Edited version of your written advice

Authorisation Number: 1051204136908

Date of Advice: 5 July 2017

Ruling

Subject

Capital Gains Tax - sale of rights

Question 1

Will any gain made on the sale of the rights to royalties be assessable under the capital gains tax provisions?

Answer

Yes.

Question 2

If the answer to question 1 is yes, can you apply the 50% discount?

Answer

Yes.

This ruling applies for the following periods

Year ended 30 June 2017
Year ending 30 June 2018

The scheme commenced on

1 July 2016

Relevant facts

You operate a prospecting and exploration business that explores and develops mining tenements.

You have previously sold a number of mining tenements and received either cash or shares from the sale.

You entered into an agreement to sell a number of prospecting licences and royalties to a mining entity.

You returned the revenue gain from the sale in an income tax return.

You have provided a copy of an Agreement for the sale and purchase of Prospecting Licences (the agreement). This document is part of the arrangement being ruled on and should be read in conjunction with the description of the arrangement.

You are currently negotiating the sale of the rights to the royalties.

You have not previously sold the rights to royalties to any other entity.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 subsection 108-5(1)

Income Tax Assessment Act 1997 section 115-10

Income Tax Assessment Act 1997 section 115-15

Income Tax Assessment Act 1997 section 115-20

Income Tax Assessment Act 1997 section 115-25

Reasons for decision

All subsequent legislative references are to the Income Tax Assessment Act 1997.

Under section 120-20 an entity will make a capital gain or a capital loss if a capital gains tax (CGT) event happens to a CGT asset. The term 'CGT asset' is defined in subsection 108-5(1) as:

(a) Any kind of property; or

(b) A legal or equitable right that is not property.

CGT event A1 occurs when you dispose of a CGT asset. You are considered to have disposed of a CGT asset if a change of ownership occurs from you to another entity because of some act or event or by operation of law. Generally, the time of the event is when the contract for the disposal is entered into. If there is no contract, the event occurs when the change of ownership takes place (section 104-10).

Division 118A outlines general exemptions to the capital gains tax provisions. Generally these exemptions allow you to disregard a capital gain or loss made from particular CGT assets.

Discount capital gains

The 50% discount will apply to your capital gain if:

You are an individual (section 115-10)

The CGT event happened after 21 September 1999 (section 115-15)

The capital gain was calculated without indexation of the cost base (section 115-20); and

The CGT asset was acquired more than 12 months before the CGT event (section 115-25).

Application to your circumstances

In this case, we do not consider that you are in the business of trading in royalty rights. We accept that you operate a prospecting and exploration business that explores and develops mining tenements. The rights to the royalties is a separate CGT asset and any disposal of the rights to royalties would cause CGT event A1 to happen. The time of the CGT event is the date a contract to end the ownership of the asset is entered into. Further, none of the general exemptions apply.

In this case you will be eligible to apply the 50% discount to any capital gain made on the disposal of the rights to royalties.