INNOVATION & TAX .... DON'T GO!
Australia's inventors are being heavily taxed while their small to medium-sized enterprise counterparts receive generous tax concessions.
The federal government channelled millions of dollars into encouraging innovation and inventiveness among SMEs, yet through the Tax Act these same organisations were hit with huge tax bills when selling intellectual property in the form of patents and copyrights.
This is a prime example of the various arms of government not working well together. The Uniform Capital Allowances Act introduced in July 2001 treats intellectual property such as patents and copyrights as depreciating assets. These assets are not subject to the generous capital gains tax concessions that apply to other types of assets, such as goodwill.
A simple comparison would be the owner of a small business who sells that business for $5million. A large portion of the sale price would be treated as goodwill and therefore receive a 50 per cent discount on capital gains tax, plus another 50 per cent discount on the balance because the asset is an active one.
The owner could also invest the remainder in a superannuation fund without paying contributions tax. The small business owner has paid in effect very little tax on a $5 million profit.
In contrast, an inventor who sells a patent for $5 million pays full tax of 50 per cent because the patent is classed as a depreciating asset.
SMEs can avoid this situation by selling shares in the company rather than selling the patent.
Most companies going down this path would find they have to offer a substantially discounted share price because of the uncertainty involved in buying into a company, and the many other liabilities that come with share ownership. Shares are a less attractive proposition for an investor than buying a clean asset such as a patent.
The Uniform Capital Allowances Act of 2001 was introduced without full consideration being given to the impact it would have on SMEs involved in developing new products. The government should ensure that SMEs creating intellectual property receive incentives at the start of the creative process as well as the end of the process, when they are trying to turn an idea into a reality by selling a patent to a prospective manufacturer.
Tony Martin - Director
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