19 May Tax considerations and patent depreciation in Australia
The Australian government’s 2021-22 budget released 11 May 2021 announced plans to encourage research through a new patent box regime (see Andy’s article) and also by allowing businesses to self-assess intangible depreciating assets, such as their intellectual property, rather than being required to use the statutory prescribed effective life.
Under income tax law, a depreciating asset is an asset that has a limited effective life and can reasonably be expected to decline in value over time. Unlike tangible assets most intangible assets are not considered to be a depreciating asset. However, intellectual property, such as patents and registered designs, is one exception.
Currently, for the purpose of income tax, intellectual property, such as patents and registered designs, can be depreciated using a method called the prime cost method. Using the prime cost method, the patent or design is given a statutory effective life, and depreciation is calculated assuming a constant decrease in value every year over its effective life. For example, the effective life of a standard patent is 20 years, therefore, the value of a standard patent is depreciated at a constant rate over 20 years. Likewise, an innovation patent has an effective life of 8 years, and a registered design has an effective life of 15 years.
There is one school of thought that this depreciation rate is too slow, and in fact much slower than other countries around the world. Additionally, for some intangible assets, the statutory effective life is longer than the term (for example, designs have a maximum term of 10 years, yet their effective life is 15 years). Consequently, this unbalance between effective life and economic life discourages innovators from holding intellectual property in Australia.
In answer to this, from 1 July 2023 businesses will be able to self-assess intangible depreciating assets, such as patents and registered designs. This means businesses will be able to self-assess the assets as having a shorter effective life than the current statutory effective life. For example, without being able to self-assess, a business having a registered design worth $150,000 would be able to deduct $10,000 each year in depreciation costs over 15 years. In contrast, under the self-assessment measure, the business could determine the effective life to be 10 years and deduct $15,000 each year in depreciation costs, thus increasing the deduction by $5,000 each year. Under the self-assessment method, businesses can use the increased cash flow toward further innovation.