Subdivision 373-D: partial change in ownership of intellectual property

Where there is a partial change in ownership of an item of intellectual property, is there a partial realisation under the former subdivision 373-C of the Income Tax Assessment Act 1997 (ITAA 1997) or is a balancing adjustment required under the former subdivision 373-D of the ITAA 1997?

Where there is a partial change in ownership of an item of intellectual property, a balancing adjustment is required under the former subdivision 373-D of the ITAA 1997 and there is no partial realisation under subdivision 373-C of the ITAA 1997.

Company A holds an item of intellectual property as the owner of a copyright. On 1 June 2001, Company A disposes of 50% of its interest in the item to Company B. The outcome of the transaction is that each of the two companies has a 50% interest in the intellectual property previously held by Company A. Company A and Company B do not hold the items of intellectual property resulting from the transaction as a partnership.

Situations which give rise to a partial realisation under Subdivision 373-C of the ITAA 1997 include: • where a part interest in the item is disposed of • where a licence is granted in respect of a patent, copyright or registered design • where an amount is received for the exploitation of a patent, or • where an amount is received due to an infringement of a patent, copyright or registered design.

Where a partial realisation occurs, a taxpayer's unrecouped expenditure is reduced by the amount received in respect of the partial realisation. If the amount received exceeds a taxpayer's unrecouped expenditure, assessable income will arise.

Situations where balancing adjustments arise are set out in Subdivision 373-D of the ITAA 1997. This includes where an item of intellectual property: • is disposed of or ceases to exist • is subject to a partial change of ownership, or • where an item of intellectual property is a licence, and that licence is surrendered.

The effect of a balancing adjustment event is to either include an amount in the taxpayer's assessable income, or allow a deduction. The amount so included or allowed as a deduction is calculated by comparing the item's termination value with its written down value, although roll-over relief is available in certain circumstances.

Section 373-45 of the ITAA 1997 (amount arising from a partial realisation of the item) can apply where an owner passes to another entity a discrete part, or parts, of the entirety of rights making up its item of intellectual property. After the passing, the item left in the hands of the owner does not consist of the same entirety of rights as before.

Subsection 373-60(2) of the ITAA 1997 (when balancing adjustment is required) can apply where an owner passes to another entity the whole, or a proportion, of the rights making up the item of intellectual property. After the passing, the item remains the same. However, ownership interests in that item have changed.

Item 1 in the table in section 373-45 of the ITAA 1997 does not apply to company A. Item 1 in the table in subsection 373-60(2) of the ITAA 1997 applies. The result of the disposal is that there has been a change in ownership to the extent of 50% in the intellectual property, being the entirety of rights held by Company A under Commonwealth law, as the owner of a copyright. For the purpose of applying subdivision 373-D of the ITAA 1997, the item of intellectual property disposed of by Company A, and acquired by Company B, is the 50% interest in the intellectual property held by Company A before the transaction occurred.