Imagine that Einstein, Fermi and Oppenheimer set out to commercialise the intellectual property (IP) involved in Einstein's famous equation, Fermi's ability to build a nuclear reactor, using Oppenheimer's labor with Australia's tax law.  This is the thought  experiment provided yesterday evening by Professor Cameron Rider on the Intellectual Property Research Institute of Australia  (IPRIA).  The seminar was jointly sponsored by the Australian Institute for Commercialisation (AIC) and Price Waterhouse Coopers (PWC).

Australia's tax laws are "very old-fashioned when they come to treatment of intellectual property".  This is the theme of Rider's analysis, which he believes helps to explain the difficulties involved in "the daunting challenge of R&D commercialisation" in Australia.  There are four major obstacles that taken togther reduce resources put into R&D commercialisation and/or drive it offshore.  The problems are compounded by the fact that use of a company structure is strongly encouraged by several forces, not least corporations law.

The four main obstacles created by the tax law are:
* Conversion of IP assets into shares involves the company being taxed on the value of the IP assets at a time when cash is very scarce - this involves taxing "very uncertain contingent gains", and the ATO will not accept company stock in payment.
* Shares or options issued to staff by the typically cash strapped venture are taxed as income, requiring the staff member to pay tax on a highly contingent asset as if it were cash.
* Start-up losses are trapped in the company and cannot be passed through to the owners - Professor Rider invited the audience to compare this situation with that of  a negatively geared property investment.  These losses may eventually be used to shelter profits, but only if ownership remains substantially unchanged (not the usual case for a rapidly developing new venture) or the business mix remains fixed (also a rare occurrance).  If all these tests are passed, dividends will be unfranked!
* Denial of tax deductions for many intellectual property commercialisation cost items, such as confidential information, trade secrets, brands and goodwill.

You will not be suprised, gentle readers, to learn that Henry has had direct first-hand experience of these obstacles.

The ideal solution involves adopting rules used by many other developed nations, in particular the USA where IP commercialistion is most effectively practiced.
* Allow rollover relief when IP is transferred into a company in exchange for shares.
* Allow start-up companies to elect to be taxed as partnerships.
* Levy no tax on employee shares unless and until capital gains are realised by sale of shares.
* Introduce comprehensive tax write-off rules for all forms of IP and IP development.

The AIC CEO, Dr Rowan Gilmore, was MC for the evening.  He reminded the audience that when the AIC was formed several years ago, a series of seminars identified the obstacles to R&D commercialisation.  Shortages of relevant skills was one major area where good progress had been made.  But in two other areas - adequate financing of R&D-based ventures and lack of adequate incentives, Australia's tax laws were identified as major blockers.  This part of the problem has not been fixed, but desreves to be taken seriously in the next round of tax reform.  IPREA's Professor Cameron Rider has shown the way.

Dr Ken Henry, please get a copy of IPRIA's Report number 01/06 - "Taxation Problems in the Commercialisation of Intellectual Property" - and read it carefully.  Treasurer Peter Costello, here is an important part of the tax reform jigsaw.

Visit AIC.    Visit IPRIA.  Visit PWC.