Private ruling: Contractual Rights
Date of advice: 1 December 2016
Published: April 2017

Ruling: Q1: Will the additional revenue arising from enhancements to contractual rights (enhanced rights) be assessable to Company V under subsection 6-5(1) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes | Q2: Will the value of the rights acquired or that will be acquired under the enhanced rights be assessable as ordinary income to Company V under subsection 6-5(1) of the ITAA 1997? | A2: No | Q3: Will the value of the rights acquired or that will be acquired under the enhanced rights be assessable to Company V as a subsidy or bounty under section 15-10 of the ITAA 1997? | A3: No | Q4: Will the value of the rights acquired or that will be acquired under the enhanced rights be capital proceeds for the purposes of calculating a capital gain or capital loss made by Company V under Part 3-1 of the ITAA 1997, as a result of any CGT events that happen or will happen upon the entering into or performance of the changes? | A4: No

Relevant facts and circumstances: Company V is the head company of an income tax consolidated group together with its wholly owned subsidiary entities. A subsidiary entity of the consolidated group entered into a contract a number of years ago with a second, unrelated party. The contract enables the entity to charge amounts (of a revenue nature) for a specified period. The contract was or will be amended to enable the entity to charge additional amounts for a longer period (enhanced rights). The enhancements were or will be provided by the second party as the entity, or other members of the Company V group, have agreed or will agree with the second party to undertake certain obligations.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 subsection 6-5(1) | Income Tax Assessment Act 1997 subsection 6-5(4) | Income Tax Assessment Act 1997 section 15-10 | Income Tax Assessment Act 1997 Part 3-1 | Income Tax Assessment Act 1997 s ection 102-20 | Income Tax Assessment Act 1997 s ubsection 104-125(1) | Income Tax Assessment Act 1997 s ubsection 104-35(1) | Income Tax Assessment Act 1997 s ubsection 104-155(1) | Income Tax Assessment Act 1997 subsection 108-5(1) | Income Tax Assessment Act 1997 subsection 108-5(2) | Income Tax Assessment Act 1997 section 110-35 | Income Tax Assessment Act 1997 subsection 116-20(2)

Reasons for decision: Summary: The additional revenue from the enhanced rights constitutes, or will constitute, ordinary income derived by Company V as head company of the consolidated group for Australian income tax purposes. The value of the rights under the enhanced rights that were or will be acquired by Company V as head company of the consolidated do not or will not constitute ordinary income derived for Australian income tax purposes at the time when the relevant amending agreements are executed. The value of the rights under the enhanced rights is not an amount in the nature of a 'bounty' or a 'subsidy' under section 15-10 of the ITAA 1997. In relation to the changes giving rise to the rights under the enhanced rights, CGT events C2, D1, and F4 do not happen or will not happen to Company V as head company of the consolidated group. CGT event H2 happens or will happen as the changes giving rise to the rights under the enhanced rights are an act, transaction or event that occurs in relation to one or more CGT assets (the asset or assets being the contractual rights that the subsidiary entity owns under the existing contractual arrangements). The Commissioner accepts that there are, or will be, no capital proceeds as a result of CGT event H2 happening. Accordingly, Company V as head company of the consolidated group does not, nor will not, receive capital proceeds from entering into or performance of the changes for the purposes of calculating a capital gain or capital loss.

Reasons for decision: All legislative references are to provisions of the Income tax Assessment Act 1997 (ITAA 1997), unless specified otherwise.