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Is a sale of software, IPR or patent considered a capital gain?

Posted 3 January 2013 under Tax Questions



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Dear Tim,
Me and my wife have been developping few software packages for years.
Now we have a client that wants to purchase them.
1. Is the sale of the software and/or IPR and/or a patent considered a capital gain?
2. Is it is a capital gane, can we sale those in our private capacity?
3. How if this taxed in case that we receive 200k per person each year for a period of 5 years?

Thank you

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TaxTimTaxTim says:
15 December 2012 at 17:28

If you have created a capital asset such as Intellectual Property then when you sell this it would be considered a capital gain. If you have been deducting amounts as capital allowances each year you would need to add these amounts back to your selling price to get the true capital gain.

You would be taxed in your own hands if you have not set up a separate entity on the gain at a maximum of 13.3%.

Have you ever sold the software packages before or will you be selling all the IP and the packages to this one buyer?


Eugene says:
15 December 2012 at 17:44

Hi Tim,
Yes the software package has been sold to the client for it's sole use (via our own CC-SA company), but without the right to re-sale (without IPR).
Now they want to purchase the rights on the software including IPR, source code and the rights to re-sale and modify to any third party.
The proceeds from the initial sale have been paid to us as a salary from our SA company.
We have never moved the IPRs to the SA company, so the IPRs are in our hands I assume.
However we have never been deducting amounts as capital allowances from the SA company.
My accountant said that sale of software is not a capital gain. This surprises me as lots of SA companies sold their software and declared is as capital gain - example is PayPal software.


TaxTimTaxTim says:
18 December 2012 at 9:34

Was this the first time any of the software was ever sold or have you sold it before? Any sale of the IP would be regarded as a Capital transaction, but depending on whether you have ever sold software before this could be seen as a trade.


Eugene says:
18 December 2012 at 13:24

Hi Tim,
The software in the form of executable (for own use by the client) have been sold before.
However we have not sold any IPRs related to this software.
Now we want to sale the IPRs, which means the source code, the right to modify and all re-distribution rights.


TaxTimTaxTim says:
23 December 2012 at 16:56

The sale of the software itself will not be a capital event and will be subject to normal income tax at the company level of 28%. Any sale of the actual Intellectual Property will be a capital event and subject to CGT. You could sell the entire company and pay CGT on the shares once sold, that would be another option.


Eugene says:
24 December 2012 at 0:04

Thank you Tim. It is very clear answer.


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