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Intellectual Property - Maximise tax benefits strategies

What is intellectual property?

Intellectual Proterty Contribution

As highlighted on the IP Australia website, Intellectual Property (IP) is the property of your mind or proprietary knowledge or the ownership of ideas. It is a productive new idea you create. This can be an invention, trade mark, design, brand or even the application of your idea.

Unlike tangible assets to your business such as computers or your office, intellectual property is a collection of ideas and concepts.

Australian IP law is designed to encourage innovation and protect businesses that develop original IP in order to have a competitive advantage.

Stages of intellectual property

Stages in IP creation

Creation and development:

Expenditure on Research and Development (R&D) activities often creates the initial Intellectual property. Alternatively, the IP can be purchased solely as a stand alone asset, or typically as part of the purchase of the assets of a business.

Income generating application of the intellectual property:

After granting IP rights, an entity is able to commercialise and maximise the application of intellectual property and balance between their statutory rights, risks associated and leveraging of the intellectual property rights by granting license rights into different and non-competitive geographical markets.

Disposal of intellectual property:

The disposal of the entity or an interest there that entity might provide an opportunity to apply the CGT concessions where the IP is a CGT asset. The sale of certain IP will be recognised on revenue account (e.g. certain IP rights are depreciating assets).

IP tax policy exerts pressure

Intellectual Proterty Tax

For companies, IP is the core of continuous innovation, growth and profitability in the global digital

economy. Amid changing tax rules, however, some global IP-intensive companies find themselves at a cross roads regarding how they have structured their supply chains, where they locate the IP, and how they exploit commercially in products and services worldwide.

Asset protection strategies

IP Protection Strategy

There are a number of important commercial and taxation strategies to achieve asset protection and maximum taxation efficiencies:

• Establishment of separate intellectual holding entities

• Linkages created to ensure potential access to CGT concessions

• Proper documentation of arrangements to ensure intellectual property asset is secure if the user of the intellectual property suffers from financial distress.

Companies must find the right balance between tax opportunity and risk as IP value increases. Business owners need to consider the following:

• closely monitor the global, interacting and kaleidoscopically changing landscapes of technology and taxation for both opportunities and risks; and

• make sure your tax advisors are fully aware of what is going on inside the company, as well, and are included from the start in any discussion regarding business change.

From the taxation point of view, unit trust or companies are the two most popular choice for IP tax optimization. Unit trust shares many of the advantages similar to those of company and also allows for a change of proprietorship without termination of the business enterprise.

Under the taxation consolidation regime, corporate structures are often utilised to achieve most of the business objectives in dealing with intellectual property.

Location of IP–Australia or Off-shore

There is a view that intellectual property be structured with a view to reducing tax liabilities. However, businesses are more likely to locate patent ownership in countries where they have associated innovative activity. This may reflect co-location external entities, or the influence of tax rules which seek to limit the extent to which income and real innovative activity can be geographically separated.

Structuring your IP overseas may have definite advantages as the company grows to maturing with the possibility that royalties and services charges can be commercial paid to offshore companies. This ensures that overseas branch operations pay their fair share for the use of intellectual property inherent in their product of service.

It is best to seek professional advice to avoid any unforeseen capital or revenue gains before any IP or assets are transferred offshore.

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