Issue
Can the creation of contractual rights as consideration for the acquisition of a CGT asset under an executory contract cause a capital gain or loss to arise under CGT event D1? (Section 104-35 of the Income Tax Assessment Act 1997 (the ITAA 1997)).
Decision
No. The creation of contractual rights as consideration for the acquisition of a CGT asset will not cause a capital gain or loss to arise under CGT event D1 in section 104-35 of the ITAA 1997. The asset acquired under the contract will not be capital proceeds (property) for the creation of rights (as consideration for the acquisition of the asset) under CGT event D1.
Facts
The taxpayer is a company. Another entity owns an asset which the taxpayer desires to exploit. The parties propose to formalise an arrangement with the licensor agreeing to grant the taxpayer a licence to commercially exploit the asset in return for the taxpayer agreeing to pay a specified percentage of any income derived from this licence to the licensor.
Reasons for Decision
In the circumstances of this case, the character of the transaction for the taxpayer is the acquisition of the licence. This asset is acquired by the taxpayer under section 109-5 of the ITAA 1997. While the licence is clearly property, it is not capital proceeds from creating the right to payment per subsection 104-35(3) and does not meet the requirements in section 116-20 of the ITAA 1997 that the property is received in respect of an event happening .
If a future event does occur in relation to the licence, such as its assignment, CGT consequences will flow from that event.