Changes to the depreciation of intangible assets
Business taxpayers will know that asset depreciation is an important aspect to their business’s tax health and longevity. However the importance, and revenue generation role, of knowledge-based or intangible assets has become much more common in the modern business landscape.
Innovative companies know that changes in the economy, including globalisation and digitisation, have elevated the importance of intellectual property and other intangible assets, which has not been adequately recognised in the tax system.
For purposes of income tax, certain intangible assets have been depreciated over a number of years, set by statute (taxable effective life). However intangible assets with a statutory effective life can’t be self-assessed to bring their tax life in line with the economic life of the asset. This can reduce the depreciation benefit and increase the cost of investment in these assets.
A new measure, which is yet to be passed as legislation, aims to change this. The Treasury Laws Amendment (2017 Enterprise Incentives No. 1) Bill 2017 (you can read the bill here) will provide businesses with:
- a new option to self-assess the tax effective life of acquired intangible assets that are currently set by statute (to better align the tax treatment of the asset with the actual number of years the asset provides an economic benefit), or
- the option to continue using the existing statutory effective life of the asset.
Intangible assets that currently have a statutory effective life, but will be able to be reassessed, include:
- intellectual property, which includes standard patents, innovation patents, petty patents, registered designs and copyrights or the licences to copyrights
- other licences including spectrum and datacasting transmitter licences, telecommunications site access rights, and
- in-house software.
A business will be enabled to self-assess the effective life for an intangible asset with a statutory effective life the same way it would for a tangible asset. That is, it would use the provisions of s40-105 of ITAA97, which states that you:
- Estimate the period (in years, including fractions of years) the asset can be used by any entity for one or more of the following purposes:
- taxable purpose
- the purpose of producing exempt income or non‑assessable non‑exempt income
- the purpose of conducting R&D activities, assuming that this is reasonably likely.
Once passed into law, the measure will apply to assets acquired from 1 July 2016.
How the initiative will work in practice
David is the founder of InstaFilm Pty Ltd, a startup that is developing a new app that allows users to easily edit and share high-definition movies taken with a smartphone. David purchases a patent over a new method for compressing data on a mobile phone.
The statutory life of the patent is 20 years, but industry analysis provides evidence that the processor will only generate net cash inflows for five years.
Under the current law, the patent must be depreciated over 20 years.
Under the new arrangements David can self-assess the patent’s effective life to be five years. This allows him to claim a larger tax deduction over a shorter period than he would have been able to under the old arrangements.
Avoiding the more common BAS mistakes
The ATO knows that business taxpayers can make errors when lodging their business activity statement (BAS) and reporting their GST transactions, even with the best intentions of getting it right.
Research the ATO has carried out in the past has indicated that more than 80% of GST errors are unintentional and can be made by any business in any industry. However it found that some of the industries where GST errors are commonly seen include property and construction, professional services, retail and wholesale trade, rental, hiring and logistics businesses.
To help businesses avoid making mistakes when completing their BAS, the ATO has provided some helpful tips, including:
- check each invoice is only entered once
- check that expenses and sales are for the current tax period
- check that amounts on the BAS are filled in as whole dollars (cents are left out)
- remember not to claim GST on private expenses
- before lodging, check that the amount calculated on the BAS equals what the taxpayer expects to pay or receive as a refund
It also says that some of the most common errors made on a BAS can be easily avoided by good record keeping practices. This includes making sure the business gets a valid tax invoice for purchases that include GST, keeping records of all sales and purchases, and keeping records electronically.
Unless there is evidence of carelessness, recklessness or intentional disregard of the law, the ATO should generally accept that businesses are trying to be honest in their tax affairs and that the information provided is as accurate as possible.
It helps to get it right the first time, but businesses may need to make corrections where they have:
- made clerical mistakes, for example, double counted some creditable purchases or excluded some taxable sales
- incorrectly recorded a taxable sale as GST-free, or
- mistakenly classified a GST-free sale as taxable.
‘Hiding the complexity’ — internal ATO documents released
At a Press Club address earlier this year, Commissioner Chris Jordan said part of his job is to help taxpayers by “hiding the complexity” of our tax system.
Suna Rizalar, from the ATO’s Public Advice and Guidance, says one way the ATO tries to make it easier for taxpayers “is by engaging with the community on simpler terms and in more contemporary ways in the provision of public advice and guidance”.
To this end, the ATO regularly releases on its legal database a series of what until recently have been internal ATO documents.
The release of these documents in an initiative that the ATO has labelled “iNOW!” (a contraction of “interpretation now”) and has, according to Rizalar, a similar objective as mentioned by Jordan — to present legislative and legal interpretation in a way that “hides the complexity”.
Assistant commissioner Gordon Brysland, who represents the Tax Counsel Network, says: “iNOW! began as a way to address the need – recognised by top judges – for those working with legislation to get better at reading it.” The iNOW! documents are therefore aimed at improving awareness about statutory interpretation. The documents, which are labelled “episodes”, are not public rulings or legal advice and are not binding on the ATO.
For example, Episode 26 deals with “ordinary” words, statutes “as a whole”, the mischief rule, and “under or in relation to”. Episode 27 looks at extrinsic materials, the context of judgment words, not taking definitions in isolation, and the impossibility of “non-contextual” statements. Episode 28 deals with the need or otherwise of interpretation on the back of “mere inconvenience”, backdated agreements, delegated legislation, and the limits of using dictionaries.
The monthly iNow! series began in June 2015, and the ATO says it has made them public in response to growing external interest. Until now, they have been filed under “miscellaneous papers” in the ATO’s legal database.
The episodes released already can be found on the legal database page. Type “interpretation NOW” into the search toolbar on that page and scroll down the resulting list of results to find all 28 episodes (all with CPD value). More episodes will be added each month, so it may be worthwhile to bookmark the page.