Tax Law Improvement Act (No. 1) 1998 (46 of 1998)

Schedule 1   Amendment of the Income Tax Assessment Act 1997

7   Section 330-605 (link note)

Repeal the link note, substitute:

[The next Division is Division 373.]

Division 373 - Intellectual property

Table of Subdivisions

Guide to Division 373

373-A Deductions for registering items of intellectual property

373-B Deductions for capital expenditure on intellectual property

373-C Partial realisation of item of intellectual property

373-D Balancing adjustments

373-E Application of Common rules

373-F Adjustments affecting your deductions under this Division

Guide to Division 373

373-1 What this Division is about

This Division creates a capital allowance for expenditure on an item of intellectual property that you use (or have used) for the purpose of producing assessable income.

Note 1: In some cases, you get a deduction even if you acquired the item for nothing.

Note 2: Division 40 sets out an overview of capital allowances.

You can also deduct expenditure you incur in being granted a patent or in registering a design or copyright.

In certain cases, this Division includes an amount in your assessable income to reverse the effect of deductions under it.

See Subdivisions 373-C and 373-D.

Subdivision 373-A - Deductions for registering items of intellectual property

Table of sections

373-5 Expenditure incurred in registering an item

373-5 Expenditure incurred in registering an item

(1) You can deduct expenditure you incur in the income year in seeking to obtain, or in obtaining:

(a) the grant of a patent, or the extension of the term of the grant; or

(b) the registration of a design, or the extension of the period of registration; or

(c) the registration of a copyright.

(2) But you can only deduct the expenditure to the extent that you incur it for the *purpose of producing assessable income.

Subdivision 373-B - Deductions for capital expenditure on intellectual property

Table of sections

373-10 Conditions for deduction

373-15 Meaning of item of intellectual property

373-20 How much you can deduct

373-25 Meaning of unrecouped expenditure

373-30 Meaning of expenditure on the item

373-35 Effective life of intellectual property

373-10 Conditions for deduction

(1) You can deduct an amount for the *current year for your *expenditure on an item of *intellectual property if you have ever used for the *purpose of producing assessable income either:

(a) the item itself; or

(b) the invention, design, work or other subject matter to which the item relates.

Note 1: In some cases, you may be treated as having incurred expenditure on an item even if you acquired it for nothing: see Cases 5 to 9 in the table in subsection 373-30(2).

Note 2: Your expenditure does not include expenditure covered by Subdivision 373-A (expenditure incurred in registering the item).

(2) However, you cannot deduct an amount under this section if:

(a) during the *current year or an earlier income year, you disposed of the item, or some other *balancing adjustment event happened at a time when you owned the item; or

(b) another entity acquired the item from you during an earlier income year because of a transmission by operation of law.

Note 1: If during the current year you disposed of the item or some other balancing adjustment event happened, you may be able to deduct an amount because of the balancing adjustment that you must make: see Subdivision 373-D.

Note 2: You can deduct an amount under this section even if you have disposed of part of the item. The effect of partial realisations is set out in Subdivision 373-C.

Note 3: Once you have a deduction under this section, an amount may be included in your assessable income under Subdivision 373-C or 373-D.

(3) You also cannot deduct an amount under this section if the item relates to a copyright in an Australian film within the meaning of Division 10B of Part III of the Income Tax Assessment Act 1936.

Note: In that case you may be able to deduct amounts under that Division.

373-15 Meaning of item of intellectual property

(1) An item of intellectual property consists of the rights (including equitable rights) that an entity holds under a *Commonwealth law as:

(a) the patentee, or a licensee, of a patent; or

(b) the owner, or a licensee, of a registered design; or

(c) the owner, or a licensee, of a copyright;

or of equivalent rights held under a *foreign law.

Extension of licence treated as grant of new licence

(2) This Division applies as if an extension of the term of a licence relating to a patent, design or copyright were the grant of a new licence.

373-20 How much you can deduct

(1) The amount you can deduct for the *current year is:

• your *unrecouped expenditure on the item at the end of the current year;

divided by:

• the number of income years from the start of the current year to the end of the item's *effective life.

Disposal of the item by transmission by operation of law

(2) But if another entity has acquired the item from you during the *current year because of a transmission by operation of law, the amount you can deduct for the current year is:

• your *unrecouped expenditure on the item immediately before the transmission;

divided by:

• the number of income years from the start of the current year to the end of the item's *effective life.

Deduction adjusted if less than $100

(3) If the amount worked out under subsection (1) or (2) is less than $100, you deduct instead the lesser of:

(a) $100; and

(b) your *unrecouped expenditure on the item at the end of the *current year or immediately before the transmission (as appropriate).

