New tax treatment of your IP: Accelerated deductions available

Changes to Instant Asset Write-Off and the introduction of the Backing Business Investment incentive

In response to the economic impact of COVID-19 on Australian enterprise, the Federal Government has introduced changes to the Income Tax Assessment Act 1997 (Cth) (ITAA). These changes have increased the allowance for Instant Asset Write-Offs (IAWO) and introduced the Backing Business Investment (BBI) incentive. The impact of these changes on intellectual property rights are as follows:

• Under IAWO, businesses can immediately deduct the cost of depreciating assets, such as intellectual property rights, of up to $150,000 per asset. The asset must be first used or installed between 12 March 2020 and 30 June 2020.

If the IAWO does not apply, the BBI incentive may apply.

• The BBI allows a depreciation deduction of 50% of the asset’s cost plus the usual depreciation deduction calculated as though the cost of the asset was reduced by 50%. The asset must be first used or installed between 12 March 2020 and 30 June 2021. The BBI may apply in FY20 if the asset cost exceeds $150,000 and in FY21 if the asset cost exceeds $1,000.

There is no limit on the number of assets a business may write-off under the IAWO (or depreciate) according to the BBI provisions in a single income year.

Instant Asset Write-Off

The criteria for an entity to claim the instant asset write-off are:

1. the asset must be a depreciating asset as defined under section 40.30 of the ITAA 1997
2. the asset must be first installed or used for a taxable purpose between 12 March 2020 and 30 June 2020
3. the total cost of the asset must not exceed $150,000
4. the aggregated turnover of the business must be less than $500 million.

Backing Business Investment

The criteria for an entity to expense depreciation at an accelerated rate under the BBI provisions are:

1. the asset must be a depreciating asset as defined under section 40.30 of the ITAA 1997
2. the asset must be new and not previously held by another entity (other than as trading stock)
3. the asset must not be one to which an entity has applied depreciation deductions or the IAWO
4. the asset must be acquired from 12 March 2020, and first used or installed for a taxable purpose by 30 June 2021
5. the aggregated turnover of the business must be less than $500 million.

Termination of incentives

From 1 July 2020 the asset threshold under the IAWO will revert to $1,000 for businesses with a turnover of less than $10 million, and $30,000 for businesses with a turnover of less than $50 million. From 1 July 2020 businesses with an aggregated turnover greater than $50 million will be ineligible for IAWO. Accelerated depreciation afforded under the BBI will cease entirely from 1 July 2021.

Example application of the new rules for IAWO

On 4 April 2020, Evolved Feet Pty Ltd acquire a registered design for footwear for $129,000. On 8 May 2020, Evolved Feet begin using the registered design to manufacture shoes for sale to consumers. Through the sale of shoes to consumers, Evolved Feet generates assessable income. Under the IAWO, Evolved Feet is entitled to deduct the entire $129,000 for the 2019-2020 income year.

Example application of BBI (accelerated depreciation)

On 21 February 2021, Protect Metals acquire a disc harrows patent for $400,000. On 24 February 2021, Protect Metals begin selling patented disc harrows. Protect Metals has an aggregated turnover of less than $10 million and would ordinarily be entitled to depreciate the asset at 15%.

The BBI provisions allow Protect Metals to depreciate 50% of the cost of the asset ($200,000) plus the usual depreciation amount of 15% calculated as though the cost of the asset were reduced by 50% (15% of $200,000 being $30,000). The total depreciation of the disc harrows patent being $230,000 for the income year 2020-2021.