Income Tax & IP
The phrase "Intellectual Property" ("IP") embraces a number of different types of monopoly recognised under our law. Some of the better-known examples include:
- Registerable IP – such as patents, registered designs and trade marks; and
- Unregisterable IP – such as copyright, confidential information and trade secrets.
If a component of your business involves IP, you're likely to qualify for at least some tax incentives in a large basket of income tax deductions. The Income Tax Act offers a number of IP-based tax deductions and allowances, for example:
- filing applications for trade marks, patents, designs or copyright – anywhere in the world;
- renewing any trade mark, patent or design registrations – again, anywhere in the world;
- acquiring any trade mark, patent or design;
- conducting R&D activities;
- paying license & royalty fees for the right to use any IP;
- making restraint of trade payments.
Each of these activities may give rise to a tax deduction or allowance, and it's often possible to claim a number of these deductions – simultaneously – in any one income tax return. Because these incentives take the form of tax deductions or allowances, they have a number of other advantages. For example:
- unlike grants or incentive programmes, there is no application process: they can be claimed automatically as of right by any taxpayer – no "red tape" to slow the process; and
- the deduction can be claimed immediately – and provisional income tax payments can be reduced early and substantially.
In addition to these aspects, we also advise on related topics, including:
- withholdings tax on particular royalty payments;
- the deductibility of particular royalty payments; and
- preparing tax optimisation assessments.
Risks & Other Important Considerations
There are a number of important aspects to bear in mind:
- each of these deductions and allowances has different requirements, is available at different rates and over different time periods. It is extremely important to be aware of all the intricacies involved;
- well-prepared deductions demand a thorough assessment of both IP legislation and of the income tax legislation & guidelines;
- all sorts of limitations and technical exclusions are included in the legislation: claiming any deduction without knowledge & appreciation of these potentially raises your risk exposure; and
- the legislation is extremely technical, and changes frequently.
In addition, the (fairly) new Tax Administration Act now imposes penalties for overstatements of deductions and inappropriate deductions claimed. When dealing with these sophisticated deductions and allowances, the need for skilled professional advice can't be overstated.