Edited version of your written advice

Authorisation Number: 1012757163483

Ruling

Subject: Disposal of R& D result

Question 1

Will section 355-410 of the Income Tax Assessment Act 1997 (ITAA 1997) or former subsection 73B(27A) of the Income Tax Assessment Act 1936 (ITAA 1936) apply to payments made to Company A under the Licence Agreement?

Answer

Yes.

Question 2

Will the upfront fee be assessable income of Company A under section 355-410 of the ITAA 1997 in the income year ended 30 June 2014?

Answer

Yes.

Question 3

Will an Initial Periodic Payment be assessable income of Company A under section 355-410 of the ITAA 1997 in the income year that Company B achieves a condition to which the payment relates?

Answer

Yes.

Question 4

Will a Subsequent Periodic Payment be assessable income of Company A under section 355-410 of the ITAA 1997 in the income year that Company B achieves a condition to which the payment relates?

Answer

Yes.

Question 5

Will Division 230 of the ITAA 1997 apply to payments made under the Licence Agreement?

Answer

No.

Question 6

Will Division 775 of the ITAA 1997 apply to bring to account any forex realisation gain and loss on receipt of payment by Company A in accordance with the Licence Agreement?

Answer

Yes.

Question 7

Will the Commissioner make a determination under section 177F of the ITAA 1936 to cancel a tax benefit of a kind referred to in subsection 177F(1) of the ITAA 1936 obtained, or that would but for subsection 177F(1) of the ITAA 1936 be obtained, by Company A in connection with the project?

Answer

No.

This ruling applies for the following periods:

This ruling applies from the income year ended 30 June 2014 and ends in the income year when the obligation of Company B to pay the royalties expires.

The scheme commences on:

Income year ended 30 June 2014

Relevant facts and circumstances

Company A is an Australian resident for income tax purposes and an R&D entity registered under section 27A of the Industry Research and Development Act 1986.

Company A and Company B are members of a group of companies.

As part of a project, Company A and Company B entered into a Licence Agreement in the year ended 30 June 2014.

Under the Licence Agreement, Company B has been granted by Company A an exclusive right to use an intellectual property (IP) that it developed as a result of its research and development activities and Company B will make the following payments to Company A:

• an upfront fee;

• Initial Periodic Payments;

• Subsequent Periodic Payments; and

• royalties

All payments by Company B under the Licence Agreement will be made in USD.

The upfront fee was paid in the year ended 30 June 2014.

The Initial Periodic Payments, Subsequent Periodic Payments and royalties will become payable in future years when certain conditions are achieved by Company B.

Relevant legislative provisions

Income Tax Assessment Act 1936 Former section 73B

Income Tax Assessment Act 1936 Former subsection 73B(27A)

Income Tax Assessment Act 1936 Former subsection 73B(27B)

Income Tax Assessment Act 1936 Former subsection 73B(27C)

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1936 Section 177D

Income Tax Assessment Act 1936 Section 177F

Income Tax Assessment Act 1997 Division 230

Income Tax Assessment Act 1997 Section 230-45

Income Tax Assessment Act 1997 Subsection 230-45(1)

Income Tax Assessment Act 1997 Subsection 230-45(2)

Income Tax Assessment Act 1997 Section 230-50

Income Tax Assessment Act 1997 Subsection 230-55(4)

Income Tax Assessment Act 1997 Division 355

Income Tax Assessment Act 1997 Section 355-410

Income Tax Assessment Act 1997 Division 775

Income Tax Assessment Act 1997 Section 775-5

Income Tax Assessment Act 1997 Subsection 775-15(1)

Income Tax Assessment Act 1997 Subsection 775-30(1)

Income Tax Assessment Act 1997 Subsection 775-45(1)

Income Tax Assessment Act 1997 Subsection 775-45(2)

Income Tax Assessment Act 1997 Subsection 775-45(3)

Income Tax Assessment Act 1997 Subsection 775-45(4)

Income Tax Assessment Act 1997 Subsection 775-45(7)

Income Tax Assessment Act 1997 Section 775-85

Income Tax Assessment Act 1997 Subsection 775-105(1)

Income Tax Assessment Act 1997 Subsection 775-105(2)

Income Tax Assessment Act 1997 Subsection 775-135(2)

Income Tax Assessment Act 1997 Section 960-50

Income Tax Assessment Act 1997 Subsection 960-50(6) item 7

Income Tax Assessment Act 1997 Subsection 960-50(6) item 11

Income Tax Assessment Act 1997 Subsection 974-160(1)

Income Tax Assessment Act 1997 Subsection 995-1(1)

Reasons for decision

NB: All legislative references are to the ITAA 1997 unless otherwise stated.

