Edited version of your private ruling

Authorisation Number: 1012589207158

Ruling

Subject: Balancing adjustment on copyright

Question 1

Will the Commissioner of Taxation confirm that intangible depreciating assets (specifically copyright) can be split from a single asset into two or more assets in accordance with section 40-115 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

Question 2

Will the Commissioner of Taxation confirm that the first element of the tax cost allocated to the copyright should be apportioned reasonably between (in this circumstance) the two copyright assets in accordance with section 40-205 of the ITAA 1997?

Answer

Not applicable in view of the answer to question 1.

Question 3

Based on the facts and assertions outlined within the ruling application, will the Commissioner of Taxation confirm that the termination value of the second asset and the adjustable value of the second asset should be calculated as described within this Private Ruling?

Answer

Not applicable in view of the answer to question 1.

Question 4

Based on the facts and assertions outlined within the ruling application, will the Commissioner of Taxation confirm that a balancing adjustment event will arise in respect of the second asset in accordance with section 40-295 of the ITAA 1997?

Answer

Not applicable in view of the answer to question 1.

Question 5

Will the Commissioner of Taxation confirm that the taxpayer can deduct an amount under section 40-285(2) of the ITAA 1997 as a result of the balancing adjustment event equal to the adjustable value of the second asset just prior to the balancing adjustment event (assuming a termination value of nil)?

Answer

Not applicable in view of the answer to question 1.

This ruling applies for the following periods:

Year ended 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

The databases

1. The taxpayer acquired a number of identifiable intangible assets including copyright in a number of database compilations.

Copyright in the database compilations

2. The taxpayer advised that the compilation of details in each database is protected under copyright law as a 'compilation' as that term is understood in the definition of 'literary work' in subsection 10(1) of the Copyright Act 1968 (Commonwealth). Copyright in each 'compilation' protected for each database is a distinct asset, separate from other assets.

3. Each 'compilation' protected by copyright was recorded electronically and developed into an electronic database system using off-the-shelf database management systems. A database management system is a software environment that structures and manipulates data and ensures data security, recovery and integrity. The taxpayer advised that the copyright in each protected 'compilation' has been used to perform acts described in section 31 of the Copyright Act 1968 (Cth).

4. The databases were subsequently copied into a single database (Adatabase). The data stored in Adatabase is still the same data as originally stored in each original database. The data has not been reformatted although the data fields have been changed. A new database management system from a new supplier is used to manage Adatabase.

Cleansing of the Databases

5. Taxpayer management periodically made a decision to cleanse the Adatabase.

6. The taxpayer provided the following explanation characterising what occurs before and after Adatabase is cleansed of unwanted parts:

Work 1 - the original database

i. The original database is a compilation. It is a literary work for copyright purposes (Work 1).

ii. Work 1 is an item of personal property.

iii. The owner of Work 1 is the person who owns the physical form in which it exists (Owner 1). [By way of example, in the case of a work that is a painting, the owner of the work is the owner of the painting.]

iv. Owner 1 has rights in relation to the physical item. [Using the example above, to hang the painting or sell it.]

v. Work 1 is also protected by copyright (Copyright 1).

vi. Copyright 1 is an item of personal property (separate to the physical item).

vii. The owner of Copyright 1 is not necessarily Owner 1; it will be either the author of the work, the author's employer, or the person who has an agreement with the author to acquire the copyright.

viii. In this instance, the taxpayer is Owner 1 and also owns Copyright 1.

Cleansing

i. Sometime after it was created, Work 1 was cleansed - that is, unwanted parts of the compilation were deleted.

ii. What remained is a work protected by copyright (Work 2).

iii. Work 2 is a separate work to Work 1, even though it is also a new version of Work 1 and comprises a new arrangement of a substantial part of Work 1. [By way of example, the new edition of an existing work is a new work, as are successive revisions of a manuscript or each new revision of a technical drawing.]

iv. Work 2 is also protected by copyright (Copyright 2).

v. Copyright 2 is a separate item of personal property.

vi. The deleted part of the original compilation is also a work protected by copyright (Work 3).

vii. Work 3 is a separate work to Work 1 and Work 2.

viii. Work 3 is also protected by copyright (Copyright 3).

ix. Copyright 3 is a separate item of personal property.