Deduction may be reduced by other provisions

(4) Your deduction may be reduced by the provisions shown in the table.

373-25 Meaning of unrecouped expenditure

(1) Your unrecouped expenditure on an item of *intellectual property starts as your *expenditure on the item, but is reduced over time. (It can also be increased later.)

Note: If you have owned the item since before the 1998-99 income year: see instead subsection 373-10(2) of the Income Tax (Transitional Provisions) Act 1997.

(2) Immediately after the end of an income year, it is reduced by the total of:

(a) the amount you can deduct under section 373-10 for the *expenditure for that income year; and

(b) any amount by which that deduction has been reduced by section 373-90 (about benefits from rights exercised outside Australia).

(3) The table shows the other provisions that reduce or increase your unrecouped expenditure.

373-30 Meaning of expenditure on the item

(1) Your expenditure incurred on the item is worked out using the table. If more than one Case in the table applies, use the expenditure in the last applicable Case. (It does not matter whether an event described happened in the *current year or earlier.)

(2) However, your expenditure does not include an amount that you have deducted or can deduct, or that has been or will be taken into account in working out an amount you have deducted or can deduct:

(a) under this Division in respect of another item of *intellectual property that you acquired before the item; or

(b) under Subdivision 373-A (about deductions for expenditure on registration of items of intellectual property); or

(c) under another Division of this Act.

373-35 Effective life of intellectual property

The effective life of an item of *intellectual property begins at the start of the first income year (the starting year) for which you can deduct an amount for the item under this Subdivision. It ends at the end of the income year specified in the table.

Note: If you have owned the item since before the 1998-99 income year: see instead subsection 373-10(3) of the Income Tax (Transitional Provisions) Act 1997.

Subdivision 373-C - Partial realisation of item of intellectual property

Guide to Subdivision 373-C

373-40 What this Subdivision is about

If you partially realise an item of intellectual property, the amount arising:

(a) reduces your unrecouped expenditure on the item, and so reduces your future deductions; and

(b) if it exceeds your unrecouped expenditure, is included in your assessable income, but only to the extent of your past deductions for the item.

Table of sections

Operative provisions

373-45 Amount arising from a partial realisation of the item

373-50 How to work out the effects of the partial realisation

373-55 Item of intellectual property left after partial realisation

[This is the end of the Guide.]

Operative provisions

373-45 Amount arising from a partial realisation of the item

A partial realisation of an item of *intellectual property is an event described in column 2 of an item in the table.

The amount arising from the partial realisation is the amount described in column 3 of that item. (If more than one item applies, use the amount arising described in the last applicable item.)

Note: There can be a partial realisation of an item even after a balancing adjustment event has happened. For example, if after disposing of a patent the former owner receives damages for infringement of the patent.

373-50 How to work out the effects of the partial realisation

(1) You work out the effects of a *partial realisation by comparing:

• the *amount arising from the partial realisation;

with:

• your *unrecouped expenditure on the item immediately before the partial realisation.

(2) If the *amount arising from the *partial realisation is less than your *unrecouped expenditure on the item, your unrecouped expenditure is reduced by that amount at the time of the *partial realisation.

(3) On the other hand, if the *amount arising from the *partial realisation exceeds your *unrecouped expenditure on the item, then:

(a) your unrecouped expenditure is reduced to nil at the time of the partial realisation (if it is not nil already); and

(b) the excess is included in your assessable income for the income year of the partial realisation.

(4) However, the amount included in your assessable income cannot exceed:

• the total of each amount (if any) you can deduct or have deducted for the item for the *current year or an earlier income year under this Division (except Subdivision 373-A (about registration expenditure));

reduced by:

• the total of each amount (if any) included in your assessable income for an income year, either under this section because of a previous *partial realisation of the item, or under section 373-65 because of a *balancing adjustment event.

Note: If you have owned the item since before the 1998-99 income year: see subsection 373-10(4) of the Income Tax (Transitional Provisions) Act 1997.

(5) If some or all of the *amount arising from the *partial realisation is *ordinary income, apply this section as if the amount arising were reduced by the amount of ordinary income.

373-55 Item of intellectual property left after partial realisation

This Division applies as if what is left of the item after the *partial realisation were the same item of *intellectual property as before the partial realisation.

Subdivision 373-D - Balancing adjustments

Table of sections

373-60 When balancing adjustment is required

373-65 How to do the adjustment

373-70 Meaning of termination value

373-75 Meaning of written down value

373-60 When balancing adjustment is required

(1) A balancing adjustment is required if:

(a) you have incurred *expenditure on an item of *intellectual property; and

(b) you have ever used for the *purpose of producing assessable income either the item itself or the invention, design, work or other subject matter to which the item relates; and

(c) a *balancing adjustment event happens during the *current year at a time when you own the item.

