Private ruling: Royalty deductions paid to unit trust
Date of advice: 13 November 2025
Published: 5 January 2026
Ruling period: XX/XX/20XX to XX/XX/20XX
Date scheme commenced: XX/XX/20XX

Ruling: Q1: Is the Initial Amount of $XX million paid by the Taxpayer pursuant to the Licensing Agreement allowable as a deduction in the 20XX income year pursuant to section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No. | Q2: Are the Ongoing Royalties also payable by the Taxpayer pursuant to the Licensing Agreement allowable as a deduction in the income year in which each amount is incurred pursuant to section 8-1 of the ITAA 1997? | A2: Yes. | Q3: Do any of sections 82KJ, 82KK, and 82KL of the Income Tax Assessment Act 1936 (ITAA 1936) apply to deny a deduction for the Initial Amount payable under the Licensing Agreement? | A3: Not applicable as the answer to Question 1 is 'No'. | Q4: Do any of sections 82KJ, 82KK, and 82KL of the ITAA 1936 apply to deny a deduction for the Ongoing Royalties payable under the Licensing Agreement? | A4: No. | Q5: Do the hybrid mismatch rules in Division 832 of the ITAA 1997 apply to deny a deduction for the Initial Amount payable under the Licensing Agreement? | A5: Not applicable as the answer to Question 1 is 'No'. | Q6: Do the hybrid mismatch rules in Division 832 of the ITAA 1997 apply to deny a deduction for the Ongoing Royalties payable under the Licensing Agreement? | A6: No.

Relevant facts and circumstances: 1. The Taxpayer is a resident of Australia and carries on business in Australia. The company designs, markets, and sells sporting wear. The Taxpayer contracts the manufacturing out to various entities related and unrelated. Historically, the Taxpayer has sold its own name branded products but has recently expanded its range to include Company X branded products as well as Taxpayer branded products. 2. Trademark Trustee is the trustee of the Unit Trust and in that capacity is the registered owner of trademarks (the Trademarks) which are used by the Taxpayer. The relevant Trademarks are listed at Schedule 1 of the Licensing Agreement dated X/XX/20XX between the Taxpayer and Trademark Trustee as trustee of the Unit Trust. 3. The Unit Trust receives royalties from the Taxpayer, and on-distributes these royalties to its unit holders. 4. Prior to X/XX/20XX, the Taxpayer was owned by the following shareholders (Existing Shareholders): (a) X number of Class Y shares Person A & B as trustee for the AB Family Trust (b) X number of ordinary shares held by Company C, and (c) X number of ordinary shares held by Company D. 5. Trademark Trustee had the following share ownership prior to XX/XX/20XX (Existing Unit Holders): (a) Person A - X number of shares (b) Person C - X number of shares, and (c) Person D - X number of shares 6. The Unit Trust had the following unit holders prior to X/XX/20XX(Existing Trustee Shareholders): (a) AB Family Trust - X Class X shares (b) Company C as trustee for the C Family Trust - X ordinary units, and (c) Company D as trustee for the D Family Trust - X ordinary units. 7. The Trademarks are not due for renewal until X/XX/20XX. Acquisition by Company X 8. On X/XX/20XX, the Taxpayer and its shareholders entered into a subscription agreement (the Subscription Agreement) with Company X. 9. Pursuant to the Subscription Agreement, Company X acquired a minority stake of XX% in each of the Taxpayer, Trademark Trustee and the Unit Trust as follows: (a) on X/XX/20XX, Company X subscribed for shares in the Taxpayer, and the Taxpayer allotted Company X a further X shares in return for total consideration of $XX. This accounted for XX% of the ownership of the Taxpayer post-acquisition. (b) on X/XX/20XX, the Existing Unit Holders disposed of X shares (in proportion to their holdings - X, X, and X shares) to Company X for $XXm. This accounted for XX% of the ownership of the Unit Trust post-acquisition. Note: The X Trust converted X out of its X Class X shares into ordinary units prior to selling these to Company X. (c) on X/XX/20XX, the Existing Trustee Shareholders disposed of X shares (in proportion to their holdings - X, X, and X shares) to Company X for $Xm. This accounted for X% of the ownership of the Unit Trust post-acquisition. 10. The Subscription Agreement provides for the possibility that Company X might acquire the balance of the shares in the Taxpayer, Trademark Trustee, and the units in the Unit Trust. Whilst there is a potential for Company X to acquire the balance of the shares and units, there is no option or any other entitlement to acquire. There is only an agreement to negotiate. 11. Correspondingly, the Taxpayer and Trademark Trustee entered into an Intellectual Property Licensing Agreement (the Licensing Agreement) with respect to the Trademarks (and related intellectual property) with an initial term of X years. This gave the Taxpayer and Company X certainty as to the continuation of the license for the following X years. Entering into the Licensing Agreement was one of a number of conditions set out in a clause of the Subscription Agreement. 12. At or about the same time as entering into the Subscription Agreement, the Taxpayer entered into a second licensing agreement with an entity related to Company with respect to the Company X trademark (the Company X Licensing Agreement). 13. The Licensing Agreement, the Company X Licensing Agreement and the Subscription Agreement followed on from a non-binding Letter of Intent dated X/XX/20XX between an Australian affiliate of Company X and the Taxpayer (the LOI). 14. In the table in the Annexure to the LOI dated X/XX/20XX it states: One-Off Royalty:. The Taxpayer will pay a one-off royalty to the Existing Trustee (One-Off Royalty) in consideration for Existing Trustee agreeing to enter into the Licensing Agreement. The One-Off Royalty will be distributed to the Existing Shareholders via the Existing Unit Trust. As outlined in section 2(b) above, the parties agree to structure the timing and/or type of interest to be acquired by Company X (or its affiliates) so that the One-Off Royalty is only distributed to the Existing Shareholders ... 15. Company X and the Taxpayer are otherwise unrelated. 16. The purpose of the arrangements with Company X (as described by the parties in the LOI) 'is to leverage the parties' respective capabilities and knowledge to service the sport wear market in Australia and another country, rebrand the Taxpayer's operating business in Australia and the other country to the Company X brand, and grow the parties' respective businesses.' 17. In the ordinary course, the Taxpayer would have continued its license with the Unit Trust as the Taxpayer has in place ongoing contracts to provide Taxpayer branded products both as regards the 'grassroots business' and its 'licensed business' and, notwithstanding the arrangements with Company X, there is no immediate change to the Taxpayer's business which continues to be the marketing and selling of the Taxpayer branded product. 18. Therefore, notwithstanding the commitment to rebrand, that rebranding will be an incremental process that happens over a number of years due to the complexity and logistical challenges associated with the rebranding. Significantly, the Taxpayer's 'licensed business' is expected to remain the subject of the Taxpayer's branding beyond the term of the Licensing Agreement (as the Licensing Agreement allows, unless in subsequent negotiations with Company X the parties agree to 'convert' all the branding from the Taxpayer to Company X). 