New depreciable intangible assets
Clauses 72, 87, 104, 107, 111 to 116, 213(2), (9), (10) and (12), and 216
Issue: Support for the proposals
Submission
(Corporate Taxpayers Group, EY, KPMG)
Three submitters expressed their overall support for the proposals to make the following intangible assets depreciable: design registrations, applications for the registration of a design, and copyright in an artistic work that has been applied industrially.
Comment
Officials note the general support for the proposed amendments.
Recommendation
That the submissions be noted.
Issue: Expenditure that is eligible for depreciation
Submission
(Corporate Taxpayers Group)
The proposed reforms should allow for depreciation deductions for all expenditure (to the extent that it is not otherwise deductible) on intangible assets created on or after 7 November 2013, not merely expenditure incurred on these assets on or after 7 November 2013.
Comment
The date of 7 November 2013 was chosen as the boundary for eligible expenditure for all of the proposed black hole expenditure amendments in the bill that represent policy changes. It was the date of release of the Government discussion document, Black hole R&D expenditure, which contained the Government’s initial proposals for providing tax deductibility for capitalised R&D expenditure and was chosen to avoid creating an undesirable incentive for businesses to defer their spending in anticipation of new tax rules. Allowing deductibility for expenditure incurred before this date would be giving windfall gains to businesses that made an economic decision to incur the expenditure under the expectation that it would not be tax deductible. It would also increase the fiscal cost of the proposed changes.
While the discussion document did not specifically propose making three new intangible assets depreciable, the proposed amendments are the result of submitters’ feedback. Therefore, for consistency with the proposed black hole R&D expenditure amendments in the bill, officials consider that the eligibility of expenditure for depreciation as part of the costs of these new depreciable intangible assets should be based on the same boundary date. The proposed addition of these intangible assets to the list of depreciable intangible assets in the Income Tax Act 2007 is not remedial in nature; rather, it represents a change in policy. Officials do not, therefore, consider that allowing additional historical expenditure to be depreciable is justified.
Recommendation
That the submission be declined.
Issue: Reference to Copyright Act 1994 in relation to the copyright in an artistic work that has been applied industrially
Submission
(EY)
We appreciate the policy desire to incorporate the criteria and definitions used in section 75 of the Copyright Act 1994 in relation to the copyright in an artistic work that has been applied industrially, but consider that the straight cross-reference may cause some confusion and uncertainty for users of the income tax legislation. For example, it is not clear when section 75 of the Copyright Act 1994 can be said to apply to a particular copyright. A defined standalone term may be preferable.
We assume that the legal life of the copyright in an artistic work that has been applied industrially is intended to equate to the 25 and 16–year periods running from the times artistic works are applied industrially, as defined in section 75(3) and (4) of the Copyright Act 1994, and should be triggered once any one or more of the paragraph (a) to (c) criteria in section 75(4) are met. In other words, the use of “or” in that provision should not be read as intending the alternatives to be “one only” qualifications for income tax purposes. Some clarification would be desirable.
Comment
Officials agree that the legislative clarity could be improved and, accordingly, recommend some drafting changes, including deleting the words “to which section 75 of the Copyright Act 1994 applies” and inserting a standalone definition into section YA 1 of the Income Tax Act 2007. Officials consider that the preferable drafting approach is for this definition to incorporate a cross-reference to section 75 of the Copyright Act 1994. Section 75 of the Copyright Act 1994 contains a definition of “applied industrially”, exclusions of some specific types of artistic work, and time periods, in relation to specific types of artistic work, from industrial application before the special exception from copyright protection applies. The policy intent is that only the copyright in an artistic work that (i) has been “applied industrially” as defined in section 75 of the Copyright Act 1994, and (ii) is not one of the excluded artistic works in section 75 of the Copyright Act 1994, should be depreciable for income tax purposes. Furthermore, it is the policy intent that the legal life over which the copyright is to be depreciated for income tax purposes should reflect the time period, for the specific type of artistic work, running from the time the artistic work is applied industrially until such time as protection against infringement of the copyright in the artistic work is no longer available due to the operation of section 75 of the Copyright Act 1994. Officials consider that including a cross-reference to section 75 of the Copyright Act 1994 is desirable as it ensures that any changes to the relevant parts of that section, which it is the policy intent to mimic for income tax purposes, are incorporated automatically into income tax law.
Officials note that the submitter’s assumption that the legal life, for tax depreciation purposes, of the copyright in an artistic work that has been applied industrially is intended to equate to the 25 or 16–year period (depending on the type of artistic work) running from the time that the artistic work is applied industrially, as defined in section 75 of the Copyright Act 1994, and should commence once any one or more of the paragraph (a) to (c) criteria in section 75(4) of the Copyright Act 1994 are met, is the correct interpretation of the policy intent.
Recommendation
That the submission be accepted, subject to officials’ comments.