Tax treatment of candidate databases
Tax issues associated with candidate databases
One of the most valuable assets your business owns is the candidate database. Amongst other things, its value will depend on the quality of the information stored, how current it is and how easy it is to access.
This article focuses on the tax ramifications associated with a candidate database that is acquired as part of a recruitment business. The issues can be quite subjective and every situation varies.
The important consideration is that a well structured digital database with details of interviews, reference checks, salary expectations, likes, dislikes, etc will potentially provide the business that acquires it with the opportunity to claim depreciation for taxation purposes.
Depreciation of intangible assets
Generally speaking, the acquisition of an intangible asset is a non-deductible capital cost. However, a deduction is available in respect of the decline in value of a depreciating asset held by a taxpayer that is used for the purpose of producing assessable income.
The decline in value is based on the cost of the asset and its effective life. The taxpayer who is entitled to depreciate a depreciating asset is, broadly, its legal owner.
A “depreciating asset” is an asset that has a limited effective life and can reasonably be expected to decline in value over the time that it is used. An intangible asset constitutes a depreciating asset if it is specifically mentioned in the Income Tax Assessment Act 1997 (Cth) (“the Tax Act”) and does not constitute trading stock. For the purposes of the Act, an “intangible asset” includes items of intellectual property and in-house software.
“Intellectual property” is defined to broadly mean:
- A registered patent
- A registered design
- A copyright
- A licence for any of these.
These terms are as defined under the applicable Commonwealth legislation, which in the case of copyright is the Copyright Act 1968 (Cth) (“the Copyright Act”).
Depreciation of databases
Databases allow recruitment companies to access details on specific candidates based on the criteria requested by a client. In most databases, a significant amount of information is compiled and categorised in relation to each candidate.
The database will search and filter through the thousands of names and details on the databases and select candidates that fit the requested profile. The information retrieved from the databases is the means by which companies derive their revenue (i.e. through commission for the provision of appropriate candidates).
If the databases constitute copyright, they will be intellectual property for the purposes of the Tax Act and will therefore constitute depreciable assets under Division 40.
For the purpose of the depreciation provisions, intellectual property includes, amongst other items, rights that an entity has under a Commonwealth law as the owner or licensee of a copyright. The databases may constitute copyright material under the Copyright Act as an original “literary work”.
A 'literary work' includes:
- A table, or compilation, expressed in words, figures or symbols
- A computer program or compilation of computer programs.
Accordingly, the first definition would be relevant in respect of copyright that subsists within the databases. That is, the databases will be afforded copyright protection to the extent that they constitute an original compilation of information.
In this respect, a compilation must convey intelligible information or have some significance as a collection, independent of the significance of its component parts. This “intelligible information” requirement is generally not difficult to satisfy. Copyright has even been held to exist in compilations consisting entirely of existing material.
In TR Flanagan Smash Repairs Pty Ltd v Jones (2000) 172 ALR 467, Hely J indicated that there could be copyright in a compilation consisting entirely of material that was not original to the compiler by reason of the selection or arrangement of the material. Indeed, telephone directories have been held to constitute original literary works for copyright purposes. The originality component in respect of a literary work in which copyright is claimed to exist is to be applied to the entire work and not its individual parts.
In satisfying the originality criteria for a “literary work”, the cases indicate that originality in a compilation is present where the compiler has exercised skill, judgment or knowledge in selecting the material for inclusion in the compilation or in presenting or arranging the material. That is, the words alone do not justify the copyright protection for a compilation. There must be some additional effort involved.
On the basis of the principles outlined above, copyright may subsist some databases. Normally databases are created to record information that is specific to the particular company’s area of recruitment expertise and therefore there is an aspect of originality in the contents of each database.
The material contained within them in many cases took considerable skill and judgment to compile in such a manner that the information retrieved from the databases can be used to determine if a candidate is an appropriate match for a particular job. Arguably more skill is involved in compiling the databases than in a telephone directory as the databases comprise more than an alphabetical listing of information.
The “author” of a literary work is the owner of any copyright subsisting in the work. However, where the literary work is made by an author in the pursuance of his or her terms of employment by another person under a contract of service, that other person is the owner of the copyright subsisting in the work.
Normally, the databases are compiled by employees of the business acquired in the performance of their employment duties and therefore if copyright subsists in the databases it should vest in the business acquired.
The above just skims the surface of issues that need to be considered when claiming depreciation on acquired candidate databases. Where a claim for depreciation is made for a candidate database it will be necessary to back the claim with independent opinions from valuers, lawyers and tax advises. Getting advice from people who understand the industry is critical.