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ATO Interpretative Decision

ATO ID 2007/69 (Withdrawn)

Income Tax
Capital Allowances: balancing adjustment amount - whether patent used for a taxable purpose

Attention This ATO ID is withdrawn. Guidance on this issue can be found in Guide to depreciating assets 2016 (NAT 1996, PDF 623KB) and the Rental properties (NAT 1729, 520KB)
Attention This document has changed over time. View its history.
FOI status: may be released
Status of this decision: Decision withdrawn 20 April 2017.

CautionCAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.


Issue

Is the balancing adjustment amount from the sale of a patent, from which no licence royalties have been received and under which no items have been successfully manufactured, reduced under subsection 40-290(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

No. The balancing adjustment amount is not reduced under subsection 40-290(1) of the ITAA 1997 as the patent had been used solely for a taxable purpose.

Facts

A self-employed inventor (the taxpayer) had embarked upon a business venture to exploit, by means of licensing patent rights for royalty income or manufacture of machines for sale, machine designs he had invented. He applied for and was granted a patent in regard of the design of the machine which showed the most potential for successful exploitation.

After failing to successfully secure any arrangements to exploit his patent and because of his advancing age, the taxpayer entered into an agreement for the sale of his patent, for a lump sum payment, to a company in which he held no interest. This agreement represented a real abandonment of the taxpayer's business in regard to the patent.

Prior to the sales agreement, the taxpayer had provided information to the same company about his machine design in an attempt to secure a licence agreement.

Reasons for Decision

The rights the taxpayer held under the patent are a depreciating asset as defined in section 40-30 of the ITAA 1997 provided the patent is not trading stock. As the taxpayer was carrying on a business with the aim of commercially exploiting his invention by way of licensing patent rights for royalty income or manufacture of machines for sale, the patent was a capital asset of the taxpayer's business.

The sale of the patent results in a balancing adjustment event under paragraph 40-295(1)(a) of the ITAA 1997. The taxpayer is required to work out a balancing adjustment amount under section 40-285 of the ITAA 1997 as the decline in value of the patent was worked out or would have been worked out under Subdivision 40-B of the ITAA 1997.

Subsection 40-290(1) of the ITAA 1997 reduces the amount worked out under section 40-285 of the ITAA 1997 if deductions for the decline in value for the depreciating asset have been reduced under section 40-25 of the ITAA 1997. Subsection 40-25(2) of the ITAA 1997 reduces deductions for decline in value where a depreciating asset is used or installed ready for use for a purpose other than a taxable purpose.

The meaning of taxable purpose is set out in subsection 40-25(7) of the ITAA 1997 and includes the purpose of producing assessable income.

The taxpayer's activities in disclosing the details of his patented invention to outside parties in attempts to secure licence agreements for use of the patent, or to secure arrangements whereby machines could be manufactured subject to the patent, amount to commercial exploitation of the taxpayer's patent. As such, these activities are sufficient to constitute use of his patent for the ultimate purpose of producing assessable income.

Accordingly, subsection 40-25(2) of the ITAA 1997 does not apply to reduce the taxpayer's deductions for the decline in value of the patent.

It follows that the balancing adjustment amount arising from the sale of the patent is not reduced under subsection 40-290(1) of the ITAA 1997.

Date of decision: 28 March 2007

Year of income:Year ended 30 June 2006

Legislative references:
Income Tax Assessment Act 1997
   subsection 40-25(2)
   subsection 40-25(7)
   section 40-25
   section 40-30
   section 40-285
   subsection 40-290(1)
   paragraph 40-295(1)(a)
   Subdivision 40-B
   Division 40

Related ATO Interpretative Decisions
ATO ID 2007/68

Keywords
Capital assets
Carrying on a business
Deduction for depreciating assets
Depreciating assets
Disposal of business
Intangible depreciating assets
Intellectual property rights
Inventors
Patents
Taxable purpose

Siebel/TDMS reference number: 5373860; 1-AVUAHL8

Business line: Small Business/Individual Taxpayers

Date of publication: 20 April 2007

ISSN: 1445-2782

ATO ID 2007/69 (Withdrawn) history   Top  
   Date   Version 
   28 March 2007   Original statement   
 You are here ®  20 April 2017   Withdrawn   


 


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