Asset depreciation of intellectual property, such as patents and copyrights, can represent a significant portion of a company’s assets—particularly for highly innovative start-ups.
Intangible assets however, are currently subject to a legislative ‘effective life’ period that’s used to calculate their rate of depreciation.
New legislation has been tabled that will allow companies to determine the effective life of these assets.
The economic benefit of intangible assets can vary significantly depending on the industry, the type of asset and its cost of development. Existing depreciation provisions which mandate their life span are inflexible and often don’t represent the true time period over which the asset may provide an economic benefit.
Economic benefit of intangible assets
The draft legislation proposes to introduce a choice between the existing statutory life or, alternatively, to self assess the tax effective life of an intangible asset. This will enable companies to better represent the period of time over which they anticipate their intangible assets to produce an economic benefit.
This method of calculation brings the treatment of depreciating intangible assets into line with tangible assets.
The legislation will apply to a range of intellectual property including patents, registered designs, copyrights, some licenses and access software as well as in-house software.
The company can assess the effective life of the asset, and then use that period of time to calculate its depreciation. Considerations will include the rate at which the asset is likely to become obsolete. The provisions are being welcomed by companies who invest heavily in the development and registration of their patents only to have them superseded before they have realised their depreciated value.
Owners of intangible assets will also be able to re-assess that period of time due to changes in circumstances, developments in the technology or market, or changed nature of the asset.
Submissions and comments on the draft legislation close on 22 April with the new provisions expected to take effect from 1 July 2016.