College of Administration and Finance SciencesAssignment (1)
Deadline: 24/4/2023 @ 23:59
Course Name:
Student’s Name:
Course Code: ACCT403
Student’s ID Number:
Semester: 3rd term
CRN: 31593
Academic Year: 1444 H
For Instructor’s Use only
Instructor’s Name: Dr. Youssef RIAHI
Students’ Grade:
/15
Level of Marks: High/Middle/Low
Instructions – PLEASE READ THEM CAREFULLY
• The Assignment must be submitted on Blackboard (WORD format only) via allocated
folder.
• Assignments submitted through email will not be accepted.
• Students are advised to make their work clear and well presented, marks may be
reduced for poor presentation. This includes filling your information on the cover
page.
• Students must mention question number clearly in their answer.
• Late submission will NOT be accepted.
• Avoid plagiarism, the work should be in your own words, copying from students or
other resources without proper referencing will result in ZERO marks. No exceptions.
• All answers must be typed using Times New Roman (size 12, double-spaced) font.
No pictures containing text will be accepted and will be considered plagiarism.
• Submissions without this cover page will NOT be accepted.
1
College of Administration and Finance Sciences
Assignment Question(s):
(Marks 15)
Question 1: The correct and complete sequence of steps in conducting research is as follows:
1.
2.
3.
4.
5.
6.
7.
Identify broad area,
Select topic,
Decide approach,
Formulate plan,
Collect information,
Analyze data,
Present findings.
Using our Saudi Digital library (SDL) you should find two papers in accounting field and determine
for each paper the steps described above.
[4 marks]
Paper 1
Paper 2
1.The broad area of the
paper
2.The topic
3.Approach used
4.Data source
5. Data analysis
6.Findings
2
College of Administration and Finance Sciences
Question 2: Write a description of the research problem you propose to investigate and explain why
you chose this topic.
[2 marks]
Question 3: What should be considered in developing a good research idea? [2 marks]
Question 4: What are the five categories of research methods? [2mark]
Question 5: Differentiate between Quantitative vs. Qualitative research. [2.5 mark]
Question 6: Define ANOVA and Regression Analysis [2.5 mark]
3
Statutory depreciation regimes for
intangible assets
Christina Allen*
Abstract
Currently, Australia’s uniform capital allowance system does not include a single
mechanism for recognising the cost of intangible wasting assets. Instead, it has
a number of separate and to some extent inconsistent regimes for different types
of assets recognised by statute. It has been suggested that Australia should adopt
a single mechanism to enable the tax system to accurately measure net income.
However, implementing this suggestion would be ineffective without an in-depth
understanding of the existing depreciation rules that apply to certain types of
intangible assets. This article examines the history of the rules relating to four
categories of depreciating assets and the policies underlying them: 1) rights and
information in the resource industry; 2) intellectual property, other than trademarks,
protected by statute; 3) in-house software; and 4) statutory or contractual rights
relating to media and telecommunications. While these intangible wasting assets
differ significantly, reviewing the depreciation rules for each category provides
useful insights for building a new universal depreciation regime that can apply to all
intangible wasting assets.
* Lecturer, Edith Cowan University and Curtin University.
This article was accepted for publication on 3 February 2021.
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1
Introduction
The earliest federal income tax legislation in Australia denied immediate tax deductions
for capital expenses. Instead, it allowed depreciation deductions for the cost of acquiring
wasting assets. Even though various types of intangible assets were recognised by statute
at the time, the original tax depreciation rules were limited to tangible wasting assets.
During the first few decades of the federal income tax system, new depreciation rules were
added for several types of intangible assets created by statute – specifically, mining rights,
copyrights and patents. The rules did not extend to expenses for other types of intangible
wasting assets, such as private contracts or government-issued licences or rights, though
costs relating to many of these were recognised later under other rules, including the
capital gains tax regime. In the 1990s, further depreciation rules were added as a subset
of the rules pertaining to copyrights protecting in-house computer software and various
communication rights such as spectrum access rights provided by the government.
From the government’s perspective, the depreciation rules for tangible and intangible
assets alike have been a useful tool for implementing various economic policies. In the last
century, the rules have been modified repeatedly to subsidise policy objectives ranging
from supporting the Australian resource industry to promoting Australian film and television
production. While the tax expenditure implications of the depreciation rules for tangible
assets have been subject to some analysis in the past, relatively little attention has been
paid to depreciation for intangible assets as a means of achieving a neutral income tax
base. This article traces the evolution of the depreciation system for intangible assets and
the dual role it has played in providing cost recognition for wasting assets and in subsidising
certain industries. In particular, it reviews the past and present rules on intangible assets
depreciated under the uniform capital allowance regime, such as mining, prospecting and
quarrying rights and information; patents, copyrights and registered designs; software
purchased or developed in-house; and statutory and contractual rights in the media and
1
telecommunications industries.
The review shows the difficulty involved in determining the effective life of wasting
intangible assets in present rules and the impediments to measuring a neutral income
tax base to achieve fairness in the tax system. The current tax law also makes it difficult
to accurately measure annual net income because costs of many intangible wasting
assets are recognised under the capital gains tax regime. This article proposes a universal
depreciation system to address these problems. This not only improves consistency and
restores the fragmentation of current depreciation rules, but also allows a broad range of
wasting intangible assets to be depreciated consistently and coherently.
2
Mining, quarrying and petroleum rights and information
Tenements and other leases acquired for mining purposes are hereafter collectively called
‘mining leases’ or the ‘rights’ to prospect or mine in a particular area. A mining lease may
be acquired by a person who primarily carries on prospecting activities or by a mining or
petroleum enterprise that prospects as well as developing and producing resources. A
1
Income Tax Assessment Act 1997 s 40-30. A brief summary of the interaction between tax regimes can
be found in Andrew O’Bryan, ‘Building, Buying, Holding, Selling and Valuing Intangible Business Assets’
(Convention Paper, Taxation Institute of Australia, 13 March 2009).
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STATUTORY DEPRECIATION REGIMES FOR INTANGIBLE ASSETS 133
mining lease can be acquired from a government authority or transferred on the market.
Similarly, mining information can be transferred on the market based on the value of what
is discovered through prospecting activities. These intangible assets play a vital role in
mining, quarrying and petroleum operations and as such, are highly valuable.
Mining operations are undertaken in stages and profits eventuate only after extensive
exploration and development, which requires significant sunk costs and capital outlays
over a long period. Generally, mining generates income in the final stage of extraction
activities (before rehabilitation), a fact that the tax system must recognise. In the past,
several options have been suggested to account for the time gap between using economic
resources and reaping the economic benefits of a going mining concern, with the goal of
2
improving market efficiency. However, determining the best timing for recognising costs
and measuring profits for tax purposes remains a difficult task. Although there is no fixed
rule for allocating the cost of acquiring mining rights and information, standard accounting
practice could be adopted to allow for depreciation of these intangible assets, which would
be consistent with the way tangible assets are treated for tax purposes. In accounting,
capitalisation of an expense is based on whether an economic resource is expected to
3
provide benefits in the future. In this regard, using the expected duration of a mining
operation to calculate its benefit period is reasonable: it means that the cost of acquiring
mining rights or information attributable to a particular project should be capitalised and
tax deductions for depreciation should be available over the life of the project, once it
commences. If the project ceases, the capitalised costs must be written off because the
benefit of the relevant mining rights or information has expired. According to accounting
practice, capitalisation cannot be applied to exploration expenditure in circumstances
where the mining entity does not have the legal right to explore a particular area or when
it is not expected that the expenditure will be recouped by successfully developing a
4
mining project or selling the rights or information for a profit. Applying these accepted
financial reporting standards in a new way—to intangible wasting assets like rights and
information—will help ease the burden of tax administration and compliance.
The tax rules relevant to mining leases and information have evolved differently for different
categories of taxpayers. At various points in time, there have different regimes for:
2
3
4
1.
bona fide prospectors, referring to those who are not mining or petroleum
operators but are primarily engaged in the business of prospecting for
minerals or metals with a view to selling a mining lease upon successfully
discovering resources or mining information through their prospecting
activities;
2.
mining operators who prospect, develop and produce mineral or metal
resources; and
3.
petroleum operators who are engaged in prospecting and extracting
petroleum.
See Robin Boadway and Michael Keen, ‘Theoretical Perspectives on Resource Tax Design’ in Philip Daniel,
Michael Keen and Charles McPherson (eds), Taxation of Petroleum and Minerals: Principles, Problems and
Practice (Routledge, 2010) 13; Wayne Mayo, ‘Combining Resource Rent and Income Taxation for Neutral
Impact’ (2019) 34(3) Australian Tax Forum 585. It is also helpful to understand the different stages of a resource
project: see Scott Bryant and Rachel Willment, ‘Lifecycle of a Resource Project’ (Convention Paper, Taxation
Institute of Australia, 26 November 2008).
Australian Accounting Standard, Conceptual Framework for Financial Reporting (AASB, 2019) [4.3].
Australian Accounting Standard, Exploration for and Evaluation of Mineral Resources (AASB 6, 2015).
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Although qualitatively, petroleum operations involve broadly similar features to the first two
groups, petroleum was dealt with under a separate regime until 1997. Similarly, for the first
half of the 20th century, the taxation of mining leases was governed by a separate division
in the tax legislation, although it appears possible that mining or petroleum enterprises
could also have applied the mining or petroleum regime if the cost of a mining lease or
information was not deductible under the division dealing with leases. This industry-specific
regime allowed depreciation deductions for capital expenditure used for developing a mine
or petroleum field, while also allowing immediate deductions for exploration expenditure.
However, the purchaser of a mining lease or information was only allowed to deduct part
of the acquisition cost, to the extent mutually agreed upon with the seller, by giving notice
to the Commissioner of Taxation, and only up to the amount that the seller had not yet
claimed as a deduction.
The depreciation regime was modified further in 2001, when bona fide prospectors
became subject to tax on proceeds from selling mining leases. This allowed purchasers
to deduct the actual expenditure incurred in acquiring a mining lease or information,
irrespective of the seller’s tax position. An inconsistency soon became apparent because
purchasers were no longer required to characterise second-hand leases or information as
capital expenditure but deduct the costs immediately under the exploration expenditure
category even when mining leases and information were acquired for resources that were
proven to exist, not merely speculative. In 2014, the depreciation rule was modified again
to prescribe a deduction period of 15 years in respect of second-hand mining leases and
information. However, the 15-year depreciation period is arbitrary.
2.1
Selling mining leases: bona fide prospectors and landholders
‘Bona fide prospector’ does not include casual or hobby explorers, nor does it apply to
5
speculators who make money by buying and selling leases on land containing deposits.
Those who engage in field work exploring and prospecting for metals or minerals as their
6
primary business objective are regarded as an enterprise for tax purposes, like any other
7
taxpayer carrying on a business. Their dealings with mining leases are paid little attention
under the resource industry tax regime, provided their expenditure is expected to be
recouped through selling, transferring or assigning mining leases.