19. Consequently, there is a commercial need for an agreement to be in place for the ongoing use of the Taxpayer brand, regardless of the arrangement with Company X, especially as there is no certainty regarding the future arrangements as Company X has only committed to a X year arrangement. Previous royalty arrangement in respect of trademarks 20. Since becoming the registered owner of the Trademarks on XX/XX/20XX, Trademark Trustee had (in an unwritten agreement) licenced the use of the Trademarks to the Taxpayer and received an annual royalty in arrears as consideration for the use of the Trademarks by the Taxpayer equivalent to XX% of the Taxpayer's net revenue. 21. Different amounts were paid in each of these prior relevant income years. 22. The royalties have been paid periodically to and formed nearly all of the net income of the Unit Trust for the purposes of section 95 of the ITAA 1936. 23. Aside from licensing the Trademarks to the Taxpayer, the Unit Trust undertakes no other activities, although it is registered on the Australian Business Register. 24. Prior to X/XX/20XX the ownership of the Taxpayer, Trademark Trustee and the Unit Trust was similar but not identical. However, the Taxpayer and the Unit Trust were clearly related as the same individuals controlled the Taxpayer, Trademark Trustee and the Unit Trust. Licensing Agreement post-acquisition by Company X 25. Pursuant to the Licensing Agreement, Trademark Trustee is licensing the Unit Trust's intellectual property to the Taxpayer. 26. The term of the agreement is X years and can be extended by further X years subject to the payment of further amounts. 27. The license is exclusive, worldwide, and irrevocable. It allows the Taxpayer to develop, exploit, use, licence, or sub-licence the intellectual property to allow for the manufacture and sale of Taxpayer branded products. 28. The consideration is comprised of an Initial Amount, and annual royalty payments (Ongoing Royalties). Clause X of the Licensing Agreement states: You have provided relevant clauses of your agreement which detail obligations of the parties. 29. The Initial Amount is a royalty of $Xm (plus GST) paid by the Taxpayer to Trademark Trustee as trustee of the Unit Trust on X/XX/20XX. The Taxpayer used the funds subscribed by Company X of $Xm to fund the payment of the Initial Amount. 30. At the time of the payment of this Initial Amount on XX/XX/20XX, Company X only held a X% interest in the Taxpayer. But it only acquired its X% interest in both Trademark Trustee and the Unit Trust later on X/XX/20XX 31. The Ongoing Royalties, based on X% of the Net Revenue of the Taxpayer. 'Net Revenue' is defined as an amount that equals the total value of X Product sales, net of any returns, discounts, value in kind and contra sponsorships, and rebates. 32. However, there is a cap and a floor on the later payments. (a) in relation to the first year, the payment is fixed at $X (plus GST) based on sales of a fixed amount, being $X. (b) in the following years it is capped at $X (plus GST) per annum, but the minimum payment in year 2 is $X (plus GST) and in year 3 is $X (plus GST). 33. There is a possibility that these amounts will be adjusted up or down by agreement (with Company X's consent) to reflect the impact of the rebranding over the term of the Licensing Agreement. 34. The assessable income the Taxpayer expects to earn over the term of the agreement will exceed the payments made under the Licensing Agreement (and the Company X Licensing Agreement). This is supported by an independent valuation and the Taxpayer's budgeted profit for the 3 years. 35. The parties have also agreed that if the Ongoing Royalties require renegotiation to ensure the profitability of the Taxpayer is maintained over the term of the Licensing Agreement, the Royalties will be adjusted. Assumptions 36. The following assumptions have been agreed to: (a) the assessable income the Taxpayer will derive over the term of the Licensing Agreement will exceed the payments made in that period under the Licensing Agreement and the Company X Licensing Agreement and the Taxpayer will be profitable over the 3 year period of the Licensing Agreement. (b) all payments made to the Unit Trust pursuant to the Licensing Agreement will be returned as assessable income of the Unit Trust in respect of which the unitholders will be presently entitled. (c) all the royalty payments flow through to non-residents and that none of them will be taxed (other than through Australian withholding tax) in Australia or the country of residence, and (d) each payment is the deduction component of a deduction/non-inclusion mismatch as defined in section 832-105.

Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 51(1) | Income Tax Assessment Act 1936 subsection 82KH(1) | Income Tax Assessment Act 1936 subparagraph 82KH(1)(b)(v) | Income Tax Assessment Act 1936 paragraph 82KH(1)(w) | Income Tax Assessment Act 1936 paragraph 82KH(1F)(b) | Income Tax Assessment Act 1936 subsection 82KH(1B) | Income Tax Assessment Act 1936 paragraph 82KH(1F)(b) | Income Tax Assessment Act 1936 subparagraph 82KH(1F)(b)(ii) | Income Tax Assessment Act 1936 section 82KK | Income Tax Assessment Act 1936 subsection 82KK(1) | Income Tax Assessment Act 1936 section 82KJ | Income Tax Assessment Act 1936 section 82KL | Income Tax Assessment Act 1936 subsection 82KL(1) | Income Tax Assessment Act 1936 section 95 | Income Tax Assessment Act 1997 section 8-1 | Income Tax Assessment Act 1997 subsection 8-1(1) | Income Tax Assessment Act 1997 paragraph 8-1(2)(a) | Income Tax Assessment Act 1997 paragraph 8-1(2)(b) | Income Tax Assessment Act 1997 Division 832 | Income Tax Assessment Act 1997 subsection 832-30(4) | Income Tax Assessment Act 1997 section 832-105 | Income Tax Assessment Act 1997 section 832-125 | Income Tax Assessment Act 1997 subsection 832-125(1) | Income Tax Assessment Act 1997 subsection 832-125(4) | Income Tax Assessment Act 1997 section 832-210 | Income Tax Assessment Act 1997 subsection 832-210(1) | Income Tax Assessment Act 1997 section 832-215 | Income Tax Assessment Act 1997 section 832-230 | Income Tax Assessment Act 1997 Subdivision 832-D | Income Tax Assessment Act 1997 section 832-310 | Income Tax Assessment Act 1997 section 832-320 | Income Tax Assessment Act 1997 subsection 832-320(2) | Income Tax Assessment Act 1997 subsection 832-320(3) | Income Tax Assessment Act 1997 section 832-325 | Income Tax Assessment Act 1997 paragraph 832-325(4)(c) | Income Tax Assessment Act 1997 section 832-400 | Income Tax Assessment Act 1997 section 832-475 | Income Tax Assessment Act 1997 section 832-545 | Income Tax Assessment Act 1997 subsection 832-550(1) | Income Tax Assessment Act 1997 Subdivision 832-H | Income Tax Assessment Act 1997 subsection 832-615(1) | Income Tax Assessment Act 1997 subsection 832-615(2) | Income Tax Assessment Act 1997 section 832-620 | Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision: Summary: No. | Detailed Reasoning - Detailed reasoning: 1. Section 8-1 states: (1) You can deduct from your assessable income any loss or outgoing to the extent that: (a) it is incurred in gaining or producing your assessable income; or (b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. (2) 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. 2. The 'positive limbs' of the test for general deductions are at subsection 8-1(1). 