Proposed changes to the CGT regime and the R&D Tax Incentive have prompted a public debate about whether Australia’s tax settings are pushing businesses to consider moving operations offshore. Industry bodies and companies have been vocal, and we also know first-hand that Boards and founders are having the conversation.
For most companies, this will not mean leaving Australia entirely. In many instances, it will mean considering whether specific functions, people, development and commercialisation activities, or IP ownership, should sit in another jurisdiction.
For IP-rich businesses, one of the key issues is the value of the IP being transferred, licensed or otherwise made available offshore.
That value can materially affect the Australian tax outcome. It can also influence whether the proposed restructure makes commercial sense, how the transaction should be arranged, and how the arrangement is supported for transfer pricing, financial reporting, audit and transaction diligence purposes.
Against a backdrop of increased ATO scrutiny of cross-border arrangements involving intangible assets, businesses should ensure valuation is addressed at the start of the process, not left until the end.
Key things to get right when valuating IP for tax purposes
IP valuations often involve more judgement than business valuations, particularly when:
- information is incomplete;
- the asset is pre-revenue or early stage;
- market comparables are limited;
- the asset is combined with complementary assets such as other intangibles, plant and equipment and workforce.
Uncertainty is an inherent feature of IP valuation. The issue is therefore not whether it exists, but whether the valuation deals with it in a clear, evidence-based and defensible way, applying appropriate professional judgement and scepticism.
1. Ensure compliance with valuation standards and guidelines
A valuation prepared for tax purposes needs to do more than produce a number. It should clearly explain:
- the asset being valued;
- the basis of value;
- the valuation approach adopted;
- why that approach is appropriate; and
- the evidence and assumptions relied on.
The ATO’s market valuation guidance sets out detailed expectations in this area, supported by professional frameworks including APES 225 Valuation Services and IVS 210 Intangible Assets. If the valuation does not align with those standards, it may be difficult to support later.
2. Define the asset with specificity
This is one of the most common failure points in IP valuations. Before you can value the IP, you need to be clear on what is being transferred or made available offshore. That may be:
- a patent family;
- trade secrets/confidential information;
- a software platform;
- a licence;
- a package of patents and know-how; or
- a broader bundle of confidential information, data and technical capability.
Describing all of this simply as “technology IP” is not enough. Different IP assets have different risk profiles and earnings potential. For example:
- a granted patent may support a very different valuation profile from a patent application with uncertain grant prospects;
- trade secrets may require a different analysis from registered rights;
- documented software may be easier to identify and assess than know-how that largely resides with key employees.
It is also important that the asset definition lines up with the legal documents, transfer pricing position, accounting treatment and board papers. Inconsistency across those materials can create difficulties later.
3. Assess the strength of the asset
IP should not be treated as a black box. The strength of the asset informs the valuation method selected and the assumptions used within it. This requires an integrated assessment across three dimensions:
- Legal: Are relevant patents granted or still pending? Do the claims adequately protect the technology? Are there ownership issues, encumbrances or freedom-to-operate risks? If confidential information or trade secrets form part of the asset, how well are they protected and how easy are they to replicate?
- Economic: What market opportunity does the IP support? What revenue, margin or cost advantage is attributable to it? Are there relevant comparable transactions, royalty benchmarks or market indicators?
- Functional: What does the technology do better than current alternatives? Has that advantage been demonstrated in the market or is it still largely developmental?
4. Make the valuation part of the transaction process
The valuation should not be left until the tax file is being assembled at the end of the transaction.
A better approach is to bring valuation into the process early, alongside tax, transfer pricing, legal and commercial structuring advice. That allows the business to test whether:
- the proposed structure is commercially coherent;
- the IP has been properly identified;
- the assumptions used in the valuation are consistent with the business plan; and
- the broader documentary position is aligned.
It also gives management a clearer basis for approving the transaction and improves readiness if the arrangement is later reviewed.
The takeaway
For some businesses, moving parts offshore may be commercially sound. But where Australian-developed IP is part of the arrangement, the value of any IP may be one of the first things the ATO examines.
The strongest position is to ensure the valuation is done early, and that it is clear, well-evidenced and standards-compliant.
Key Summary
- IP valuation should be one of the first steps in any offshore restructuring -not an afterthought.
- The value of Australian-developed IP can materially affect tax outcomes, transfer pricing and transaction viability.
- Clearly identifying the IP being transferred is essential to a credible valuation.
- Robust, standards-compliant valuations are increasingly important given heightened ATO scrutiny of cross-border intangible asset arrangements.
- Early collaboration between tax, legal, commercial and valuation advisers reduces risk and strengthens the overall transaction.
Talk to us today about how we can assist with our IP Valuation Services.
IP Advisory Leadership Team
IIP Advisory team brings together deep experience across valuation, law and strategy to deliver innovative, data driven solutions for managing and protecting intangible value.
Director, IP Valuation and Risk Assurance
Specialist in IP valuation for mergers and acquisitions, tax and licensing, with expertise in deep tech, life sciences and advanced manufacturing.
Managing Director, IP Advisory and Risk Assurance
Global IP strategist (IAM Strategy 300, 2021 to 2026) and co founder of Integrated IP.
IP Advisory and Risk Assurance
More than 15 years of cross disciplinary experience in law, finance and strategic growth across Australia and Southeast Asia.
More about our people here: https://iip.com.au/our-people/
IP Advisory Leadership Team
Integrated IP is one of Australia’s leading specialist IP firms, advising clients on all aspects of intellectual property, intangible assets and data driven strategy. With offices across Australia and a network in New Zealand, we help organisations identify, value, protect and realise the full potential of their intangible assets.
For media enquiries or more information, please contact our IP Advisory Team at contact@iip.com.au.