Under the original 1915 federal income tax laws, bona fide prospectors were assessed
8
on the proceeds from a mining lease and allowed to deduct the amount of money spent
(or, prior to 1918, the sinking fund required to replace the money spent) to acquire the
9
lease, for the duration of the lease period, if the Commissioner of Taxation allowed it.
Generally, this was in respect of expenditure incurred to produce income. However, from
5
6
7
8
9
In Thomson v FCT (1923) 33 CLR 73, a taxpayer who procured a mining lease for the purpose of selling it for
a profit was not regarded as a bona fide prospector but merely a speculator.
‘Exploration and prospecting’ take their ordinary meaning. For example, in Henderson v FCT (1943) 68 CLR
29, testing mine dumps was considered prospecting. A company that carries on commercial activities can be
considered as a bona fide prospector as long as a major part of its business is prospecting: see Biggs v FCT
(1975) 5 ATR 505; cf. Case 33/96 (1996) 32 ATR 1288.
Accordingly, immediate deductions were allowed for revenue outgoings under s 51(1) of the Income Tax
Assessment Act 1936: see, eg, FCT v Ampol Exploration Ltd (1986) 13 FCR 545 (fees paid for a petroleum
search). For further discussion, see Harry M Rigney, ‘Petroleum Exploration: The Taxation Environment’ (1995)
109(2) Australian Banker: Journal of the Australian Institute of Bankers 84.
Income Tax Assessment Act 1915 s 14(d). See subsequent iterations in Income Tax Assessment Act 1922 s
16(d); Income Tax Assessment Act 1936 s 84.
Income Tax Assessment Act 1915 s 20(i). See subsequent iterations in Income Tax Regulations 1915 s 29, Sch
Table I; Income Tax Assessment Act 1922 s 25(i); Income Tax Assessment Act 1936 s 85.
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STATUTORY DEPRECIATION REGIMES FOR INTANGIBLE ASSETS 135
very early on, to encourage exploration activities and the sustainability of the industry, the
government provided various tax exemptions for proceeds from selling, transferring or
10
assigning mining leases. The first exemption, which lasted for three years, between 1921
11
and 1924, applied to individual taxpayers prospecting for minerals. Another exemption
was introduced for gold prospectors in 1928, in response to slow rises in gold prices after
World War I; the exemption was extended to companies in 1936, and in 1947, to individual
12
and corporate taxpayers prospecting for other kinds of minerals and metals. In 1954, the
13
exemption was extended again, to ordinary lessors under the lease provisions. It was
intended to encourage landholders to grant or assign leases over land that potentially
14
contained resources. When the election option was selected, prospectors and mining
15
operators were prevented from claiming deductions on lease transactions. Neither party
was assessed on any income they received, but they were not allowed to deduct expenses
relating to the transaction.
Due to difficulty dealing with leases in some commercial contexts, the government
16
decided to remove the lease division from the tax legislation. In 1964, the lease division
17
was abolished for all leases except primary production and mining leases. In practice,
this meant that a mining lease could be disregarded for tax purposes if the parties to the
transaction agreed to do so. Other categories of lessors were assessed on lease premiums
18
under a newly introduced lease assessment provision. The tax exemption rule for mining
19
leases continued until 1968.
The changes to the lease division did not significantly affect bona fide prospectors of
prescribed minerals and metals because their income from selling, transferring or assigning
mining leases was exempt from tax, separately under a stand-alone provision. Like other
taxpayers, they were allowed to deduct general costs, but the cost of acquiring a mining
lease could not be deducted, since the lease division had ended. The income exemption
20
rule ended in 1973. However, four years later, it was reintroduced in the same terms
10
11
12
13
14
15
16
17
18
19
20
It did not extend to simply entering a royalty arrangement (see, eg, Ivanac v DFCT (1995) 60 FCR 417) but did
include granting an option to transfer or assign a tenement (eg, Cooke v DCT (2000) 44 ATR 1118).
Income Tax Assessment Act 1915 s 14(d), as amended by Income Tax Assessment Act 1921 s 6. The
provision was rewritten in Income Tax Assessment Act 1922 s 16(d), which was repealed by Income Tax
Assessment Act 1924 s 4(k).
Income Tax Assessment Act 1922 s 14(o), as inserted by Income Tax Assessment Act 1928 s 5. See also
Commonwealth, Parliamentary Debates, House of Representatives, 18 September 1928, 6784 (Green). The
provision was rewritten in Income Tax Assessment Act 1936 s 23(p).
Income Tax and Social Services Contribution Assessment Act 1954 s 10, inserting Income Tax Assessment
Act 1936 s 88B.
Commonwealth, Parliamentary Debates, House of Representatives, 2 September 1954, 884 (Fadden).
Income Tax Assessment Act 1936 s 88B.
For example, some hotel and motel business owners attempted to disguise the value of leases in the
form of non-assessable goodwill when transferring their businesses along with leased premises. For
further information, see Commonwealth Committee on Taxation (ES Spooner, chair), Report on Leases
(Commonwealth of Australia, 1952); Commonwealth Committee on Taxation (SB Holder, acting chair), Report
on Leases (Parliament of Australia, 1952); Commonwealth Committee on Taxation (GC Ligertwood, chair),
Report of the Commonwealth Committee on Taxation (Commonwealth of Australia, 1961) [265].
Income Tax and Social Services Contribution Assessment Act (No. 3) 1964 s 20, abolishing the lease division,
except s 88A (primary production) and s 88B (mining leases) of the Income Tax Assessment Act 1936.
Income Tax and Social Services Contribution Assessment Act (No. 3) 1964 s 9; Income Tax Assessment Act
1936 s 26AB.
Income Tax Assessment Act (No. 2) 1968 s 16, amending s 88B of the Income Tax Assessment Act 1936 to
give effect to the termination of election.
Income Tax Assessment Act (No. 5) 1973 s 4(2), repealing s 23(p) of the Income Tax Assessment Act 1936.
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136 (2021) 36 AUSTRALIAN TAX FORUM
21
and it continued until 2001. The effect of exempting income from selling or transferring
mining leases was most significant for the purchaser, especially after the lease division was
abolished. As will be explained below, the acquisition cost of a mining lease was not fully
deductible for the mining operator under the mining regime, only up to the amount that the
vendor had not yet claimed as a deduction. In effect, the tax on profits generated by bona
fide prospectors, whose income was exempt from tax in respect of discovery sites, was
passed on to the mining operators who would eventually generate income from selling the
resources. While mining operators were entitled to some deductions by mutual consent
with vendor prospectors and were required to give notice of these agreed deductions to
the Commissioner of Taxation, bona fide prospectors had no incentive to facilitate this
22
process, which meant vendors’ profits were often overstated for tax purposes. Similarly,
mining profits would likely be overtaxed if a mining enterprise could not reach an agreement
with a lessor (who did not pay tax on lease premiums) concerning deductions.
Tax for bona fide prospectors changed significantly after the government’s Review of
Business Taxation—chaired by John Ralph and commonly known as the Ralph Review—
released its report in 1999. Relying on concepts adopted from accounting, the Ralph
Review did not consider it justified that mining operators acquiring leases could only
23
deduct costs up to the amount that the seller could transfer. It recommended allowing
deductions for the full purchase price of mining leases and information and suggested that
bona fide prospectors’ income from mining leases become tax assessable. In 2001, these
24
recommendations were enacted as legislation. Consequently, mining operators were
allowed to deduct the full cost of mining leases and information for the expected duration
of their operations. While engaged in exploration, bona fide prospectors were allowed
to deduct the cost of a mining lease immediately as exploration expenditure if the lease
25
was first used for exploration purposes. In other words, bona fide prospectors carrying
on business with a view to deriving income from selling, transferring or assigning mining
leases could carry their tax losses forward until they successfully discovered deposits that
produced a profit.
2.2
Prospecting, developing and producing minerals and metals
As mentioned earlier, until 1964, the main rules for dealing with mining leases were in
26
the lease division of the tax legislation. The rules allowed mining operators to deduct
21
22
23
24
25
26
Income Tax Assessment Amendment Act (No. 3) 1977 s 3, inserting Income Tax Assessment Act 1936 s
23(pa). This was replaced by Income Tax Assessment Act 1997 subdiv 330-B. See also ATO, Income Tax:
Exemption of Income Derived by Bona Fide Prospectors, TR 92/19, 1992.
The Taxation Review Committee (KW Asprey, chair) noted this practice in its Full Report (Commonwealth of
Australia, 1975) at [19.43] (‘Asprey Committee Report’).
Review of Business Taxation (JT Ralph, chair), A Tax System Redesigned: More Certain, Equitable and Durable
(Commonwealth of Australia, July 1999) [242], 327–8, particularly Recommendations 8.15–8.16 (‘Ralph
Review Report’). Previously, the Asprey Committee Report (n 22) (at [19.46]) had also suggested full tax
assessment for prospectors. The government’s responses to the Ralph Review Report are summarised in
Alice McCleary, ‘Overview of the Review of Business Taxes’ (Convention Paper, Taxation Institute of Australia,
March 2000).
New Business Tax System (Capital Allowances – Transitional and Consequential) Act 2001 ss 197, 331, which
repealed div 330 and inserted s 15-40 in the Income Tax Assessment Act 1997.
Income Tax Assessment Act 1997 subdiv 40-H.
Case law in this area is limited. However, a report by the Royal Commission on Taxation (W Kerr, chair)
mentioned leases in the context of mining operation in its Third Report dated 4 August 1922 at [520] (‘Kerr
Royal Commission Report’). The explanatory memorandum for the 1936 Bill (at 88 n(c)) notes that the income
exemption provision was deliberately positioned outside the lease division (div 4). Division 4 consolidated the
tax rules governing leases in the previous tax legislation, with the term ‘lease’ defined coherently to apply to
lessors and lessees (see Income Tax Assessment Act 1936, s 83).
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STATUTORY DEPRECIATION REGIMES FOR INTANGIBLE ASSETS 137
27
the cost of acquiring a mining lease for the unexpired term of the lease. Between 1954
and 1968, if the lessor agreed not to apply the lease division, the mining operator could
28
not deduct the cost of acquiring the lease. From 1968, the mining regime provided an
alternative mechanism for deducting costs related to acquiring mining leases. This can
be understood with the historical background of the deduction rules for mining leases
and mining or prospecting information, which were, explicitly, deductible items under the
mining regime at the time.
The original 1915 federal income tax legislation contained a separate regime for mineral
29
and metal mining. It allowed deductions for capital expenditure incurred for plant and
30
developing a mining property, for the estimated number of years of the mining operation.