Question 1

Summary

Section 355-410 or former subsection 73B(27A) of the ITAA 1936 will apply to payments made to Company A under the Licence Agreement.

Question 2

Summary

The upfront fee will be an assessable income of Company A under section 355-410 in the income year ended 30 June 2014.

Question 3

Summary

An Initial Periodic Payment will be assessable income of Company A under section 355-410 in the income year that Company B achieves a condition to which the payment relates.

Question 4

A Subsequent Periodic Payment will be assessable income of Company A under section 355-410 in the income year that Company B achieves a condition to which the payment relates.

Detailed reasoning - Questions 1 to 4

The R&D provisions - a brief legislative history

Division 355 was introduced into the ITAA 1997 with the passage of the Tax Laws Amendment (Research and Development) Act 2011 (Act No. 93 of 2011). Division 355 applies to R&D entities and to income years commencing on or after 1 July 2011. Division 355 replaces a number of provisions of the ITAA 1936, most notably, former section 73B of the ITAA 1936.

Although repealed by Act No 93 of 2011, former section 73B of the ITAA 1936 including former subsection 73B(27A) of the ITAA 1936 continue to apply by virtue of the operations of the transitional provisions in Act No 93 of 2011. These repealed provisions of the ITAA 1936 continue to apply to income years commencing prior to 1 July 2011 where the concession under former provisions have been claimed.

As Company A has incurred expenditure on R&D activities in relation to the IP in income years commencing both prior and subsequent to 1 July 2011, the assessability of the amounts payable to Company A under the Licence Agreement was considered under both section 355-410 and former subsection 73B(27A) of the ITAA 1936.

The following reasoning is based on section 355-410, one of the integrity rules in the R&D provision in Division 355.This section corresponds to the former rules in subsections 73B(27A), 73B(27B) and 73B(27C) of the ITAA 1936. The role of these provisions is to ensure statutory revenue treatment for amounts received by an R&D entity relating to the results of R&D activities, including the grant of rights to the results by way of licensing. Where a concession has been claimed under the former rules, amounts received after 1 July 2011 for the results of those research and development activities will be assessed under former subsection 73B(27A) of the ITAA 1936.

Assessability of the amounts payable to Company A under the Licence Agreement

Section 355-410 operates to include certain amounts ('results amounts') an R&D entity receives or is entitled to receive in an income year in the R&D entity's assessable income for the relevant year.

Section 355-410 states:

(1) This section applies to an *R&D entity if:

a) the R&D entity is entitled under section 355-100 to a *tax offset because it can:

i. deduct under section 355-205 or 355-480 expenditure incurred on *R&D activities; or

ii. deduct under section 355-305 or 355-520 an amount for an asset (the R&D asset) used for the purpose of conducting one or more R&D activities; and

b) the R&D entity receives or becomes entitled to receive one or more of the following amounts (the results amounts) in an income year (the results year):

i. an amount for the results of any of the R&D activities;

ii. an amount from granting access to, or the right to use, any of those results;

iii. an amount attributable to the R&D entity having incurred the expenditure, including an amount it is entitled to receive regardless of the results of the R&D activities;

iv. an amount attributable to the R&D asset being used for the purpose mentioned in subparagraph (a)(ii), including an amount the R&D entity is entitled to receive regardless of the results of the R&D activities;

v. an amount from *disposing of a *CGT asset, or from granting a right to occupy or use a CGT asset, where the disposal or grant resulted in another person acquiring a right to access or use any of those results.

Note: This section also applies with changes to the partners of an R&D partnership (see section 355-535).

(2) For each results amount, the following amount is included in the *R&D entity's assessable income for the results year:

a) if the results amount is only a results amount because of subparagraph (1)(b)(v), and the asset referred to in that subparagraph is a *depreciating asset-an amount equal to the extent (if any) that the results amount exceeds the asset's *cost just before the disposal or grant;

b) if the results amount is only a results amount because of subparagraph (1)(b)(v), and the asset referred to in that subparagraph is not a depreciating asset-an amount equal to the extent (if any) that the results amount exceeds the asset's *cost base just before the disposal or grant;

c) otherwise-the results amount.

