ATO Interpretative Decision
ATO ID 2002/832
Income Tax
Capital expenditure on a project developing a manufacturing process: unsuccessful application for patentFOI status: may be released
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Where an inventor of a new manufacturing process is unsuccessful in obtaining a patent for the process, is capital expenditure incurred by the inventor in devising, testing and refining the process deductible under section 40-830 of the Income Tax Assessment Act 1997 ('ITAA 1997')?
Decision
Yes. Where the application for the granting of a patent is unsuccessful the capital expenditure incurred in devising, testing and refining the process is deductible under section 40-830 of the ITAA 1997 provided certain conditions are met.
Facts
The taxpayer has invented a new manufacturing process and was unsuccessful in obtaining a patent for the process. Capital expenditure was incurred by the taxpayer in devising, testing and refining the process. The taxpayer had intended to exploit the patent for income producing purposes but has now abandoned the project.
Reasons for Decision
Expenditure incurred by the taxpayer in devising, testing and refining the manufacturing process provided information that was associated with the taxpayer's proposed project. The proposed project was the exploitation, for taxable purposes, of a patent granted for the manufacturing process. A depreciating asset does not exist as no patent was granted.
Section 40-830 of the ITAA 1997 provides a deduction for 'project amounts' that are allocated to a project pool. Section 40-840 of the ITAA 1997 defines 'project amount' to be capital expenditure that:
- (a)
- does not form part of the cost of a depreciating asset you hold;
- (b)
- you cannot deduct under another provision of the ITAA 1997;
- (c)
- is directly connected with a project you carry on or propose to carry on for a taxable purpose; and
- (d)
- is, relevantly, incurred in obtaining information associated with the project (subparagraph 40-840(2)(d)(v) of the ITAA 1997).
Qualifying project amounts are generally deductible over the life of the project (subsection 40-830(3) of the ITAA 1997). However the undeducted balance of a project pool is also deductible for the year in which a project is abandoned (subsection 40-830(4) of the ITAA 1997).
As the taxpayer was unsuccessful in being granted the patent then the following has occurred:
- (a)
- the taxpayer does not hold a depreciating asset;
- (b)
- the relevant expenditure is not otherwise deductible under the ITAA 1997; and
- (c)
- the project of exploiting the patent for taxable purposes has been abandoned.
In these circumstances, the relevant expenditure will be deductible under section 40-830 of the ITAA 1997.
Date of decision: 10 May 2002Year of income: Year ending 30 June 2002
Legislative References:
Income Tax Assessment Act 1997
section 40-185
section 40-220
section 40-830
subsection 40-830(3)
subsection 40-830(4)
subparagraph 40-840(2)(d)(v)
ATO ID 2002/810
ATO ID 2002/811
ATO ID 2002/812
Keywords
Intellectual property rights
Intellectual property development expenses
Inventors
Patents
Depreciating asset
Cost of a depreciating asset
ISSN: 1445-2782