After 30 June each year taxpayer’s minds often turn to which expenses incurred during the year can be deducted. For taxpayers who have invested in intangible depreciating assets, announcements made as part of the Federal Budget announcements in May 2021 may come to mind.
As part of Australia’s ‘Digital Economy Strategy’ the Federal Government announced faster tax write-offs for intangible depreciating assets. However, key to this announcement is that it will only apply from 1 July 2023, therefore expenses incurred in FY21 of FY22 may only be deducted in accordance with the current statutory timeframes.
In this article we take a closer look at the proposed measure and what it means for holders of certain types of intellectual property in Australia now and in the future.
What is the ‘Digital Economy Strategy’?
Prime Minister Scott Morrison stated that as part of the Australia’s Digital Economy Strategy:
One of our biggest challenges and opportunities turns on how we respond to the digital transformation occurring in every sector and every facet of our lives. – Media Release, 6 May 2021.
The primary purpose of this strategy is to improve Australia’s productivity and global competitiveness, with the aim of positioning Australia as a leading digital economy by 2030.
What are intangible depreciating assets?
Section 40-30 of the Income Tax Assessment Act 1997 provides a complete list of all intangible assets which, unless held as trading stock, are depreciating assets for taxation purposes. The list includes
Intellectual property, that is rights (including equitable rights) as an owner or licensee in a patent, registered design, or copyright under Commonwealth or foreign law; and
In-house software.
There is no indication at the date of writing this article that the Government intends to broaden the definition of intangible assets contained in section 40-30 for the purpose of these measures.
Under the law in force at the date of this article the uniform capital allowance (“depreciation”) tax rules do not provide taxpayers with the choice to work out the effective life of intangible depreciating assets. Taxpayers must use the prescribed statutory effective lives.
What are the proposed changes?
The Government has proposed that taxpayers be allowed to self-assess the effective life of intangible depreciating assets. Taxpayers can still use the statutory effective life to depreciate the assets, however the measures will allow taxpayers to adopt a rate that is more appropriate to the asset.
How do you work out the effective life of an asset?
Generally self-assessment of effective life requires that you consider how many years you will reasonably be expected to produce income from the asset given the method in which you use it. In terms of physical assets this may include consideration of the following:
the physical life of the asset;
engineering information;
the manufacturer’s specifications;
your own past experience with similar assets;
the past experience of other users of similar assets;
the level of repairs and maintenance commonly adopted by users of the asset;
retention periods; and
scrapping or abandonment practices.
Whilst guidance is yet to be provided by the Commissioner on the self-assessment of intangible assets, consideration may be given to:
the registration period for the asset (and any renewal period);
your own experience with similar assets;
the experience of other users of similar assets;
the duration of any licences relating to the asset;
how the asset is commercialised and used; and
any plans for commercialisation and use of the asset in the future.
Should you consider self-assessing the effective life of an asset?
Below is a comparison of the statutory effective life of some intangible intellectual property assets compared to their registration period or duration of protection under intellectual property law.
|
Asset |
Effective Life for Tax Purposes |
Length of Protection pursuant to IP laws |
Self-Assess |
|
Standard Patent |
20 years |
20 years (or 25 years for pharmaceutical substances) |
Periods are generally in line and it may therefore be appropriate to use the statutory standard. |
|
Registered Designs |
15 years |
10 years. Once your design has been registered it will last for five years. You can then renew your registration for a further five years. |
As the duration of the protection is shorter taxpayers may wish to consider self-assessment when the new rules are introduced. |
|
Copyright (except copyright in a film which falls under other provisions of the tax legislation) |
The shorter of 25 years from when you acquire it or the period until the copyright ends |
The general rule is that copyright endures for the life of the author, plus 70 years.
However , different conditions apply to certain categories of copyright-protected works. |
The statutory effective life is clearly shorter than the general position under IP laws. In such circumstances, taxpayers may wish to use the statutory method to provide greater cash flow. It may be difficult to justify periods less than 25 years considering the general length of the IP protection. |
|
A licence (except one relating to a copyright or in-house software) |
The term of the licence |
The term of the licence |
The statutory effective life is comparative to the direction of protection and therefore self-assessment may not be justified unless specific circumstances apply. |
|
A licence relating to a copyright (except copyright in a film) |
The shorter of 25 years from when you become the licensee or the period until the licence ends |
The term of the licence |
Where the period of the licence is shorter than 25 years taxpayers may wish to consider if a more appropriate period should apply. |
|
In-house software (which includes computer programs that you acquire, develop or have another entity develop for your business) |
5 |
The life of the author, plus 70 years. |
The statutory effective life is clearly shorter than the general position under IP laws. In such circumstances, taxpayers may wish to use the statutory method to provide greater cash flow. It may be difficult to justify periods less than 25 years. |
The effective life will commence from the assets ‘start time’. An asset’s start time is generally when you first use the asset for any purpose (whether than is for business or private purposes).
When will it apply?
If enacted, the proposed measure will apply from 1 July 2023.
What next?
The proposed measure is significant for holders of intellectual property in Australia and those considering registering intellectual property in Australia. The measures have the potential to assist businesses, particularly those in the start up phase, manage cash flows. Whilst waiting until the measures come in to trigger the asset’s ‘start time’ to ensure a faster write-off for the whole period of the asset we encourage taxpayers to weigh up this benefit with the potential of losing the opportunity to register intellectual property (prior to another party submitting a registration).
* * *
For additional information about these measures or general tax or intellectual property advice please contact one of our lawyers:
Laura Spencer (Tax and Business Law)
Senior Associate
M 0436 436 718 | T +61 3 9611 0110
E: lspencer@sladen.com.au
Neil Brydges (Tax and Business Law)
Principal Lawyer | Accredited Specialist in Tax Law
M +61 407 821 157 | T +61 3 9611 0176
E: nbrydges@sladen.com.au
Laura Bentley (Intellectual Property)
Lawyer
T +61 3 9611 0120
E: lbentley@sladen.com.au
Michelle Dowdle (Intellectual Property)
Principal Lawyer
T +61 3 9611 0114
M +61 408 674 256
E: mdowdle@sladen.com.au