(3) For the purposes of paragraph (2)(a), assume that subsection 40-45(2) did not, except in the case of buildings and extensions, alterations and improvements to buildings, prevent Division 40 from applying to certain capital works.

The Explanatory Memorandum to the Tax Laws Amendment (Research and Development) Bill 2010 which introduced Division 355 provides the following explanation about section 355-410:

Disposal of R&D results

3.159 The assessable income of an R&D entity includes an amount if:

• it is entitled to a notional deduction for expenditure on R&D activities or for using a depreciating asset for R&D activities; and

• it receives, or becomes entitled to receive, an amount:

- for the results of any of the activities;

- from the grant of access to, or the right to use, any of those results;

- attributable to the entity having incurred the expenditure or having used the asset for R&D activities (including an amount that it is entitled to receive irrespective of the results of the activities); or

- from disposing of a CGT asset, or from granting a right to occupy or use a CGT asset, where the disposal or grant resulted in another entity acquiring a right to access or use any of those results.

…

3.160 The amount assessable is generally the amount received or receivable. However, where the amount is from disposing of a CGT asset that is a depreciating asset, or from granting a right to occupy or use such an asset, the assessable income amount is the amount received or receivable less the cost of the asset (just before the disposal or grant).

Where the amount is from disposing of a CGT asset that is not a depreciating asset, the amount assessable is the amount received or receivable less the cost base of the asset (just before the disposal or grant).

Thus, an amount under section 355-410 is included in an R&D entity's assessable income provided (emphasis added):

(a) the R&D entity was entitled to a tax offset under section 355-100, and

(b) the amount was received or entitled to be received:

- for the results of any of the R&D activities,

- from the grant of access to, or the right to use, any of those results,

- that is attributable to the expenditure incurred or having used the asset for R&D activities (including amounts received/receivable irrespective of the results of the activities),

or

- from disposing a CGT asset, or from granting a right to occupy or use a CGT asset such that another entity acquires a right to access/use any of those results.

It is clear from the words in section 355-410 that for its operation, all that is required is for the R&D entity to be entitled to the notional deduction and tax offset in respect of the expenditure incurred in developing the R&D results (for example intellectual property or know-how). Once this condition is met, the provision operates to assess the entire amount received (or entitled to be received) by the R&D entity, on disposal or licensing of those results, as an R&D results amount.

It is also clear from the plain meaning of the words in section 355-410 that it is designed to capture all amounts that are received, or entitled to be received, for the results of any of the R&D activities, or from the granting of the right to use any of those results.

Company A has indicated in its ruling request that it has met the condition for eligibility for the notional deduction and tax offset under Division 355. .

Accordingly, the amounts payable to Company A under the Licence Agreement should be accounted for as follows.

Upfront fee

The upfront fee is a payment that Company A has received from granting access to, or the right to use, the R&D results associated with the IP. This amount clearly falls within the scope of section 355-410 and its predecessor provision, former subsection 73B(27B) of the ITAA 1936. The Commissioner accepts that upon signing the Licence Agreement there is no contingency or defeasibility to the payment of the upfront fee. As the Licence Agreement was executed in the income year ended 30 June 2014, the amount will be assessable in the year ended 30 June 2014.

Initial Periodic Payments

The Licence Agreement states that this payment (or a series of payments upon the achievement of relevant conditions) is a consideration for Company A's grant of the licence pursuant to the Licence Agreement. This is clearly a consideration for the grant of right to use the IP, and therefore, falls within the scope of a 'results amount' covered by subparagraph 355-410(1)(b)(ii) and the former subsections 73B(27A) to 73B(27C) of the ITAA 1936.

These are payments Company A is entitled to receive upon the achievement of each condition by Company B. Therefore, Company A needs to include these payments in its assessable income under section 355-410 (and/or former subsections 73B(27A) to 73B(27C) of the ITAA 1936) in the income year in which Company B achieves each condition.

The Commissioner considers that Company A becomes entitled to receive the amount on the date Company B achieves the condition. This is irrespective of the fact that Company B has to subsequently notify Company A of the achievement of the relevant condition and payment is not effected until the requirements the Licence Agreement are satisfied. Further, the Licence Agreement also provides that none of the periodic payments payable by Company B are refundable for any reason whatsoever.

