ATO Interpretative Decision

ATO ID 2002/810

Income Tax

Capital expenditure incurred in successfully seeking to obtain a patent
FOI status: may be released

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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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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

Is capital expenditure incurred, by the inventor of a new manufacturing process in successfully seeking to obtain a patent for the process, deductible under section 40-25 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

Yes. The capital expenditure incurred in successfully seeking to obtain the patent will form part of the cost of the patent. A deduction for the decline in value of the patent is allowable under section 40-25 of the ITAA 1997.

Facts

The taxpayer has invented a new manufacturing process and has applied for and been granted a patent for the process. Capital expenditure incurred by the taxpayer include fees for advice from a patent lawyer about the application for a patent and statutory application fees. 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 incurred by the taxpayer in obtaining a patent for the manufacturing process include fees for advice from a patent lawyer about the application for a patent and statutory application fees. Expenditure of this type is 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 2002

Year 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

Related ATO Interpretative Decisions
ATO ID 2002/811
ATO ID 2002/812
ATO ID 2002/832

Keywords
Intellectual property rights
Intellectual property development expenses
Inventors
Patents
Depreciating assets
Cost of a depreciating asset

Siebel/TDMS Reference Number: DW331540

Business Line: Public Groups and International

Date of publication: 22 August 2002

ISSN: 1445-2782

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