Edited version of private advice

Authorisation Number: 1052050732126

Date of advice: 28 October 2022

Ruling

Subject: CGT and intellectual property

Question 1

Did capital gains tax (CGT) event C2 in section 104-25 of the Income Tax Assessment Act 1997 (ITAA 1997) happen when you received a payment that represented your share of the realisation of a successful commercialisation process to which you had contributed intellectual property?

Answer

Yes.

Question 2

Is the capital gain you made from the successful commercialisation of your contributed intellectual property a discount capital gain under Subdivision 115-A of the ITAA 1997 on the basis that you held the right to receive the payment for at least 12 months?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You were an employee of entity X.

In performing this role, you were an inventor of a patented invention which was recognised and protected as intellectual property (IP).

You entered into an assignment agreement with entity X. The agreement provided that:

•         In consideration of entity X undertaking to investigate commercialisation of the invention and share such commercialisation resultswith the Employee, the Employee assigns to entity X his/her entire right, title and interest in and to the invention, the patent application and patents subsequently granted.

•         The employee will at the expense of entity X do all acts and execute all documents necessary or desirable for further assuring the title of entity X to the invention and for obtaining and securing patent and corresponding protection in Australia and all other countries of the world.

Several years later, entity X assigned to entity Y the right, title and interests to the invention and the patent application. Entity X had a shareholding in entity Y.

Several years later, you signed an agreement concerning distribution of the financial benefit from the commercialisation of the technology and IP rights claimed in the relevant patent application(s).

The agreement provided that the financial benefit from the sale of the entity X shareholding in entity Y would be distributed to you and your share would be a percentage of the financial benefit after it had been calculated by entity X.

The shareholders in entity Y subsequently entered into an agreement to sell their shares to another entity.

Less than 12 months after the date of the share sale agreement, you received your share of the financial benefit from the sale of the entity X shareholding in entity Y.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-25

Income Tax Assessment Act 1997 Subdivision 115-A

Reasons for decision

Section 102-20 of the ITAA 1997 states that a capital gain or capital loss is made only if a CGT event happens.

CGT event C2 in section 104-25 of the ITAA 1997 happens if your ownership of an intangible CGT asset ends in certain ways, including because the asset expires or is redeemed, cancelled, released, discharged, satisfied, abandoned, surrendered or forfeited. The time of the event is when you enter into the contract that results in the asset ending. If there is no contract, the event happens when the asset ends.

It is important to identify the CGT asset for which capital proceeds are received.

Section 108-5 of the ITAA 1997 defines a CGT asset as follows:

108-5(1) A CGT asset is:

(a) any kind of property; or

(b) a legal or equitable right that is not property.

108-5 (2) To avoid doubt, these are CGT assets:

(a) part of, or an interest in, an asset referred to in subsection (1);

The initial agreement you entered into with entity X committed you and entity X to work together for the purposes of enabling possible future profits from commercialisation relating to contributions of IP and ongoing support from you.

One of the intended outcomes that may arise from a successful commercialisation process is that your contributions of property and support could have created valuable IP that could result in a monetary benefit for you from entity X 'sharing commercialisation results'.

Some years later when you signed an agreement concerning distribution of the financial benefit, you did not have ownership of the IP and entity X owned the entity Y shares to which the payments covered by the ruling relate.

It is considered that on this date you were being advised of a possible future right to payment that could arise for you, arising by virtue of the agreement entered into some years earlier.

As noted above, a right is capable of being a CGT asset.

You created IP which is an intangible asset for CGT purposes. However, you disposed of this asset when you assigned the entire right, title and interests to the IP and the patent application to your employer entity X in exchange for entity X committing to share commercialisation results with you.

Although you assigned your interest in the IP to entity X in exchange for the right to receive a future financial benefit, we note that any future payment was contingent on the IP being developed sufficiently to allow it to be successfully commercialised and to be in excess of development costs incurred by entity X. Until the time the activities being undertaken were able to produce a surplus for entity X above its costs to which entity X was legally entitled, Entity X did not have any legal obligation to make a payment of any amount to you and you had no right to demand any amount of payment as there were no 'commercialisation results' under the initial agreement that were available for entity to 'share' with you.

Instead, it is considered that the earliest possible time you could have had a right to receive a 'share of commercialisation results' from entity X was from when the contract for the sale of the entity Y shares was entered into. There was no guarantee of any payment prior to that time. This is so regardless of how commercially certain a payment may have been prior to that time.

You had a right to receive a payment of the financial benefit and that right ended and CGT event C2 happened when you received your share of the financial benefit.

As you held the right to receive the payment for less than 12 months, the CGT discount in subdivision 115-A of the ITAA 1997 is not available.

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