In determining when Company A becomes entitled to receive the payment for the purposes of section 355-410, the focus is on when the amounts are payable under the Agreement as opposed to when/how they are paid. This view finds support in ATO ID 2004/568 which considers, among other things, when a taxpayer becomes entitled to receive a Government grant or recoupment in the R&D context. The ATO ID relevantly states:

The ordinary meaning of 'becoming entitled to receive an amount' is that there is an absolute or unconditional entitlement to receive the amount…

ATO ID 2004/568 goes on to consider the ordinary dictionary meaning of 'entitle', noting that it means 'to qualify for, to furnish with proper grounds for seeking or claiming'.

Consistent with the above interpretation of the term 'entitled to receive', Company A becomes entitled to the Initial Periodic Payments upon Company B achieving each condition. Although payment is subject to notification and invoicing as required under the Licence Agreement, this does not affect Company A's entitlement to receive the amount for the purposes of section 355-410 and its predecessor provisions in section 73B of the ITAA 1936.

Subsequent Periodic Payments

The Subsequent Periodic Payments are payments required to be made by Company B (as licensee) to Company A (as licensor) for the continued use of the IP ('R&D results'), subject to the successful development of this IP/results by Company B. Again, these amounts are captured by section 355-410 (and the former sections 73(27A) to 73B(27C) of the ITAA 1936) because they are amounts from the granting of the right to use the R&D results.

Section 355-410 does not put a time limit on how long, or the manner in which, those results should be used. All that is required is that the amount is received (or entitled to be received):

• for the results of any of the R&D activities, or

• from the grant of access to, or the right to use, any of those results.

The terms 'for' and 'from' are sufficiently broad to encompass payments a taxpayer (licensor company) is entitled to receive from the continued use of the 'results' by the licensee, in whichever manner consistent with the licensing terms and conditions.

Company A is entitled to receive the Subsequent Periodic Payments upon the first achievement of each condition attached to each payment. Payment is effected under the terms set out in the Licence Agreement. Therefore, Company A is required to include in its assessable income, under section 355-410 (and/or its predecessor provisions in section 73B of the ITAA 1936) the Subsequent Periodic Payments in the income year in which Company B achieves each condition, consistent with the view in ATO ID 2004/568.

Royalties

The royalties payable are assessable as R&D 'results amounts' under section 355-410 and its predecessor provisions in section 73B of the ITAA 1936 for the same reasons as the Subsequent Periodic Payments discussed above. They are payments by Company B for the continued use of the IP ('R&D results'), irrespective of the capacity in which those results are being used (i.e. product sales as opposed to further research and testing). They are assessable in the income year in which Company A becomes entitled to receive those payments, in accordance with the view set out in ATO ID 2004/568.

Question 5

Summary

Division 230 will not apply to payments made under the Licence Agreement.

Detailed reasoning

Division 230 is about the tax treatment of gains and losses from financial arrangements. The unit of taxation for Division 230 is a 'financial arrangement'. Sections 230-45 and 230-50 provide tests which determine whether a taxpayer has a financial arrangement.

Subsection 230-55(4) determines the scope of that to which the section 230-45 and subsection 230-50(2) tests apply, providing criteria by which it is determined whether a number of rights and/or obligations are themselves an 'arrangement' or are 2 or more separate 'arrangements' for the purposes of Division 230. In this respect it is considered that the Licence Agreement, having regard to the matters referred to in paragraphs 230-55(4)(a) to (f), constitutes one arrangement.

Section 230-45 financial arrangement

Section 230-45 is the general test. Pursuant to subsection 230-45(1), you have a 'financial arrangement' if you have, under an arrangement identified pursuant to subsection 230-55(4), a cash settlable right to receive or obligation to provide a financial benefit, or a combination of such rights and/or obligations, unless, broadly, you have not insignificant other rights to receive or obligations to provide something which is not a financial benefit, or the other rights or obligations are not cash settlable.

Therefore, if an arrangement includes a not insignificant non-cash settlable right and/or obligation, it will not give rise to a financial arrangement (see paragraphs 230-45(1)(d),(e) and (f)). In respect of the meaning of the expression 'not insignificant', the Explanatory Memorandum to Tax Laws Amendment (Taxation of Financial Arrangements) Bill 2008 at paragraph 2.38 provides:

...cash settlable rights and/or obligations otherwise comprising the financial arrangement must be the only rights and/or obligations of any significance subsisting under the arrangement before a financial arrangement will arise.

Subsection 995-1(1) in conjunction with 974-160(1) defines a 'financial benefit' as anything of economic value. Subsection 230-45(2) specifies the circumstances in which a right to receive or obligation to provide a financial benefit that you have is 'cash settlable'.