3. In Fletcher v Commissioner of Taxation (1991) 173 CLR 1 at 20,the court said in respect of a partnership seeking to deduct interest which generated losses. In a dispute regarding the deductibility of the interest: To the extent that the partnership's outgoings of interest in a particular tax year did not exceed assessable income actually derived by the partnership under the annuity agreement in that tax year, they are properly to be characterized as incurred in gaining or producing that assessable income and were therefore deductible (pursuant to s.51 (1)) in the calculation of the net income or loss of the partnership for tax purposes. Beyond that point, the mere relationship between outgoings actually incurred and the much smaller amounts of assessable income actually derived does not suffice, without more, to answer the question whether, and if so to what extent, the adjusted outgoings of interest are properly to be characterized as incurred in gaining or producing assessable income. That question must be answered by reference to a common sense appreciation of the overall factual context in which the outgoings were incurred. It necessarily involves a consideration of the contents and implications of the overall contractual arrangements to which the partnership became a party and pursuant to which the outgoings of interest became payable. As will be seen, it also encompasses a consideration of the purpose which the members of the partnership, and those who advised them or acted on their behalf, had in view in incurring the outgoings.'' Capital or Capital in Nature? 4. There is various case law from the High Courts which deal with distinction between outgoings of capital and outgoings of revenue. 5. The key principles were developed in Sun Newspapers Ltd v Commissioner of Taxation [1938] HCA 73; (1938) 61 CLR 337 at 363, where Dixon J said that in determining whether a payment was on capital or revenue account 3 matters are to be considered: (a) the character of the advantage sought, and in this its lasting qualities may play a part (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment. 6. In GP International Pipecoaters Pty Ltd v Federal Commissioner of Taxation (1990) 170 CLR 124 at 137 (GP International Pipecoaters),the High Court determined that the character of expenditure is ordinarily determined by reference to the nature of the asset acquired or the liability discharged by the making of the expenditure, for the character of the advantage sought by the making of the expenditure is the chief, if not the critical, factor in determining the character of what is paid. 7. Furthermore, Commissioner of Taxation v Sharpcan Pty Ltd [2019] HCA 36 (Sharpcan) held that the purchase price, although paid in instalments, was in the nature of a once and-for-all outgoing for the acquisition of a capital asset, and thus not deductible under section 8-1. 8. & In Sharpcan , the High Court said (at 33): As has been observed, the determination of whether an outgoing is incurred on capital account or revenue account depends on the nature and purpose of the outgoing: specifically, whether the outgoing is calculated to effect the acquisition of an enduring advantage to the business . And the identification of what (if anything) is to be acquired by an outgoing ultimately requires a counterfactual, not an historical, analysis: specifically, a comparison of the expected structure of the business after the outgoing with the expected structure but for the outgoing, not with the structure before the outgoing. Other things being equal, it makes no difference whether the outlay has the effect of expanding the business or simply maintaining it at its present level. If a once-and-for-all payment is made for the acquisition of an asset of enduring advantage which, once acquired, forms part of the profit-earning structure of the business, the payment is incurred on capital account. 9. In AusNet Transmission Group Pty Ltd v Federal Commissioner of Taxation (2015) 255 CLR 439 (AusNet), the majority held that, from a practical and business point of view, AusNet assumed the liability to make the payments in order to acquire the transmission licences and the other assets of PNV. The payments of the charges were outgoings of a capital nature and were therefore not tax deductible. 10. In determining the aforementioned conclusion in AusNet , the High Court considered (at paragraph 71) that notwithstanding the taxpayer's submissions: ... as the Commissioner submitted, upon Completion of the Asset Sale Agreement, AusNet was under a present legal obligation to make the payments at the times specified in the Order in Council. No further or other matter was necessary for the liability to crystallise. The case was distinguishable from Cliffs International , where the relevant royalty payments were contingent upon the removal of iron ore from the relevant reserves. 11. In Commissioner of Taxation v Citylink xx Limited (Citylink), the plurality held that the deduction was 'incurred' in the relevant year of income because Citylink was subject to a contractual liability to pay the concession fees twice a year and this obligation did not depend on the commercial operating risks of City Link. It did not matter that Citylink paid the fees by issuing concession notes which it did not have to pay until a later date. Secondly, the plurality held that the concession fees were not of a capital nature as Citylink did not acquire permanent ownership rights over the roads or land. All rights revert to Victoria at the end of the concession period. 12. Citylink's rights were to build, operate and derive profit from the roads for a set period of time. Unlike periodic payments on the purchase price of a capital asset, the concession fees are periodic licence fees for infrastructure from which Citylink derives income. 13. As the fees were 'incurred' in the relevant income year, and were not of a capital nature, they satisfied the test for deductibility at their full face value for each of the income years in which they were claimed as a deduction. | Detailed Reasoning - Positive Limb: 14. The positive limbs of section 8-1 would seek to verify if the amount is deducible in the first instance as either be incurred for the purpose of gaining or producing assessable income, or carrying on a business for the purpose of producing assessable. 15. In Taxation Ruling TR 95/33, Income tax: subsection 51(1) - relevance of subjective purpose, motive or intention in determining the deductibility of losses and outgoings (TR 95/33), at paragraph 37, the Commissioner (observing comments made in Magna Alloys & Research Pty Ltd v. FC of T (80 ATC 4558; 11 ATR 294) concluded that it was the subjective purpose or motive behind the outgoing that was of critical importance as to whether an outgoing was necessarily incurred in carrying on a relevant business, rather than whether the outgoing resulted in achieving a quantifiable return of income or profit. 16. The Commissioner does not consider the subjective purpose or motive behind the payment of the Initial Amount is reflective of a genuine cost in relation to the business of the Taxpayer. The Initial Amount was a one-off amount paid in addition to annual Ongoing Royalties, and unusually large in its size relative to historical royalty payments which were also paid annually. Ordinarily, an upfront payment of this size would not be expected as it is a continuation and formalisation of a pre-existing arrangement. 17. The origination of this amount in the LOI between Company X and the Taxpayer as part of Company X receiving an allotment of shares in the Taxpayer suggests that the purpose of the Taxpayer behind incurring the payment by the Taxpayer is neither for the purpose of gaining or producing its assessable income, nor was it necessarily incurred in carrying on a business for the purpose of gaining or producing its assessable income. 18. The actual underlying purpose appears to be to facilitate a mechanism by which the consideration from Company X (to obtain shares in the Taxpayer) would somehow make its way into the Unit Trust rather than to the Existing Shareholders of the Taxpayer. This is supported by the delay of a few days in Company X subsequently acquiring a proportionate number of shares and units in Trademark Trustee and the Unit Trust, to effectively make its way to the affiliates of the respective Existing Shareholders. 