Taxation Problems in the Commercialisation of Intellectual Property
IPRIA Report No. 01/06
158 Pages Posted: 5 Oct 2006
Date Written: 2006
A curious feature of the Australian tax treatment of intellectual property is that, while specific tax incentives are given to initial research and development activity which might generate intellectual property with commercial potential, and while significant tax concessions are given to capital gains which might be realised if a project for commercialisation of intellectual property is ultimately successful, there is no special tax assistance for the intermediate phase of commercialisation activity itself. That is the activity by which the knowledge, ideas and inventions generated by the research and development are converted into the business assets capable of producing commercial revenues from marketable goods and services. This Report undertakes a comprehensive review of the features of the Australain income tax system which inhibit or discourage commercialisation of intellectual property. We find that the income tax law revevals a sub-optimal tendency to impose taxation of unrealised gains, and double taxation of realised gains, from intellectual property commercialisation. Areas we have identified as causing problems include: (a) up-front tax liabilities imposed on the initial contribution of intellectaul property to commercialisation vehicles such as spin-off companies; (b) inappropriate tax liabilities imposed on employee shares in start-up companies; (c) unfavourable tax treatment of start-up losses where the commercialisation vehicle is a limited liability company; (d) denial of tax deductions for many intellectual property commercialisation cost items, such as confidential information, trade secrets, trade marks, brands and goodwill; (e) features of the general tax law which negate the intended benefits of specific concessions such as deductions for research and development and the venture capital and pooled development fund concessions; (f) tendencies in the tax law to encourage relocation of intellectual property ownership and control to more favourable overseas jurisdictions; and (g) tendencies in the tax law to discourage investment in entrepreneurial risk activity as an alternative to passive low-risk investment activity.
Keywords: taxation, intellectual property, commercial, incentive, concession
JEL Classification: K11
Suggested Citation: Suggested Citation