Company A has under the Licence Agreement cash settlable rights to receive financial benefits, i.e. the right to receive the upfront fee and subject to the happening of specified events, the periodic payments and royalties.

However, Company A has under the Licence Agreement also ongoing obligations to allow, and be deprived of, the use of the IP as specified in the Licence Agreement. It is considered that these ongoing obligations to provide financial benefits are not cash settlable and not insignificant when compared to Company A's cash settlable rights to receive financial benefits under the Licence Agreement.

Accordingly, the Licence Agreement is not a financial arrangement under section 230-45.

Section 230-50 financial arrangement

The Licence Agreement is not an equity interest or rights and/or obligations in relation to an equity interest under an arrangement.

Accordingly, the Licence Agreement is not financial arrangements under section 230-50.

Conclusion

The Licence Agreement is not a financial arrangement for the purposes of Division 230. Accordingly, Division 230 will not apply to payments made under the Licence Agreement.

Question 6

Summary

Division 775 will apply to bring to account any forex realisation gain and losses on receipt of payment by Company A in accordance with the Licence Agreement.

Detailed reasoning

Division 775 operates to include in assessable income or allow as a deduction, a forex realisation gain or loss which results from a forex realisation event (FRE) happening. Section 775-5 provides the 5 main types of FREs that are dealt with under Division 775.

Having regard to the terms of the Licence Agreement, it is considered that FRE 2 is the relevant FRE.

Subsection 775-45(1) provides as follows:

Forex realisation event 2 happens if:

(a) you cease to have a right, or a part of a right, to receive *foreign currency; and

(b) the right, or the part of the right, is one of the following:

(i) a right, or a part of a right, to receive, or that represents, *ordinary income or *statutory income (other than statutory income that is assessable under this Division or Division 102);

…

Foreign currency is defined in subsection 995-1(1) to mean a currency other than Australian currency.

Under the terms of the Licence Agreement, the consideration payable to Company A consists of the following:

i. upfront fee;

ii. Initial Periodic Payments;

iii. Subsequent Periodic Payments; and

iv. royalties.

Payments will be made in US dollars (USD).

Whilst the term right is not defined in Division 775, paragraph 2.58 of the Explanatory Memorandum to the New Business Tax System (Taxation of Financial Arrangements) Bill (No. 1) 2003 states that it is intended to carry its ordinary legal meaning. The Macquarie Dictionary, 2001 rev. 3rd edn, The Macquarie Library Pty Ltd, NSW defines a right as:

… a just claim or title, whether legal, prescriptive, or moral; that which is due to anyone by just claim.

Under the terms of Licence Agreement, Company A obtains a right to receive foreign currency as follows:

I. in respect of the upfront fee, when Company A enters into Licence Agreement;

II. in respect of the Initial Periodic Payments, Subsequent Periodic Payments and royalties (periodic payments), when Company B achieves each defined event in respect of which a payment is due to Company A. It should be noted that although these periodic payments are subject to meeting certain conditions the extended meaning of the phrase right to receive foreign currency contained in subsection 775-135(2) includes a right to receive foreign currency where the right is subject to a contingency.

Pursuant to subsection 775-45(2), FRE 2 will happen at the time of each payment by Company B.

Under the arrangement, when Company A receives a payment in accordance with the Licence Agreement, FRE 2 will happen because it will cease to have a right to receive foreign currency. As discussed above in the Detailed reasoning for questions 1 to 4, these payments will be treated as statutory income under section 355-410.

Forex realisation gain or forex realisation loss

When Company A receives a payment in accordance with the Licence Agreement, the receipt may result in a forex realisation gain (subsection 775-45(3)) or a forex realisation loss (subsection 775-45(4)) to the extent that such gain or loss is attributable to a currency exchange rate effect.

A currency exchange rate effect is defined in subsection 775-105(1) as:

(a) any currency exchange rate fluctuations; or

(b) a difference between:

(i)  an expressly or implicitly agreed currency exchange rate for a future date or time; and

(ii)  the applicable currency exchange rate at that date or time.

To determine whether there is a currency exchange rate effect, the translation rules in section 960-50 apply (subsection 775-105(2)). Section 960-50 provides a standard translation rule for the translation of all foreign currency denominated amounts to Australian Dollar (AUD) and requires that foreign currency denominated amounts be translated to AUD at specific times.

To establish whether Company A makes a forex realisation gain or forex realisation loss, subsections 775-45(3) and 775-45(4) require a comparison to be made between the AUD equivalent of:

(1) the amount received in respect of the event happening; and

(2) the forex cost base of the right or the part of the right (translated at the tax recognition time provided in the table in subsection 775-45(7)).

