Business taxpayers will know that asset depreciation is an important aspect to their business’s tax health and longevity. However the importance, and revenue generation role, of knowledge-based or intangible assets has become much more common in the modern business landscape.
Innovative companies know that changes in the economy, including globalisation and digitisation, have elevated the importance of intellectual property and other intangible assets, which has not been adequately recognised in the tax system.
For purposes of income tax, certain intangible assets have been depreciated over a number of years, set by statute (taxable effective life). However intangible assets with a statutory effective life can’t be self-assessed to bring their tax life in line with the economic life of the asset. This can reduce the depreciation benefit and increase the cost of investment in these assets.
A new measure, which is yet to be passed as legislation, aims to change this. The Treasury Laws Amendment (2017 Enterprise Incentives No. 1) Bill 2017 (you can read the bill here) will provide businesses with:
– a new option to self-assess the tax effective life of acquired intangible assets that are currently set by statute (to better align the tax treatment of the asset with the actual number of years the asset provides an economic benefit), or
– the option to continue using the existing statutory effective life of the asset.
Intangible assets that currently have a statutory effective life, but will be able to be reassessed, include:
– intellectual property, which includes standard patents, innovation patents, petty patents, registered designs and copyrights or the licences to copyrights
– other licences including spectrum and datacasting transmitter licences, telecommunications site access rights, and
– in-house software.
A business will be enabled to self-assess the effective life for an intangible asset with a statutory effective life the same way it would for a tangible asset. That is, it would use the provisions of s40-105 of ITAA97, which states that you:
- Estimate the period (in years, including fractions of years) the asset can be used by any entity for one or more of the following purposes:
- taxable purpose
- the purpose of producing exempt income or non?assessable non?exempt income
- the purpose of conducting R&D activities, assuming that this is reasonably likely.
Once passed into law, the measure will apply to assets acquired from 1 July 2016.
How the initiative will work in practice
David is the founder of InstaFilm Pty Ltd, a startup that is developing a new app that allows users to easily edit and share high-definition movies taken with a smartphone. David purchases a patent over a new method for compressing data on a mobile phone.
The statutory life of the patent is 20 years, but industry analysis provides evidence that the processor will only generate net cash inflows for five years.
Under the current law, the patent must be depreciated over 20 years.
Under the new arrangements David can self-assess the patent’s effective life to be five years. This allows him to claim a larger tax deduction over a shorter period than he would have been able to under the old arrangements.