Buying and Selling IP: Impact of R & D Legislation
What is Intellectual Property (‘IP’)?
IP is an intangible commonly identified as patents, trademarks, registered designs and copyright.
How is IP acquired?
Intellectual Property (‘IP’) can be acquired in a number of different ways, both directly and indirectly, resulting in a number of different taxation consequences. A direct acquisition occurs where IP is acquired as an asset purchase. An indirect acquisition may occur through acquisition of a tax consolidated group of shares in another company.
It is necessary to understand the tax implications of IP acquisitions.
What tax categories does it fall into?
- Ordinary tax deductions for IP to the extent that the outgoings are on revenue account.
- Tax depreciation on items of “intellectual property” defined to be ownership or licensee rights held under Australian or foreign patents, registered designs or copyrights.
- Tax depreciation on “in-house software”.
- Tax depreciation over five years for otherwise undeducted “black hole” business related costs.
- Deductions for “core technology”.
- Tax basis for CGT assets.
When are these deductions available?
There will be significant consequences based on the timing that the deduction is available to the tax entity.
Patents are deducted over their life which may range between six, eight or twenty years depending on their type.
Registered designs and copyrights are deductible over 15 and 25 years.
In-house software is deductible over 2.5 years.
“Black hole” business related costs may be deducted over 5 years on a straight line basis.
Some circumstances deductions will be over the remaining useful life.
Core technology allows for an immediate deduction however the annual deduction is restricted to an amount equal to one-third of the future spend on research and development related to that IP.
Where the acquired IP asset is not covered by the above provisions it may fall solely under the capital gains tax (‘CGT’) provisions. In this case the tax deduction only arises in the calculation of any CGT gain or loss on disposal of that IP. This is generally not a preferred outcome.
What is the priority of deductions?
Acquisitions of technology based businesses are likely to contain a number of different types of IP to which various different parts of the tax law will apply and take priority.
“in house software” precludes software which is otherwise eligible for deduction outside of Division 40.
“Black hole” capital expenditure deductible under s 40-880 is the “last resort” deduction. The legislation has been drafted in such a way to ensure that any other available deduction takes priority.
Core technology in relation to the R&D activities is defined to be technology where the purpose of the R & D activities was or is to obtain new knowledge based on that technology or to create new or improved materials, products or devices to be based on that technology, or the R & D activities are an extension, continuation, development or completion of the activities that produced that technology.
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