Income Tax Act 2007 section 461

Spreading of patent royalty receipts

Section 461 allows the recipient of a lump sum patent royalty to claim a tax reduction by notionally spreading the payment over the period the patent was used, up to a maximum of six years.

• A claim may be made where a royalty or similar payment is received for the use of a patent that has been used for two years or more, and income tax is required to be deducted at source from the payment
• The lump sum is notionally split into equal yearly instalments over the number of complete years of patent use, subject to a maximum of six instalments, with the last instalment treated as falling on the actual payment date
• The tax reduction equals the difference between the actual tax payable on the full lump sum in the year of receipt and the total tax that would have been payable had the payment been received in those notional equal instalments
• The tax reduction is given effect at Step 6 of the income tax calculation in section 23