Alternatively, from 1918, taxpayers could deduct some of the income they had used for
plant or development, but this was not suitable for taxpayers in a spending stage, as tax
31
losses could only be carried forward for four years. When the income exemption rule was
extended to bona fide prospectors of various minerals and metals in 1947, a new deduction
rule was also added to the mining regime. It allowed immediate deductions for exploration
expenditure on mining tenures to recognise the fact that exploration and prospecting were
32
necessary parts of a mining operator’s enterprise. If a mining enterprise had no profits
against which to offset immediate deductions for exploration expenditure, their unclaimed
deduction was included in the capital expenditure for developing their mining property the
next tax year, which could be deducted for the number of years the current or future mining
33
operations related to that project area were expected to continue. Any tax losses due to
unprofitable mining operations could be offset against other income, not limited to mining
34
income. In 1951, the maximum duration of mining operations was deemed to be 25 years,
35
reflecting the general timeframe within which mineral deposits are exhausted.
27
28
29
30
31
32
33
34
35
Income Tax Assessment Act 1915 s 14(d); Income Tax Assessment Act 1922 s 16(d); Income Tax Assessment
Act 1936 s 84.
Income Tax Assessment Act 1936 s 88B.
Income Tax Assessment Act 1915 s 17. This was replaced by Income Tax Assessment Act 1922 s 22; Income
Tax Assessment Act 1936 div 10 (which initially contained ss 122–4). Coal mining was excluded from the
scope of the provision until 1951: see Income Tax and Social Services Contribution Assessment Act 1951 s
16.
A ‘mining property’ refers to mineral or metal deposits: see Kerr Royal Commission Report, (n 26) [523]; Asprey
Committee Report (n 22) [19.12]. See also JAL Gunn, Australian Income Tax Law and Practice: Volume 5
(Butterworths, 11th ed, 1975) [122/01].
See Income Tax Assessment Act 1915 s 17, as amended by Income Tax Assessment Act 1918 s 12. This
was replaced by Income Tax Assessment Act 1922 s 22(c) and Income Tax Assessment Act 1936 s 124
and ultimately, removed by the restructure of the mining regime under Income Tax Assessment Act (No. 2)
1968. The historic development of the mining regime was surveyed in JA Timbs, ‘Historical Survey of the
Mining Provisions of Commonwealth Income Tax Legislation’ in the Asprey Committee Report (n 22) 164;
CT Gibbons, ‘Recent Development in Taxation of the Mining and Petroleum Industries’ (1977) 1(1) Australian
Mining and Petroleum Law Journal 123.
Income Tax Assessment Act 1947 s 20, inserting Income Tax Assessment Act 1936 s 123AA.
Income Tax Assessment Act 1947 s 19, replacing Income Tax Assessment Act 1936 s 122. Previously, capital
expenditure was deductible for the number of years mining operations had been underway. However, it
became apparent that this approach was ineffective because tax losses were allowed to be carried forward for
only four years. The new section included deductions for the number of years remaining in a mining operation.
See Explanatory Memorandum, Income Tax Assessment Bill 1947, cl 19.
Offsetting tax losses against income from non-mining income was allowed from 1928 onwards: see Income
Tax Assessment Act 1928 s 10.
Commonwealth, Parliamentary Debates, Senate, 27 November 1951, 2719–22 (Spooner).
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In 1968, the mining regime was modified in response to ambiguity in the deduction
36
categories for capital expenditure. Mining and prospecting rights and information were
37
explicitly listed as deductible items. The acquisition cost of mining or prospecting rights
was deductible up to the amount that the vendor had not yet claimed as a deduction, which
38
was required to be specified in a notice to the Commissioner of Taxation. In this regard,
mining and prospecting information was treated the same way as mining and prosecting
39
rights, and value could be shifted between them. Bona fide prospectors, whose profits
from selling, transferring or assigning mining leases was tax exempt, could also transfer
exploration expenditure. Unlike capital expenditure, exploration expenditure was not
40
itemised. However, this time, the option to claim immediate deductions on income used
for developing a mining property was removed from the rules.
The mining regime underwent several more changes in the next few decades, most notably,
increased concessions through tax deductions. Previously, tax concessions had generally
been provided by exempting certain types of income. For example, from 1924, income
41
relating to gold mining operations was exempt from tax. From 1955, income from uranium
42
mining was exempt. In 1942, when there was a shortage in mineral production due to
43
World War II, mining profits were also made partially exempt from tax. Over time, this
temporary exemption was extended to encourage exploration and development of base
44
metal and rare mineral resources. The uranium income exemption rule was removed in
36
37
38
39
40
41
42
43
44
The landmark case on this issue was FCT v Broken Hill Pty Co Ltd (1969) 120 CLR 240, which dealt with
various expenses. The acquisition cost for the right to explore, for example, was not a capital expenditure
because exploration was preliminary to mining operations. See also Mount Isa Mines Ltd v FCT (1954) 92 CLR
483, in which the court said ‘development’ in the phrase ‘development of the mining property’ did not embrace
prospective work. Preparatory expenditure for mining operations included payment to a leaseholder for inducing
the surrender of their lease with a view to obtaining a mining lease from the government, compensation paid
for disturbing the surface of the land and feasibility study expenditure: see Utah Development Co v FCT (1975)
5 ATR 334; Griffin Coal Mining Co Ltd v FCT (1990) 21 ATR 819; Andrew Nelson, Basil Mistilis and Shigeaki
Inoue, ‘Exploration Issues’ (Conference Paper, Taxation Institute of Australia, 17 October 2012).
Income Tax Assessment Act (No. 2) 1968 s 17, replacing Income Tax Assessment Act 1936 s 122A. Mining
and prospecting rights and information were mentioned in s 122A(1)(d)), which is equivalent to the current ss
995-1(1), 40-730(8), Income Tax Assessment Act 1997.
Income Tax Assessment Act 1936 s 122B. See the notice requirement for deductions in QCT Resources Ltd
v FCT (1997) 36 ATR 184 (reimbursement to the vendor for removing overburdened work-in-progress at a
strip mine); Cyprus Mines Corporation v FCT (1978) 36 FLR 295 (no consent obtained from the vendor who
carried on mining operations). A balancing adjustment was allowed upon abandonment of a tenement: see
Esso Australia Resources Ltd v FCT (1998) 84 FCR 541 (technical and professional services, options, rentals,
legal fees, stamp duties and licence fees).
Chu and Lonergan claimed the market value of information also depended on the market value of other
critical mining assets such as mining rights, plant and equipment: Hung Chu and Wayne Lonergan, ‘The
Value of Mining Information and Its Tax Implications’ (2013) 48(2) Taxation in Australia 96. See also the Asprey
Committee Report (n 22) [19.45].
Income Tax Assessment Act 1936 s 122J. Bona fide prospectors were allowed to immediately deduct
exploration expenditure under the general deduction rule for revenue outgoings: Esso Australia Resources Ltd
v FCT (1998) 84 FCR 541. Further, see ATO, Income Tax: Mining Exploration and Prospecting Expenditure, IT
2642, 1991, [6].
Income Tax Assessment Act 1922 s 14(1)(la) was inserted by Income Tax Assessment Act 1924 s 3(b) and
replaced by Income Tax Assessment Act 1936 ss 23(o), 23C (for gold miners and eligible gold marketing
companies, respectively). See Parker v CT (1953) 90 CLR 489.
Under s 23D of the Income Tax Assessment Act 1936, as inserted by the Income Tax and Social Services
Contribution Assessment Act 1955 s 4, exempt income must be derived by sale to or to a purchaser approved
by the Commonwealth of Australia.
Income Tax Assessment Act 1936 s 23A, as inserted by Income Tax Assessment Act (No. 2) 1942 s 6.
Income Tax and Social Services Contribution Assessment Act (No. 2) 1953 s 4 substituted s 23A of the Income
Tax Assessment Act 1936. See Mount Isa Mines Ltd v FCT (1976) 6 ATR 334; Ravenshoe Tin Dredging Ltd v
FCT (1966) 116 CLR 81.
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1969 and mining profits from selling uranium became subject to the partial exemption rule,
45
46
which was also abolished in 1974.
Following these changes to the tax exemption rules, amendments were also made to the
deduction rules under the mining regime. The first, in 1974, allowed deferral of exploration
expenditure to the next tax year, or later years, until net mining income was available after
47
deducting capital expenditure. The second change came two years later, permitting capital
expenditure deductions for mining operations over five years, a significant reduction from
48
49
the previous maximum of 25 years. In the early 1980s, it was increased to six years, then
50
to 10 years. From 1984, exploration expenditure was allowed to be offset against income
51
from any source. The tax exemption for gold mining income was eventually abolished in
52
1988, in response to the government’s May 1988 economic statement. In this statement,
it was argued that the gold mining industry was largely owned by foreign corporations and
exempting them from tax, while Australian-owned mining operations were being fully taxed
53
on their profits, only diminished Australia’s economic returns.
54
In 1990, the tax regime for mining was extended further to include quarrying operations.
Previously, coal mining had been excluded due to coal deposits being close to the surface
55
of land and, similarly, questions being raised about whether the mining regime applied
56
to open pit and surface mining. Adding quarrying operations to the regime removed this
ambiguity, albeit in a slightly modified manner. Unlike other mining operations, capital
expenditure for quarries was deductible for the estimated number of years of operation or
20 years (instead of 10 years), whichever was less, on the presumption that quarries would
last longer than mines and were situated close to urban areas. In the same year, one more
change was made to the deduction rules to allow an immediate deduction for regional
exploration expenditure in the grassroots stage, removing the requirement to explore only
57
on existing mining tenures.
45
46
47
48
49
50
51
52
53
54
55
56
57
Income Tax and Social Services Contribution Assessment Act (No. 2) 1961 s 2 amended s 23D of the Income
Tax Assessment Act 1936. The provision was repealed by Tax Laws Amendment (Repeal of Inoperative
Provisions) Act 2006 s 47.
Income Tax Assessment Act (No. 2) 1974 s 5, repealing Income Tax Assessment Act 1936 s 23A.
Income Tax Assessment Act (No. 2) 1974 s 28, amending Income Tax Assessment Act 1936 s 122J.
Income Tax Assessment Amendment Act (No. 3) 1976 s 14, inserting Income Tax Assessment Act 1936 s
122DB, which applied to expenditure incurred between 18 August 1976 and 30 April 1981.
Income Tax (Assessment and Rates) Amendment Act 1981 s 13, inserting Income Tax Assessment Act 1936
s 122DD, which applied to expenditure incurred between 1 May 1981 and 18 August 1981.
Income Tax Laws Amendment Act (No. 3) 1981 s 14, inserting Income Tax Assessment Act 1936 s 122DF,
which applied to expenditure incurred from 19 August 1981 onwards. Section 122DG was inserted (by Income
Tax Assessment Amendment Act 1983 s 27) to fix the technical deficiency in the 10-year deduction rule.
