Capital expenditure incurred in unsuccessfully seeking to obtain a patent

Is capital expenditure, incurred by the inventor of a new manufacturing process in unsuccessfully seeking to obtain a patent for the process, deductible under section 40-830 of the Income Tax Assessment Act 1997 ('ITAA 1997')?

Yes. Where the application for the granting of a patent is unsuccessful the capital expenditure incurred in seeking to obtain the patent may be deductible under section 40-830 of the ITAA 1997 provided certain conditions are met.

The taxpayer invented a new manufacturing process and had applied for, but was unsuccessful in being granted a patent for the process. Capital expenditure incurred by the taxpayer include fees for advice from a patent lawyer about the application for a patent and statutory application fees. The taxpayer had intended to exploit the patent for income producing purposes but has now abandoned the project.

Expenditure incurred by the taxpayer 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 exploitation, for taxable purposes, of a patent granted for the manufacturing process. A depreciating asset does not exist as no patent was granted.

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 the taxpayer was unsuccessful in being granted the patent then the following has occurred: (a) the taxpayer does 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.