ATO ID 2004/493: Capital Allowances: depreciating asset-cost - expenditure incurred to acquire a patent licence
Date of decision: 7 June 2004
Year of income: Year ended 30 June 2004 Year ended 30 June 2005 Year ended 30 June 2006
Business line: Public Groups and International

Issue
Does the capital expenditure the taxpayer incurred to acquire the licence to a patent form part of the cost of a depreciating asset pursuant to section 40-185 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
Yes. The capital expenditure that the taxpayer incurred to acquire the licence to a patent does form part of the cost of a depreciating asset pursuant to section 40-185 of the ITAA 1997.

Facts
The taxpayer has acquired a licence for a patent, from the patent holder, for substantial consideration under a Patent Licence Agreement. The agreement allows the taxpayer an exclusive licence to enjoy, commercialise and exploit the patents, trade secrets, licensors' improvements and to manufacture, have manufactured, use, market and sell the products. The agreement also allows the taxpayer to grant sublicences.

Reasons for decision
Summary: The rights a licensee of a patent holds under a Commonwealth patent is an item of intellectual property pursuant to the definition of that term in subsection 995-1(1) of the ITAA 1997. An item of intellectual property is a depreciating asset pursuant to the definition of that term in section 40-30 of the ITAA 1997. The costs of a depreciating asset include capital amounts that are taken to have been paid to hold the asset (section 40-185 and 40-220 of the ITAA 1997).

Legislative references: Income Tax Assessment Act 1997 section 40-25 section 40-30 section 40-185 section 40-220 section 995-1
Related ATO interpretative decisions: ATO ID 2002/810 | ATO ID 2002/812 | ATO ID 2002/832
Subject references: Intellectual property rights Patents Depreciating assets Cost of a depreciating asset