Income Tax Assessment Amendment Act (No. 4) 1984 s 16, amending Income Tax Assessment Act 1936 s
122J.
Taxation Laws Amendment Act (No. 5) 1988 ss 9(b), 10, inserting the words ‘subject to Division 16’ in ss 23(o),
23C of the Income Tax Assessment Act 1936. Division 16, which was also inserted by this Act, gave effect to
the termination of the exemption for gold mining income from 1 January 1991.
Paul Keating (Treasurer), Economic Statement May 1988 (Parliament of Australia, 25 May 1988) 85–6.
Taxation Laws Amendment Act (No. 2) 1990 s 22, which inserted subdiv 10-B into Pt III of the Income Tax
Assessment Act 1936.
The exclusion was lifted by Income Tax and Social Services Contribution Assessment Act 1951 s 16. See n 29
and accompanying text.
See, eg, NSW Associated Blue-Metal Quarries Ltd v FCT (1956) 94 CLR 509; North Australian Cement Ltd v
FCT (1969) 119 CLR 353; cf. North Australian Cement Ltd v FCT (1989) 20 ATR 1058. See also ICI Australia
Ltd v FCT (1972) 127 CLR 529 (pumping brine from underground was characterised as mining operations).
Taxation Laws Amendment Act (No. 3) 1991 s 43, amending Income Tax Assessment Act 1936 s 122J. See
also Matthew Popham, ‘The Income Tax Considerations Faced by Junior Explorers’ (Seminar Paper, Tax
Institute of Australia, 29 February 2012; 18 September 2012).
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By the mid-1990s, after being heavily modified over the previous 60 years, the Income Tax
Assessment Act 1936 was rewritten to a large extent in 1997. The mining and quarrying
58
regime was incorporated into the new version of the Act. The main aim of the rewrite was
to improve readability. Accordingly, while the content of the new mining and quarrying
provisions did not change substantially, they were restructured. The rules were rearranged
to reflect the different stages of mining and quarrying operations. For example, subdivision
330-A applied to the exploration stage and allowed taxpayers to claim immediate deductions
for exploration expenditure including mining, quarrying or prospecting rights acquired from
a government authority. Subdivision 330-C applied to the development and production
stage and allowed taxpayers to deduct capital expenditure relating to a specific mining
property, for up to 10 years for mining operations or 20 years for quarrying operations.
Under subdivision 330-C, the amount the purchaser could deduct for second-hand rights
or information was limited to what the vendor had not yet claimed as a deduction and had
agreed to transfer to the purchaser (under subdivision 330-B).
As noted earlier, the rule exempting bona fide prospectors’ mining lease income from
tax was abolished in 2001. Relying on standard accounting practice concerning sunk
costs, and as a matter of practicality, the 1999 Ralph Review had recommended that
59
immediate deductions for exploration expenditure continue. However, this caused serious
60
inconsistencies in the way mining assets and assets in other industries were taxed. After
the Ralph Review, in 2001, the mining regime was dissolved and the tax rules relating to
mining and quarrying were moved to a different part of the Act, to consolidate the various
61
depreciation rules under the new uniform capital allowance system. Mining, prospecting
62
and quarrying rights and information were identified as separate ‘depreciating assets’,
deductible for the number of years mining or quarrying operations were expected to
63
continue. If mining operations were expected to last for 30 years, the deduction period
was 30 years, unless the mining, quarrying or prospecting rights included a 21-year
statutory limit that could not be extended or renewed, in which case the statutory period
64
of 21 years applied. Also, for both mining and quarrying operations, respectively, the old
10- and 20 year statutory limits on deductions were also removed to allow deductions on
65
capital expenditure for the entire estimated life of a project.
58
59
60
61
62
63
64
65
Income Tax Assessment Act 1997 div 330.
Ralph Review Report (n 23) 167 [243], 327.
Ibid 326, in particular, Recommendation 8.15. Note that from 1988 onwards, plant and articles used in the
resource industry were depreciable in the same manner as plant and articles in non-resource industries:
Taxation Laws Amendment Act (No. 4) 1988 ss 48–9, amending Income Tax Assessment Act 1936 ss 122A,
124AA.
The New Business Tax System (Capital Allowances) Act 2001 effectively repealed the mining regime in div 330
and repositioned the tax rules in various parts in div 40 of the Income Tax Assessment Act 1997.
Income Tax Assessment Act 1997 ss 40-30(2)–(3), 40-290(5). A tenement could not be divided into the right to
explore and the right to produce: Mitsui and Co (Australia) Ltd v FCT (2011) 86 ATR 258. In 2013, geothermal
exploration rights and geothermal information were added to s 40-30(2)(ba)–(bb). Immediate deductions
became available for geothermal exploration expenditure (s 40-730) and proceeds from selling geothermal
exploration information were made exempt (s 15-40, which is still in effect). However, due to a change of
government, the funding source for the new deduction mechanism, the mineral resources rent tax, ceased
and the new deduction rules lasted for only two years. Since then, no further tax incentive has been provided
for shifting from non-renewable energy to renewable energy. See Tax Laws Amendment (2012 Measures No.
6) Act 2013; Minerals Resource Rent Tax Repeal and Other Measures Act 2014.
Income Tax Assessment Act 1997 ss 40-30(5), 40-105(4); Explanatory Memorandum, New Business Tax
System (Capital Allowances) Bill 2001, [1.49], [1.114]–[1.117].
Income Tax Assessment Act 1997 s 40-95(8).
Income Tax Assessment Act 1997 subdiv 40-I (including ‘mining capital expenditure’, as detailed in s 40-860).
See also Recommendation 8.9 in the Ralph Review Report (n 23); James Macky and Praneel Nand, ‘Project
Pools’ (Conference Paper, Tax Institute of Australia, 15–17 October 2014).
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A problem soon emerged with these changes. Previously, rights and information acquired
on the market were treated as part of capital expenditure for developing a mining property.
66
Deductions were limited to exploration expenditure that the vendor had actually expended,
but had not yet deducted, and agreed to transfer to the purchaser. However, the term
‘depreciating assets’ did not specifically refer to market transfer of mining, prospecting or
quarrying rights or information. This encouraged some taxpayers to utilise the immediate
deduction rule for exploration expenditure, which was allowed in the year in which the asset
was first used, consistent with when depreciation began under the new uniform allowance
67
regime (whereas previously, depreciation began when expenditure was incurred).
In 2003, the depreciation period for mining, prospecting and quarrying rights and
information was deemed to be the life of the relevant mine, petroleum field or quarry,
68
whether it was proposed or already existed. However, this was insufficient to prevent
rights and information transferred on the market from being mischaracterised as exploration
expenditure and eroding the tax base through unjustified deductions. To address the
69
issue, the government amended the legislation again in 2014. The amended rule, which
is still in force today, made no substantial changes to the depreciation period for mining,
prospecting and quarrying rights and information relating to a specific mine, petroleum
field or quarry, but it allowed immediate deductions in only three circumstances: when
rights or information were acquired from a government authority; when geophysical or
geological data was acquired from another entity that specialised in mining, quarrying or
prospecting information; or when the taxpayer had contributed to the cost of creating the
70
mining, quarrying or prospecting information. Other rights and information (first used for
71
exploration) transferred on the market are typically deemed depreciable for 15 years. A
taxpayer could write off the book value before the 15-year period expired if exploration
72
activities ceased but a clawback fee could be charged if exploration recommenced.
The following year, further provisions were introduced for interest realignment and ‘farm-
66
67
68
69
70
71
72
See Pratt Holdings Proprietary Ltd v FCT (2013) 94 ATR 251.
Income Tax Assessment Act 1997 subdiv 40-H.
Initially, s 40-95(7) of the Income Tax Assessment Act 1936 was modified by Tax Laws Amendment Act (No.
4) 2003 to insert items 11–13. To ensure depreciation was limited to straight line depreciation (i.e. not on
a declining balance basis), the items were removed and s 40-95(7) was rewritten in s 40-95(10)-(11). See
Explanatory Memorandum, Tax Laws Amendment (2007 Measures No. 2) Bill 2007, [1.20].
See Wayne Swan (Deputy Prime Minister and Treasurer) and Penny Wong (Minister), Budget Measures 2012–
13: Budget Paper No 2 (Commonwealth of Australia, 14 May 2013) 36–7; JB Hockey (Treasurer) and Arthur
Sinodinos (Assistant Treasurer), ‘Restoring Integrity in the Australian Tax System’ (Joint Media Release, 6
November 2013); Explanatory Memorandum, Tax and Superannuation Laws Amendment (2014 Measures No.
3) Bill 2014, [1.6].
Income Tax Assessment Act 1997 s 40-80(1)–(1AA); Explanatory Memorandum, Tax and Superannuation
Laws Amendment (2014 Measures No. 3) Bill 2014, [1.9], [1.15].
Tax and Superannuation Laws Amendment (2014 Measures No. 3) Act 2014 sch 1 ss 3, 5, replacing s
40-95(10) with s 40-95(10)–(10A); inserting s 40-95(12) of the Income Tax Assessment Act 1997. See also
Claire Nicholson, ‘Limiting the Immediate Tax Deduction for Exploration Expenditure’ 33 Australian Resources
Energy Law Journal 297. A shorter period than 15 years is only possible if a mine is proposed in relation to the
rights or information.
Income Tax Assessment Act 1997 s 40-295(1A)-(1B).
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in, farm-out’ arrangements to remove tax-induced penalties arising from the 15 year
73
depreciation rule.
As it currently stands, the new 15-year depreciation rule is not consistent with contemporary
accounting standards and tax policy principles alike, particularly neutrality. Although it can
be difficult to determine whether to capitalise costs, accounting practice requires that,
consistent with the way tangible assets are treated for tax purposes, capitalisation should
only occur when a future benefit is expected. In contrast, the cost of acquiring mining,
prospecting or quarrying rights and information (for a project at the exploration stage) is
deductible over 15 years even if the rights would last for five years or if they are being used
in early-stage exploration activities. The start date for depreciation on these intangible
assets—that is, when they are first used or held for use—is also inconsistent with other
costs attributable to a resource project which begin depreciating from the year in which
74
the project commences. It seems using standard accounting practice to determine the
deduction time of mining, prospecting or quarrying rights and information would be more
logical and make tax simpler for taxpayers in the resource industry, who are predominately
external financial reporting entities.
2.3
Petroleum exploration and extraction
The original mining regime did not apply to petroleum operations. A separate regime
existed for petroleum prospecting and production, in parallel to the mining regime,
between 1939 and 1997. The petroleum and mining industries share many features,
including the significant sunk costs involved in exploration and prospecting and the capital
outlays required for to produce resources commercially. In the 1930s, interest in petroleum
production grew significantly around the world. Canada and New Zealand introduced tax
concessions for the petroleum industry. Similarly, Australia introduced new tax incentives to
encourage local petroleum operations, allowing taxpayers to claim immediate deductions
75
on capital expenditure, offset against petroleum income, which provided immediate cash
flow and tax deferral benefits that could be reinvested. This mechanism lasted for nearly
35 years, until 1974, when it became apparent that highly profitable petroleum enterprises
were paying relatively little tax and the petroleum regime was revised to align more closely
76
with the mining regime.