After cleansing

i. After cleansing, there are three works (Work 1, Work 2 and Work 3) and three copyrights (Copyright 1, Copyright 2 and Copyright 3).

Work 2 and Copyright 2 - the retained part

i. A work that is a compilation can be split into parts from which it is complied. [By way of example, an anthology of poems is a literary work in its own right and each poem is also a separate literary work.]

ii. Copyright can also be "split" - this is clear from section 196(2) of the Copyright Act 1968 - "so as to apply [for example] to a place … [or] part of the period for which the copyright is to subsist".

iii. In this instance, where an original work was split into parts, the copyright was also split so as to apply, as between the owners of each part, to the part that belongs to that owner. Rights that once applied to the whole of the work now apply only to the relevant part.

iv. The taxpayer owns Work 2 and that part of Copyright 1 that is Copyright 2.

Work 3 and Copyright 3 - the part disposed of

i. Copyright can only subsist in works that exist.

ii. If, as here, Work 3 no longer exists (because the deleted parts have been destroyed) Copyright 3 no longer subsists.

Conclusion

i. What has occurred in this instance is that:

a. Work 1 has been split into two works - Work 2 and Work 3; and

b. Copyright 1 has also been split into:

i. Copyright 2 - which the taxpayer owns; and

ii. Copyright 3 - which no longer subsists, because Work 3 no longer exits.

7. Data was cleansed out of Adatabase at various times. In the last 2 to 3 years this has usually been done on an annual basis. However, prior to the last 3 years the cleansing was done on an irregular basis. In future a database may be examined more often.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 40-35

Income Tax Assessment Act 1997 Section 40-115,

Income Tax Assessment Act 1997 Subsection 40-115(1),

Income Tax Assessment Act 1997 Subsection 40-115(2),

Income Tax Assessment Act 1997 Subsection 40-115(3),

Income Tax Assessment Act 1997 Section 40-205,

Income Tax Assessment Act 1997 Section 40-285,

Income Tax Assessment Act 1997 Subsection 40-285(2),

Income Tax Assessment Act 1997 Section 40-295,

Income Tax Assessment Act 1997 Section 701-55,

Income Tax Assessment Act 1997 Subsection 701-55(2),

Income Tax Assessment Act 1997 Section 955-1,

Copyright Act 1968 Section 10,

Copyright Act 1968 Subsection 10(1),

Copyright Act 1968 Section 31,

Copyright Act 1968 Section 196 and

Copyright Act 1968 Subsection 196(1).

Reasons for decision

Summary

Copyright cannot be split from a single asset into two or more assets in the manner described in the application for the private ruling for the purposes of section 40-115 of the Income Tax Assessment Act 1997 (ITAA 1997).

Detailed reasoning

Section 40-115 of the ITAA 1997 deals with splitting and stopping to hold a depreciating asset. It states:

40-115(1) If a *depreciating asset you *hold is split into 2 or more assets, this Division applies as if you had stopped holding the original asset and started holding the assets into which it is split.

Note 1: For the cost of the split assets, see section 40-205.

Note 2: A balancing adjustment event does not occur just because you split a depreciating asset: see section 40-295.

40-115(2) If you stop *holding part of a *depreciating asset, this Division applies as if, just before you stopped holding that part, you had split the original asset into the part you stopped holding and the rest of the original asset. (The rest of the original asset is then taken to be a different asset from the original asset.)

Example:

Bronwyn sells Tim a part interest in a depreciating asset she owns. They become joint holders under section 40-35. She is taken to have split the underlying asset into the interest she retains and the interest Tim buys. She now holds an interest (a new depreciating asset) in the underlying asset and is taken to have stopped holding the interest sold.