19. Clause X of the Licensing Agreement which states that 'As consideration for the Licensor entering into this Agreement and the rights granted to it, the Licensee must pay the Initial Amount and the Ongoing Royalties to the Licensor', provides a form to describe the purpose of arrangement. However, the Commissioner considers that this does not accurately describe the substance of what the payment was actually made for. | Detailed Reasoning - Negative Limb: 20. Even if the positive limbs were satisfied, the Commissioner considers that 'negative limbs' of section 8-1 must be found to not apply would in any case prevent a deduction being available under that section. 21. The most pertinent of the 'negative limbs' denying deductibility for the Initial Amount as it is either capital, or capital in nature pursuant to paragraph 8-1(2)(a). 22. The relevant factors that assist in the consideration of the character of the advantage sought are: (a) the Taxpayer has historically utilised the Trademarks the subject of the Licensing Agreement on an informal basis, paying annual fees to the Unit Trust since 20XX. Under the new Licensing Agreement, the Ongoing Royalties (the subject of Question 2) continue to be paid on similar terms to royalties paid prior to the Taxpayer's acquisition by the buyer. In substance, the Initial Amount was supplementary to the purpose already achieved by the Ongoing Royalties. (b) the Taxpayer's business continues to be the design, marketing and sale of sporting wear (described in the LOI as a 'marketer and vendor of professional, semi-professional, and amateur team sporting apparel.'). The form of the Licensing Agreement refers to the Initial Amount and Ongoing Royalty on one reading as being incurred for identical purposes relating to the exclusive nature of the rights granted to the Taxpayer: As consideration for the Licensor entering into this Agreement and the rights granted to it, the Licensee must pay the Initial Amount and the Royalty to the Licensor... (c) as noted in at Clause XX of the Annexure to the LOI, the Initial Amount is a 'One-Off Royalty' which is to ultimately be on-distributed to the Existing Shareholders (or their affiliates) in their capacity as unitholders of the Unit Trust. In substance, this is an amount paid by Company X to the Existing Shareholders in respect of its acquisition of the X%. As an alternative, the Existing Shareholders could have proportionally sold their shares directly to Company X for collective consideration of $Xm. Instead, this consideration has been effectively delivered or streamed via the Licensing Agreement to the same shareholders' family trusts via the Unit Trust. One-off amounts tend to be capital, or capital in nature per Sharpcan . (d) the Licensing Agreement is in effect an extension of the existing arrangement - see clause 3(a) of the Licensing Agreement as far as the Ongoing Royalties are concerned. In accordance with the principles in Sharpcan, but for Company X acquiring an interest in the Taxpayer, the Initial Amount would likely not have been paid to the Unit Trust, only the Ongoing Royalties. (e) Company X subscribed for new units in the Taxpayer, in return for a capital investment of $Xm on X/XX/20XX. It was confirmed that the Taxpayer used the funds from Company X subscription to make the payment of the Initial Amount to a related party, Trademark Trustee as trustee of the Unit Trust on X/XX/20XX. (f) the Taxpayer's asset position diminishes by $X, and the Unit Trust's position increases by the same amount. The Unit Trust at this point included only its Existing Unit Holders (Company X has not yet acquired its share in the Unit Trust). Only after the Initial Amount is paid as aforementioned does Company X also acquire Trademark Trustee and the Unit Trust. The character of the advantage sought is that the consideration paid by Company X for shares in the Taxpayer is provided to the Unit Trust instead. The character of this advantage is capital in nature. (g) the Licensing Agreement is an agreement for a license to use the Trademarks owned by the Unit Trust for X years, although there is an option to extend this by further X years (on making appropriate periodic payments). (h) Company X is concurrently licencing its own trademarks to the Taxpayer. (i) the Initial Amount is funded by the funds subscribed (on arm's length terms) by Company X and not from the day-to-day returns from the Taxpayer's business. (j) the payments are assessable in the hands of the Unit Trust or its unit holders. 23. In accordance with GP International Pipecoaters, the nature of the liability discharged by the Taxpayer in making of the Initial Amount, was to forward the capital consideration paid by Company X to acquire shares in the taxpayer. 24. As noted in the discourse above in relation to the 'positive limbs' the Initial Amount was incurred not for any purpose of the Taxpayer despite Clause X of the Licensing Agreement but was referrable to the consideration provided by Company X to obtain shares in the Taxpayer. As such, this payment properly is capital or capital in nature. Consequently, it fails the 'negative limb' as well. Conclusion in relation to Initial Amount 25. In arriving at a conclusion, the courts have not chosen to weigh different factors but to make a conclusion regarding a payment by reference to the facts and circumstances. 26. In the first instance, the Initial Amount fails to meet either of the 'positive limbs' in section 8-1. Even if it did it would also fail the 'negative limb' as the amount would be properly categorised as 'capital' or 'capital in nature' per paragraph 8-1(2)(b). Hence, the Taxpayer is unable to deduct the Initial Amount under section 8-1. | Detailed Reasoning - Question 2: Are the 'Royalties' also payable by the Taxpayer pursuant to the Licensing Agreement allowable as a deduction in the income year in which each amount is incurred pursuant to section 8-1 | Summary: Yes. | Detailed Reasoning - Detailed reasoning: 27. The relevant legislation and common law are the same as Question 1. | Detailed Reasoning - Application to your circumstances: 28. In arriving at a conclusion, the courts have not chosen to weigh different factors but to make a conclusion regarding a payment by reference to the facts and circumstances. 29. The following factors in Sun Newspapers support the characterisation of the Ongoing Royalties being on revenue account: (a) the character of the advantage sought, and in this its lasting qualities may play a part: The advantage sought by payment of the Ongoing Royalties is to enable the Taxpayer to have branded goods manufactured, marketed and sold (generating significant revenue) free from liability for breaching the Unit Trust's intellectual property rights. (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part: The Licensing Agreement is an agreement for a license to use the Trademarks owned by the Unit Trust for X years, although there is an option to extend this by further X years (on making appropriate periodic payments). Also, the Taxpayer had historically utilised the Trademarks the subject of the Licensing Agreement on an informal basis, paying annual fees to the Unit Trust since 20XX on similar terms. (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment: The Ongoing Royalties are paid periodically and our commensurate with revenue derived by the Taxpayer in the relevant period. Conclusion in relation to the Royalties 30. The Ongoing Royalties satisfy the positive limbs in section 8-1, and don't meet any of the negative limbs. Consequently, these amounts are deducible under section 8-1. | Detailed Reasoning - Question 3: Do any of sections 82KJ, 82KK, and 82KL of the ITAA 1936 apply to deny a deduction for the Initial Amount payable under the Licensing Agreement? | Summary: Not applicable. As the answer to Question 1 is 'No'. | Detailed Reasoning - Question 4: Do any of sections 82KJ, 82KK, and 82KL of the ITAA 1936 apply to deny a deduction for the Ongoing Royalties payable under the Licensing Agreement? | Summary: Sections 82KJ, 82KK, and 82KL of the ITAA 1936 do not apply to deny a deduction for the Ongoing Royalties payable under the Licensing Agreement. | Detailed Reasoning - Detailed reasoning: 31. Subdivision D of Division 3 of Part III of the ITAA 1936 was enacted to counter various tax avoidance schemes which involve the effective recoupment of expenditure so that the loss or outgoing is not really suffered. | Detailed Reasoning - Section 82KJ of the ITAA 1936: DEDUCTION NOT ALLOWABLE IN RESPECT OF CERTAIN PRE-PAID OUTGOINGS: 32. Section 82KJ of the ITAA 1936 denies a deduction under certain tax avoidance schemes involving (but is not limited to) prepayments, where a taxpayer incurs interest or other expenses with the aim of reducing the amount payable for the acquisition of property by the taxpayer or an associate. 