New tax incentives: accelerated deductions for certain IP expenditure (including patents, designs and copyright)
On 24 March 2020, the Coronavirus Economic Response Package Omnibus Bill 2020 received Royal Assent. The Act, found here, forms part of the Federal Government’s response to the economic challenges posed by the global COVID-19 pandemic.
The changes introduced by the Act mean that, if you are considering patent, design or copyright protection:
- now until 30 June 2020 is an opportune time to undertake any expenditure related to patents, registered designs or copyright, with a cost of less than $150,000, per asset, as you may be eligible for an immediate 100% deduction under the Instant Asset Write-off (IAWO); and
- now until 30 June 2021 is a good time to undertake the above expenditure, if you are not eligible for an IAWO, because you may be eligible to claim an immediate 50% deduction (BBI Incentive) on the cost of that patent, registered design or copyright protection. The remaining 50% would then depreciate across the statutory effective life of the asset.
Both incentives only apply to assets that were first used or installed ready for use for a taxable purpose, including for the purpose of producing assessable income, between the relevant dates as above. These incentives offered by the Federal Government are very generous, with previous measures only allowing for depreciation across the statutory effective life of the asset, being:
- 20 years for a standard patent;
- 8 years for an innovation patent;
- 15 years for a registered design; and
- the shorter of 25 years from when you acquired the copyright, or the period until the copyright ends.
In contrast, the above IAWO provisions provide an immediate 100% deduction on the cost of asset, or if not eligible, the BBI Incentive provides an immediate 50% deduction on the cost of the asset if certain criteria are met. Full details are set out below.
Increase to the Instant Asset Write-off
As part of these measures, the Federal Government has increased, from announcement (12 March 2020) until 30 June 2020, the IAWO threshold under Division 40 of the Income Assessment Act 1997 (Cth) (ITAA 1997). The key features of the IAWO incentive are as follows:
- Threshold – the threshold has increased to $150,000 (up from $30,000) and applies on a per asset basis. This allows eligible businesses to write-off multiple assets, provided that each asset (whether new or second-hand) cost less than $150,000.
- Eligibility – eligibility for the IAWO has been expanded to apply to businesses with an aggregated turnover of less than $500 million (up from $50 million).
- Eligible asset – an eligible asset is an asset for which a decline in value is deductable (i.e. a depreciating asset) under s 40-25 of the ITAA 1997. A depreciating asset is defined under the ITAA 1997 as an asset that has a limited effective life and can reasonably be expected to decline in value over the time it is used, and includes the following intellectual property rights arising under a Commonwealth law as:
- the patentee, or a licensee, of a patent; or
- the owner, or licensee, of a registered design; or
- the owner, or a licensee, of a copyright.
An exclusion applies for assets that do not currently qualify for simplified depreciation rules.
Eligible businesses will need to act quickly in order to make use of the IAWO provisions, given that the relevant deadline is less than three months away. The IAWO will revert to $1,000 for small businesses (turnover less than $10 million) from 1 July 2020.
In addition to the IAWO threshold increase, the Act also introduces the Backing Business Investment (BBI) provisions, which provide support for business investment by allowing businesses to access accelerated depreciation reductions. The key features of the BBI Incentive are as follows:
- Benefit – eligible businesses are able to claim an immediate 50% deduction on the cost of an eligible asset at the time of installation, with existing Division 40 depreciation rules applying to the balance of the asset’s cost in subsequent years after the asset has been installed.
- Eligible business – the business must have an aggregated turnover of less than $500 million to be eligible for the BBI Incentive.
- Eligible asset – eligible assets are new assets that can be depreciated under Division 40 of the ITAA 1997 (i.e. plant, equipment and specified intangible assets, including the above mentioned items of intellectual property rights) acquired after announcement (12 March 2020) and first used or installed by 30 June 2021. The BBI Incentive does not apply to second-hand Division 40 assets, buildings and other capital works depreciable under Division 43, or assets to which the eligible business has already applied depreciation deductions or the IAWO rules.
Therefore, the BBI provisions may be used for eligible assets which do not fall within the above IAWO provisions due to the asset(s) cost exceeding the $150,000 threshold, or alternatively, because the item is not first used or installed for use by 30 June 2020.
Disclaimer. This article is general in nature and should not be relied on as legal or taxation advice. Before taking any action in relation to the above it is recommended that you obtain legal and taxation advice that is specific to your structure and circumstances. The content of this article is current as at 9 April 2020, but is subject to change.
 Note – An intangible asset (including the above mentioned items of intellectual property rights) may be a qualifying asset notwithstanding the exclusion under the rule about an asset not previously being held (see 40-125(7)(a) of the ITAA 1997). To qualify, the intangible asset must not have been used for the purpose of producing ordinary income, or installed ready for use by the entity for any purpose (whether taxable or non-taxable). For the purpose of this rule, any ordinary income that arises from the disposal of that intangible asset to the entity that begins to hold the asset is disregarded.