40-115(3) If you grant or assign an interest in an item of *intellectual property, subsection (2) applies to you as if you had stopped *holding part of the item.

Intellectual property has the meaning given in section 995-1 of the ITAA 1997. Relevantly, it includes an item of intellectual property consisting of the rights (including equitable rights) that an entity has under a Commonwealth law as the owner, or a licensee, of a copyright.

For most tangible assets, a physical separation or division of the original asset into two or more physical assets might ordinarily be expected for section 40-115 of the ITAA 1997 to apply. However, subsection 40-115(3) of the ITAA 1997 recognises that the splitting of a depreciating asset that is an item of intellectual property can occur when you grant or assign an interest in your asset. Where this occurs the grant or assignment of the interest amounts to a division of the original rights held in the item of intellectual property including division as to time, place and the class of acts or acts permitted and subsection 40-115(3) of the ITAA 1997 has application.

The relevant depreciating assets in this case are the copyrights in relation to the original database compilations. The taxpayer originally identified the original database compilations as the works subject to copyright. Each of these database compilations was separately protected by copyright. The taxpayer subsequently advised that these databases were merged into a single database (Adatabase). The taxpayer advised that periodically, the Adatabase is cleansed.

According to the taxpayer, the cleansing process involves deleting unwanted parts of the database compilation. After the cleansing process, there were 3 'Works' - Work 1 being the original database, i.e. Adatabase, Work 2 being the database remaining after the cleansing process and Work 3 being the deleted part of the Adatabase and 3 'Copyrights' - Copyrights 1, 2 and 3 being copyrights over Work 1, Work 2 and Work 3 respectively.

There is a clear distinction at law between a work subject to copyright and the copyright in that work (Pacific Film Laboratories v Federal Commissioner of Taxation (1970) 121 CLR 154). In this case there is a distinction between the database compilation and copyright in that database compilation. The issue for taxation purposes is whether the cleansing of the Adatabase results in splitting the copyrights in each of the compilation of the original databases.

The creation of the Adatabase, through copying the original databases into a single database, does not, arguably, result in a split of the copyrights over the original database compilations as nothing new and original is created. Hence, the copyrights in relation to the original database compilations continue to subsist.

The taxpayer stated that when Adatabase is cleansed by deleting unwanted parts of it, new Works and Copyrights are created (see above). However, the copyright over the original database compilations, being Copyright 1, still subsist.

The taxpayer submitted that copyright can also be 'split' in this case. Where an original work was split into parts, the copyright was also split so as to apply, as between the owners of each part, to the part that belongs to that owner. Rights that once applied to the whole of the work now apply only to the relevant part (Work 2) and the taxpayer owns Work 2 and that part of Copyright 1 that is Copyright 2.

Although the cleansing process may create new works and copyrights, it does not appear from the facts that the taxpayer has split Copyright 1 for the purposes of section 40-115 of the ITAA 1997. This is because the cleansing process only involves the deletion of unwanted parts of the Adatabase which does not affect the taxpayer's rights as the owner of Copyright 1.

Subsection 40-115(3) of the ITAA 1997 applies where a taxpayer grants or assigns an interest in an item of intellectual property. A grant of an interest involves the bestowal of a particular right from one party to another party. To assign an interest involves a transfer of an existing interest from one party to another party. Both the words 'grant' and 'assign' connote the involvement of more than one party, i.e. the transfer of property, or an interest in relation to property, from one party to another party.

As the cleansing of Adatabase does not involve a transfer of ownership to another party, or the granting of permission to another party to use copyright in any of the original copyright assets, there was no grant or assignment of the rights from the taxpayer to another party. Accordingly, subsection 40-115(3) has no application to the original copyright assets. Hence, copyright cannot be split from a single asset into two or more assets in the manner described in this private ruling for the purposes of section 40-115 of the ITAA 1997.

Questions 2 - 5

Summary

In view of the answer to Question 1, it is not necessary to address the other questions.