ATO ID 2006/168: Capital Allowances: balancing adjustment event occurring on the granting of a licence to exploit a patented invention
Date of decision: 30 May 2006
Year of income: Year ended 30 June 2006
Business line: Public Groups and International

Issue
Does a balancing adjustment event occur for a depreciating asset under section 40-295 of the Income Tax Assessment Act 1997 (ITAA 1997) when an entity is granted a licence to exploit another entity's patent?

Decision
Yes. A balancing adjustment event occurs for a depreciating asset under section 40-295 of the ITAA 1997 because company B is taken to have stopped holding part of a depreciating asset.

Facts
Company A (non-resident of Australia for taxation purposes) enters into a licence agreement with company B (resident for taxation purposes) for the exploitation by company A of company B's patented invention. Company B retains all propriety rights to the patent while company A is granted exclusive rights to exploit the invention protected by the patent in a foreign jurisdiction for a fixed period of time. The rights company A has been granted in respect of the licence agreement under foreign law are similar to the rights that would have been granted for such an agreement in Australia under Australian law.

Reasons for decision
Summary: A balancing adjustment is required if a balancing adjustment event occurs for a depreciating asset whose decline is worked out under Subdivision 40-B of the ITAA 1997 (section 40-285 of the ITAA 1997). Paragraph 40-295(1)(a) of the ITAA 1997 provides that a balancing adjustment event occurs when an asset stops being held by an entity. For depreciating assets satisfying the definition of the term 'intellectual property' in subsection 995-1(1) of the ITAA 1997, the granting or assigning of an interest in the asset is treated as if the asset is split into two assets with the holder ceasing to hold the part of the original asset that represents the interest granted or assigned to the other entity (subsection 40-115(3) of the ITAA 1997). Therefore in the present case, company B's patent is split into: The rights that company A enjoys are recognised as an item of intellectual property (subsection 995-1(1) of the ITAA 1997) and company B has stopped holding that depreciating asset. Therefore, a balancing adjustment event occurs when the licence in the patent is granted to company A by company B.

Legislative references: Income Tax Assessment Act 1997 subsection 40-115(3) section 40-285 section 40-295 paragraph 40-295(1)(a) subsection 995-1(1)
Related ATO interpretative decisions: ATO ID 2004/493 | ATO ID 2006/167 | ATO ID 2006/169
Subject references: Balancing adjustment event Balancing adjustments Intellectual property rights Patents Uniform capital allowances system