33. Section 82 KJ of the ITAA 1936 states: Where: (a) a loss or outgoing in respect of which a deduction would, but for this Subdivision, be allowable, was incurred by a taxpayer after 19 April 1978 by reason of, as a result of or as part of a tax avoidance agreement; (b) having regard to the benefit in respect of which the loss or outgoing was incurred (but without regard to any benefit relating to the acquisition or possible acquisition of the property referred to in paragraph (c)), the amount of the loss or outgoing was greater than the amount (if any) that might reasonably be expected to have been incurred, at the time when the loss or outgoing was incurred, in respect of that benefit if the loss or outgoing had not been incurred by reason of, as a result of or as part of a tax avoidance agreement; (c) property has been, will be, or may reasonably be expected to be, acquired by the taxpayer or by an associate of the taxpayer as a result of, by reason of, or as part of the tax avoidance agreement; and (d) the consideration (if any) that was payable in respect of the acquisition of that property was less, or the consideration that may reasonably be expected to be payable in respect of the acquisition of that property is less, than the consideration that might reasonably be expected to have been payable, or to be payable, as the case may be, in respect of the acquisition of that property if the loss or outgoing had not been incurred, notwithstanding any other provision of this Act, a deduction is not allowable to the taxpayer in respect of the loss or outgoing 34. The relevant definitions of 'associate', in relation to a taxpayer, is set out in subsection 82KH(1) of the ITAA 1936 to mean: (a) in the case of a taxpayer who is a natural person, other than a taxpayer in the capacity of a trustee: (i) a relative of the taxpayer; (ii) a partner of the taxpayer; (iii) if a person who is an associate of the taxpayer by virtue of subparagraph (ii) is a natural person - the spouse or a child of that person; (iv) a trustee of a trust estate where the taxpayer or another person who is an associate of the taxpayer by virtue of another subparagraph of this paragraph benefits or is capable (whether by the exercise of a power of appointment or otherwise) of benefiting under the trust, either directly or through any interposed companies, partnerships or trusts; or (v) a company where: (A) the company is, or its directors are, accustomed or under an obligation, whether formal or informal, to act in accordance with the directions, instructions or wishes of the taxpayer, of another person who is an associate of the taxpayer by virtue of another subparagraph of this paragraph, of a company that is an associate of the taxpayer by virtue of another application of this subparagraph or of any 2 or more such persons; or (B) the taxpayer is, the persons who are associates of the taxpayer by virtue of sub-subparagraph (A) and the preceding subparagraphs of this paragraph are, or the taxpayer and the persons who are associates of the taxpayer by virtue of that sub-subparagraph and those subparagraphs are, in a position to cast, or control the casting of, more than 50 % of the maximum number of votes that might be cast at a general meeting of the company; (b) in the case of a taxpayer being a company, other than a taxpayer in the capacity of a trustee: (i) a partner of the taxpayer; (ii) if a person who is an associate of the taxpayer by virtue of subparagraph (i) is a natural person - the spouse or a child of that person; (iii) a trustee of a trust estate where the taxpayer or another person who is an associate of the taxpayer by virtue of another subparagraph of this paragraph benefits or is capable (whether by the exercise of a power of appointment or otherwise) of benefiting under the trust, either directly or through any interposed companies, partnerships or trusts; (iv) another person where: (A) the taxpayer company is, or its directors are, accustomed or under an obligation, whether formal or informal, to act in accordance with the directions, instructions or wishes of that person, or of that person and another person or other persons, whether those directions, instructions or wishes are communicated directly to the taxpayer company or its directors, or through any interposed companies, partnerships or trusts; or (B) that person is, or that person and the persons who, if that person were the taxpayer, would be associates of that person by virtue of paragraph (a), by virtue of sub-subparagraph (A), by virtue of another subparagraph of this paragraph or by virtue of paragraph (c) are, in a position to cast, or control the casting of, more than 50 % of the maximum number of votes that might be cast at a general meeting of the taxpayer company; (v) another company where: (A) the other company is, or its directors are, accustomed or under an obligation, whether formal or informal, to act in accordance with the directions, instructions or wishes of the taxpayer company, of a person who is an associate of the taxpayer company by virtue of another subparagraph of this paragraph, of a company that is an associate of the taxpayer company by virtue of another application of this subparagraph or of any 2 or more such persons; or (B) the taxpayer company is, the persons who are associates of the taxpayer company by virtue of sub-subparagraph (A) and the other subparagraphs of this paragraph are, or the taxpayer company and the persons who are associates of the taxpayer company by virtue of that sub-subparagraph and those subparagraphs are, in a position to cast, or control the casting of, more than 50% of the maximum number of votes that might be cast at a general meeting of the other company; or (vi) any other person who, if a third person who is an associate of the taxpayer company by virtue of subparagraph (iv) were the taxpayer, would be an associate of that third person by virtue of paragraph (a), by virtue of another subparagraph of this paragraph or by virtue of paragraph (c); (c) in the case of a taxpayer in the capacity of a trustee of a trust estate: (i) any person who benefits or is capable (whether by the exercise of a power of appointment or otherwise) of benefiting under the trust estate, either directly or through any interposed companies, partnerships or trusts; (ii) where a person who is an associate of the taxpayer by virtue of subparagraph (i) is a natural person - any person who, if that natural person were the taxpayer, would be an associate of that natural person by virtue of paragraph (a) or this paragraph; or (iii) where a person who is an associate of the taxpayer by virtue of subparagraph (i) or (ii) is a company - any person who, if that company were the taxpayer, would be an associate of that company by virtue of paragraph (b) or this paragraph; or (d) in the case of a taxpayer being a partnership: (i) a partner in the partnership; (ii) where any partner in the partnership is a natural person - any person who, if that natural person were the taxpayer, would be an associate of that natural person by virtue of paragraph (a) or (c); or (iii) where any partner in the partnership is a company - any person who, if the company were the taxpayer, would be an associate of the company by virtue of paragraph (b) or (c). | Detailed Reasoning - Application to your circumstances: 35. In this case, property was not acquired by the Taxpayer or an associate of the Taxpayer. The relevant property (being, the shares in the Taxpayer) was acquired by Company X who is not an associate of the Taxpayer for the purposes of subparagraph 82KH(1)(b)(v). 