IPToolbox Intellectual Property Management Taxation & Government Incentives
IPToolbox Intellectual Property Management Taxation & Government Incentives
The content in this section is subject to change and should not be acted upon without seeking appropriate professional advice.
As noted previously, outgoings relating to acquiring or developing IP will typically be capital outgoings and will not be deductible under the provisions applying to ordinary business expenses.
In order to get a tax deduction for expenditure, you will need to satisfy one or more of the specific provisions that allow for a tax deduction for capital items. These apply to designs, patents and copyright, and licences relating to designs, patents and copyright.
Compared with other forms of IP, trade mark taxation is relatively simple. There are no income tax deductions arising from acquiring or developing trade marks. Expenses relating to generating a trade mark are regarded as a capital expenditure and cannot be amortised. They need to be included in the cost structure of the asset, and taken into account when you dispose of the trade mark and/or its associated asset.
When you dispose of the trade mark, a capital gain or capital loss will arise. If a capital gain arises and the trade mark has been owned for at least 12 months, you may apply the discount capital gains concessions, provided you are not a company. If a capital loss arises, you will need to carry forward the capital loss and it can only be used to offset future capital gains.
Division 40 of the Income Tax Assessment Act 1997 (1997 Act) allows an entity to deduct an amount equal to the decline in value of a depreciating asset that it held for income producing purposes during the year. Depreciating assets includes capital expenditure incurred in acquiring IP, other than IP to be held as trading stock. IP consists of the rights (including equitable rights) that an entity holds under Commonwealth law as:
Renewals or extensions of the term of a right relating to a patent, design, copyright or licence are treated as the continuation of the original right (with the consequences that no balancing adjustment event arises under section 40-295 of the 1997 Act when the original right is extended or renewed). Where an item of IP outlined above is disposed of and a tax deduction has or could have been claimed under Division 40 of the 1997 Act, a balancing adjustment will occur. The balancing adjustment will be either a revenue gain or a revenue loss. This means that the discount capital gain concessions can not be applied to reduce any assessable balancing adjustment. Similarly, where the balancing adjustment results in a loss, the loss will not be a capital loss and may be offset against other assessable income.
Tax deductions in developing IP are contingent on expenditure being incurred for the purpose of gaining or producing assessable income at some point. However, this does not mean that your IP development must immediately generate assessable income (Taxation Ruling IT 2658). What is necessary is that you are required to invest money into the development of IP with the ultimate intention of generating assessable income from the IP in the future. Therefore, a clear link between expenditure related to IP and producing a taxable income must be established.
Expenditure that is associated with the purchase or development of IP is deducted over a designated period of time using only the prime cost method. This designated period, named the effective life of the IP asset, cannot be self assessed. Alternatively, to deduct an appreciable IP asset you must use the effective life determined by the Commissioner of Taxation. Generally, the effective life commences at the beginning of the income year in which the owner first uses the item to produce assessable income and ends at the close of the income year during which the effective life expires. More specifically, the effective life for various IP items is as follows:
| Type of IP | Effective Life |
| Standard Patent | 20 years |
| Innovation Patent | 8 years |
| Petty Patent | 6 years |
| Registered Design | 15 years |
| Copyright | The shorter of 25 years or when the copyright ends |
| A licence (except a licence relating to copyright or in-house software) | The number years over which the licence extends |
| A licence relating to a copyright | The shorter of 25 years or when the copyright ends |
| In-house software | 2.5 years |
| Spectrum licence | The term of the licence |
| Datacasting transmitter licence | 15 years |
Different effective life rates are applied to items owned before 1998/1999 and are calculated under ITAAA36 Pt III Div 10B where patents had an effective life of 16 years and no provision was made for petty patents. Innovation patents, Licences relating to software, In-house software, Spectrum licence and Datacasting transmitting licences were introduced as a part of the Uniform Capital Allowance Bill, effective from 1 July 2001.
To calculate the allowable deduction for IP in each year, you first must calculate the cost of a depreciating asset which consists of 2 elements. The first element is generally the cost paid to hold the asset and the second element is the amount paid to bring the asset into its present condition.
