Private ruling: Australian tax treatment of proceeds from license agreements by a connected entity for the purposes of determining aggregated turnover
Date of advice: 16 July 2021
Published: September 2021
Ruling period: 1 July 20xx to 30 June 20xx
Date scheme commenced: 1 July 20xx

Ruling: Q1: Does paragraph 328-115(3)(c) of the ITAA1997 apply to exclude the $ xx million received by ABC (under the X License Agreement) from the subsequent aggregated turnover calculations of Aust Pty Ltd on the basis that it was derived by ABC upfront on receipt in July 20xx, prior to incorporation of Aus Pty Ltd in December xxxx? | A1: No. | Q2: Does subsection 328-120(1) of the ITAA1997 apply to include the non-refundable upfront payment of $xx million received by ABC (under the X License Agreement) in the annual turnover calculations of Aus Pty Ltd for the period ended 31 December xxxx on the basis that is was derived by ABC upfront on receipt in June xxxx? | A2: No. The upfront payment is not derived upon receipt, but is derived when Lyndra's obligations are performed.

Relevant facts and circumstances: Aus Pty Ltd is an Australian proprietary limited company that intends to conduct research and development (R&D) activities in Australia. The R&D activities may be eligible for the Australian Research and Development Tax Incentive (RDTI). ABC is a company incorporated in another country. ABC is the sole shareholder of Aus Pty Ltd. ABC received upfront payments under two license agreements. The first payment was received when the Aus Pty Ltd entity was not incorporated yet.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 328-115 | Income Tax Assessment Act 19 97 Section 328-120 | Income Tax Assessment Act 1997 Section 328-125 | Unless otherwise stated, all legislative references in this ruling are to the Income Tax Assessment Act 1997 (ITAA 1997)

Reasons for decision: Summary: Paragraph 328-115-3(3)(c) of the ITAA 1997 does not apply to exclude the non-refundable upfront payment. Arthur Murray (NSW) Pty Ltd v Federal Commissioner of Taxation (1965) 114 CLR 314, sets out the relevant considerations for determining the appropriate basis of recognising income. The non-refundable upfront payment is included in Aus Pty Ltd annual turnover calculations for the periods in which the obligations under the license agreement are performed. Arthur Murray (NSW) Pty Ltd v Federal Commissioner of Taxation (1965) 114 CLR 314, sets out the relevant considerations for determining the appropriate basis of recognising income.