ATO ID 2002/810: Capital expenditure incurred in successfully seeking to obtain a patent
Date of decision: 10 May 2002
Year of income: Year ending 30 June 2002
Business line: Public Groups and International

Issue
Is capital expenditure incurred, by the inventor of a new manufacturing process in successfully seeking to obtain a patent for the process, deductible under section 40-25 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
Yes. The capital expenditure incurred in successfully seeking to obtain the patent will form part of the cost of the patent. A deduction for the decline in value of the patent is allowable under section 40-25 of the ITAA 1997.

Facts
The taxpayer has invented a new manufacturing process and has applied for and been granted a patent for the process. Capital expenditure incurred by the taxpayer include fees for advice from a patent lawyer about the application for a patent and statutory application fees. The taxpayer intends to exploit the patent for income producing purposes.

Reasons for decision
Summary: The rights a patentee 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 cost of a depreciating asset includes capital amounts that are taken to have been paid to hold the asset (sections 40-185 and 40-220 of the ITAA 1997). Expenditure incurred by the taxpayer in obtaining a patent for the manufacturing process include fees for advice from a patent lawyer about the application for a patent and statutory application fees. Expenditure of this type is considered to be of a capital nature and form part of the cost of a depreciating asset. A deduction for the decline in value of a depreciating asset is allowable to the extent the asset is used for a taxable purpose.

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 2002/811 | ATO ID 2002/812 | ATO ID 2002/832
Subject references: Intellectual property rights Intellectual property development expenses Inventors Patents Depreciating assets Cost of a depreciating asset