ATO Interpretative Decision
ATO ID 2002/811
Income Tax
Capital expenditure on a project developing a manufacturing process: successful 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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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 has been successful in obtaining a patent for the process, is capital expenditure incurred by the inventor in devising, testing and refining the process deductible under section 40-25 of the Income Tax Assessment Act 1997 ('ITAA 1997')?
Decision
Yes. Where a patent is granted, a deduction for the decline in value of the patent is allowable under section 40-25 of the ITAA 1997. The capital expenditure incurred in devising, testing and refining the process will form part of the cost of the patent.
Facts
The taxpayer has invented a new manufacturing process and has applied for and been granted a patent for the process. Capital expenditure was incurred by the taxpayer in devising, testing and refining the process. The taxpayer intends to exploit the patent for income producing purposes.
Reasons for Decision
The rights a patentee holds under a Commonwealth patent is an item of intellectual property pursuant to the definition of that term in subsection 995-1(1) of the ITAA 1997. An item of intellectual property is a depreciating asset pursuant to the definition of that term in section 40-30 of the ITAA 1997.
The cost of a depreciating asset includes capital amounts that are taken to have been paid to hold the asset (sections 40-185 and 40-220 of the ITAA 1997). Expenditure of the type incurred by the taxpayer in devising, testing and refining the manufacturing process are considered to be of a capital nature and form part of the cost of a depreciating asset. A deduction for the decline in value of a depreciating asset is allowable to the extent the asset is used for a taxable purpose.
Date of decision: 10 May 2002Year of income: Year ending 30 June 2002
Legislative References:
Income Tax Assessment Act 1997
section 40-25
section 40-30
section 40-185
section 40-220
section 995-1
ATO ID 2002/810
ATO ID 2002/812
ATO ID 2002/832
Keywords
Intellectual property rights
Intellectual property development expenses
Inventors
Patents
Depreciating asset
Cost of a depreciating asset
ISSN: 1445-2782