Capital Allowances: opening adjustable value of an item of intellectual property

In calculating the opening adjustable value of an item of intellectual property to which Division 40 of the Income Tax Assessment Act 1997 (ITAA 1997) applies, does the taxpayer have regard to the former Division 373 of the ITAA 1997 and former Division 10B of the Income Tax Assessment Act 1936 (ITAA 1936) as if those former Divisions had applied to the item from the commencement of its use?

Yes. The opening adjustable value of an item of intellectual property is calculated as though the provisions of the former Division 373 of the ITAA 1997 and former Division 10B of the ITAA 1936 had applied to an item of intellectual property from the commencement of its use.

For a number of years prior to 1996, the taxpayer incurred capital expenditure in writing a book. It was written for personal reasons and consequently the copyright in the book was not used for a taxable purpose. However, the use of the copyright in the book changed during the 2002-03 income year when the taxpayer was approached to publish the book commercially. An advance payment of royalties from expected book sales was received during the 2002-03 income year.

Where an item of plant is used for private purposes before it starts to be used for the purpose of producing assessable income, a taxpayer would calculate the undeducted cost and/or notional written down value of an item of plant as though the provisions of the former Division 42 of the ITAA 1997 and/or former section 56 of the ITAA 1936 had applied to the item from the time the taxpayer started to use it for private purposes. Once the taxpayer has worked out the undeducted cost and/or notional written down value of an item of plant, the taxpayer would then calculate their entitlement for a depreciation deduction in respect of that income year they started to use the item to produce assessable income.

A similar principle applies to the calculation of unrecouped expenditure and/or residual value of an item of intellectual property for the purposes of the former Division 373 of the ITAA 1997 and/or former section 124S of the ITAA 1936 where an item of intellectual property is first used wholly for private purposes before being used to produce assessable income.

Subsection 40-45(1) of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A 1997) provides that where a taxpayer holds an item of intellectual property as defined in subsection 995-1(1) of the ITAA 1997 and they could have deducted an amount under the former Division 373 of the ITAA 1997 for that expenditure if they had used the item for the purpose of producing assessable income then that taxpayer will be entitled to a deduction for the decline in value of that item of intellectual property under Division 40 of the ITAA 1997.

Subsection 40-45(2) of the IT(TP)A 1997 provides that the taxpayer will work out the decline in value using the same basis ( that is, using the same calculation method, cost, and effective life) as they did under the former Division 373 of the ITAA 1997.

For taxpayers to continue to claim deductions for existing items of intellectual property as they did under the former Division 373 of the ITAA 1997, the item's opening adjustable value is treated under paragraph 40-45(2)(a) of the IT(TP)A 1997 as the amount of unrecouped expenditure as at the end of 30 June 2001.

Accordingly, the taxpayer in this case will calculate the unrecouped expenditure of an item of intellectual property as though the provisions of the former Division 373 of the ITAA 1997 had applied to the item from the commencement of its use.

Section 40-45 of the IT(TP)A 1997 will then operate to allow a taxpayer to claim a deduction for the decline in value of an item of intellectual property under Division 40 of the ITAA 1997 using the opening adjustable value as at 1 July 2001 being equal to the unrecouped expenditure as at 30 June 2001 (paragraph 40-45(2)(a) of the IT(TP)A 1997).

Date of Amendment Part Comment 24 October 2014 Reason for Decision Minor grammatical change.

Date of Amendment | Part | Comment

24 October 2014 | Reason for Decision | Minor grammatical change.