Key takeaways
- Businesses can capitalise on economic stimulus measures announced by the Federal Government by investing in intellectual property (IP).
- Businesses may be eligible for 100% tax deductions on new or existing IP assets acquired before 31 December 2020, or 50% tax deductions on new IP assets acquired before 30 June 2021.
- This article summarises the eligibility requirements for the Instant Asset Write Off (IAWO) and Backing Business Investment (BBI) incentive schemes.
Businesses should consider taking steps to protect their IP or bringing purchases forward to capitalise on measures announced in the Federal Government’s first COVID-19 Stimulus Plan provided in the Coronavirus Economic Response Package Omnibus Act 2020 (Cth).
Instant Asset Write Off threshold changes
Businesses can immediately write off assets that cost less than the IAWO threshold in the year they are first used. When an asset is written off, its value is deducted from the business’s assessable income, reducing the business’s tax payable. This measure is generous, as the statutory effective life of IP assets is long, being 20 years for standard patents, 15 years for designs and broadly 25 years for copyright.
On 12 March 2020, the IAWO threshold increased from $30,000 to $150,000 (GST exclusive). It is now available to businesses with an aggregated annual turnover (very broadly, associated and related party inclusive turnover) of less than $500 million, up from the previous limit of $50 million.
On 9 June 2020, the Treasurer and the Minister for Employment, Skills, Small and Family Business announced that the IAWO scheme would be extended until 31 December 2020. The amending act, the Treasury Laws Amendment (2020 Measures No. 3) Act 2020 (Cth), received royal asset on 19 June 2020.
The measure is limited to depreciating assets. Under the Income Tax Assessment Act 1997 (Cth), depreciating assets include the rights of an entity as the:
- Patentee or licensee of a patent;
- Owner or licensee of a registered design; or
- Owner or licensee of a copyright.
Trade marks (and other forms of unregistered IP) are not considered depreciating assets.
The depreciating assets must be acquired and used or be ready to be used before 31 December 2020. This means that new IP rights must be granted under the Patents Act 1990 (Cth) or Designs Act 2003 (Cth), or created under the Copyright Act 1968 (Cth), before 31 December 2020. From 1 January 2021, the prior rules will apply – an instant write-off will only be available for small businesses with an aggregated turnover of less than $10 million, and the threshold value for the relevant asset will be $1,000.1
Accordingly, businesses with pending patent or design applications that become registered before 31 December 2020 may be able to take advantage. Similarly, existing IP rights acquired prior to 31 December 2020 may be eligible. The acquisition can be undertaken through an assignment or a licence of the IP – both of which will have various commercial and tax implications.
For businesses, this change means that:
- Rather than depreciating an asset annually over a number of years, you can write off the asset entirely in the first year (so tax deductions that you would have eventually claimed are brought forward);
- The cost of IP falling within the above definition can be written off, provided it is less than $150,000. The cost of IP can include the amount you have paid for an asset (eg the purchase cost), as well as the cost of maintaining the asset (eg additional development costs relating to existing IP); and
- The cost of multiple separate assets can be written off, provided each asset falls under the $150,000 threshold.
Backing Business Investment incentive scheme
Businesses that are not eligible for the IAWO may be able to claim a 50% tax deduction under the BBI scheme. To be eligible, a business must:
- Have an aggregated annual turnover of less than $500 million;
- Acquire a new depreciating asset (including new IP rights as defined above) after 12 March 2020. In this context, ‘new’ means not previously held by another entity; and
- Use the asset or install the asset for use by 30 June 2021.
Accelerated depreciation afforded under the BBI will cease from 1 July 2021.
The BBI scheme allows businesses to claim a 50% deduction on the cost of the asset. The balance of the cost will then depreciate over the statutory life of the asset according to existing rules.
Unlike the IAWO, the BBI scheme captures assets that:
- Cost more than $150,000; and
- Are not used or installed for use by 31 December 2020, but rather are used or installed ready for use by 30 June 2021.
However, the BBI scheme applies to new assets only, and does not extend to the acquisition of existing IP rights. New licences of existing IP rights may be eligible, assuming that the licencing agreement is validly executed.
Practical considerations
1. Should you apply for new IP rights or acquire existing IP?
The requirement for assets to be installed ready for use by 31 December 2020 may make it difficult for new patent or design rights to fall within the IAWO scheme, given the lengthy process for IP registration. However, you may consider acquiring existing IP before 31 December 2020. As noted above, the acquisition of IP can be undertaken through an assignment or a licence of the IP, both of which will have various commercial and tax implications. Some considerations include:
- The buyer may want to acquire the IP outright if the cost is under $150,000 in order to fully utilise the IAWO provisions. The buyer may want to acquire a licence for the IP if the purchase price of the IP exceeds $150,000; and
- For the seller, granting a licence causes the IP asset to ‘split’, and a balancing adjustment is required on that part of the asset which the seller no longer holds, as the seller is effectively disposing part of its IP. There may also be difficulty in valuing the various parts of the IP asset (the licence and the remaining IP), which would have tax implications for the seller and any future tax deductions for the buyer.
2. What costs can be deducted under the IAWO?
There are two types of costs that may be deducted for depreciating assets, being:
- The amount paid for the asset; and
- Any costs incurred in relation to the maintenance of the asset (eg development costs for existing IP).
3. What is the relationship between the IAWO and R&D offsets?
The R&D tax incentive provides a refundable tax offset of 45%, for a decline in value of tangible depreciating asset used for R&D activities. The R&D tax incentive does not apply to intangible depreciating assets such as IP.2
This is as opposed to the IAWO provisions, which do apply to intangible deprecating assets such as IP.
4. Does the IAWO apply to the acquisition of foreign IP?
Depreciating assets include both rights under Australian law, and equivalent rights under foreign laws. This means that the IAWO may apply if you acquire foreign IP to be used in your Australian business. You may need to consider what are considered ‘equivalent rights’ under foreign laws.
5. What entity structure should be used to acquire the IP?
It is not unusual for a company to structure its business with a holding company that owns IP for the entire group, and an operating company that undertakes the business operations, or alternatively to hold the IP separately in a ‘sister’ entity to the operating business. The entity that is eligible for the IAWO should be the entity that is operating a business, and not merely holding assets for investment purposes. However, there are some instances where a holding company can be held to be carrying on business if it has expectation of receiving income from subsidiaries and/or other entities. Accordingly, you may need to consider the eligibility requirement of the IAWO for holding companies or special purpose IP entities. Solutions may be found in internal IP licensing arrangements or in having an operating company purchase the asset and undertaking any corporate restructures in the future.
Our team is available to assist with all IP and taxation matters. Please contact us if you would like to take advantage of the changes to the increased IAWO threshold or BBI scheme to improve the protection of your business’s IP, or if you would like to discuss the tax implications of the assignment or licensing of IP rights.
This article was written by Luke Dale, Partner, Nima Sedaghat, Partner, Amy Liu, Associate and Kelly Williamson, Solicitor.
1 https://www.ato.gov.au/Business/Depreciation-and-capital-expenses-and-allowances/Simpler-depreciation-for-small-business/Instant-asset-write-off/#:~:text=Businesses%20with%20an%20aggregated%20turnover%20of%20%24500%20million%20or%20more,the%20threshold%20will%20be%20%241%2C000
2 https://www.ato.gov.au/Business/Research-and-development-tax-incentive/In-detail/Guides/Amounts-you-can-claim/?page=2