Australian films have special write-off provisions for IP in the guise of copyright. An Australian resident taxpayer is entitled to a tax deduction for capital expenditure incurred in the production of a certified Australian film. The potential entitlement to a tax deduction is for the amount over two years (under Division 10BA) of the Income Tax Assessment Act (1936).
A 12.5% refundable tax offset is available for film production companies of foreign and Australian films that cost $15m or more and are completed on or after 4 September 2001 (Division 376 Income Tax Assessment Act 1997.)
However, where the film expenditure is between $15m and $50m, the producers will be required to spend a minimum of 70% of the film's total production expenditure on film production activity in Australia in order to qualify.
You can obtain a tax deduction for the capital costs involved in acquiring or developing IP if your activities fit the definition of research and development activities in the income tax legislation. Depending on the nature of the expenditure, it may also be possible to obtain an immediate tax deduction at the concessional rate of up to 175 percent. Details of eligibility under the R&D Tax Concession are set out below in SECTION 20.5 describing Government incentives.
Under the Australian income tax system, non-residents of Australia are liable to pay Australian income tax on income sourced in Australia. Payments made by Australians to non-residents relating to exploiting IP in Australia will typically constitute a royalty payment and be the Australian-sourced income of the non-resident. To ensure that non-residents meet their tax obligations, the system demands that as the entity making the royalty payment to a non-resident you withhold an amount of tax and remit that amount to the Australian Taxation Office (ATO). This is referred to as withholding tax.
If Australian IP is being used overseas, withholding tax applies not only to royalties but also to dividend and interest payments to non-residents. For royalty payments such as licence fees, the rate of withholding tax is usually 30 percent. However, if the payment is to a resident of a country with which Australia has a comprehensive double tax agreement (for example, the UK and the USA) the rate of withholding tax can be reduced to 10 percent.
It is important for you to identify your liability to withhold tax and ensure that any agreements with non-residents relating to the use of IP in Australia incorporate an explicit withholding tax clause.
A similar regime exists for Australian IP that is commercialised overseas, where entities making payments to non-residents are required to withhold an amount from the payment. Where the country has a comprehensive double tax withholding agreement with Australia, a similar reduction in the amount withheld applies. It is important to identify the nature and extent of the liability before entering into any agreement to ensure it is explicitly dealt with and factored into the commercial considerations relating to the agreement.
Any withholding tax deducted from foreign royalty revenues may be offset against Australian tax payable on that income or could be carried forward for five years.
On 1 July 2000, Australia introduced a broad-based indirect tax system known as a Goods and Services Tax or GST. The system imposed a 10 per cent tax on the vast majority of business transactions carried out in Australia with certain exceptions, ie. some food products, education, health, etc, the tax being one eleventh of the transaction price. In theory, the GST is a consumption tax that alleviates the indirect tax impost on business.
All enterprises are required to impose GST on all taxable sales transactions made. Generally, when a registered entity is charged GST for goods or services received, they can claim the GST credits back if it was incurred as a part of gaining assessable income. These credits are named input tax credits, which are offset against any GST your business charges on goods and services you have supplied to your own customers. Therefore, where the GST paid on goods and services received exceed the GST on goods and services delivered, the ATO pays a refund to your enterprise. In comparison, where GST on sales exceeds the GST paid, the difference is remitted to the ATO.
The definition of 'supply' is very broad and includes transactions involving not only goods and services but also 'the creation, grant, transfer, assignment or surrender of any IP right'. Therefore, virtually any transaction involving IP will fall within the scope of the GST legislation and incur the transaction tax of 10 percent of the value.
Virtually all parties involved in transactions with Australian IP or overseas IP used in Australia will need to be registered as an Australian Business and pay GST on transactions. GST will have to be paid by the recipient on any acquired IP to the entity providing the IP. Subsequently, it is the obligation on the entity making the supply of the IP to remit one eleventh of the transaction to the ATO.