(2) A balancing adjustment event is an event listed in the table.

For partial realisations: see Subdivision 373-C.

For transmissions by operation of law: see subsection 373-20(2).

Note: An example of item 4 is if the owner of a copyright becomes a partner and contributes the copyright to the partnership assets.

(3) A balancing adjustment is not required if roll-over relief is available under Common rule 1.

For the application of Common rule 1: see Subdivision 373-E.

(4) A balancing adjustment is not required if the item relates to a copyright in an Australian film within the meaning of Division 10B of Part III of the Income Tax Assessment Act 1936.

Note: In that case, see that Division.

373-65 How to do the adjustment

(1) You make the adjustment by comparing:

• the item's *termination value;

with:

• the item's *written down value.

(2) If the *termination value exceeds the *written down value, the excess is included in your assessable income. However, the amount included cannot be more than:

• the total of the amounts (if any) you have deducted or can deduct for earlier income years under Subdivision 373-B for your *expenditure on the item;

less:

• the total of each amount (if any) that section 373-50 has included in your assessable income for an income year because of a *partial realisation of the item.

Note 1: If roll-over relief under Common rule 1 has previously applied to the item: see section 41-40 and subsections 373-85(3) and (4).

Note 2: If you have owned the item since before the 1998-99 income year: see subsection 373-10(4) of the Income Tax (Transitional Provisions) Act 1997.

Note 3: If there has been an earlier balancing adjustment event for which roll-over relief was available under section 124PA of the Income Tax Assessment Act 1936: see section 373-65 of the Income Tax (Transitional Provisions) Act 1997.

(3) If the *termination value is less than the *written down value, you can deduct the difference.

Note: The deduction may be reduced if you obtain a benefit from a right you can exercise outside Australia: see section 373-90.

(4) Your *unrecouped expenditure on the item is reduced to nil at the time of the *balancing adjustment event (even if the *termination value equals the *written down value).

Note: If the termination value equals the written down value, the balancing adjustment has no effect on your assessable income or deductions. (One case where this can happen is if you dispose of the item for no consideration: see section 373-70.)

373-70 Meaning of termination value

(1) The item's termination value is worked out using the table. If more than one Case in the table applies, use the termination value in the last applicable Case.

Note: If Case 10 applies and the parties jointly elect for roll-over relief under subsection 373-85(2), a balancing adjustment is not required.

(2) The termination value is reduced if:

(a) the *balancing adjustment event is a disposal of the item; and

(b) some or all of what you receive for the disposal is *ordinary income.

It is reduced by the amount of ordinary income.

373-75 Meaning of written down value

The item's written down value is your *unrecouped expenditure on the item immediately before the *balancing adjustment event.

Subdivision 373-E - Application of the Common rules

Table of sections

373-80 Application of Common rules in Division 41

373-85 Common rule 1 (roll-over relief for related entities)

373-80 Application of Common rules in Division 41

These Common rules apply to your *expenditure on an item of *intellectual property:

(a) Common rule 1 (roll-over relief for related entities), but with the qualifications and modifications set out in section 373-85;

(b) Common rule 2 (non-arm's length transactions), but only if that expenditure is worked out using Case 1 in the table in subsection 373-30(2).

Note 1: Non-arm's length transactions are also dealt with in section 373-100.

Note 2: If you have owned the item since before the 1998-99 income year: see subsection 373-10(4) of the Income Tax (Transitional Provisions) Act 1997.

373-85 Common rule 1 (roll-over relief for related entities)

Application of Common rule 1

(1) Common rule 1 does not apply to a *partial realisation, or to a transmission by operation of law.

(2) Roll-over relief is also available if:

(a) a *balancing adjustment event happens that is covered by item 4 or 5 (about partial changes of ownership) in the table in subsection 373-60(2); and

(b) the owner or owners of the item immediately before the change (the transferor) and the owner or owners of the item immediately after the change (the transferee) jointly elect for roll-over relief.

Note: For the conditions relating to the election: see section 41-55.

Modifications of Common rule 1

(3) Disregard subsection 41-40(3) (about the transferee being taken to have incurred the transferor's expenditure).

Note: This is because the transferee's expenditure on the item is dealt with in the table in subsection 373-30(2) and is based on the transferor's unrecouped expenditure immediately before the roll-over event.

(4) Instead, the balancing adjustment is affected in this way:

(a) the total of each amount (if any) that section 373-50 has included in the transferor's assessable income for an income year (because of a *partial realisation of the item); or

(b) if there have been 2 or more prior applications of Common rule 1 - the total of each amount (if any) that section 373-50 has included in the assessable income of any of the transferors for an income year;

is taken to have been included by that section in the assessable income of the transferee for that income year.

