A recently released interpretation statement (IS 17/05) looked at the treatment of NZ patent costs. Previously we had relied on a statement issued in 2006, however, a number of recent legislative changes meant some revision was needed.
The statement deals with the treatment of all outgoings and receipts associated with patent rights, including the ability to depreciate the patent as Fixed Life Intangible property.
A few of interesting points arising out of this statement are:
- Capitalised R&D costs relating to the development of the intangible property covered by the patent, now form part of the depreciable patent cost under section EE 18B.
- The previous statement considered patent renewal fees as a capital cost to be added to the patent cost. Now these fees are treated as revenue expenditure and deductible when incurred.
- The Commissioner’s view on the deductibility of legal fees incurred defending patent rights depend on the patent in question. Although they accept that such costs will generally be revenue in nature, they also suggest that If the taxpayer has a single patent, around which the whole business is based, the costs are capital. It is worth noting that while this distinction refers to some case law, it has not been directly tested in a case involving a single patent business.
The taxation of intellectual property has been a difficult area and with fixed life intangible property limited to a finite list there are many opportunities for black-hole expenditure. The statement is useful to give the IRD view on patents however, there are a number of other intangible items where there are still no guidance and as a result a bit of uncertainty exists.