Tax depreciation treatment of patents

Sections DB 31(4)(a) and (b), DZ 14, EE 16(4)(b) and (5)(b), EE 16(6), EE 24B, EE 27(1)(b) and (c), EE 27B, EE 37(2), EE 51(1)(b) and (c), EE 51(3)(a), EE 51(5)(a) to (d), EE 58, and definitions of "acquire" and "dispose" in section OB 1 of the Income Tax Act 2004

A number of remedial changes have been made to new tax depreciation rules for patents and plant variety rights, which were enacted as part of the Taxation (Base Maintenance and Miscellaneous Provisions) Act 2005. The changes deal with several unintended consequences of the rules and further simplify the tax depreciation rules for patents (and patent applications) and plant variety rights.

Background

As enacted by the Taxation (Base Maintenance and Miscellaneous Provisions) Act 2005:

• For patent applications lodged with a complete specification before 1 April 2005 and granted to a taxpayer in their 2005-06 or a later income year, a "catch up" depreciation deduction for the period the patent application was pending is allowed in the year the patent is granted.
• For patent applications lodged with a complete specification on or after 1 April 2005, a deduction for depreciation is allowed in the income year the application is filed and in subsequent years (including years when the patent is granted).
• Plant variety rights acquired or granted in a taxpayer's 2005-06 or later income year are depreciable property.
• For plant variety rights applications that are granted in a taxpayer's 2005-06 or a later income year, a "catch up" depreciation deduction for the period the application was pending is allowed in the income year the rights are granted.

These rules were enacted mainly by the addition of new sections EE 27B, EE 27C, EE 27D and EE 27E to the Income Tax Act 2004.

However, the rules as enacted contained the following unintended consequences:

• They double counted the period a patent (and patent application) or plant variety rights were held when calculating the amount of depreciation loss allowed - first under sections EE 27B to EE 27E and then under section EE 16. This double counting has the effect of reducing the amount of depreciation allowed.
• They did not take into account the "remaining legal life" of a patent (and patent application) or plant variety rights when additional costs in relation to these rights were incurred. This also had the consequence of lowering the amount of depreciation allowed.

Key features

New section DZ 14 provides a one-off "catch up" deduction for the period a patent application was pending for patent applications with complete specifications lodged before 1 April 2005 that are granted in the 2005-06 or a later income year. New section EE 24B provides a one-off "catch up" depreciation deduction for plant variety rights applications that are granted in the 2005-06 or a later income year.

Sections EE 27B to EE 27E have been replaced by new section EE 27B, which provides the correct annual rate for patents granted in a person's 2005-06 and subsequent years. This new provision provides the correct depreciation rate for a patent that has been granted (taking into account factors such as depreciation previously allowed for the patent application and any additional costs incurred).

Existing section EE 27 applies to patent applications with complete specifications that are lodged on or after 1 April 2005 and plant variety rights that are acquired or granted in the 2005-06 or a later income year.

A number of other consequential amendments have been made to sections DB 31(4), EE 16, EE 27(1), EE 37(2), EE 51 and to the definitions of "legal life" in section EE 58 and "acquire" and "dispose" in section OB 1 of the Income Tax Act 2004. The definition of "patent application date" in section OB 1 has been repealed.

Application date

These changes apply from 1 October 2005 to:

• patent applications lodged with a complete specification before 1 April 2005 that are granted in the 2005-06 or later income years;
• patent applications lodged with a complete specification on or after 1 April 2005; and
• plant variety rights acquired or granted in the 2005-06 or a later year.

Correction: The Commentary on the Taxation (Annual Rates, Savings Investment, and Miscellaneous Provisions) Bill incorrectly referred to patent applications with complete specifications lodged before 1 April 2007. The correct date is 1 April 2005.