Private ruling: CGT events
Date of advice: 18 April 2018
Published: July 2018
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Did a CGT event occur when you entered into a licensing arrangement for the exclusive use of a computer software program and client database? | A1: Yes.

Relevant facts and circumstances: You entered into an agreement with an unrelated party to provide exclusive use of a specialised computer software and client database, for a specified number of years. At the end of the arrangement, ownership of the computer software and database would transfer to the unrelated party.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 104-15 | Income Tax Assessment Act 1997 Subsection 102-25(1)

Reasons for decision: Summary: Section 104-15 of the Income Tax Assessment Act 1997 (ITAA 1997) explains that CGT event B1 happens if you enter into an agreement with another entity under which: a) the right to the use and enjoyment of a CGT asset you own passes to the other entity; and b) title in the asset will or may pass to the other entity at or before the end of the agreement. The time of the event is when the other entity first obtains the use and enjoyment of the asset. You make a capital gain if the capital proceeds from the agreement are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base. CGT event B1 effectively brings forward the time of a disposal (and the time of a capital gain or loss) under such an agreement from the time when the actual disposal takes place to the time when the use and enjoyment of the asset changes hands. In other words, the asset is treated as if it was disposed of when the use and enjoyment of the asset changes rather than waiting until the time when there is an actual disposal. Even though CGT event B1 happens at the time the agreement commences, there is also an actual disposal when the title in the relevant asset passes at or before the end of the agreement. As a result of the actual disposal, CGT event A1 (section 104-10 of the ITAA 1997) happens. Subsection 102-25(1) of the ITAA 1997 explains that if more than one event can apply to your situation, the one that you use is the one that is most specific to the situation. Clearly, where both CGT events A1 and B1 arise from this kind of agreement, CGT event B1 is the more specific. Accordingly, only the rules relevant to CGT event B1 are appropriate for working out any capital gain or loss that arises. In your case, on entering into the licence agreement, the right to the use and enjoyment of a CGT asset you own, being the computer software program and client database, passes to the unrelated purchaser. Then, on the expiry of the agreement, the title to the assets will pass to the purchaser. Accordingly, CGT event B1 occurred when the licensing agreement was entered into.