Edited version of private advice

Authorisation Number: 1052081223901

NOTICE

The private ruling on which this edited version is based has been (in part) overturned on objection.

This notice must not be taken to imply anything about the correctness of other edited versions.

Edited versions cannot be relied upon as precedent or used for determining how the ATO will apply the law in other cases.

Date of advice: 16 February 2023

Ruling

Subject: Payment received for intellectual property

Question 1

Whether a payment you received and that represents your share from the commercialisation of intellectual property, is assessable as ordinary income?

Answer

No.

Question 2

If the payment is ordinary income, is it business income and subject to the Goods and Services Tax legislative provisions?

Answer

Not applicable.

Question 3

Whether a payment you received and that represents your share from the commercialisation of intellectual property, is assessable as a capital gain?

Answer

Yes.

Question 4

If the payment is a capital gain, does it qualify as a discount capital gain?

Answer

No.

Question 5

Whether a payment you received and that represents your share from the commercialisation of intellectual property, is included in your assessable income in the income year of receipt?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XY

The scheme commences on:

1 July 20XX income year

Relevant facts and circumstances

You invented a process (theIP).

The IP was created whilst you were employed with entity X.

There were several patent families in relation to the IP and for every provisional patent registered you entered into an agreement with entity X.

You entered into various agreements to assign the IP to entity X. The agreements provided consideration for the assignment, such that entity X would pay you a percentage of the net revenue received as a result of commercialisation of the inventions.

Entity X started a company to specifically commercialise the IP. You were not a shareholder of this company.

During the 20XX income year, entity X sold the IP and company shares to a third party.

Less than 12 months after the date of the sale of the IP and shares, entity X advised you of your share of the net revenue amount that was attributable to the sale of the IP you assigned to them, and made the payment to you.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 104-25

Income Tax Assessment Act 1997 Subsection 104-35(5)

Income Tax Assessment Act 1997 Subdivision 115-A

Reasons for decision

Ordinary income

Section 6-5 provides that the assessable income of an Australian resident includes the ordinary income derived directly or indirectly from all sources. Ordinary income is defined to mean income according to ordinary concepts.

The legislation does not provide any specific guidance on what is meant by income according to ordinary concepts. However, case law has evolved to identify various factors that indicate whether an amount is income according to ordinary concepts. A frequent characteristic of income receipts is an element of periodicity, recurrence or regularity, even if the receipts are not directly attributable to employment or services rendered. Wages and business income are examples considered to be income according to ordinary concepts.

The payment you received from entity X was for your share of net revenue from IP you assigned to them whilst you were employed with entity X. You assigned your interest in the IP to entity X in exchange for the right to receive a future financial benefit and any future payment was contingent on the IP being successfully commercialised by entity X.

The payment was not paid to you because of your employment relationship with entity X. Whilst the assignment of IP was a condition of employment, there was no guarantee of any payment and ultimately it was only if the invention was successfully commercialised was there the possibility of any proceeds. You had an intangible capital asset separate to your employment with entity X. The payment is not considered to be ordinary income for the purposes of section 6-5.

Capital Gains Tax

Section 102-20 states that a capital gain or capital loss is made only if a CGT event happens.

CGT event C2 in section 104-25 happens if your ownership of an intangible CGT asset ends in certain ways, including because the asset expires or is redeemed, cancelled, released, discharged, satisfied, abandoned, surrendered or forfeited. The time of the event is when you enter into the contract that results in the asset ending. If there is no contract, the event happens when the asset ends.

It is important to identify the CGT asset for which capital proceeds were received.

Section 108-5 defines a CGT asset as follows:

"108-5(1) A CGT asset is:

(a) any kind of property; or

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

108-5 (2) To avoid doubt, these are CGT assets:

(a) part of, or an interest in, an asset referred to in subsection (1)..."

You entered into various agreements with entity X, where you assigned your entire right, title and interests to the inventions and patent applications to entity X in return for a share of the net revenue from the successful commercialisation of the inventions.

One of the intended outcomes that may arise from a successful commercialisation process is that your contributions of property and support could have created valuable IP that could result in a monetary benefit for you from entity X 'sharing commercialisation results'.

During 20XX income year, entity X sold the IP and associated company shares to a third party. At that time, you did not have ownership of the IP and entity X owned the IP. Less than 12 months later, entity X advised you of a future right to payment arising by virtue of the various agreements that you had entered into with entity X.

A right is capable of being a CGT asset. You created IP which is an intangible asset for CGT purposes. However, you disposed of this asset when you assigned the entire right, title and interests to the IP and patent applications to entity X in exchange for entity X committing to share commercialisation results with you.

Although you assigned your interest in the IP to entity X in exchange for the right to receive a future financial benefit, we note that any future payment was contingent on the IP being developed sufficiently to allow it to be successfully commercialised by entity X. Until the time the activities being undertaken were able to produce a surplus for entity X, they had no legal obligation to make a payment of any amount to you and you had no right to demand any amount of payment, because there were no commercialisation results under the various agreements that were available for entity X to share with you.

Instead, it is considered that the earliest possible time you could have had a right to receive a share of commercialisation results from entity X was from when the contract for the sale of the IP and company shares was entered into. There was no guarantee of any payment prior to that time. This is so regardless of how commercially certain a payment may have been prior to the sale of the IP and company shares.

You had a right to receive a payment of the net revenue and this right ended and CGT event C2 happened when you received your share of the net revenue in the 20XY income year.

As you held the right to receive the payment for less than 12 months, the CGT discount in subdivision 115-A is not available.