36. Hence, section 82KJ does not apply. | Detailed Reasoning - Section 82KK of the ITAA 1936: SCHEMES DESIGNED TO POSTPONE TAX LIABILITY: 37. Section 82KK of the ITAA 1936 relates to certain schemes between associated parties and designed to secure a deduction for one party in respect of an amount which in whole or in part is not assessable to the other party until a later year or years of income. 38. Subsection 82KK(1) of the ITAA states: This section applies to a loss or outgoing incurred by a taxpayer if: (a) the loss or outgoing was incurred after 19 April 1978 and was incurred to an associate of the taxpayer; (b) a deduction is allowable to the taxpayer in respect of that loss or outgoing; and (c) the deduction allowable in respect of that loss or outgoing would, but for this section, be allowable to the taxpayer in the year of income in which the loss or outgoing was incurred and: (i) in a case where the loss or outgoing is in respect of interest that, if it had actually been paid, would be subject to withholding tax under Division 11A - the withholding tax payable in respect of the whole or a part of the interest is not payable until a time occurring in a subsequent year of income; and (ii) in any other case - the whole or a part of the amount incurred to the associate will not be included in the assessable income of the associate until a subsequent year of income. | Detailed Reasoning - Application to your circumstances: 39. ln relation to subsection 82KK(1) of the ITAA 1936, as the amounts payable will be included in the Unit Trust's assessable income in the same year of income, there is no relevant deferral. 40. Consequently, section 82KK of the ITAA 1936 does not apply in relation to the Ongoing Royalties. | Detailed Reasoning - Section 82KL of the ITAA 1936 TAX BENEFIT NOT ALLOWABLE IN RESPECT OF CERTAIN RECOUPED EXPENDITURE: 41. Subsection 82KL(1) of the ITAA 1936 states: Where the sum of the amount or value of the additional benefit in relation to an amount of eligible relevant expenditure incurred by a taxpayer and the expected tax saving in relation to that amount of eligible relevant expenditure is equal to or greater than the amount of the eligible relevant expenditure, notwithstanding any other provision of this Act but subject to this section, a tax benefit is not and shall be deemed never to have been, allowable in respect of any part of that amount of eligible relevant expenditure. 42. Broadly, the 'additional benefit' (as defined in subsection 82KH(1) and paragraph 82KH(1F)(b) of the ITAA 1936) is a benefit obtained by the taxpayer in addition to the benefit in respect of which the eligible relevant expenditure is incurred. 43. Paragraph 82KH(1)(w) of the ITAA 1936 defines 'relevant expenditure', in relation to a taxpayer, means: a loss or outgoing (other than a loss or outgoing referred to in subsection 52A(1) or to which a preceding paragraph of this definition applies) incurred by the taxpayer to the extent to which a deduction would, apart from section 82KL, be allowable to the taxpayer under section 8-1 of the Income Tax Assessment Act 1997 in respect of the loss or outgoing. | Detailed Reasoning - Application to your circumstances: 44. Section 82KL of the ITAA 1936 applies effectively where the taxpayer receives a compensatory benefit which when taken together with the tax benefit result in no real deduction or outgoing being incurred by the taxpayer. 45. The Ongoing Royalties are otherwise deductible under section 8-1 in Question 2, so it satisfies the definition of relevant expenditure in paragraph 82KH(1)(w) of the ITAA 1936. Consequently, subparagraph 82KH(1F)(b)(ii) of the ITAA 1936 could potentially be engaged in relation to identify if the expenditure has been incurred as a result, or part of a tax avoidance agreement. 46. For the purposes of 82KH(1L)(w) of the ITAA 1936, the expenditure has arguably been incurred in respect of the same benefit. 47. The expected tax saving (as defined in subsections 82KH(1) and 82KH(1B) of the ITAA 1936) in relation to an amount of eligible relevant expenditure incurred by a taxpayer is essentially the tax saved if a deduction is allowed for the relevant expenditure. 48. Subsection 82KH(1) of the ITAA 1936 defines an 'expected tax saving as: in relation to an amount of eligible relevant expenditure incurred by a taxpayer, means: (a) where only one amount is, under subsection (1B), a tax saving amount for the purposes of the application of this definition in relation to the eligible relevant expenditure - that tax saving amount; and (b) where 2 or more amounts are, under subsection (1B), tax saving amounts for the purposes of the application of this definition in relation to the eligible relevant expenditure - the sum of those tax saving amounts. 49. The Ongoing Royalties are not reimbursed, nor is any compensatory benefit received by any party, in respect of the development expenditure. 50. Section 82KL of the ITAA 1936 will therefore not apply to deny deductions claimed by the Taxpayer under section 8-1 for the Ongoing Royalties, as there is no additional benefit by way of recoupment of expenses. | Detailed Reasoning - Conclusion: 51. Section 82KJ, 82KK, and 82KL do not apply to deny a deduction for the Ongoing Royalty amounts otherwise claimable under section 8-1. | Detailed Reasoning - Question 5: Do the hybrid mismatch rules in Division 832 apply to deny a deduction for the Initial Amount payable under the Licensing Agreement? | Summary: Not applicable as the answer to Question 1 is 'No'. | Detailed Reasoning - Question 6: Do the hybrid mismatch rules in Division 832 apply to deny a deduction for the Ongoing Royalties payable under the Licensing Agreement? | Summary: The hybrid mismatch rules in Division 832 do not apply to deny a deduction for the Ongoing Royalties. | Detailed Reasoning - Detailed reasoning: 52. In broad terms, the hybrid mismatch rules are contained in Division 832. A hybrid mismatch will arise if an entity enters into a scheme that gives rise to a payment and the payment gives rise to a deduction/non-inclusion mismatch or a deduction/deduction mismatch. 53. The types of hybrid mismatch arrangements are deduction/deduction mismatch arrangements and deduction/non-inclusion mismatch arrangements: • a deduction/deduction mismatch occurs when a business receives a deduction in two countries for the same payment. • a deduction/non-inclusion mismatch occurs when a deduction is provided for a payment in one country, but the corresponding income is not included as assessable income in the recipient country. 54. A mismatch will be covered by the hybrid rules if it is: (a) a hybrid financial instrument mismatch (b) a hybrid payer mismatch (c) a reverse hybrid mismatch (d) a branch hybrid mismatch (e) a deducting hybrid mismatch, or (f) an imported hybrid mismatch. 55. Depending on the category of the mismatch, subsection 995-1(1) outlines the term 'hybrid mismatch' to have the meanings given by sections 832-215, 832-230, 832-310, 832-400, 832-475, 832-545, and 56. 