It appears that the old lease division in the tax legislation did not apply to the petroleum
industry. Tax reforms undertaken in 1963 confirmed that costs associated with purchasing
prospecting or mining rights and information were immediate deduction items under the
73
74
75
76
Tax and Superannuation Laws Amendment (2015 Measures No. 2) Act 2015 sch 1. The previous administrative
practice can be found in ATO, Miscellaneous Taxes: Application of the Income Tax and GST Laws to Immediate
Transfer Farm-Out Arrangements, MT 2012/1, 2012; ATO, Miscellaneous Taxes: Application of the Income
Tax and GST Laws to Deferred Transfer Farm-Out Arrangements, MT 2012/2, 2012. See also Ian Murray,
‘The Tax Treatment of Farmouts: Do Rulings MT 2012/1 and MT 2012/2 Chart a Path to Revenue Nirvana
or Hades?’ (2013) 42(1) Australian Tax Revenue 5; Jonathon Leek and Peter Jarosek, ‘The Resource Joint
Venture’ (Conference Paper, Tax Institute of Australia, 17–19 October 2012); David Young, ‘Hot Tax Issues for
Resource Companies Contract Rights and Agreements: Tips and Traps’ (Convention Paper, Taxation Institute
of Australia, 3 August 2006).
See Income Tax Assessment Act 1997 s 40-860.
Income Tax Assessment Act 1939 s 4, inserting Income Tax Assessment Act 1936 s 123A; Commonwealth,
Parliamentary Debates, House of Representatives, 21 September 1939, 962–4 (Spender).
Commonwealth, Parliamentary Debates, House of Representatives, 14 November 1974, 3551 (Crean).
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STATUTORY DEPRECIATION REGIMES FOR INTANGIBLE ASSETS 143
77
petroleum regime. As was the case under the mining regime, the purchaser of petroleum
rights or information was entitled to deduct the acquisition cost only to the extent that the
vendor had not already claimed a deduction for exploration expenditure, and the purchaser
78
was required to notify the Commissioner of Taxation of the amount.
Government policy concerning the petroleum industry shifted in the 1970s. In 1974, whereas
capital expenditure relating to petroleum operations could previously be fully recouped
79
before tax, it became deductible for the estimated number of years of the operations.
Prospecting expenditure became deductible immediately or, if there was insufficient
income, expenditure could be deducted in a later year, when the petroleum operations
became profitable. From 1976, capital expenditure could be deducted against income
80
from any source, not just petroleum. The depreciation period for capital expenditure on
petroleum operations was also changed several times in the 1970s and early 1980s. Set at
81
25 years in 1974, it was changed to five years in 1976 to align with the mining regime, then
82
to six years for expenditure incurred between 1 May and 18 August 1981, and 10 years for
83
expenditure incurred from 19 August 1981 onwards.
Under the new Income Tax Assessment Act 1997, the petroleum regime was merged with
the mining regime. The rules discussed above concerning deductions for exploration
expenditure, capital expenditure, prospecting rights and information for mining became
applicable to petroleum, although unlike mining prospectors, petroleum prospectors’
proceeds from selling, transferring or assigning rights have never been exempt from
tax. Mining and prospecting rights and information were defined as depreciating assets
under the uniform capital allowance regime in the new Act, which included rights and
84
information used in petroleum operations. Later, in 2003, the depreciation period for
petroleum operations was deemed to be the life of an existing or proposed petroleum
85
field. However, an inconsistency arose with late stage prospecting rights and information
transferred on the market for the value of existing resources, which were deductible
immediately as exploration expenditure. In 2014, the depreciation period for rights and
information transferred on the market (except for interest realignment and ‘farm-in farmout’ arrangements) was set at 15 years if there was no specific petroleum field to which
86
exploration and prospecting expenditure could be attributed. To maintain consistency
77
78
79
80
81
82
83
84
85
86
Income Tax and Social Services Contribution Assessment Act (No. 2) 1963 s 46, inserting Income Tax
Assessment Act 1936 div 10AA to provide a clear distinction between the petroleum related rules (div 10AA)
and mineral or metal-related rules (div 10). Division 10AA, especially s 124DD(b), listed mining or prospecting
rights and information as deductible capital expenditure items.
Income Tax Assessment Act 1936 s 124DE. It was renumbered as s 124AB when the mining regime was
modified by Income Tax Assessment Act (No. 2) 1974.
Income Tax Assessment Act (No. 2) 1974 s 33, replacing Income Tax Assessment Act 1936 div 10AA.
Income Tax Assessment Amendment Act (No. 3) 1976 s 27, amending Income Tax Assessment Act 1936 s
124AH.
Income Tax Assessment Amendment Act (No. 3) 1976 s 25, inserting Income Tax Assessment Act 1936 ss
124ADA–124ADB, which applied to expenditure incurred between 18 August 1976 and 30 April 1981.
Income Tax Assessment Act 1936 ss 124ADC–124ADD, as inserted by Income Tax (Assessment and Rates)
Amendment Act 1981 s 19.
Income Tax Assessment Act 1936 ss 124ADE–124ADF, as inserted by Income Tax Laws Amendment Act (No.
3) 1981 s 26. Section 124ADG was inserted by Income Tax Assessment Amendment Act 1983 s 36, to fix the
technical deficiency in the 10-year deduction rule.
Income Tax Assessment Act 1997 s 40-30(2)(a)-(b).
The amendment by Tax Laws Amendment Act (No. 4) 2003, as rewritten in s 40-95(10)-(11) of the Income Tax
Assessment Act 1997. See n 68 and accompanying text.
Income Tax Assessment Act 1997 ss 40-80(1)–(1AA), 40-295(1A)-(1B): see nn 70,72.
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within the tax system, a balancing adjustment for costs previously written off was subject
87
to the same clawback fee that applied to mining and quarrying rights and information.
In retrospect, it was arbitrary to set the depreciation period for petroleum rights and
information at 15 years, because mining or prospecting rights and information can
legitimately be acquired for exploration activities. A neutral income tax policy, as reflected
in standard accounting practice, requires costs to be capitalised based on the probability
of future economic benefits. Sunk costs from exploration activities should be written off
immediately, whereas capitalised costs for an expected future economic benefit should be
deductible over time, from when that benefit begins to diminish.
3
Patents, registered designs and copyrights
Although in Australia’s early history, intellectual property played a smaller role in generating
business profits than it did in the latter half of the 20th century, it still played an important
role. Even prior to federation, the colonies had intellectual property legislation in place.
Commonwealth patents legislation was enacted in 1903, followed by copyright and
trademarks laws in 1905. A law concerning registered designs was enacted in 1906.
Shortly after World War II, in recognition of the important role research played in creating
intellectual property that contributed to the nation’s long-term economic growth, Australia
88
introduced tax concessions to support scientific research activities. However, the first
cost recognition mechanism for depreciating intellectual property did not come until the
1950s.
In 1955, the Commonwealth Committee on Rates of Depreciation (AH Hulme, chair) was
commissioned to investigate the depreciation deduction rules in the existing tax legislation.
It found that the rules were limited to tangible assets, while patent rights and similar
intangible rights, particularly registered designs and copyrights, which were akin to plant
89
or articles, were not depreciable for tax purposes. It also found that some taxpayers
were paying five times more to deduct royalty payments immediately, when it would be
more economical for them to enter into a licence arrangement or purchase the rights to
90
intellectual property outright instead. In 1956, the government adopted the Committee’s
recommendation to introduce new depreciation deductions, allowing deductions for the
costs involved in securing patents, registered designs and copyrights on a straight line
91
depreciation basis. When the capital gains tax regime was introduced in 1986, the cost
of acquiring other types of intangible assets like trademarks, plant breeders’ rights, circuit
layouts and non-wasting forms of intellectual property became recognised as capital
losses upon expiry or early disposal.
87
88
89
90
91
See n 73 and accompanying text.
It can be found in s 73A of the Income Tax Assessment Act 1936, as inserted by Income Tax Assessment Act
1946 s 11. In 1986, a separate R&D regime was legislated by Income Tax Assessment Amendment (Research
and Development) Act 1986 s 7, inserting Income Tax Assessment Act 1936 s 73B. From 2010, all R&D
concessions are provided through tax credits: see Tax Laws Amendment (Research and Development) Act
2011 and Income Tax Rates Amendment (Research and Development) Act 2011.
Commonwealth Committee on Rates of Depreciation (AS Hulme, chair), Report of the Commonwealth
Committee on Rates of Depreciation (Commonwealth of Australia, 1955) 19–20.
Ibid [140].
Income Tax and Social Services Contribution Assessment Act (No. 3) 1956 ss 9, 20, inserting s 68A (for
outright deductions); div 10B (for depreciation deductions) into the Income Tax Assessment Act 1936.
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The depreciation deduction rule for patents, copyrights and registered designs has evolved
over time as a result of various reforms to the tax legislation and standardisation of the
capital allowance system. While the tax laws concerning depreciable intellectual property
92
were last reviewed in 2001, ongoing changes have been made under intellectual property
laws and the two systems sometimes conflict. For example, the effective life of a petty
patent is six years under the tax laws, despite the fact that petty patents can no longer be
93
granted in Australia. Currently, the depreciation period for registered designs is 15 years
under the tax laws whereas under the intellectual property laws, the statutory protection
period is five years and can be extended to 10 years. For tax purposes, copyrights are
depreciable for either the statutory protection period or 25 years, whichever is shorter.
However, under intellectual property laws, the copyright protection period is the life of the
94
author plus 70 years. These inconsistencies are problematic but can be resolved simply
by aligning depreciation periods to match the period for which the rights to depreciable
intellectual property have been granted. It is important to note, as will be discussed in
more detail later, that costs for developing or acquiring film copyrights should be treated
differently because since 1978, the government has provided support to the Australian film
industry through accelerated deductions and later, tax credits, referred to as ‘tax offsets’
in Australia.
3.1
Depreciation deductions for intellectual property
The original deduction rules applied to acquisition costs associated with registered patents,
copyrights and designs recognised by statute, collectively referred to in the legislation
95
as ‘units of industrial property’. The deduction rules also distinguished between three
types of expenses: the initial costs incurred to establish ownership of intellectual property,
such as registration and filing for extension; ‘development costs’, meaning any expenses
involved in producing intellectual property that had not previously been deducted; and
acquisition costs for patents, copyrights or registered designs already developed. An
outright deduction was allowed for the first type of expense, despite the fact that it related
96
to the acquisition of a long-term wasting asset. However, this concession was small,
given the relatively low costs involved in most cases. Capital expenses incurred in the
course of creating intellectual property was depreciable over the legal life of the property,
with a minimum annual write-off of either £50 (later, $100) or a pro rata amount based on
97
the costs yet to be deducted. Taxpayers who bought a second hand unit of industrial
92
93
94
95
96
97
New Business Tax System (Capital Allowances) Act 2001.
