Private ruling: Deductibility of licence fees
Ruling period: 1 July 2010 to 30 June 2046

Ruling: Q1: Are the Licence Fees payable by the Project Trust deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes.

Relevant facts and circumstances: The scheme is as identified in the request for ruling and in the documents provided in support of the request. The ruling is provided on the understanding that the scheme will be undertaken in accordance with the scheme as identified in the request for ruling, the draft documentation and the additional information provided pursuant to that request.


Reasons for decision: Summary: Subsection 8-1(1) of the ITAA 1997 provides that you can deduct from your assessable income any loss or outgoing to the extent that: (a) it is incurred in gaining or producing your assessable income; or (b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. Subsection 8-1(2) provides that you cannot deduct a loss or outgoing under section 8-1 to the extent that: (a) it is a loss or outgoing of capital, or of a capital nature; or (b) Business expenditure is deductible as a general (revenue nature) deduction if it has the necessary and relevant connection with the operation or activities which directly gain or produce assessable income ( Charles Moore & Co (WA) Pty Ltd v. Federal Commissioner of Taxation (1956) 95 CLR 344; 11 ATD 147; 6 AITR 379, Federal Commissioner of Taxation v. Smith (1981) 147 CLR 578; (1981) 11 ATR 538; (1981) 81 ATC 4114, Ronpibon Tin NL & Tong Kah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 4 AITR 236; (1949) 8 ATD 431). Provided that a loss or outgoing can be objectively viewed as a necessary or natural consequence of the taxpayer's income earning activities, it will be considered 'incidental and relevant' to the income earning activities of the taxpayer and deductible as a revenue deduction under section 8-1 of the ITAA 1997, except to the extent that it is a loss or outgoing of capital or of a capital nature (see discussion of the High Court in Steele v. Deputy Commissioner of Taxation (1999) 197 CLR 459; 99 ATC 4242; (1999) 41 ATR 139). The established principles on the distinction between capital and income are well known; see for example, Dixon J's judgement in Sun Newspapers Ltd & Associated Newspapers Ltd v. Federal Commissioner of Taxation (1938) 61 CLR 337; (1938) 5 ATD 87 (Sun Newspapers Case), and the Full Federal Court decision in FC of T v. Email (1999) 99 ATC 4868 at 4873; 42 ATR 698 at 704). The character of the advantage sought provides guidance as to the nature of the expenditure as it says most about the essential character of the expenditure itself. The decision of the High Court in G.P. International Pipecoaters v. Federal Commissioner of Taxation (90 ATC 4413; (1990) 170 CLR 124; 21 ATR 1) emphasised this, stating: …the character of expenditure is ordinarily determined by reference to the nature of the asset acquired or the liability discharged by the making of the expenditure, for the character of the advantage sought by the making of the expenditure is the chief, if not the critical, factor in determining the character of what is paid: Sun Newspapers Ltd and Associated Newspapers Ltd v FCT (1938) 61 CLR 337, at 363; 1 AITR 353. The Project Trust will be granted a licence to enable it to access the Project site and carry out its commitments under the Project Agreement. In consideration for the grant of this licence, the Project Trust will be liable to pay licence fees. The licence fees will be negotiated on an arm's length basis between and will be based on the value of the site access. The Project Trust will be paid the quarterly service payments to carry out its commitments under the Project Agreement. The quarterly service payments will form part of the Project Trust's assessable income and therefore, the payment of the licence fees is a necessary consequence of the activities by which the Project Trust earns its assessable income. The outgoing incurred by the payment of the licence fees fulfils the positive test for a general deduction (subsection 8-1(1) of the ITAA 1997). However, a deduction will not be allowable to the extent that it is a loss or outgoing of capital or a capital nature (subsection 8-1(2) of the ITAA 1997). The licence fees will be payable periodically, be relatively uniform, and be referable only to the granting of access to the Project site. The Project Trust will not acquire an asset or anything of an enduring nature by paying the licence fees. At the expiration of the licence term, it must hand back the Project site for nil consideration and it will no longer have the access to the site that was granted under licence. Accordingly, the payment of the licence fees is not considered to be an outgoing of a capital nature. The liability of Project Trust to pay the licence fees fulfils the requirements for a general deduction under section 8-1 of the ITAA 1997.

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