Know how

Question 1:

Will the know-how acquired by XYZ Limited constitute an asset for the purposes of the tax cost setting rules in Part 3-90?

Answer:

No.

Question 2:

Will XYZ Limited be deemed to have incurred expenditure at the time ABC Limited (ABC) joined the XYZ Limited tax consolidated group equal to the tax cost setting amount of the know-how, for the purposes of applying subsection 40-880(2)?

Answer:

No.

Question 3:

Will subsection 40-880(5) apply to limit XYZ Limited's deduction under section 40-880 for the tax cost setting amount of the know-how?

Answer:

No.

Question 4:

Will the expenditure incurred by XYZ Limited, as identified in Question 2, be capital expenditure incurred:

(a) in relation to the business of XYZ Limited; or

(b) in relation to a business proposed to be carried on by XYZ Limited; that satisfies the requirements of subsection 40-880(2)?

Answer:

No.

This ruling applies for the following periods:

1 January 2006 to 31 December 2006

1 January 2007 to 31 December 2007

1 January 2008 to 31 December 2008

1 January 2009 to 31 December 2009

1 January 2010 to 31 December 2010

The scheme commences on:

December 2006

Relevant facts and circumstances

In December 2006, ABC and the DEF groups were acquired by and became members of the XYZ Limited tax consolidated group.

At the time ABC and DEF held confidential information identified as the know-how.

Relevant legislative provisions

Income Tax Assessment Act 1997 Part 3-90 as amended by Tax Laws Amendment (2012 Measures No. 2) Act 2012 (TLAA 2012 No2) (Part 4 in Schedule 3)

Income Tax Assessment Act 1997 subsection 701-63(3) of Tax Laws Amendment (2012 Measures No. 2) Act 2012 (TLAA 2012 No2) (Part 1 in Schedule 3)

Income Tax Assessment Act 1997 subsection 701-55(6) of Tax Laws Amendment (2012 Measures No. 2) Act 2012 (TLAA 2012 No. 2) (Part 1 in Schedule 3)

Reasons for decision

Question 1:

Summary

The know-how asset held by XYZ Limited is not recognised as a separately identifiable asset for the purposes of the tax cost setting rules in Part 3-90.

Detailed reasoning

Legislation and Ruling concerning asset identification

Part 3-90 provides for the treatment of certain groups of entities as single entities for income tax purposes. Among other things, Part 3-90 contains rules which set the cost for income tax purposes of assets of entities when they become subsidiary members of a consolidated group.

Under subsection 701-10(4), when an entity joins a consolidated group, each asset of the joining entity is set at the time the entity becomes a subsidiary member of the group at the asset's tax cost setting amount in accordance with tax cost setting rules.

The Application rules in Tax Laws Amendment (2012 Measures No. 2) Act 2012 (TLAA 2012 No.2) (Part 4 in Schedule 3) provides for which rules apply to the head company of a consolidated group in respect of an entity that becomes a member of that group at a particular time.

In accordance with subitem 50(2) of the TLAA 2012 No.2, the Pre rules apply to XYZ Limited as the joining time is before 12 May 2010. The Pre rules are those amendments made by Part 1 in Schedule 3 of TLAA 2012 No.2. It is noted that the following references to sections relate to the legislative amendments contained within Part 1 of Schedule 3.

Subsection 701-63(3) provides that an asset forming part of goodwill means any of the following:

(a) an intangible asset, the value of which is attributable to expected future profits from *life insurance policies or *general insurance policies;

(b) a customer relationship asset, know-how asset or other accounting intangible asset, that is not any of the following:

(i) a *CGT asset;

(ii) a *revenue asset;

(iii) a *depreciating asset;

(iv) *trading stock;

(v) a thing that is or is part of a *Division 230 financial arrangement;

(vi) goodwill;

(vii) an excluded asset for the purposes of section 705-35;

(c) a *non-deductible right to future income.

The Commissioner's view, as set out in Taxation Determination 2000/33, is that a know-how asset is not a CGT asset because it is neither a form of property nor a legal or equitable right.

Further, the know-how asset in the present case does not fall within any of the exclusions listed in paragraph 701-63(3)(b).

Therefore, the know-how asset is an asset forming part of goodwill pursuant to subsection 701-63(3).

Subsection 701-63(1) states that subsection 701-63(2) applies if an entity (the joining entity) became a subsidiary member of a consolidated group at a time (the joining time).

In December 2006, ABC and DEF (the joining entities) became subsidiary members of the XYZ Limited tax consolidated group. Therefore, subsection 701-63(2) applies.

For the purposes of applying the consolidation provisions in Part 3-90 to an entity that becomes a subsidiary member of a consolidated group:

· the goodwill of a business of the joining entity is treated as a single asset; and

· an asset of that business that is an asset forming part of goodwill is treated as being part of that single asset; and

· as a result, an asset of that business of the joining entity that is an asset forming part of goodwill is not treated as a separate asset.

In accordance with subsection 701-63(2), the know-how asset (which is an asset forming part of goodwill pursuant to subsection 701-63(3)) forms part of a single asset being goodwill.

Therefore, the know-how asset is not recognised as a separately identifiable asset for the purpose of tax cost setting rules in Part 3-90. It is a part of the goodwill of the business of the joining entity.

Question 2:

Summary

As explained in the reasons for decision for Question 1 above, the know-how asset forms part of the single asset being goodwill for the purpose of Part 3-90 and is not a separately identifiable asset.

Due to the operation of subsection 701-63(2), there is no know-how asset whose tax cost is set or that subsection 701-55(6) (in Part 1 of Schedule 3 of TLAA 2012 No. 2) applies to. Therefore, there is no expenditure equal to the tax cost setting amount of the know-how and the requirements of subsection 40-880(2) are not satisfied.

Question 3:

Summary

For the reasons stated above, subsection 40-880(5) will not apply to XYZ Limited as no deduction is available under subsection 40-880(2) in relation to the know-how asset.

Question 4:

Summary

For the reasons stated above, there is no expenditure incurred by XYZ Limited in relation to the know-how asset, as identified in Question 2, and therefore the requirements of subsection 40-880(2) cannot be satisfied.