Item 1 of the table in subsection 775-45(7) provides that the tax recognition time for a right to statutory income is when the requirement first arose to include the statutory income in Company A's assessable income. Thus:

i. in respect of the upfront fee, the tax recognition time is when Company A enters into Licence Agreement;

ii. in respect of the periodic payments, the tax recognition time is when Company B achieves each defined event in respect of which a payment is due to Company A.

The forex cost base of a right (or part thereof) to receive foreign currency is defined in section 775-85 as the total of money paid (or required to pay) and the market value of non-cash benefits provided (or required to provide) in respect of acquiring the right, reduced by any amount that is deductible under the Act (other than under Division 775). Pursuant to this definition, the forex cost base of the amounts payable under the Licence Agreement are as follows:

i. in respect of the upfront fee, the AUD equivalent amount when Company A enters into the Licence Agreement;

ii. in respect of the periodic payments, the AUD equivalent amount when Company B achieves a defined event in respect of which a payment is due to Company A.

Accordingly, whether Company A makes a forex realisation gain or loss requires a comparison of the AUD equivalent of the amount received translated at the exchange rate applicable at the time when Company A ceases to have the right to receive foreign currency (subsection 960-50(6) item 11) and the forex cost base translated at the exchange rate applicable at the time when the requirement first arose to include it in Company A's assessable income (subsection 960-50(6) item 7).

Where the amount in (1) above exceeds the amount in (2) above, so much of the excess that is attributable to a currency exchange rate effect is a forex realisation gain. Pursuant to subsection 775-15(1), Company A will be required to include the forex realisation gain in its assessable income in the income year in which FRE 2 happens.

Conversely, where the amount in (1) above falls short of the amount in (2) above, so much of the short fall that is attributable to a currency exchange rate effect is a forex realisation loss. Pursuant to subsection 775-30(1), Company A can deduct the forex realisation loss from its assessable income in the income year in which FRE 2 happens.

Question 7

Summary

The Commissioner will not make a determination under section 177F of the ITAA 1936 to cancel a tax benefit of a kind referred to in subsection 177F(1) of the ITAA 1936 obtained, or that would but for subsection 177F(1) of the ITAA 1936 be obtained, by Company A in connection with the project.

Detailed reasoning

Part IVA of the ITAA 1936 applies to a scheme, or any part of a scheme, entered into or carried out by a person for the dominant purpose of enabling a taxpayer to obtain a tax benefit in connection with the scheme. If Part IVA of the ITAA 1936 applies to a scheme, the Commissioner can make a determination under section 177F of the ITAA 1936 to cancel the tax benefit obtained under the scheme.

1. The scheme

The relevant scheme is the project which includes Company B entering into a Licence Agreement with Company A for use of its IP and Company B paying Company A the upfront fee and the periodic payments in accordance with the agreement. As part of the project, the IP will be further developed outside of Australia.

2. The tax benefit

Broadly, subsection 177C(1) of the ITAA 1936 provides that a tax benefit exists for the purposes of Part IVA of the ITAA 1936 where it might reasonably be expected that an amount would be included in assessable income, a deduction would not be allowable, a capital loss would not be incurred, or a foreign tax credit would not be allowable to the taxpayer in a year of income, if the scheme had not been entered into or carried out. Determining whether this is the case depends on the facts and 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'. This prediction is often referred to as the 'counterfactual'.

A counterfactual that might reasonably be expected to have happened if the project had not been carried out was for the further development of the IP to remain in Australia and for an Australian entity to have assumed control and responsibility to carry out the activity.

The tax benefit that might be obtained under this counterfactual is the amount that would be included in Company A's assessable income if the project had not been entered into or carried out.

3. The applicable purpose test

In deciding whether Part IVA of the ITAA 1936 applies to a scheme, it is necessary to consider whether, having regard to each of the factors set out in subsection 177D(2) of the ITAA 1936, it would be concluded that the person, or one of the persons who entered into the scheme or any part of it, did so for the purpose of enabling a relevant taxpayer to obtain a tax benefit in connection with the scheme.

Having regard to the Part IVA analysis set out in the ruling request and the Commissioner's consideration of the eight factors set out in subsection 177D(2) of the ITAA 1936, the Commissioner has concluded that the scheme is not being entered into or carried out for the dominant purpose of obtaining a tax benefit.