See Patents Amendment (Innovation Patents) Act 2000.
Copyright Act 1968 s 33.
Income Tax Assessment Act 1936 div 10B, as inserted by Income Tax and Social Services Contribution
Assessment (No. 3) Act 1956. Originally limited to rights granted under Australian laws, the rules relating to
depreciable units of industrial property were expanded to include similar rights granted under foreign laws: see
Taxation Laws Amendment Act 1991 s 28, amending Income Tax Assessment Act 1936 s 124K. In Primary
Health Care Ltd v CT (2010) 186 FCR 301, copyrights recognised by common law did not include rights in
patient records transferred as part of the acquisition of medical practices. See also Krampel Newman Partners
Pty Ltd v CT (No 2) (2003) 126 FCR 561 (copyrights in cinematograph films). Different types of intellectual
property are discussed in Sean Van Der Linden, ‘Intangibles: Tax Tips and Traps’ (Seminar Paper, Taxation
of Institute of Australia, 10 October 2006); Anthony Bradica, ‘Intellectual Property: Traps & Opportunities’
(Convention Paper, Taxation Institute of Australia, 6 October 2006; Mark Macrae, ‘Taxation of Virtual Property’
(2008) 11(5) Tax Specialist 324 (‘Taxation of Virtual Property’).
Income Tax Assessment Act 1936 s 68A, as inserted by Income Tax and Social Services Contribution
Assessment (No. 3) Act 1956 s 9. It was amended by Income Tax Assessment Amendment Act (No. 3) 1984
s 20 to allow apportionment of expenditure partly incurred for income producing purposes.
Income Tax Assessment Act 1936 s 124M(2).
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property could also deduct the acquisition cost over the remaining statutory protection
98
period or, in the case of a licence, the licence term.
For vendors selling intellectual property rights, profits in excess of the depreciated book
value were assessed using a balancing adjustment. The balancing adjustment rules in the
intellectual property write-off regime were similar to the rules for depreciable tangible plant
and equipment. Sales for less than the written-down value would give rise to a deductible
loss, while excess depreciation, revealed by a sale for more than written-down value, was
corrected by treating the excess as taxable income. In contrast, from 1985, the balancing
adjustment rules for tangible assets corrected excess depreciation only up to the original
acquisition cost and any profit greater than that remained untaxed until capital gains tax
99
was required.
The rules applied differently to ‘partial disposals’ of intellectual property, where taxpayers
100
derived gains from intellectual property rights they still held. Examples of partial disposals
included licensing arrangements, compensation paid by the government for exercising its
power to use a patented invention and any award of damages a taxpayer received for
infringement of intellectual property rights. In effect, the proceeds from partial disposals
were treated as balancing adjustments, offset against the value yet to be depreciated.
Proceeds greater than the written down value of the property were an untaxed capital
101
gain. Proceeds were not treated as royalty substitutes and in the case of licensees,
acquisition costs for intellectual property rights could be written off over the length of
the licence term. Deemed consideration rules applied to non-arm’s length transfers of
intellectual property. In the case of a payment above market value, the transaction was
deemed to take place at market value. A sale by the original owner was also deemed to
be at market value. The sale value for a subsequent owner was deemed to be the original
102
owner’s costs. If the property was sold in a non-arm’s length transfer for less than market
103
value, the Commissioner of Taxation had the power to adjust the transfer value.
In the revised depreciation rules in the Income Tax Assessment Act 1997, the term ‘industrial
104
property’ was renamed ‘intellectual property’. The effective life periods prescribed in the
Act were also revised to align with intellectual property laws. The depreciation period for
patents was updated from 16 years to 20 years and the period for petty patents from one
105
year (which previously, could be extended by five years) to six years. The effective life
106
of registered designs was set at 15 years. The effective life of copyrights was either 25
years or the remaining rights period, whichever was shorter. The Commissioner’s discretion
with respect to the effective life of copyrights, which had been inserted into the legislation
in 1956, was removed due to uncertainty about the statutory protection period in cases
107
of joint authorship. Partial disposals were renamed ‘partial realisations’ and the written-
98
99
100
101
102
103
104
Income Tax Assessment Act 1936 s 124L.
Income Tax Assessment Act 1936 ss 124N, 124P.
The partial disposal rules were contained in Income Tax Assessment Act 1936 ss 124V–124Y.
Disposal was at a zero value in FCT v AusNet Transmission Group Pty Ltd (2015) 231 FCR 59.
Income Tax Assessment Act 1936 s 124R(1).
Income Tax Assessment Act 1936 s 124R(2).
Tax Law Improvement Act (No. 1) 1998 sch1, inserting into the Income Tax Assessment Act 1997 div 383
(including a definition in s 995 1(1)). See also the capital gains tax treatment under the former s 104-205 (CGT
event K1) of the Income Tax Assessment Act 1997.
105 Income Tax Assessment Act 1997 s 373-35.
106 Ibid.
107 Ibid.
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STATUTORY DEPRECIATION REGIMES FOR INTANGIBLE ASSETS 147
down balance available for future deductions was reduced, while proceeds greater than
108
the total amount of expenditure became a taxable capital gain.
The uniform capital allowance regime consolidated the depreciation rules for intellectual
109
property, except for copyrights in films. Again, the depreciation periods were reviewed.
The period for an innovation patent was extended to eight years, while the periods for
standard patents, petty patents, registered designs and licences that did not relate
to copyrights remained unchanged (20 years, six years, 15 years and the licence term,
110
respectively). The approach to partial realisation was renamed ‘splitting’ and required
a balancing adjustment in respect of the disposed part, with the remainder continuing
111
to depreciate for the rest of the depreciation period. It was not until 2001 that a further
change to the depreciation rules allowed proceeds from selling intellectual property rights
that exceeded the original acquisition cost to be treated as ordinary income under the
112
balancing rules.
Currently, the depreciation regime for intellectual property interacts with various other
tax rules, such as the research and development regime, which provides tax credits for
113
expenditure incurred in developing a unit of industrial property. Once expenses are
claimed under the tax credit scheme, they cannot be claimed again as deductions under
114
the capital allowance system. The cost of obtaining an intellectual property right relating
115
to a project is deductible over the life of the project. Alternatively, for small and mediumsized businesses, the cost of acquiring intellectual property rights may be used to reduce
assessable income in the year in which the property is first used or added to a pool of
116
deductions, as will be discussed in detail below in parts 5 and 6 of this article. Under the
current laws, no special immediate write-off rule exists for fees incurred to register or renew
intellectual property rights.
108 For capital gains tax purposes, granting a licence may be taken as creating contractual or other rights under
s 104-35 (CGT event D1) of the Income Tax Assessment Act 1997 or as a cancellation, surrender or similar
termination of ownership of an asset under s 104-25 (CGT event C2,which applies before CGT event D1 in
the Income Tax Assessment Act 1997). Under s 115-25 of the Income Tax Assessment Act 1997, the partial
exemption on the gain does not apply to the former but does apply to the latter. See also Taxation of Virtual
Property (n 95); Daniel Sydes, ‘Tax Consequences of Disposing of Intellectual Property’ (2012) 15(4) Tax
Specialist 196.
109 New Business Tax System (Capital Allowances) Act 2001 sch 1, inserting Income Tax Assessment Act 1997 s
40-30(2)(c). The definition of intellectual property is in s 995-1(1), Income Tax Assessment Act 1997.
110 Income Tax Assessment Act 1997 s 40-95(7), as inserted by New Business Tax System (Capital Allowances)
Act 2001.
111 Income Tax Assessment Act 1997 ss 40-115, 40-295(3).
112 New Business Tax System (Capital Allowances) Act 2001 sch 1, inserting Income Tax Assessment Act 1997
s 40-285. This was recommended in the Ralph Review Report (n 23) 318–20, specifically, Recommendation
8.11.
113 See n 88. See further Andrew Clements, ‘Income Tax Implications of Disposals of Intellectual Property’ (1990)
1 Australian Intellectual Property Journal 36; Geoff Mann and Michelle Parsons, ‘Taxation of Intellectual
Property: A Summary of Australian Tax Issues’ (2002) 8 Asia-Pacific Tax Bulletin 718. Generally, prospecting or
mining operations are not considered core research and development activities: see Income Tax Assessment
Act 1997 s 355-25(2); Steve Elias and Aaron Ng, ‘Resources 101 Day: The R&D Tax Incentive and Compliance
for the Resources Sector’ (Convention Paper, Taxation Institute of Australia, 18 October 2013).
114 Income Tax Assessment Act 1997 s 355-715 (in div 355, providing refundable tax offsets for eligible taxpayers
with a turnover of less than $20 million and non-refundable tax offsets for all other eligible taxpayers). See
also Maria Lui and James Macky, ‘Commercialising Intellectual Property – A Taxing Initiative?’ (2002) 6(1) Tax
Specialist 10 (‘Commercialising Intellectual Property’).
115 Income Tax Assessment Act 1997 s 40-840(2).
116 Income Tax Assessment Act 1997 subdiv 328-D, s 40-82.
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In 2015, the government proposed that taxpayers be allowed to decide the appropriate
117
depreciation period for their income-producing intellectual property rights. However, the
118
proposal did not pass in the Senate and never became law. Depreciation periods have
not been reviewed since 2001 and have become outdated, particularly in light of current
intellectual property laws granting protection to registered designs for five years (which can
be extended to 10 years) and copyrights for the life of an author plus 70 years, while petty
patents are no longer granted in Australia. Now, the 2015 proposal to allow self-assessed
effective life periods for intellectual property should be revisited or at least, the arbitrary
depreciation periods set by the current legislation should be revised to match the statutory
periods for which the rights have been granted.
3.2
Tax concessions for Australian film and television
After World War II, Australia’s cultural focus shifted towards establishing a national identity
distinct from the British Empire. In 1960, restrictions were imposed on broadcasting
imported television content. Throughout the 1960s and 1970s, government policies
and new government-funded institutions designed to promote local film and television
content continued to evolve. For example, the Australian Film Development Corporation
was created in the late 1960s, the Australian Film and Television School in 1973 and the
Australian Film Commission in 1975. The tax system was also enlisted to support the
Australian film and television industry.
