The innovation income deduction applies to net income: the gross IP income minus current-year expenditures for the development of the IP asset. The following elements are included in those expenditures and should be derived from the gross income:
expenditures for the acquisition of IP rights;
related R&D expenses;
expenditures for R&D outsourcing to related or unrelated parties;
prior-year expenditures incurred in financial years ending after June 30, 2016 – you may, however, choose to spread the recapture of these expenses over a maximum of 7 years.
Once the net income is determined, the following formula is used to calculate the innovation income deduction:
innovation income deduction =
((qualifying expenditures x 130%)/overall expenditures) x 85% x net qualifying income.
Note: the fraction above cannot equal a result higher than 1, as the maximum exemption level amounts to 85% of the net innovation income.