Capital Allowances: cost - copyright - expenditure on creating subject matter of an educational programme

Is the capital expenditure incurred by the taxpayer directly in creating the subject matter of a computer disk (CD) included, pursuant to paragraph 40-180(1)(b) of the Income Tax Assessment Act 1997 (ITAA 1997), in the first element of cost of the copyright the taxpayer holds as developer of the CD?

Yes. The taxpayer's capital expenditure is directly attributable to creating the subject matter of the copyright the taxpayer holds and, therefore, is an amount paid by the taxpayer to hold the copyright and forms part of the first element of cost of the depreciating asset (copyright) pursuant to paragraph 40-180(1)(b) of the ITAA 1997.

The taxpayer created educational material which they recorded on a CD master copy in order to derive royalty income from licensing the copyright in their work. The taxpayer incurred various production expenses (including the costs of filming and editing, encryption of media, graphic design and art work) directly in order to create educational courses accessible from the CD. By the operation of the Copyright Act 1968 (Cth) , the taxpayer became the owner of copyright in their work (including any other subject matter involved in creating the CD).

The rights an owner of a copyright holds under a Commonwealth Law is an item of intellectual property pursuant to the definition of that item in subsection 995-1(1) of the ITAA 1997. An item of intellectual property is a depreciating asset pursuant to the definition of that term in section 40-30 of the ITAA 1997.

The deduction for the decline in value of a depreciating asset provided for under section 40-25 of the ITAA 1997 is based on the cost of the depreciating asset worked out under Subdivision 40-C of the ITAA 1997. Where, as in the general case, paragraph 40-180(1)(b) of the ITAA 1997 applies, the first element of cost of a depreciating asset includes all capital amounts paid to hold the depreciating asset and is worked out under section 40-185 of the ITAA 1997.

In the case of the original owner of copyright, the first element of cost will include all capital amounts which are paid by that owner in order to create the subject matter of the copyright. As the creation of the copyright necessarily entails bringing into existence the subject matter which it protects, the first element of cost of the original owner of copyright includes capital amounts incurred by them directly in creating the subject matter which the copyright protects.

In this case, the subject matter of the copyright is the educational courses accessible from the CD. The first element of cost of the copyright in the subject matter of the educational CD therefore includes all capital costs directly incurred by the taxpayer in producing the master copy of the educational CD.