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Is intellectual property, that is disposed of prior to 1 July 2001, an active asset for the purposes of the Small Business CGT Concessions under section 152-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The intellectual property disposed of prior to 1 July 2001 is an active asset for the purposes of the CGT Small Business concessions under section 152-40 of the ITAA 1997.

The taxpayer is a 50% shareholder of a company involved in the development of computer software. The intellectual property associated with the software products being developed and sold by the company (in its normal course of business) was owned personally by the taxpayer. During the 2000 income year the company sold the entire software business to an unrelated third party. The contract stipulated that the taxpayer also dispose of their intellectual property rights and assign the intellectual property unreservedly to the purchaser.

The taxpayer holds an item of intellectual property as defined in subsection 373-15(1) of the ITAA 1997. It consists of the rights (including equitable rights) that an entity holds under a Commonwealth law. Such a right can be regarded as a CGT asset under section 108-5 of the ITAA 1997.

Intellectual property is an active asset for the purposes of the subparagraph 152-40(1)(c)(ii) of the ITAA 1997.

Paragraph 152-30(1)(a) states that an entity will be connected with another entity if either entity directly or indirectly controls the other entity. If an entity has a minimum of a 40% interest in another entity it will be taken to control that entity.

The business of software product development, utilising the intellectual property is carried on by the company. The taxpayer owns a 50% interest in the company carrying on the business and as such is 'connected with' the entity carrying on the business. The intellectual property is an active asset of the taxpayer.