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Edited version of private advice
Authorisation Number: 1051819816728
Date of advice: 16 July 2021
Ruling
Subject: Australian tax treatment of proceeds from license agreements by a connected entity for the purposes of determining aggregated turnover
Question 1
Does paragraph 328-115(3)(c) of the ITAA1997 apply to exclude the $ xx million received by ABC (under the X License Agreement) from the subsequent aggregated turnover calculations of Aust Pty Ltd on the basis that it was derived by ABC upfront on receipt in July 20xx, prior to incorporation of Aus Pty Ltd in December xxxx?
Answer
No.
Question 2
Does subsection 328-120(1) of the ITAA1997 apply to include the non-refundable upfront payment of $xx million received by ABC (under the X License Agreement) in the annual turnover calculations of Aus Pty Ltd for the period ended 31 December xxxx on the basis that is was derived by ABC upfront on receipt in June xxxx?
Answer
No. The upfront payment is not derived upon receipt, but is derived when Lyndra's obligations are performed.
This ruling applies for the following periods:
1 July 20xx to 30 June 20xx
The scheme commences on:
1 July 20xx
Relevant facts and circumstances
Aus Pty Ltd is an Australian proprietary limited company that intends to conduct research and development (R&D) activities in Australia.
The R&D activities may be eligible for the Australian Research and Development Tax Incentive (RDTI).
ABC is a company incorporated in another country. ABC is the sole shareholder of Aus Pty Ltd.
ABC received upfront payments under two license agreements. The first payment was received when the Aus Pty Ltd entity was not incorporated yet.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 328-115
Income Tax Assessment Act 1997 Section 328-120
Income Tax Assessment Act 1997 Section 328-125
Unless otherwise stated, all legislative references in this ruling are to the Income Tax Assessment Act 1997 (ITAA 1997)
Reasons for decision
Question 1
Paragraph 328-115-3(3)(c) of the ITAA 1997 does not apply to exclude the non-refundable upfront payment.
Arthur Murray (NSW) Pty Ltd v Federal Commissioner of Taxation (1965) 114 CLR 314, sets out the relevant considerations for determining the appropriate basis of recognising income.
Question 2
The non-refundable upfront payment is included in Aus Pty Ltd annual turnover calculations for the periods in which the obligations under the license agreement are performed.
Arthur Murray (NSW) Pty Ltd v Federal Commissioner of Taxation (1965) 114 CLR 314, sets out the relevant considerations for determining the appropriate basis of recognising income.