832-620 depending on the relevant type of mismatch. 57. Under paragraph 1.65 of the Treasury Laws Amendment (Tax Integrity and Other Measures No. 2) Bill 2018 (Revised 2018 EM), a payment gives rise to a deduction/non-inclusion mismatch if: • an Australian income tax deduction (other than a deduction that is solely attributable to a currency exchange rate effect) is allowable to an entity in an income year in respect of the payment (including a part or share of the payment); and • the amount of the deduction exceeds the sum of the amounts of the payment that are: - subject to foreign income tax in a foreign country in a foreign tax period that starts no later than 12 months after the end of the income year; or - subject to Australian income tax for that income year. 58. If the mismatch arises, it is neutralised by disallowing the deduction or including an amount in assessable income. 59. Under subsection 832-30(4), a reference in Division 832 to an amount being included in the assessable income of an entity, or being allowable, or not allowable, as a deduction to an entity, is taken to be a reference to an amount that is so included, or allowable or not allowable, as the case requires, in determining: (a) in the case of an entity that is a trust - the entity's *net income; or (b) in the case of a partnership - the partnership's net income or *partnership loss 60. Under section 832-125(1), an amount of income or profits is subject to Australian income tax in an income year if it is an amount that is included in an entity's assessable income for the income year. 61. However, if the entity is a trust, and the trust has net income for the income year then the amount is only subject to Australian income tax under subsection 832-125(4) to the extent it reasonably represents amounts included in the assessable income of another entity for the income year (other than an entity that is a partnership or a trust, or for a trust - on which the trustee is liable to be assessed and to pay tax. 62. Paragraph 34 of Taxation Determination TD 2024/4 Income tax: hybrid mismatch rules - application of certain aspects of the 'liable entity' and 'hybrid payer' definitions (TD 2024/4) refers to paragraphs 1.36 and 1.37 of the Explanatory Memorandum to the Treasury Laws Amendment (2020 Measures No. 2) Bill 2020 (the 2020 EM) to explain the following: A number of provisions in the hybrid mismatch rules refer to an entity that is a liable entity. Generally, an entity is a liable entity in Australia if income tax is imposed on the entity in respect of all or part of its profits, or in respect of all or part of the profits of another entity (section 832-325). An entity may be a liable entity for a country even if it has no actual liability to pay income tax. A trust that is taxed under Division 6 of Part III of the ITAA 1936 is taxed as a flow-through entity. In these circumstances: • the trustee of the trust (in its capacity as trustee) is a liable entity in Australia in respect of the income or profits of the trust because it is liable to tax on the net income of the trust in some circumstances; and • each beneficiary of the trust is also a liable entity in Australia in respect of the income or profits of the trust because they are liable to tax on the net income of the trust in some circumstances. 63. Paragraph 1.199 of the Revised 2018 EM, an entity is a 'liable entity' under section 832-325, in a country, in respect of its income or profits if: • for Australia - tax is imposed on the entity in respect of all or part of the income or profits of the test entity for an income year; and • for a foreign country - foreign income tax is imposed under the law of a foreign country on the entity in respect of all or part of the income or profits of the test entity for a foreign tax period. 64. In respect of the explanation in paragraph 34 of TD 2024/4 the trustee and beneficiaries are liable entities because they 'are liable to tax... in some circumstances'. 65. The beneficiaries may not in fact be liable to pay an amount of tax in a particular income year (that is, a situation covered by paragraph 832-325(4)(c)). However, the possibility of being taxed is sufficient to make the beneficiary a liable entity. 66. A 'hybrid payer mismatch' may be neutralised by Subdivision 832-D. If a hybrid payer mismatch is an 'offshore hybrid mismatch', the offshore hybrid mismatch might give rise to an 'imported hybrid mismatch' which may be neutralised by Subdivision 832-H. 67. A payment gives rise to a hybrid payer mismatch if (among other requirements), the payment is made by a 'hybrid payer'. 68. 'Hybrid payer' is defined by section 832-320. An entity (defined as the 'test entity'), is a hybrid payer in relation to a payment it makes if both the following subsections are satisfied: (a) subsection 832-320(2) applies to the entity in relation to a country and the payment, and (b) subsection 832-320(3) applies to the entity in relation to a different country and the payment. 69. Subsection 832-320(2) is relevant to the deducting country and subsection 832-320(3) is relevant to a non-including country. 70. Subsection 832-320(2) states: This subsection applies to a test entity in relation to a country (the deducting country ) and a payment the test entity makes if: (a) the test entity, or another entity, is a * liable entity in the deducting country in respect of income or profits of the test entity (or a part of those income or profits); and (b) that liable entity is not also a liable entity in the deducting country in respect of income or profits of the recipient of the payment. 71. Subsection 832-320(3) states: This subsection applies to a test entity in relation to a country (a non-including country) and a payment the test entity makes if: (a) the test entity, or another entity, is a *liable entity in the non-including country in respect of income or profits of the test entity (or a part of the income or profits); and (b) that liable entity is also a liable entity in the non-including country in respect of income or profits of the recipient of the payment. 72. Paragraph 1.134 of the Revised 2018 EM, 2 or more entities are in the same Division 832 control group if: • each of the entities is a member of a group of entities that are consolidated for accounting purposes as a single group; • one of the entities holds a total participation interest of 50 per cent or more in each of the other entities; or • a third entity holds a total participation interest of 50 per cent or more in each of the entities. 73. Subsection 832-210(1) outlines that a payment that gives rise to a hybrid mismatch is considered to be made under a structured arrangement if: (a) the hybrid mismatch is priced into the terms of a *scheme under which the payment is made; or (b) it is reasonable to conclude that the hybrid mismatch is a design feature of a scheme under which the payment is made. | Detailed Reasoning - Application to your circumstances: 74. In this particular case, the Taxpayer has asked the Commissioner to assume that all the payments for the for the Ongoing Royalties (paid to the Unit Trust) flow through to non-residents and that none of them will be subject to tax in Australia for the purposes of section 832-125. Hence, on this assumption there is a deduction/non-inclusion mismatch. 75. For the purposes of Division 832 the relevant entity making the payment is the Taxpayer. 76. The Taxpayer is not part of a Division 832 control group with Trademark Trustee, and the Unit Trust - as no entity holds a 50% or more interest in any of these entities, nor are these entities part of the same tax consolidated group. 77. The Taxpayer is also unable to be part of any other Division 832 control group as no single entity holds more than 50% participation interests in it. 78. The Licensing Agreement (in so far as it applies only to the payment of the Ongoing Royalties) is not considered to be a structured arrangement for the purposes of section 832-210. 