Private ruling: Deduction - Patent
Date of advice: 21 July 2017
Published: November 2017
Ruling period: 1 July 2015 to 30 June 2016 | 1 July 2016 to 30 June 2017 | 1 July 2017 to 30 June 2018 | 1 July 2018 to 30 June 2019 | 1 July 2019 to 30 June 2020
Date scheme commenced: 1 July 2017

Ruling: Questions and Answers | 1. Are any of the patent expenses allowable as deductions in the 2015-16 tax year pursuant to section 8-1 of the Income Tax Assessment Act 1997 , being expenditure necessarily incurred in carrying on a business for the purpose of gaining or producing their assessable income? | No | 2. To the extent that the patent expenses are not allowable as deductions under section 8-1, are they allowable as deductions in the 2015-16 tax year pursuant to section 40-830 of the Income Tax Assessment Act 1997 ? | Yes | 3. Alternatively, are the patent expenses, that are not allowable ad deductions under section 8-1 or section 40-830, allowable as immediate deductions in the 2015-16 tax year pursuant to section 40-880 of the Income Tax Assessment Act 1997 ? | Not applicable | 4. In the further alternative, are the patent expenses that are not immediately deductible under section 8-1, 40-830 or 40-880, allowable deductions in equal instalments in the 2015-16 and the subsequent 4 tax years pursuant to section 40-880 of the Income Tax Assessment Act 1997 ? | Not applicable | 5. Is a tax deduction allowable for trading stock physically scrapped in that tax year, pursuant to subsection 70-35(3) of the Income Tax Assessment Act 1997 ? | No

Relevant facts and circumstances: In the 2015-16 income year, you incurred expenditure on developing a patent for an invention, and in manufacturing trading stock. The project was abandoned before 30 June 2016 after attempts to sell the product failed. The patent costs, totalling $X consisted of: (a) Design Engineer engaged, (b) Prototypes (c) Production costing, tooling (d) Patent Attorney (e) Global searches (f) Patent application (g) Patent values (h) Marketing (i) Advertising (j) Travel costs (k) Market research, interviewing No patent was granted. All intellectual property rights to the product were abandoned. Your incurred costs for the production trading stock. You decided, after actively promoting the product, that there was no commercial market for the product. The stock could not be sold. It was dumped prior to the end of the 2015-16 tax year. You had no other items of trading stock in the income year. The value of your trading stock at the beginning and end of the income year was zero.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 40-830 | Subsection 40-830(3) | Subsection 40-830(4) | Section 40-840 | Subparagraph 40-840(2)(d)(vi) | Subsection 70-35(3)

Reasons for decision: Summary: Expenditure incurred by you include fees for advice from a patent lawyer about the application for a patent and statutory application fees that was associated with the taxpayer's proposed project. The proposed project was the manufacture and sale of specific furniture which were to be sold as trading stock in the taxpayer’s business. 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: a. does not form part of the cost of a depreciating asset you hold; b. you cannot deduct under another provision of the ITAA 1997; c. is directly connected with a project you carry on or propose to carry on for a taxable purpose; and d. is, relevantly, incurred in seeking to obtain a right to intellectual property(subparagraph 40-840(2)(d)(vi) of the ITAA 1997). 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 you were unsuccessful in being granted the patent the following has occurred: a. you do not hold a depreciating asset; b. the relevant expenditure is not otherwise deductible under the ITAA 1997; and c. the project of exploiting the patent for taxable purposes has been abandoned. In these circumstances, the relevant expenditure will be deductible under section 40-830 of the ITAA 1997. Subsection 70-35(3) of the ITAA 1997 provides a deduction for any excess of the value of trading stock at the start of the income year over the value at the end of the income year. Therefore, as the value of your trading stock at the end of the income year was the same as the value of the trading stock at the beginning of the income year you are not entitled to a deduction under Subsection 70-35 of the ITAA 1997.