Depreciating intangible business assets can be a valuable tax deduction for business owners in Australia. Under Division 40 of the ITAA 1997, certain intangible assets such as patents, copyrights, and software are considered depreciable. Unlike tangible assets, these intangibles have unique effective lives and depreciation methods, often overlooked by business owners.
Intangible assets are not physical in nature. Instead, they represent legal rights or benefits. The ATO allows depreciation on these assets, provided they are used in the business for generating income. The effective life of an intangible asset is determined by its legal protection period. For example, a patent may have an effective life of 20 years, while software can typically be depreciated over 2 to 5 years.
A common misconception is that all intangible assets can be depreciated. This is not the case. Goodwill, for example, cannot be depreciated. To ensure compliance and maximise deductions, it’s crucial to differentiate between depreciable and non-depreciable intangibles.
To see how this plays out in practice, consider a business that purchases a software license for $50,000. Assuming the software has an effective life of 5 years, the business can claim a depreciation deduction of $10,000 annually. At a 30% corporate tax rate, this equates to a tax saving of $3,000 per year.
In our experience reviewing thousands of properties and business assets across Australia, we find that business owners frequently overlook the potential deductions from intangible assets. Many businesses fail to update their asset registers with new intangibles, missing out on valuable deductions. Additionally, the incorrect classification of an intangible asset's effective life can lead to under or over-claiming depreciation.
The answer can differ depending on your situation. If the intangible asset was acquired as part of a business acquisition, its treatment might differ from a standalone purchase. Similarly, assets acquired before 1 July 2001 fall under different rules. For software developed in-house, different rules apply compared to off-the-shelf software.
When it comes to intangible assets, professional advice is invaluable. A Chartered Quantity Surveyor can accurately assess the effective life and correct classification of your intangible assets, ensuring compliance and maximising deductions. Working alongside your accountant, they can provide a comprehensive strategy tailored to your business needs.