Private ruling: Costs relating to PBS licence
Published: January 2013
Ruling period: 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Is the amount paid to a supplier in consideration of cancellation of a licence deductible under section 40-880 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Is the amount paid to a supplier in consideration of cancellation of a licence dealt with as the first element of the cost base of your licence under subsection 110-25(2) of the ITAA 1997? | A2: Yes.

Relevant facts and circumstances: You paid an amount as consideration for a supplier to cancel their licence so you could apply to the relevant government body for a licence, which was subsequently issued to you. Your payment, under the contract between the supplier and you, was conditional upon a government department granting you the licence. Paragraph 3.1 of the contract with the supplier stated: This Agreement is subject to and conditional on:- The Applicant obtaining a favourable recommendation for approval of its Application for relocation of the licence to the new premises from the governing body…. The government department approving such Application…

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 40-880 | Income Tax Assessment Act 1997 Section 108-5 | Income Tax Assessment Act 1997 Section 110-25

Reasons for decision: Summary: Section 440-880 of the ITAA 1997 is a provision of last resort that allows a deduction over five years for business capital expenditure that is not allowable or not prohibited by any other tax provision. For example, paragraph 40-880(5)(f) of the ITAA 1997 provides you cannot deduct anything under this section for an amount of expenditure you incur to the extent that it could, apart from this section, be taken into account in working out the amount of a capital gain or capital loss from a CGT event. Section 108-5 of the ITAA 1997 is about CGT assets and provides a CGT asset is any kind of property or a legal or equitable right that is not property. For example, a licence that is part of a profit yielding structure is a CGT asset and the recipient of a payment for the surrender of such a licence will usually have CGT consequences (see Example 14 in Taxation Ruling TR 2006/3). Paragraph 110-25(2)(a) of the ITAA 1997 provides the first element of cost base of a CGT asset includes the total of the money you paid, or are required to pay, in respect of acquiring it. In your case, your licence is a CGT asset because it is a licence that is part of a profit yielding structure. Following paragraph 110-25(2)(a) of the ITAA 1997, your payment was simply money you paid, or were required to pay, in respect of acquiring your licence. The contract you entered into with the supplier was explicit. Your payment was not merely money paid for the supplier to cancel their licence. Ultimately, your payment was made subject to and conditional on your obtaining a favourable recommendation for approval from the governing body and conditional on the government department approving your application. Under paragraph 110-25(2)(a) of the ITAA 1997, to whom you paid money and from whom you received the asset is not relevant. Under paragraph 110-25(2)(a) of the ITAA 1997, the relevant matter is the money you paid, or were required to pay, in respect of acquiring the asset. As you were required to pay to acquire the asset, your payment falls into the first element of cost base of the asset. As your payment forms part of the first element of the CGT cost base of your licence, paragraph 40-880(5)(f) prohibits its deductibility under section 40-880 of the ITAA 1997.

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