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Tax implications of incorporating a patent attorney practice

This article explores the anticipated changes to the Patents Act 1990 and the tax implications of shifting to a simple incorporated practice for patent attorneys. It discusses the income tax issues upon incorporation, including capital gains tax, work in progress and debtors. The article also covers stamp duty, the employment and shareholder aspects, and other tax considerations such as GST.

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Tax implications of incorporating a patent attorney practice

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  1. JULY 2008 Tax implications of incorporating a patent attorney practice Reynah Tang Partner Corrs Chambers Westgarth

  2. 1. Introduction • Context: anticipated changes to the Patents Act 1990 (Cth) • Scope: tax implications of shifting to a simple incorporated practice. • Other structures: • fixed or unit trust • discretionary trust • partnerships of companies or trusts • other?

  3. 1. Introduction cont’d… Commercial and tax benefits of incorporation vs Associated tax and non-tax costs

  4. 2. Income tax issues upon incorporation2.1 Capital Gains Tax (CGT) • Partner’s interest in partnership assets = CGT asset • Transfer to incorporated entity might produce capital gain where capital proceeds > cost base • Goodwill is likely to be the most valuable asset

  5. 2. Income tax issues upon incorporation2.1 CGT cont’d… • Capital proceeds: • Usually what is received (cash or shares in the incorporated entity) • ‘Market value substitution rule’ may apply • ATO’s approach to valuation of goodwill (IT 2540)

  6. 2. Income tax issues upon incorporation2.1 CGT cont’d… • Reducing quantum of capital gain • Partnership/company rollover • General 50% discount • Small business concessions

  7. Income tax issues upon incorporation2.2/2.3 Work in Progress (WIP) and debtors • Transfer of WIP requires careful consideration: • When assessable to partners • When deductible to the incorporated entity • Treatment of debtors • Deductibility of bad debts?

  8. 3. Income tax issues following incorporation • CGT upon entry and exit of shareholders from the incorporated entity • 50% discount • Small business concessions

  9. 4. Stamp Duty • Interstate offices/interstate clients? • Goodwill is the critical issue again • Complicated by different jurisdictions • Dealings in shares in incorporated entity

  10. 5. Principals…as employees • Part IVA • PAYG withholding • Payroll tax • Other on-costs

  11. 5. Principals…as shareholders • Dividends • Shareholder loans

  12. 6. Other tax considerations • GST: the ‘going concern’ exception

  13. ` Questions?

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