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Is a taxpayer entitled to claim a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997), for annual renewal fees paid to IP Australia and solicitors fees for ongoing administration which will be incurred during the life of a patent?

Yes. Annual renewal fees and ongoing legal fees are expenses that are revenue in nature and deductible under section 8-1 of the ITAA 1997.

The taxpayer successfully obtained a standard patent for a product and claims deductions for the decline in value of the resultant asset, an item of intellectual property, under section 40-25 of the ITAA 1997.

To maintain the patent IP Australia requires an annual renewal fee be paid from the fifth anniversary of the filing date for the remaining duration of the standard patent run-time. In addition, patent lawyer administration fees will be incurred throughout the life of the patent.

Section 8-1 of the ITAA 1997 allows deductions for any loss or outgoing to the extent that it is incurred in gaining or producing assessable income or in carrying on a business for the purpose of gaining or producing assessable income. However, a deduction is not allowable for a loss or outgoing if it is of a capital, private or domestic nature, incurred in relation to producing exempt income or specifically prevented by a provision of the ITAA 1997 or the Income Tax Assessment Act 1936 (ITAA 1936).

It was held in Case F19 (1955) 6 TBRD 119; (1955) 5 CTBR (NS) Case 78 that expenditure incurred to renew registered trademarks as required by New Zealand legislation was revenue in nature and allowable as a deduction under subsection 51(1) of the ITAA 1936 (now section 8-1 of the ITAA 1997). It was considered that because the expenditure was not necessary to establish the original title, was recurring and had the character of expenditure necessarily undertaken from time to time by owners of income-producing assets in order to prevent wastage or deterioration it was not capital in nature.

Canberra Income Tax Circular Memorandum (CITCM) No. 288 considered that the renewal fee payable before the expiration of a patent is not capital expenditure. It states that the annual fee incurred in the maintenance of an existing asset in the shape of the patent right is an allowable deduction under subsection 51(1) of the ITAA 1936.

The taxpayer is therefore entitled to a deduction under section 8-1 of the ITAA 1997 for the cost of annually renewing a patent as required by IP Australia and ongoing administration fees charged by a solicitor as these costs are revenue in nature.