Private ruling: Licencing arrangement under deed of company arrangement
Published: March 2014
Ruling period: Year ending 30 June 2014 | Year ending 30 June 2015
Date scheme commenced: 1 July 2013

Ruling: Questions and Answers | 1. Is X entitled to a deduction for the licence fee paid to X? | Answer: Yes | 2. Is the licence fee received by X included in its assessable income as ordinary income? | Answer: Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Section 108-5 | Income Tax Assessment Act 1997 Section 104-35 | Income Tax Assessment Act 1997 Section 116-30 | Income Tax Assessment Act 1936 Part IVA

Reasons for decision: Detailed Reasoning - Assessability of payment: Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year. Periodic income derived from the letting, renting, leasing and licensing of property rights is generally considered ordinary income. The courts of law have identified factors like periodicity, recurrence or regularity as indicating that an amount is ordinary income. Accordingly the fees are also assessable to X under section 6-5 of the ITAA 1997, since the fees are considered to constitute ordinary income. | Detailed Reasoning - Deductibility of payment: Subsection 8-1 of the ITAA 1997 states you can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income or it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. However, you cannot deduct a loss or outgoing under this section to the extent that: (a) it is a loss or outgoing of capital, or of a capital nature; or (b) it is a loss or outgoing of a private or domestic nature; or (c) it is incurred in relation to gaining or producing your exempt income or your non-assessable non-exempt income; or (d) a provision of this Act prevents you from deducting it. Losses or outgoings are incurred in gaining or producing assessable income where they are incidental, relevant and practical to that end. In general, it is the taxpayer who decides whether the expenditure is dictated by the business ends to which it is directed. In Magna Alloys & Research Pty Ltd v. Federal Commissioner of Taxation (1980) ATC 4542; (1980) 11 ATR 276, the Court stated: For practical purposes and within the limits of reasonable human conduct, it is for the man who is carrying on the business to be the judge of what outgoings are necessarily incurred. In your case, in 200X, X granted a right to X to carry on the business, in return for the payment of an annual royalty. Later, in 20XX, to enhance the business image due to X's DOCA, X granted X the right to use their existing right to carry on the business, in return for the payment of an annual license fee. It is accepted the fees are incurred by X for the purpose of producing its assessable income, therefore the fees are deductible to X under section 8-1 of the ITAA 1997.

Relevant facts and circumstances | You and Company X have the same sole shareholder. A number of years ago, to avoid capital gains tax (CGT) from a disposal, you granted Company X the right to carry operate your business in return for a royalty free. (At the time, neither you or Company X had carry forward losses.) | Recently, Company X was placed under administration. Its unprofitable businesses were sold and only your (profitable) business remained. The creditors of Company X agreed for it to continue trading under a deed of company arrangement (DOCA). | To avoid your business trading with the expression "Subject to deed of company arrangement" on all of its public documents, it was decided that Company X grant you the right (in return) to carry on your business, in return for you paying Company X a license fee equivalent to the total net profit of your business (less the original royalty fee payable to you). | This arrangement keeps Company X as the assessable entity for the taxable income of your business, also allowing the carry forward losses of Company X to offset that taxable income.