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Inland Revenue

Tax Policy

Claw-back for derecognised non-depreciable assets

Clause 73


(Chartered Accountants Australia and New Zealand, EY)

A deduction taken for capitalised development expenditure on a derecognised non-depreciable intangible asset should not be clawed back, as income, if the intangible asset becomes “available for use”.  If a company’s auditors have determined that an asset must be written off for financial reporting purposes that should be sufficient and the deduction should not be clawed back if the asset is “available for use”, which is a very subjective test.  (Chartered Accountants Australia and New Zealand)

Proposed paragraph (b) of new section CG 7C(1) should be deleted.  That is, there should be no claw-back where a derecognised non-depreciable intangible asset is subsequently used or becomes available for use.  We acknowledge the policy objective of including such claw-back provisions as an integrity measure and the general similarity of the proposed new section CG 7C to the existing section CG 7B, but consider that proposed paragraph (b) of new section CG  7C(1) is expressed too broadly and could render the proposed extended deductibility of R&D expenditure meaningless in some cases.  (EY)


Upon further consideration, officials agree that clawing back deductions if a derecognised intangible asset subsequently becomes “available for use” may not be workable in the case of intangible assets as, so long as the taxpayer retained relevant records and/or personnel, the asset may be regarded as “available for use”.  We accept that an “available for use” test is too subjective for intangible assets.

Officials acknowledge EY’s argument that even a claw-back based on subsequent “use” may be problematic because arguably some intangible assets, such as know-how, can never be disposed of or discarded.  As the submitter points out, an absence of expected future economic benefits from an asset’s use or disposal (that is, the test for derecognition), may not preclude that know-how from informing subsequent R&D work.  The know-how may thus be regarded as continuing to be “used” in any event, arguably meaning that taxpayers could effectively never receive deductions under proposed new section DB 34(3).

The claw-back upon subsequent “use” was not intended to apply in such circumstances.  Rather, it was intended to apply when a previously derecognised intangible asset becomes substantively useful again.  For example, if an intangible asset had been derecognised because it became apparent that the market it was believed existed for the technology developed did not actually exist but then, several years later, the market conditions changed and there was a market for the technology.  In these sorts of situations, officials consider that a claw-back is appropriate and an important integrity measure.

However, in light of the concerns raised about the “use” test, officials consider that it is preferable that a clearer test is used as a proxy for “use”.  Officials consider that reinstatement for financial reporting purposes of the previously derecognised intangible asset would be a more appropriate trigger for a claw-back of a deduction.


That Chartered Accountants Australia and New Zealand’s submission be accepted.

That EY’s submission be accepted, subject to officials’ comments, and that the drafting be amended accordingly.