As mentioned previously, most entities can offset the GST paid against the GST incurred by goods and services delivered that are owed to the ATO. For example, your company can offset the GST paid for the IP purchased against the GST owed to the ATO for the goods or services provided to your clients that was subsequently developed from the acquired IP. The only transaction where the GST becomes a cost to business is where the supply is made to an entity that cannot claim input tax credit for the GST paid. These include supplies to unregistered entities (such as consumers) or enterprises operating in designated industries where the legislation precludes them from charging GST on transactions and claiming credit for GST paid, including financial services, life insurance and residential property. Therefore, if an unregistered company, such as a bank, acquired IP and incurred 10 percent GST, it could not claim the offset amount back from the ATO nor pass on the GST amount to its customers.
An exception to the requirement to remit GST on transactions is where the supply is GST-free. Examples of GST-free supplies include certain exports, supplies in relation to health, education, childcare, water, and the sale of businesses.
All entities have to register with the ATO and acquire an Australian Business Number (ABN) to be able to charge GST or receive the tax benefits of claiming input tax credits. The ATO has designated compulsory registration for some businesses based on annual turnover. It is imperative for businesses to be registered where it is carrying on an enterprise with an annual turnover of $50,000 or more. Even if an entity does not meet the $50,000 threshold, it is possible to register as long as the entity is carrying on, or intends to carry on, an enterprise from a particular date. Note that it is possible to register for an ABN though not register for GST, though an ABN is a pre-requisite for registering for GST.
For most businesses involved in commercialising IP there is a distinct benefit from registering with the ATO for GST purposes because such registration enables entities to obtain credits for GST paid on goods or services acquired in the course of commercialising the IP. This is clearly advantageous for start-up businesses and those involved in early stages of IP commercialisation, as it could be expected that their input tax credits would exceed GST on sales, thereby resulting in a GST refund.
Stamp duty is a State and Territory based tax with each jurisdiction having its own legislation. Accordingly, the types of property that are liable to stamp duty and the rate at which stamp duty is imposed differs between the jurisdictions. The stamp duty treatment of IP differs between the States and Territories, from the definition to the circumstances in which it will be liable to stamp duty. We outline below a general overview of the stamp duty implications of a transfer (ie. sale) of IP in each jurisdiction. The value of IP is generally apportioned between the jurisdictions on a sales/location of customers basis. Be aware that these implications are separate to stamp duty implications on the licensing of IP - for all jurisdictions other than the Northern Territory there is no stamp duty payable.
In New South Wales, the Australian Capital Territory and Tasmania, a transfer of IP should only be liable to stamp duty (at rates of up to between 4% - 5.5%) if it is transferred as part of an arrangement that involves a dutiable transaction over goodwill (in respect of NSW and the ACT) or a sale of a business (in respect of Tasmania).
Generally, no stamp duty should arise in Victoria on a transfer of IP. However, the Victorian Revenue have recently changed their position regarding the dutiablity of goodwill (that is, goodwill is now potentially subject to stamp duty in Victoria if Victorian land is transferred as part of a sale of business transaction). Accordingly, the position of the Victorian Revenue should be monitored closely in relation to its assessing practice in relation to transfers of IP.
A transfer of IP should only be liable to stamp duty (at rates of up to 3.75%) in Queensland if it is transferred together with another 'Queensland business asset'. A Queensland business asset includes such items as goodwill, statutory business licences, a right to use a statutory business licence, business names, rights under a franchise arrangement, debts and supply rights.
Presently, a transfer of IP should not be liable to stamp duty in Western Australia provided it is separately valued and identified. However, the Western Australian government propose to amend their stamp duty legislation to bring to duty, transfers of IP when IP is transferred as part of a business. These amendments are proposed to be brought in between 1 July 2003 and 31 December 2003 (in which case the rate of duty will be up to 6.3%).
South Australia imposes stamp duty on transfers of IP if:
The Northern Territory imposes stamp duty on transfers of IP if the IP is used in connection with a 'business undertaking' in the Territory (at rates of up to 5.4%). Furthermore, the grant of a right to use IP can also be liable to duty in the Northern Territory (at rates of up to 5.4%).
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