3.2.1
1978–2001: subsidising local content
The first tax concession specifically for the film and television industry was introduced in
119
1978. To receive it, taxpayers were required to make their film in Australia and have it
certified by the Minister for Home Affairs and Environment as Australian content. Upon
certification, film development costs were tax deductible over two years. Also, 50% of the
production costs could be deducted each year, beginning when the film first produced
income, instead of the 25-year period that applied to capitalised development costs
for non-film copyrights under the industrial property depreciation regime. This initial tax
concession was soon followed by an even more generous deduction rule in 1981, which
was available to Australian tax residents bearing entrepreneurial risk for producing a feature
120
film, documentary or television drama mini series. The amount of capital expenditure
that could be deducted for developing an eligible Australian film was increased to 150%,
deductible in the year in which the film copyright was first used to produce income.
Meanwhile, any proceeds from the sale or partial disposal of the rights in a film copyright
121
was assessable income. The assessment rule inserted into the tax legislation at this time
applied to both the 1978 and the 1981 concessions for film development costs, irrespective
of whether money received from a film project was income or capital in character. In effect,
117 Scott Morrison (Treasurer), ‘Tax and Business Incentives to Boost Economic Growth & Jobs’ (Media Release,
7 December 2015). Subsequently, this proposal was included in the Treasury Laws Amendment (2017
Enterprises Incentives No 1) Bill 2017 sch 2.
118 See the Schedule of the Amendment made by the Senate on 5 December 2018 in Treasury Law Amendment
(2017 Enterprise Incentives No 1) Bill 2017. This bill was passed by the House of Representatives: see
Commonwealth, Parliamentary Debates, House of Representatives, 12 December 2019, 12967–8.
119 Income Tax Assessment Amendment Act (No. 4) 1978 ss 13–28, amending Income Tax Assessment Act 1936
div 10B.
120 Income Tax Assessment Amendment Act 1981 s 13, inserting Income Tax Assessment Act 1936 div 10BA.
Investment costs were deductible if they were subsequently spent on producing a film (FCT v Faywin
Investments Pty Ltd (1990) 22 FCR 461) but marketing activities were not considered part of film production
(Gross v FCT (1999) 85 FCR 270).
121 Income Tax Assessment Amendment Act 1981 s 4, inserting Income Tax Assessment Act 1936 s 26AG.
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STATUTORY DEPRECIATION REGIMES FOR INTANGIBLE ASSETS 149
this meant a tax on capital gains, even before the new capital gains tax regime was added
122
to the legislation. The overall tax effect was exceedingly favourable to the industry. At that
time, the top marginal tax rate of 60% applied to taxable income exceeding $34,478 (for
the 1980-81 income year). It means that individual taxpayers could receive an immediate
tax refund of $90 on the $100 invested in a film, whereas any profits were half exempt.
There was no incentive to produce a good film that would sell; the film could make a loss
and the investor would still make a profit.
To increase the financial incentive for making profitable films, 50% of the net assessable
income derived from a film copyright transaction was exempt from tax, in addition to the
123
150% deduction rule. In 1983, the 150% deduction rule was extended again to allow
immediate deductions for capital expenditure if a film was expected to be completed and
124
distributed within two years. However, in 1984, the percentage of expenditure eligible
for immediate deductions and net income exempt from tax was reduced to 33% and to
125
20% in 1985. From 1988, deductions greater than actual expenditure and the exemption
126
on net assessable income where no longer available. Nonetheless, throughout the
1980s, the various tax incentives offered for eligible films were a great success in terms of
encouraging private investment in the industry. While investment was worth $120 million in
127
1982, it had grown to over $180 million by the late 1980s and the number of feature films
128
produced per year in Australia increased from less than 20 to 40.
3.2.2
2001 onwards: the shift towards foreign investment
In the 1990s, with growing multiculturalism and cross-border investment, policy
perspectives began to shift. Although restrictions on international content had sheltered
the Australian film industry, heavy industry regulation had impeded market competition,
creativity and innovation. Meanwhile, Hollywood was dominating the global film market.
Various countries competed to attract big budget American productions. For example,
129
Canada and Ireland introduced new tax incentives for foreign film investment. Similar
measures were eventually introduced in Australia. In 2001, when the intellectual property
depreciation rules were incorporated into the uniform capital allowance regime, the
130
accelerated deduction rules for Australian films continued, after an industry review.
The following year, a new subsidy was introduced: a 12.5% return on film production
expenditure of at least $15 million upon completion of the film. This was clearly aimed at
foreign film investment, as most domestic production budgets were less than $6 million at
122 Film production subsidies generally preceded capital gains measures. See also Income Tax Assessment Act
1936 pt III div 13; Income Tax Assessment Act 1997 ss 104-205, 118-30.
123 Income Tax Assessment Amendment Act 1981 s 3, inserting Income Tax Assessment Act 1936 s 23H.
124 Income Tax Assessment Amendment Act 1983 s 45, inserting Income Tax Assessment Act 1936 ss 124ZADA–
ADB.
125 Income Tax Assessment Amendment Act 1984 s 4; Taxation Laws Amendment Act (No. 3) 1985 s 22.
126 Taxation Laws Amendment Act (No. 5) 1988 s 23, amending Income Tax Assessment Act 1936 s 124ZAFA.
127 Braedon Clark, ‘Using Tax Incentives to Encourage Investment in the Australian Film Industry’ (1999) 9(1)
Revenue Law Journal 58 (‘Using Tax Incentives’). See also Kay Daniels, ‘Balancing Objectives: The Role of the
Commonwealth in Cultural Development’ (1997) 8(1) Culture and Policy 5.
128 Ibid.
129 Ibid.
130 See David Gonski, Review of Commonwealth Assistance to the Film Industry (Commonwealth Department of
Communications and the Arts, January 1997).
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131
the time. However, Australia’s program to encourage foreign film investment was not a
132
great success and did not achieve any substantial policy outcomes.
The 2005 free trade agreement between Australia and the US was another significant event
for the Australian film and television industry. It meant that regulatory restrictions, such as
quotas for Australian content on free-to-air television, would no longer been tightened. The
133
same year, film copyrights were included in the uniform capital allowance regime. Unlike
other copyrights, which were depreciable based on statutory periods, film copyrights were
depreciable based on an effective life determined by the taxpayer. Film copyrights could
also be depreciated on a declining balance basis, whereas other intellectual property was
depreciable on a straight line basis.
Commonwealth tax concessions for Australian films were scaled back in 2007. However,
as foreign investment opportunities grew, state governments began subsidising the
industry and Commonwealth agencies sought to avoid dual subsidisation. Subsequently,
the accelerated deduction rules for films were converted into three new types of mutually
134
exclusive tax offsets. The first, ‘producer offsets’, provided a 40% return on investment
in a feature film production or a 20% return on investment for any other type of film.
The second, ‘location offsets’, consolidated the subsidies available for large production
companies and incentivised large scale film productions located in Australia by providing
a 15% return on investment for any type of film. The third category, ‘post, digital and
visual effect offsets’ (‘PDV offsets’) sought to attract post-production, digital and visual
effects production to Australia by providing a 15% (or, from 1 July 2001, 30%) return on
investment. From 10 May 2011, the subsidy level increased to 16.5% for location offsets
135
and 30% for PDV offsets. In 2017, producer offsets were extended to include costs
136
associated with principal photography undertaken overseas.
Currently, the expenditure categories used for calculating these tax offsets are still not
137
deductible under the capital allowance regime. The offsets, which promote foreign
investment while attempting to protect the domestic industry, have also been criticised
138
from a policy perspective. Should they be withdrawn, adopting the neutral income
131 Income Tax Assessment Act 1997 div 376, as inserted by Taxation Laws Amendment (Film Incentives) Act
2002 and repealed by Tax Laws Amendment (2007 Measures No. 5) Act 2007. Australia’s policy changes
relating to the film industry are explained in Rachel Parker and Oleg Parenta, ‘Explaining Contradictions in Film
and Television Industry Policy: Ideas and Incremental Policy Change Through Layering and Drift’ (2008) 30(5)
Media, Culture & Society 609; Rachel Parker and Oleg Parenta, ‘Multi-Level Order, Friction and Contradiction:
The Evolution of Australian Film Industry Policy’ (2009) 15(1) International Journal of Cultural Policy 91.
132 Income Tax Assessment Act 1997 subdivs 375-G (special loss rules), 375-H (equity investor subsidies), as
introduced by Taxation Laws Amendment (Film Incentives) Act 2002 and repealed by Tax Laws Amendment
(2007 Measures No. 5) Act 2007. See also Using Tax Incentives (n 127).
133 Tax Laws Amendment (Loss Recoupment Rules and Other Measures) Act 2005 sch 4, amending Income Tax
Assessment Act 1997 s 40-70(2). Tax Laws Amendment (2007 Measures No. 5) Act 2007 repealed Income
Tax Assessment Act 1936 divs 10B–10BA.
134 Tax Laws Amendment (2007 Measures No. 5) Act 2007, inserting Income Tax Assessment Act 1997 div
376. These changes were expected to produce an estimated $11 million reduction in tax expenditure for the
one or two-year deduction provision and only a $3 million increase in the tax offset system: Tax Expenditures
Statement 2007 (Commonwealth of Australia, 2007); John Garden, ‘Film, Arts and Culture’ in Parliament of
Australia, Research Brief: Budget Review 2007-08 (Commonwealth of Australia, 2007) 92–4.
135 Tax Laws Amendment (2011 Measures No 7) Act 2011 sch 9 items 1–4.
136 Treasury Laws Amendment (Tax Integrity and Other Measures No. 2) Act 2018 sch 3 s 1, inserting Income Tax
Assessment Act 1997 s 376-170(3A).
137 Income Tax Assessment Act 1997 s 40-45(6).
138 See, eg, Gene Tunny, ‘Moochers Making Movies: Government Assistance to the Film Industry’ (2013) 29(1)
Policy 8; Commonwealth House of Representatives Standing Committee on Communications and the Arts,
Report on the Inquiry into the Australian Film and Television Industry (Commonwealth of Australia, 2017).
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STATUTORY DEPRECIATION REGIMES FOR INTANGIBLE ASSETS 151
tax approach would require that depreciation deductions be allowed for capitalised film
development costs, for the length of the film copyright period. Straight line depreciation is
likely to be appropriate for films available for online streaming, but the declining balance
method may be allowed for films principally screened in theatres because they often lose
much of their value after the first few weeks of screening.
4
In-house software
In a taxation ruling issued in 1979, the Commissioner of Taxation permitted taxpayers to
claim immediate deductions for the cost of acquiring software (other than software integral to
139
a computer system), whether off-the-shelf, custom-made or modified. The rule remained
in place for the next 19 years, as information technology developed rapidly and more
businesses began using software for internal business purposes. The rule ended in 1998,
when the Commissioner decided to remit the issue of distinguishing between current and
140
capital expenses to the courts. The same year, the government responded by providing
new deductions for capital expenses relating to software, separate from the intellectual
141
142
property depreciation rules, which was legislated in 1999. The new deduction rules
applied to costs for developing or acquiring software used for internal purposes in running
143
a business, ranging from simple word processing software to commercial websites and
144
complex enterprise solutions, collectively called ‘in-house software’ in the legislation.
