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Business income tax
Te take whiwhinga pakihi
Business income tax: Depreciation

Taxation of patents

Patents are depreciable intangible assets and must be depreciated using the straight line method.  They have a legal life of 20 years, which is 240 months.

Patent applications lodged before 1 April 2005 and granted in the 2005-06 tax year or later

  • Depreciation on patent begins from the date the application is granted.
  • A catch-up deduction applies for the period between when the application is lodged and when it is granted.
  • To work out the catch-up depreciation rate divide the number of months the patent was pending by 240.
Example Patent application lodged before 1 April 2005
Amnah filed for a patent on a new type of footwear on 4 April 2004.  The patent is granted on 2 June 2007.  The total patent costs were $10,000.  The depreciation for the patent would be calculated as follows:
First income year of use (2007-08)
Depreciation catch-up (April 04-May 07) 38 months/240 months = 16% on cost of $10,000 = $1,600 depreciation*
Annual rate for the year (June 07-March 08) 10 months/240 months = 4% on cost of $10,000 = $400 depreciation*
*Total depreciation for 2007-08 income year would be $2,000
2008-09 income year onwards
12 months/240 months = 5% on cost of $10,000 = $500 depreciation

Patent applications lodged on or after 1 April 2005

  • Depreciation on patent application begins from the date the patent application is lodged with a complete specification.
  • Depreciation continues once the application has been granted as depreciation on patent.
  • To work out the depreciation rate divide the number of months in the year by 240.
Example Application lodged on or after 1 April 2005
KIZ limited files for a patent on a new type of cat-door.  It lodged its application with complete specification on 15 September 2005.  The patent is granted on 21 February 2008.  The depreciation rate for the patent application and for the patent (once granted) would be calculated as follows:
Depreciation rate for patent application
2005-06 income year
(Sept 05 to March 06) 7 months/240 months = 0.03
2006-07 income year
12 months / 240 months = 0.05
2007-08 income year
(April 07-Jan 08) 10 months/240 months = 0.04*
Depreciation rate for patent
2007-08 income year
(Feb 08-Mar 08) 2 months/240 months = 0.01*
2008-09 income year onwards
12 months/240 months = 0.05
*the total depreciation rate for the 2007-08 income year would be 0.05 (0.04 0.01)

Other deductions

Examples of other deductions that may be allowable in respect of patents are:

  • certain legal expenses
  • certain research and development costs
  • costs incurred in an unsuccessful patent application
  • costs in connection with the grant, maintenance or extension of a patent, provided the patent was acquired before 23 September 1997 and the patent was used in deriving income.

Selling patents

When you sell a patent, the net proceeds from the sale are taxable, after deducting costs.  Also, any amount derived from the sale of a patent application (with a complete specification) is income, provided the application is lodged for the first time after 21 June 2005.

In calculating the profit or loss on the sale of a patent the cost of the patent is reduced by any depreciation deductions that have been allowed. 

From 2007-08 income year

  • Taxable income from the sale of patent rights or patent applications can be spread over three years, including the year of sale.
  • Electing to spread income will be voluntary.

Further information

Tax Information Bulletin volume 17 No 10 - Income tax treatment of New Zealand patents

 

 


Date published: 16 Jan 2007

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