A sharper focus on intangibles
The taxation of intangible assets is a complex area of taxation and further complexity is added where there are international related party dealings in respect to these assets. Significant legislative and interpretative changes are being made in relation to the taxation of intangibles which impact taxpayers.
The taxation of international related party intangible arrangements is further under the scrutiny of the Australian Taxation Office (ATO) following the release of draft Practical Compliance Guideline (PCG) 2021/D4. PCG 2021/D4 sets out the ATO’s compliance approach to international arrangements connected with the development, enhancement, maintenance, protection, and exploitation of intangible assets and/or involving a migration of intangible assets.
The PCG provides detailed explanation and examples of the ATO’s risk assessment framework for international related party intangible agreements and the key theme of the PCG is that any transfers of intangible assets to or from overseas jurisdictions need to be fully documented and supported by a commercial rationale. In particular, where research and development (R&D) activities are being carried out in Australia, there needs to be contemporaneous documentation surrounding the commercial rationale where the ownership of the intangible is with another international related party following the commercialisation or pre-commercialisation phase of the intangible(s).
The ATO would be concerned with high risk arrangements where the ownership of intangibles is 'shifted' to an international related party in a lower tax paying jurisdiction which are undertaken at below market value or where there is no commercial rationale for undertaking the transfer.
The taxation of intangibles will be subject to more developments over the coming year(s). However, the following are some changes affecting intangibles that have either been already legislated or were announced in the 2021-22 Federal Budget:
Temporary Full Expensing provisions (legislated)
The temporary full expensing (TFE) provisions may apply to intangible assets purchased after 6 October 2020. In essence, under the primary test, the taxpayer may be eligible to claim the full cost of an eligible depreciating intangible asset if the taxpayer’s aggregated turnover is less than $5 billion. However, assets allocated to a software development pool are not eligible under the TFE provisions.
Certain taxpayers with an aggregated turnover of more than $5 billion who access the TFE provisions under the alternate test will not be allowed a full deduction for the cost of intangible assets, as they are specifically excluded assets for large businesses with an aggregated turnover of more than $5 billion.
Self-assessment of effective lives of intangible assets (announced)
Once the TFE provisions end, and from 1 July 2023, taxpayers will be able to self-assess the effective life of certain intangible assets including patents, registered designs, licenses, copyrights, and in-house software. Under current tax law, the Commissioner has prescribed the effective life for these assets and taxpayers do not have a choice to self-assess the effective life of such assets.
Patent Box Regime - Medical and Biotechnology (announced)
The Government will introduce a patent box tax regime to encourage medical and biotech innovations. Corporate income derived from patents will be taxed at a concessional effective corporate tax rate of 17% starting on or after 1 July 2022. Currently, income derived from patents are taxed at the standard corporate tax rates (i.e. 25% for base rates entities from 1 July 2021 or 30% for all other companies).
Digital Gaming Tax Offset (announced)
From 1 July 2022, a digital games tax offset will be introduced and will be made available to Australian resident companies or foreign resident companies trading through a permanent establishment in Australia. The tax offset will be introduced at a rate of 30%, and will be a refundable tax offset for eligible businesses that spend $500,000 or more on qualifying gaming expenditure.
With a raft of changes being introduced to encourage an increase in Australia’s share in the worldwide technology market, it is also critical to ensure you consider the interaction of the transfer pricing provisions if there are international related party dealings. Given this is a complex and dynamic area of tax, you should consider seeking advice from one of our experts to determine how these changes may impact your business.