This meant costs characterised as revenue outgoings were deductible immediately—
for example, annual licence fees for third-party software and recurring monthly fees for
145
software updates and technical support. If characterised as capital expenses, they were
146
deductible under the new software regime.
The software regime has not changed significantly since it was introduced, other than
certain changes made to deemed effective life periods. The rules operate in one of two
ways: either depreciation can be claimed on individual units of software or, in the case of
software development, expenditure can be pooled and depreciated as one unit. Currently,
139 In the Taxation Ruling IT 26 (Computers – Depreciation, Investment Allowance, withdrawn on 11 May 1998),
software was treated as a revenue asset and hardware was treated as depreciable plant: see Harry Rigney,
‘Deductions for Year 2000 Compliance Expenses’ (1998) 10(5) Journal of the Australian Institute of Bankers
196.
140 Explanatory Memorandum, Taxation Laws Amendment (Software Depreciation) Bill 1995, [7].
141 Peter Costello (Treasurer), ‘Taxation Treatment of Y2K Computer-related and Software Expenditures’ (Press
Release No 49, 12 May 1998).
142 Taxation Laws Amendment (Software Depreciation) Act 1999 sch 1 s 14, inserting Income Tax Assessment
Act 1997 div 46. Capitalisation of in-house software is also allowed in the US and the UK: see Andrew Lymer
et al, ‘Taxing the Intangible: Overview of Global Approaches and a Review of Recent Policy Changes in the UK’
(2003) 18 Australian Tax Forum 431.
143 However, domain names and content with a separate value to the owner (i.e. digital images) are distinct assets
and not considered in-house software: see ATO, Capital Allowances: Depreciating Asset – In-House Software,
ATO ID 2014/16, 2014, [43].
144 See the definition in Income Tax Assessment Act 1997 s 995-1(1). Internal use includes when the taxpayer
incurs expenditure on in-house software that will be used groupwide: see ibid. However, this does not apply
to software developed and marketed for deriving income: see, eg, ATO, Income Tax: Computer Software, TR
93/12, 1993. Also, it does not apply to software that is trading stock: see Kate Walters, ‘Potential Deductions
Arising from Creating or Exploiting Intellectual Property’ (2012) 15(4) Tax Specialist 186, 188–9.
145 ATO, Capital Allowances: Cost – Enhancement and Support Fees for In-House Software, ATO ID 2003/931,
2003; ATO, Capital Allowances: Cost – Computer Software – Annual Licence Fees, ATO ID 2010/14, 2003;
Commercialising Intellectual Property (n 114).
146 See, eg, ATO, Income Tax: Deductibility of Expenditure on a Commercial Website, TR 2016/3, 2016, [12]–[13],
[20]–[32].
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the depreciation period is five years for individual software units, while expenditure pools
147
for software are deductible at 30% per annum. However, these patterns of deductions are
unlikely to accurately reflect the actual benefit period of in-house software. One alternative
is to make acquisition costs for software deductible outright under the small business
concessions.
4.1
Short-term depreciation deductions for software
148
The software regime introduced in 1999 provided two options for claiming deductions.
The first, which borrowed several features from the tangible asset depreciation rules that
applied to plant, allowed depreciation deductions for the cost of acquiring or developing
149
150
individual units of software, with outright deductions allowed up to $300. However,
151
depreciation only applied to 40% of the cost per annum, on a straight line basis. The
second option applied to development costs for in-house software including labour costs,
software improvement costs and any commission paid to develop the software. Costs
attributable to a software development project could be pooled and depreciated on a
152
straight line at 40% per annum, from the year after the expenditure was incurred. There
153
was also a special rule allowing immediate deductions for ‘Y2K’ compliance costs, which
was a legislated version of the administrative practice that the Commissioner of Taxation
154
had introduced in a ruling issued the year before. However, these tax benefits were only
temporary, until the Y2K issue was resolved.
Under the capital allowance regime, in-house software was defined as a depreciating asset
separate from intellectual property, despite the fact that software-related transactions
155
generally involve transfer or licensing of copyrights. Aside from this, the optional pooling
system that applied to software development costs was also revised under the uniform
capital allowance regime to allow various expenditure incurred in the same year to be
156
allocated into one pool. It removed the difficulty involved in assigning costs related to
157
multiple projects undertaken at the same time. Other than these revisions made at the
beginning of the uniform capital allowance regime, the software depreciation rules have
remained relatively steady. The main changes have been to increase the deemed effective
life periods. As part of measures included in the 2008 Budget, the depreciation period for
147 Income Tax Assessment Act 1997 s 40-455.
148 Taxation Laws Amendment (Software Depreciation) Act 1999 sch 1 s 14, inserting Income Tax Assessment
Act 1997 div 46.
149 Income Tax Assessment Act 1997 s 46-30.
150 Income Tax Assessment Act 1997 s 46-65.
151 Income Tax Assessment Act 1997 ss 46-40, 46-45.
152 Income Tax Assessment Act 1997 subdiv 46-D.
153 Income Tax Assessment Act 1997 s 46-75.
154 ATO, Income Tax: Deductibility of Year 2000 (Millennium Bug) Expenses, TR 98/13, 1998.
155 New Business Tax System (Capital Allowances) Act 2001 sch 1 s 1, inserting Income Tax Assessment Act
1997 s 40-30(2)(d).
156 Income Tax Assessment Act 1997 subdiv 40-E. The software pooling system does not have a clawback
provision: see Tony Baxter, ‘The Sting: Depreciation and Leasing’ (Convention Paper, Taxation Institute of
Australia, March 2000) 57-59; Tony Baxter, ‘Tax Reform – Depreciation and Capital Allowances’ (Seminar
Paper, Taxation Institute of Australia, 20 April 2000) 24; Tony Baxter, ‘Depreciation’ (Seminar Paper, Taxation
Institute of Australia, 20 April 2000; 6 July 2000) 24.
157 Explanatory Memorandum, New Business Tax System (Capital Allowances) Bill 2001, [4.30]; Geoff Mann,
‘Australian Tax Issues for Development of Intellectual Property’ (2005) 57(5) Chartered Secretaries Australia Ltd
296, 298; Teresa Dyson and Geoff Mann, ‘Taxation Issues in the Development of Intellectual Property’ (2007)
59(4) Chartered Secretaries Australia Ltd 236, 238.
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STATUTORY DEPRECIATION REGIMES FOR INTANGIBLE ASSETS 153
158
units of in-house software increased from 2.5 years to four years. In 2015, it increased
159
again, from four years to five years. The government claimed this change was made to
160
better reflect the longevity of the benefits of internal software. The annual depreciation
rate for software development pools has also been increased from 40% to 30% per
161
annum.
Despite the recent changes, depreciation periods for in-house software remain relatively
short, even with increased reliance on software in a wide range of business settings,
including automated manufacturing and service industries. In these contexts, the use
of software is akin to plant and equipment and the effective life of software should be
calculated the same way. Although there may be greater uncertainty about how long
software is expected to be used in a business, rational assessments can still be made and
as with plant and equipment, balancing adjustments can provide write-offs for obsolete
software.
4.2
Instant deductions for small to medium-sized businesses
Small business tax concessions have been changing continuously. The small business
concessions introduced in response to the Ralph Review in 2001 apply not only to plant
162
and equipment but also to in-house software. At present, for those classified as small
businesses for tax purposes, immediate deductions are allowed for assets costing less
163
than $150,000, due to expire on 31 December 2020. This concession is extended to any
business with an aggregate annual turnover of less than $150 million, until 30 December
164
2020. In addition, assets acquired between 6 October 2020 and 30 June 2022, businesses
165
may be eligible to temporary full expensing. To justify providing such significant tax
concessions to the small and medium sized business sector, detailed evaluation of the
economic benefits of the scheme is necessary. In doing so, the government would need to
recognise in-house software as an important area of investment and evaluate it separately
from the benefits of investment in capital intensive industries.
5
Media and telecommunications rights
When the capital gains tax regime was introduced in 1986, the cost base of an intangible
wasting asset was either used to offset the proceeds, if any, from disposing of the asset
or recognised as a capital loss upon expiry of the asset. This tax treatment was modified
in 1999 for spectrum licences and the ‘indefeasible right to use’ (IRUs) international
telecommunications submarine cable systems to allow immediate depreciation
deductions that reduced assessable business income. Further, in 2001, the cost of
datacasting transmitter licences recognised under the capital gains regime also became
158 Tax Laws Amendment (Budget Measures) Act 2008 sch 2 s 1, amending table item 8 in s 40-95(7) of the
Income Tax Assessment Act 1997.
159 Tax and Superannuation Laws Amendment (2015 Measures No. 2) Act 2015 sch 2, amending Income Tax
Assessment Act 1997 s 40-95(7).
160 Commonwealth, Parliamentary Debates, Senate, 7 September 2015, 6048–9, 6054, 6056–7.
161 Tax and Superannuation Laws Amendment (2015 Measures No. 2) Act 2015 sch 2, amending Income Tax
Assessment Act 1997 s 40-455.
162 Income Tax Assessment Act 1997 div 152. See also Ralph Review Report (n 23) 581–4, particularly
Recommendation 17.3.
163 Income Tax Assessment Act 1997 s 328-180; Income Tax (Transitional Provisions) Act 1997 s 328-180.
164 Income Tax Assessment Act 1997 s 40-82.
165 See the eligibility criteria as enacted by Treasury Laws Amendment (A Tax Plan for the COVID-19 Economic
Recovery) Act 2020.
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deductible under the uniform capital allowance regime, followed by domestic IRUs and
telecommunications site access rights in 2005.
5.1
Spectrum and datacasting transmitter licences
Spectrum licences and datacasting transmitter licences are both granted for a limited time
under the Radiocommunications Act 1992. A spectrum licence permits the holder to use
radio frequencies in a designated geographic area. A datacasting transmitter licences
permits the holder to provide services such as digital television and internet. New tax
deductions were introduced in 1999, after the government introduced a market auctioning
system for acquiring these licences. The depreciation mechanisms were considered
necessary to avoid disadvantaging domestic bidders competing against foreign bidders
166
who might be allowed to deduct their acquisition costs under foreign tax laws. From
1999, the cost of acquiring a licences was depreciable for its statutory life span (generally
167
15 years) on a straight line basis. The cost base for depreciation did not include auction
application fees or penalties for withdrawing a bid, although they might be deductible
outright.
The relevant regulatory body can vary the terms of a spectrum licence, which is reflected
in the tax laws. For example, when a spectrum licence is split, the part that is disposed
of is subject to a balancing adjustment, which results in either assessable income or a
deduction. Any new part added to a current licence is considered a separate depreciating
asset. The depreciation rules for spectrum licences in the uniform allowance regime have
168
also been rewritten in a similar manner. In 2001, datacasting transmitter licences we…
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