Private ruling: Business - deductions
Published: June 2012
Ruling period: Year ended 30 June 2011 Year ending 30 June 2012
Date scheme commenced: 1 July 2010

Ruling: Q1: Did the purchase of licences from Company A and Company B result in the acquisition of intangible depreciating assets under paragraph 40-30(1)(c) of the Income Tax Assessment Act 1997 (ITAA 1997) as items of intellectual property under being licences over patents, registered designs and copyright? | A1: No. | Q2: Does the termination of the licences from Company A and Company B result in a balancing adjustment event for both licences? | A2: No.

Relevant facts and circumstances: During the 2010-11 financial year you purchased licences from Company A and Company B. Each company owned certain intellectual property. Intellectual property was defined in each licence agreement as including: · all registered and unregistered copyrights, designs, trade marks, patents, processes and corporate names, computer software licensed to the Company and/or owned by the Company and the goodwill of any business name, any secret process or Confidential Information licensed to and/or owned by the Company including the Marks and the System. The licence agreements do not state what portion of the licence fees relate to any particular item listed in the definition of intellectual property. The grant of the licences gave you an exclusive right to commercialise each company's intellectual property and business systems within a defined geographical area. Each licence agreement established obligations on both you and the licence provider. During the later years both companies failed to meet their obligations under the licence. When you attempted to enforce the licence agreements both agreements were terminated.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 40-30(1) Income Tax Assessment Act 1997 Paragraph 40-30(2)(c) Income Tax Assessment Act 1997 Section 995-1

Reasons for decision: Summary: The purchase of the licences did not result in the acquisition of a depreciable intangible asset for the purposes of paragraph 40-30(2)(c) of the ITAA 1997 as you did not solely purchase intellectual property as defined in section 995-1 of the ITAA 1997. As the licence fees did not result in the acquisition of depreciable intangible assets a balancing adjustment did not occur on the termination of the licences. | Detailed Reasoning - Depreciating asset: Subsection 40-30(1) of the ITAA 1997 states a depreciating asset is an asset which has a limited effective life and can reasonably be expected to decline in value over the time it is used. Intangible assets are excluded from the definition of a depreciating asset except where they are specifically mentioned in subsection 40-30(2) of the ITAA 1997. Paragraph 40-30(2) of the ITAA 1997 states that items of intellectual property are depreciating assets if they are not trading stock. Intellectual property is defined in section 995-1 of the ITAA 1997 which states · an item of intellectual property consists of the rights (including equitable rights) that an entity has under a Commonwealth law as: · the patentee, or a licensee, of a patent; or · the owner, or a licensee, of a registered design; or · the owner, or a licensee, of a copyright; · or of equivalent rights under a foreign law. In your case, you paid licence fees to give you the exclusive right to commercialise Company A and Company B's intellectual property and business systems in a defined geographical area. The intellectual property listed in the licence agreements include assets which fall outside of the definition of 'intellectual property' for tax purposes. These assets include unregistered copyrights, trade marks, goodwill and confidential information owned by Company A or Company B. Thus, the payment of each licence fee resulted in the acquisition of more than just intellectual property as defined by the tax legislation. Section 40-195 of the ITAA 1997 state that where an amount is purchased for two or more things, including one depreciable asset, the amount is apportioned on a reasonable basis between those things. Where a lump sum payment is made for both capital and revenue assets and the lump sum cannot be dissected between the two types of assets the full amount of the payment is treated as capital. As the licence agreements give no indication of the value of the assets of intellectual property and the other assets and rights obtained, it is not possible to identify what portion of the licence fee relates to those items of intellectual property which meet the income tax legislative definition. Thus, as no part of the licence fees can be attributed solely to the intellectual property the licence fees are not considered to have been incurred in acquiring depreciating intangible assets. | Detailed Reasoning - Balancing adjustment: Subdivision 40-D of the ITAA 1997 states that you may have to make an adjustment to your taxable income if you stop holding or using a depreciating asset. This adjustment is known as a balancing adjustment. In your case, two licences you hold have been terminated. However, as these licences were not depreciating assets, no balancing adjustment has occurred.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.