ATO ID 2002/832: Capital expenditure on a project developing a manufacturing process: unsuccessful application for patent
Date of decision: 10 May 2002
Year of income: Year ending 30 June 2002
Business line: Public Groups and International

Issue
Where an inventor of a new manufacturing process is unsuccessful in obtaining a patent for the process, is capital expenditure incurred by the inventor in devising, testing and refining the process deductible under section 40-830 of the Income Tax Assessment Act 1997 ('ITAA 1997')?

Decision
Yes. Where the application for the granting of a patent is unsuccessful the capital expenditure incurred in devising, testing and refining the process is deductible under section 40-830 of the ITAA 1997 provided certain conditions are met.

Facts
The taxpayer has invented a new manufacturing process and was unsuccessful in obtaining a patent for the process. Capital expenditure was incurred by the taxpayer in devising, testing and refining the process. The taxpayer had intended to exploit the patent for income producing purposes but has now abandoned the project.

Reasons for decision
Summary: Expenditure incurred by the taxpayer in devising, testing and refining the manufacturing process provided information that was associated with the taxpayer's proposed project. The proposed project was the exploitation, for taxable purposes, of a patent granted for the manufacturing process. A depreciating asset does not exist as no patent was granted. Section 40-830 of the ITAA 1997 provides a deduction for 'project amounts' that are allocated to a project pool. Section 40-840 of the ITAA 1997 defines 'project amount' to be capital expenditure that: Qualifying project amounts are generally deductible over the life of the project (subsection 40-830(3) of the ITAA 1997). However the undeducted balance of a project pool is also deductible for the year in which a project is abandoned (subsection 40-830(4) of the ITAA 1997). As the taxpayer was unsuccessful in being granted the patent then the following has occurred: In these circumstances, the relevant expenditure will be deductible under section 40-830 of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1997 section 40-185 section 40-220 section 40-830 subsection 40-830(3) subsection 40-830(4) subparagraph 40-840(2)(d)(v)
Related ATO interpretative decisions: ATO ID 2002/810 | ATO ID 2002/811 | ATO ID 2002/812
Subject references: Intellectual property rights Intellectual property development expenses Inventors Patents Depreciating asset Cost of a depreciating asset