If you consider purchasing a business you should bear in mind tax implications where the acquisition includes intangible assets (eg. intellectual property).
The legal definition of intellectual property (IP) includes intangible items such as patents, trademarks, designs, copyright, confidential information and trade secrets. For the purposes the definition of IP is significantly narrower. Thus, trade marks and confidential information are not IP.
When you develop or acquire IP assets you have to establish which tax provision is applicable to claim a tax deduction for their cost. The most favourable tax treatment is under the research and development (R&D) activities. There are strict eligibility requirements to claim a deduction under R&D.
Where IP assets are held as a trading stock, expenditure incurred in their development will be fully deductible in the year in which it is incurred. If you are not eligible for the R&D concessions and unable to claim an outright deduction for IP, the next alternative would be depreciating the assets over their effective lives.
For tax purposes IP (such as patents, registered designs, copyrights) and in-house software are treated as a depreciating asset and must be depreciated using the prime cost method. The effective life of IP and in-house software is fixed.
The income tax law specifies the effective life of IP and in-house software as:
• Standard patent – 20years
• Innovation patent – 8 years
• Petty patent – 6 years
• Registered design – 15 years
• Copyright (excluding copyright in a film) – the shorter of 25 years from when you acquired the copyright or licence, and the period until the copyright or licence ends
• In-house software – 4 years and
• A licence (except in relation to a copyright or in-house software) – the term of the licence.
As trade marks and confidential information are not IP they do not qualify as depreciating assets. Instead, the ATO considers them as a separate CGT asset.
For further clarification or to speak with an IP lawyer, submit your enquiry here or contact us on 02 9223 9166 to arrange an appointment.
