The 2013 Budget proposes tax changes to allow deductions for expenditure on withdrawn patent and plant variety right (PVR) applications.

Currently, legal and administrative fees for patent and PVR applications are treated as capital expenses that can be depreciated over the life of the resulting patent or PVR. However, if the application does not result in a granted patent or PVR, no capital asset arises and no depreciation applies.

In other words, the expenditure is neither deductable nor depreciable. This is sometimes called a 'black hole' expenditure.

Under the change, when a taxpayer decides to not proceed with a patent or PVR application, it will receive a deduction in that income year for the relevant expenditure.

There are a many legitimate reasons why a business will make patent or PVR applications that are ultimately withdrawn before grant.  They may be part of a broader IP strategy or to assist in commercial negotiations. Or, it may simply be that the business' ongoing research, or the examination of the application, makes it clear that it is not commercially sensible to pursue the application.

It is important that the tax system does not discourage businesses from investing in research and development, or from protecting their intellectual property assets. Removing a 'black hole' for this type of expenditure is a welcome step in improving the tax treatment of research and development.

It is expected that the changes will be introduced in a tax bill later this year and will apply from the 2014/15 income year.