At the 26th Noosa Intensive, Clint Harding, CTA, (Arnold Bloch Leibler) presented the session ‘Protecting the recipe’, where he looked at how intellectual property is defined, goodwill, and some of the key legal mechanisms that can be used to govern and protect the use of valuable ip.
In the paper he presented, excerpted in this post, he then looked at how structures can be optimised for both ip protection and retaining access to any concessions, grants or incentives that may be available, as well as some of the tax issues associated with ip that you need to be aware of during the lifecycle of a business.
What is Intellectual Property?
Properly identifying and understanding early stage intellectual property is critical when it comes to planning for the future. The creation and development of intellectual property can happen fast and the accounting and taxation treatment associated with it can be complicated. In order to ensure the optimal business structure is in place to protect and maximise the value of any intellectual property, the hard work must be done up front.
Whereas it is usual accounting and taxation practice to identifying all items of intellectual property has merely being an intangible asset, not all items of intellectual property have the same all-embracing taxation characteristics.
There are specific taxation issues that need to be fully understood when we are dealing with intellectual property and the taxation implications. These issues can be best summarised in the form of three simple propositions which are set out below, and covered in more detail in the paper itself.
- Guiding proposition 1: All forms of intellectual property rights are CGT assets
- Guiding proposition 2: Some, but not all, forms of intellectual property are also depreciable assets
- Guiding proposition 3: Software has its own rules.
Clint then comments briefly upon the relationship between intellectual property and the specific regime that exists (albeit ever-changing) for research and development (R&D) expenditure, highlighting some key points to note regarding the interaction of the R&D rules and ip.
What is goodwill?
All intellectual property is an intangible asset of a business, however not all intangible assets of a business are intellectual property. In his paper, Clint discusses some of the common misconceptions that blur the line between goodwill and intellectual property, and briefly explores what the courts and the ATO have said about goodwill and why it is important to properly distinguish between goodwill and intellectual property.
Why do we care?
Perhaps the best reason why we should care about identifying and separating goodwill from IP is that the High Court decision in FCT v Murry 98 ATC 4585 tells us that for capital gains tax purposes on the sale of a business an allocation of the purchase price to goodwill is necessary. Goodwill is a CGT asset (and potentially subject to concessionary treatment) whereas certain IP may be a depreciable asset as outlined above and the sale of those items will result in a balancing adjustment event under Division 40.
The paper goes on to look at Taxation Ruling TR 1999/16 which adopted the reasoning in Murry regarding goodwill and provided the Commissioner’s views on how goodwill might be allocated on the sale of a business, as well as debates in the courts on the issue of goodwill in a mining context.
As he notes in the paper “Suffice to say that an accurate identification of the goodwill of a business, which is necessary such that it can be valued or part of the sale price can be accurately apportioned to it, can be a difficult task fraught with uncertainty and difficult legal concepts.’
His paper then goes on to look at some of the key legal mechanisms that can be used to govern and protect the use of valuable intellectual property, and how you can optimise your structure for both ip protection and retaining access to any concessions, grants or incentives that may be available.
Finally, he looks at some of the tax issues associated with ip that you need to be aware of during the lifecycle of a business.
Clint Harding, CTA is a partner at Australian commercial law firm Arnold Bloch Leibler and leads the Sydney taxation practice. Advising across most taxes, with particular expertise in corporate and international tax, the taxation of financial instruments and transactions, and the management of tax audits and disputes with the ATO.
His clients have included both public and private organisations, start-ups and venture capital, high net worth individuals, and some of Australia’s largest family groups. Clint is the author of numerous tax articles, a regular presenter, and is currently a working member of The Tax Institute’s Large Business and International Committee. He was the winner of the 2018 The Tax Institute’s Tax Adviser of the Year Awards for “Corporate Adviser of the Year”.
He is also recognised as a leading tax lawyer by a number of independent legal guides, including Chambers Asia Pacific, Legal 500 Asia Pacific and Doyles Guide.