Capital expenditure on a project developing a manufacturing process: unsuccessful application for patent

Where an inventor of a new manufacturing process is unsuccessful in obtaining a patent for the process, is capital expenditure incurred by the inventor in devising, testing and refining 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 devising, testing and refining the process is deductible under section 40-830 of the ITAA 1997 provided certain conditions are met.

The taxpayer has invented a new manufacturing process and was unsuccessful in obtaining a patent for the process. Capital expenditure was incurred by the taxpayer in devising, testing and refining the process. The taxpayer had intended to exploit the patent for income producing purposes but has now abandoned the project.

Expenditure incurred by the taxpayer in devising, testing and refining the manufacturing process provided information 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 obtaining information associated with the project (subparagraph 40-840(2)(d)(v) 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.