ATO ID 2002/811: Capital expenditure on a project developing a manufacturing process: successful 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 has been successful in obtaining a patent for the process, is capital expenditure incurred by the inventor in devising, testing and refining the process deductible under section 40-25 of the Income Tax Assessment Act 1997 ('ITAA 1997')?

Decision
Yes. Where a patent is granted, a deduction for the decline in value of the patent is allowable under section 40-25 of the ITAA 1997. The capital expenditure incurred in devising, testing and refining the process will form part of the cost of the patent.

Facts
The taxpayer has invented a new manufacturing process and has applied for and been granted a patent for the process. Capital expenditure was incurred by the taxpayer in devising, testing and refining the process. 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 of the type incurred by the taxpayer in devising, testing and refining the manufacturing process are 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 2002/810 | ATO ID 2002/812 | ATO ID 2002/832
Subject references: Intellectual property rights Intellectual property development expenses Inventors Patents Depreciating asset Cost of a depreciating asset