The taxation of IP is about CGT, depreciation, instant asset write-offs and tax incentives.
Taxation of IP
In episode 287, we discussed intellectual property as such. In this episode Melissa McGrath of Coleman Greig Lawyers in Sydney will talk about the taxation of IP.
Here is what we learned but please listen in as Melissa explains all this much better than we ever could.
To listen while you drive, walk or work, just access the episode through a free podcast app on your mobile phone.
Taxation of IP
The taxation of IP is mainly about five things: 1 – CGT – 2 – depreciation – 3 – instant asset write-offs – 4 – tax incentives – 5 – Look-through rules, for example the proposed rules for fame and image.
1 – CGT
All intellectual property rights are CGT assets. And so like any other CGT asset, you have CGT events.
You for intellectual property they are not the usual ones like A1, but you have D1 for the creation of intellectual property, or C2 for the cancellation or surrender of intellectual property and so on.
But after that it is business as usual. You have the usual discounts and concessions like with other CGT assets.
2 – Depreciation
All IP rights are CGT assets. But not all IP rights are depreciable assets.
Patents, copyrights and designs are depreciable assets, but not for example trademarks, since trademarks don’t expire (as long as you renew them every 10 years).
3 – Instant Asset Write-Offs
There are two instant asset write offs. The IAWO for assets below $150k. And the BBI for assets over $150k.
3A – Instant Asset Write-Off (IAWO)
The instant asset write-off (IAWO) applies to depreciable assets below $150,000 for business with a turnover below $500m. So it covers intellectual property but only to the extent it is depreciable. Hence trademark costs are not covered for example.
The IAWO received a huge boost with COVID. The threshold increased to $150,000 as long as the asset is first used or installed between 12 March 2020 and 30 June 2021.
From 1 July 2021 the IAWO will revert back to the old thresholds, but this remains to be seen. It is highly likely that the IAWO gets extended in some shape or form.
3B – Backing Business Investment Incentive (BBI)
Just like the IAWO, the backing business investment incentive (BBI) only applies to depreciable assets and only for business with an aggregated turnover of below $500m.
However, the BBI does not have the $150k threhold. So if the IAWO does not apply because the asset exceeds $150,000, then the Backing Business Investment Incentive (BBI) is the way to go.
There is just one additional condition. It must be a brand-new asset and not have been previously held by another entity (apart from trading stock).
The BBI allows a depreciation deduction of 50% of the asset’s cost plus the usual depreciation deduction calculated as though the cost of the asset was reduced by 50%.
Just like with IAWO, the asset must be first used or installed between 12 March 2020 and 30 June 2021.
From 1 July 2021 the BBI will cease entirely, unless it gets extended.
4 – Tax Incentives
There are two tax incentives relevant for intellectual property. The R & D tax incentive to cover costs to develop intellectual property. And then the EMDG to sell this intellectual property to overseas markets.
4A – R & D Tax Incentive
The R & D tax incentive is to partly offset the costs of research and development in Australia through a tax offset. SMEs often overlook this tax incentive but it should be part of any IP strategy. In fact, the R & D tax incentive specifically targets small to medium Australian companies.
The incentive provides a tax offset of 43.5%, refundable to companies in tax losses, delivering much needed cash flow to fund further R & D activities.
Larger companies receive a non-refundable tax offset of up to 38.5% for their eligible R&D activities.
4B – Export Market Development Grant
This grant is a federal program assisting Australian businesses in developing their export markets taking their product or IP to a global stage. It basically covers the next stage after R & D developed new products.
The business needs to spend the money first but can then claim a reimbursement of part of the cost.
5 – Look Through Rules for Fame and Image
Until now you could park income from fame and image in a company and then slowly distribute via dividends over many years, minimising tax.
The proposed law change is to apply a look-through rule to this, so that all income for fame and image is fully taxed in the year it is received. So you would no longer be able to ‘park’ taxable income within a company.
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