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Technical tax area Ngā tūmomo whakataunga me ngā aratohu

New rules for spreading income on the sale of patents

Section EI 3B of the Income Tax Act 2004

This amendment allows taxable income from the sale of patent rights to be spread evenly over three income years, at the vendor's election.

Background

Patent rights are often sold for non-cash items, such as shares or share options. Section CB 26 of the Income Tax Act 2004 makes gains on sale of patent rights taxable income, but if patent rights are sold for non-cash items, a vendor can have a tax liability without having the cash to pay it. This can create cashflow problems for vendors of patent rights, thus creating a potential barrier to investment in research and technology.

Key features

Vendors of patent rights will be able to spread income on sale of patent rights over three years, including the year of sale. Allowing the income spread may help to alleviate the potential cashflow problem, thus helping to reduce the potential barrier to investment in research and technology. The three-year spread is at the taxpayer's election, giving taxpayers greater capacity to plan for the required cashflows.

Application date

The amendment applies from the 2007-08 income year.