For purposes of income tax, certain intangible assets are depreciated over a number of years, set by statute (taxable effective life).
This measure provides taxpayers with a new option to self-assess the taxable effective life to better align this with the actual number of years that the asset provides an economic benefit (the economic effective life).
This proposal will better align the tax treatment of these intangible assets with the treatment of tangible assets.
Why this is being done?
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 and can impede innovative and entrepreneurial business opportunities.
Generally, acquired intangible assets, for example goodwill, do not have taxable effective lives and cannot be depreciated. However, specific intangible assets are accorded a statutory effective life so that they can be brought into the depreciation regime and their cost to businesses depreciated.
The statutory effective lives of these assets however, can be longer than the actual life of the asset and, unlike for most tangible assets, these intangible assets with a statutory effective life cannot be self-assessed to bring the tax life in line with the economic life of the asset.
Some submissions to Re:think put the view that Australia’s slower rates of depreciation on certain forms of intangibles and complex depreciation rules discourage various forms of intellectual property being held locally. There was a view that the rate at which intellectual property is currently eligible for tax write-off is comparatively slower than many other countries and questions were raised about the basis upon which a fixed period has been set into current tax law.
The Government considers that it is impractical to change the treatment of self-generated intangible assets (including goodwill), the costs associated with which will remain largely immediately deductible. In addition, there is not a strong case to change the treatment of acquired goodwill and intangible assets that are not subject to statutory lives — as this would involve a substantial cost to revenue and it is not clear that it would have a significant impact on investment and innovation.
While start-up enterprises will generally claim the expenses in building intellectual property as revenue (employee) expenses rather than depreciating them, faster depreciation will decrease the cost of investment in these asses for larger companies that can better exploit and commercialise the assets. This in turn will enable smaller innovative companies to better market their intellectual property and similar intangible assets.
What types of assets can be reassessed in terms of their taxable effective life?
Intangible assets that currently has a statutory effective life will be able to be reassessed, these are:
- 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.
How will business go about re-assessing the actual life of an asset?
A business will 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 ITAA 1997 s40-105 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.
When will the self-assessment option apply from?
The proposal will apply to intangible assets acquired from 1 July 2016.
What will be the cost to Revenue?
The measure is estimated to cost revenue $80 million over the forward estimates.