79. The following are liable entities in relation to the payment of the ongoing royalties: (a) the Taxpayer is a liable entity in relation to it payments in Australia (b) the Unit Trust is a liable entity to the extent it is taxed in its capacity as trustee (c) the beneficiaries of the Unit Trusts, being family trusts themselves are liable entities to the extent they are taxed in their capacities as trustee, and (d) the beneficiaries of the family trusts as they may be liable to tax in Australia in respect of the income or profits of the trust because they are liable to tax on the net income of the trust. 80. A deduction/deduction mismatch is not applicable as the Taxpayer does not receive a deduction in 2 countries for the same payment. Hybrid financial instrument mismatch 81. A payment gives rise to a hybrid financial instrument mismatch if the payment gives rise to a hybrid mismatch under section 832-215 or section 832-230 and either: • the entity that made the payment and each entity that is a liable entity in respect of the income or profits of the recipient of the payment are related; or • the payment is made under a structured arrangement. 82. Paragraph 1.147 in the Revised 2018 EM states: A payment gives rise to a hybrid mismatch under section 832-215 if: • the payment is made under: - a debt interest (as defined in subsection 995-1(1)); - an equity interest (as defined in subsection 995-1(1)); - derivative financial arrangement (as defined in subsection 995-1(1)); or - an arrangement covered by subsection 832-215(2) (about the transfer of financial instruments); • the payment might reasonably be expected to give rise to a deduction/non-inclusion mismatch; and • the mismatch that might reasonably be expected to arise, or a part of that mismatch, meets the hybrid requirement in section 832-220 or 832-225. 83. Accordingly, there is no hybrid financial instrument mismatch as the relevant agreement does not relate to any of the types of interests outline in section 832-215 or 832-230. A hybrid payer mismatch 84. For the purposes, of identifying the liable entities subsection 832-320(2) is relevant to the deducting country and subsection 832-320(3) is relevant to a non-including country. 85. Paragraph 1.186 of the Revised 2018 EM states: A payment gives rise to a hybrid payer mismatch if the payment gives rise to a hybrid mismatch under section 832-310 and either: • the entity that is the hybrid payer and each entity that is a liable entity in respect of the income or profits of the hybrid payer are in the same Division 832 control group; or • the payment is made under a structured arrangement 86. In summary, for the purposes of meeting the meaning of 'hybrid payer' in Division 832, the Taxpayer, being the entity making the payment is a liable entity in Australia but is not a liable entity in any other country. Accordingly, it is not a hybrid payer, and there is no hybrid mismatch. 87. If the Taxpayer was a hybrid payer, then the hybrid mismatch payer provision would not apply as it is not part of a Division 832 control group. A reverse hybrid mismatch 88. Paragraph 1.233 of the Revised 2018 EM states: A payment gives rise to a reverse hybrid mismatch if the payment gives rise to a hybrid mismatch under section 832-400 and either: • the following entities are in the same Division 832 control group: - the entity that made the payment; - the entity that is the reverse hybrid; and - each entity that is an investor identified in paragraph 832-410(2)(c) in relation to the reverse hybrid; or • the payment is made under a structured arrangement. 89. The payment does not result in a reverse hybrid mismatch as the Taxpayer is not part of a Division 832 control group, and the payments is not made under a structured arrangement. A branch hybrid mismatch 90. In paragraph 1.259 of the Revised 2018 EM, a payment gives rise to a branch hybrid mismatch if the payment gives rise to a hybrid mismatch under section 832-475 and either: • the following entities are in the same Division 832 control group: - the entity that made the payment; - the branch hybrid; or • the payment is made under a structured arrangement. 91. As the Taxpayer is not part of a Division 832 control group, and there is no structured arrangement, there is no branch hybrid mismatch. Deducting hybrid mismatch 92. In accordance with subsection 832-550(1), an entity is a deducting hybrid in relation to a payment or other amount, if amongst other things the payment or other amount gives rise to a deduction/deduction mismatch. 93. As the payment does not give rise to a deduction/deduction mismatch, there is no deducting hybrid mismatch. An imported hybrid mismatch. 94. Under subsection 832-615(1), a payment gives rise to an imported hybrid mismatch if: (a) the payment gives rise to a *hybrid mismatch under section 832-620; and (b) an item in the table in subsection (2) applies to the importing payment. 95. Subsection 832-615(2) outlines the following priority rules for importing payments: If more than one item in the following table covers an *importing payment in relation to an *offshore hybrid mismatch, apply the first item that covers it. However, an item does not apply to an importing payment if: (a) an item higher in the table applies to one or more other importing payments in relation to the offshore hybrid mismatch; and (b) the offshore hybrid mismatch is, or will be, fully neutralised by the application of this Subdivision, and equivalent provisions of applicable *foreign hybrid mismatch rules, to those other importing payments. Table 1: Priority table for importing payments | Detailed Reasoning - An * importing payment is covered if:: 1 Structured arrangement (a) the *importing payment is made under a *structured arrangement; and (b) the payer of the importing payment, the offshore deducting entity mentioned in paragraph 832-625(1)(c), and each interposed entity (if applicable) are all *parties to the structured arrangement 2 Direct payment (a) the * importing payment is made directly to the offshore deducting entity mentioned in paragraph 832-625(1)(c); and (b) the payer of the importing payment and the offshore deducting entity are in the same *Division 832 control group 3 Indirect payment (a) the *importing payment is made indirectly through one or more interposed entities to the offshore deducting entity mentioned in paragraph 832-625(1)(c); and (b) the payer of the importing payment, the offshore deducting entity, and each interposed entity are in the same *Division 832 control group 96. As noted above, the Taxpayer is not part of a Division 832 control group, and the payment is not made under a structured arrangement. Accordingly, none of the items in the table apply, and there is no imported hybrid mismatch. | Detailed Reasoning - Conclusion: 97. As there are no hybrid mismatch arrangements in respect of the Ongoing Royalties arising under the Licensing Agreement, the hybrid mismatch rules in Division 832 do not apply to deny a deduction for the Ongoing Royalties payable under the Licensing Agreement.

Does IVA apply to this private ruling?: Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement. | If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax. | We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. | If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply. | For more information on Part IVA, go to our website ato.gov.au/gaar . | Reasons for decision: All legislative references are to the ITAA 1997 unless otherwise stated. | Is the Initial Amount of $X million paid by the Taxpayer pursuant to the Licensing Agreement allowable as a deduction in the 20XX income year pursuant to section 8-1?