Private ruling: Capital gains tax
Date of advice: 31 July 2020
Published: September 2020
Ruling period: Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are the proceeds received by the company as a result of the disposal of the property by the Licensor subject to capital gains tax? | A1: Yes. | Q2: Is the licence to use the premises as a XXXX an active asset? | A2: No.

Relevant facts and circumstances: The company entered into an agreement in the 20XX income year with Company B (the Licensor), to use and operate the property premises. The annual licence fee payable by the company to the Licensor, was $XXXXX plus GST per annum, increased each year in accordance with the agreement. The company, through the director obtained and held a licence as required under the relevant Act 2007, and operated the property as the Licensee. The directors improved the performance of the business and recorded an increase in profits (prior to owner's remuneration). The agreement entitled the Licensor to dispose of the property at any time. The initial agreement was for X years from the commencement date. On X XXXX 20XX a contract for sale of the premises and business was entered by the Licensor, which settled on XX XXXX 20XX. The property and business were sold. The company received $XXXXX on X XXX 20XX, inclusive of GST, for their share in the net gain from the disposal (based on the license agreement). Clause XX of the agreement detailed what would happen on sale of the property: · Clause XX.X - the Licensor may sell the property at any time and in such event this agreement will end · Clause XX.X - the Licensor agrees to pay the Licensee XX% of the net gain realised by the Licensor on the sale of the property · Clause XX.X - the Licensee expressly acknowledges and agrees that the agreement by the Licensor in clause XX.X is a gesture of goodwill and gratitude only and does not grant the Licensee any interest, whether legal, equitable, financial or otherwise, in the property or the XXXX licence.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection6-5(1) | Income Tax Assessment Act 1997 subsection6-5(2) | Income Tax Assessment Act 1997 Section 104-25(1) | Income Tax Assessment Act 1997 Section 152-35 | Income Tax Assessment Act 1997 Section 152-40

Reasons for decision: Summary: 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. Ordinary income is income according to ordinary concepts (subsection 6-5(1) of the ITAA 1997). An amount received in connection with the cancellation or variation of a contract or agreement made in the course of carrying on a business is usually of an income nature if the amount which it replaces would have been income. On the other hand, if the cancellation or variation affects the framework of the business or causes a substantial part of the business to be lost then the amount received will be of a capital nature. Capital gains tax (CGT) event C2 occurs if your ownership of an intangible CGT asset ends by the asset being cancelled, abandoned or expiring (section 104-25(1) of the ITAA 1997). The time of the event is when you enter into the contract that results in the asset ending, or if there is no contract, at the time the asset ends. In this case, under the terms of the agreement with the Licensor, the company had a right to receive XX% of the net capital gain from the sale of the property and business in the event of the sale occurred during the course of the agreement. When the sale contract was entered into by the Licensor, the company had a right to receive the payment, as specified in clause XX. Therefore, CGT event C2 occurred when the company received the payment after the sale of the property. The payment was made in consequence of the termination of the agreement, so it is of a capital nature. | Detailed Reasoning - Active asset: Section 152-40 of the ITAA 1997 provides that a CGT asset is an active asset at a time if, at that time you own the asset and it is used, or held ready for use, in the course of carrying on a business that is carried on (whether alone or in partnership) by you, your affiliate or another entity connected with you. Section 152-35 of the ITAA 1997 provides that a CGT asset will satisfy the active asset test if: · you have owned the asset for 15 years or less and the asset was an active asset of yours for a total of at least half of the test period detailed below, · or you have owned the asset for more than 15 years and the asset was an active asset of yours for a total of least 7.5 years during the test period. The test period: begins when you acquired the asset, and ends at the earlier of · the CGT event, and · when the business ceased, if the business in question ceased in the 12 months before the CGT event. The right only came into existence when the sale contract was executed, there was no asset that was used in the course of carrying on the business. The intangible asset, being the contractual entitlement to the payment, was not an asset used by the taxpayer in operating the business so is not an active asset. Put another way, the asset did not come into existence until the property owner sold the property; that is, it did not come into existence until after the taxpayer stopped operating the business when the property was sold.