Note: If you have owned the item since before the 1998-99 income year: see subsection 373-10(4) of the Income Tax (Transitional Provisions) Act 1997.

(5) The obligation in subsection 41-50(4) applies to the transferee as if the period for keeping the notice referred to in subsection 41-50(2) were until the end of 5 years after the next *balancing adjustment event occurs for the item.

(6) The obligation in subsection 41-55(5) applies to the transferee as if the period for keeping the election referred to in subsection 41-55(2) or a copy of it were until the end of 5 years after the next *balancing adjustment event occurs for the item.

Subdivision 373-F - Adjustments affecting your deductions under this Division

Table of sections

Adjusting the amount you can deduct

373-90 Benefits from rights exercised outside Australia

Increasing your unrecouped expenditure on the item

373-95 Expenditure incurred in obtaining the surrender of a licence

Adjusting your expenditure on the item

373-100 If the item is acquired in a non-arm's length transaction

373-105 Some cases where the item is a percentage interest of another item, or is a licence

Adjusting the amount you can deduct

373-90 Benefits from rights exercised outside Australia

The amounts you can deduct under Subdivision 373-B or 373-D for *expenditure on an item of *intellectual property are reduced if:

(a) you have a right relating to the invention, design, work or other subject matter to which the item relates; and

(b) you can exercise the right outside Australia; and

(c) you obtain a benefit from that right at any time.

They are reduced by amounts that are reasonable having regard to the benefit.

Increasing your unrecouped expenditure on the item

373-95 Expenditure incurred in obtaining the surrender of a licence

(1) If:

(a) you grant a licence (for consideration) in relation to an item of *intellectual property; and

(b) the licence is later surrendered to you;

your *unrecouped expenditure on the item is increased, at the time of the surrender, by the amount of any capital expenditure you incurred in obtaining the surrender.

(2) However, the increase is less if you and the licensee were not dealing with each other at *arm's length, and the consideration for the surrender is greater than:

(a) the licence's market value when it is surrendered to you; or

(b) the capital expenditure the licensee incurred in obtaining the licence.

In that case, your *unrecouped expenditure on the item is only increased by the lesser of those amounts.

(3) If the surrender happens after the end of the item's *effective life, section 373-20 applies to the income year of the surrender as if the number of income years referred to in that section were one.

Note: This means that if you can deduct an amount for the item under Subdivision 373-B for the income year of the surrender, that amount is the whole of any capital expenditure you incurred in obtaining the surrender.

Adjusting your expenditure on the item

373-100 If the item is acquired in a non-arm's length transaction

(1) Your *expenditure on an item of *intellectual property may be adjusted as set out in this section if:

(a) that expenditure would otherwise be worked out using Case 2, 3 or 4 in the table in subsection 373-30(2); and

(b) you and the entity from which you *acquired the item did not deal with each other at *arm's length.

Note: If that entity had owned the item since before the 1998-99 income year: see section 373-100 of the Income Tax (Transitional Provisions) Act 1997.

(2) Compare your *expenditure on the item as worked out using that Case with:

(a) that entity's *expenditure on the item; and

(b) the item's market value when you acquired it.

(3) If your *expenditure on the item as worked out using that Case is greater than one or other of those amounts, your *expenditure on the item is instead taken to be the lesser of them.

Special rules if you bought only part of another item

(4) However, if you bought the item from that entity (Case 3 or 4 in the table in subsection 373-30(2)) and an item in the table below applies, instead compare your *expenditure on the item as worked out using that Case with each amount described in the last column of that item.

Note: If that entity had owned the other item since before the 1998-99 income year: see section 373-100 of the Income Tax (Transitional Provisions) Act 1997.

373-105 Some cases where the item is a percentage interest of another item, or is a licence

(1) If:

(a) you would otherwise work out your *expenditure on the item under Case 5 or 6 in the table in section 373-30; and

(b) the item was only a percentage interest of another item of *intellectual property owned by the entity from which you *acquired the item;

your expenditure on the item is instead that percentage of the expenditure worked out under that Case.

(2) If:

(a) the item is a licence; and

(b) you would otherwise work out your *expenditure on it under Case 5 in the table in section 373-30; and

(c) immediately before you *acquired it, the entity from which you acquired it was the owner of another item of *intellectual property to which the licence relates;

your expenditure on the item is instead so much of that entity's *unrecouped expenditure on the item (immediately before disposing of it to you) as is reasonably attributable to the licence.

[The next Division is Division 375.]