Commonwealth of Australia Explanatory Memoranda Commonwealth of Australia Explanatory Memoranda[Index] [Search] [Download] [Bill] [Help]
2008-2009-2010
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
SENATE
Tax Laws Amendment (Research and Development) Bill 2010
Income Tax Rates Amendment (Research and Development) Bill 2010
REPLACEMENT EXPLANATORY MEMORANDUM
(Circulated by the authority of the
Treasurer, the Hon Wayne Swan MP)
THIS MEMORANDUM RELACES THE EXPLANATORY MEMORANDUM PRESENTED TO THE HOUSE
OF REPRESENTATIVES ON 13 MAY 2010
Table of contents
Glossary 5
General outline and financial impact 7
Chapter 1 Introduction to the new research and development tax incentive
11
Chapter 2 Meaning of research and development activities 19
Chapter 3 Tax offsets for research and development 49
Chapter 4 Application rules, transitional rules and consequential
amendments for the new tax offsets 107
Chapter 5 Administrative arrangements for the research and development
tax incentive 117
Index 157
Glossary
The following abbreviations and acronyms are used throughout this
explanatory memorandum.
|Abbreviation |Definition |
|AAT |Administrative Appeals |
| |Tribunal |
|AAT Act |Administrative Appeals |
| |Tribunal Act 1975 |
|ATO |Australian Taxation Office |
|Bill |Tax Laws Amendment (Research |
| |and Development) Bill 2010 |
|CGT |capital gains tax |
|Commissioner |Commissioner of Taxation |
|GST |goods and services tax |
|IR&D Act |Industry Research and |
| |Development Act 1986 |
|ITAA 1936 |Income Tax Assessment Act |
| |1936 |
|ITAA 1997 |Income Tax Assessment Act |
| |1997 |
|IT(TP) Act 1997 |Income Tax (Transitional |
| |Provisions) Act 1997 |
|MEC group |multiple entry consolidated |
| |group |
|OECD Model |Organisation for Economic |
| |Co-operation and Development |
| |Model Tax Convention on |
| |Income and on Capital |
|PAYG |pay as you go |
|R&D |research and development |
|TAA 1953 |Taxation Administration Act |
| |1953 |
|the Board |Innovation Australia |
General outline and financial impact
The new research and development tax incentive
The Government's new tax incentive for research and development
(R&D) is implemented through the Tax Laws Amendment (Research and
Development) Bill 2010 (Bill), together with the supporting Bill ,
the Income Tax Rates Amendment (Research and Development) Bill
2010.
The new R&D tax incentive provides more generous benefits for
eligible activities than the existing concession and is better
targeted towards R&D that benefits Australia. It is also
substantially simpler and accompanied by improved administrative
arrangements. The new R&D tax incentive replaces the existing R&D
Tax Concession for all income years starting on or after
1 July 2010.
The two core components of the new R&D incentive are:
. a 45 per cent refundable R&D tax offset for eligible
entities with a turnover of less than $20 million; and
. a non-refundable 40 per cent R&D tax offset for all other
eligible entities.
Accompanying this change of rates and delivery mechanism is a
clearer and better targeted definition of eligible 'R&D activities'
that will ensure that the incentive is available in circumstances
consistent with the underlying rationale for government
intervention and that it delivers value for money for taxpayers.
The Bills amend the Income Tax Assessment Act 1936, the Income Tax
Assessment Act 1997, the Income Tax (Transitional Provisions) Act
1997, the Income Tax Rates Act 1986, the Taxation Administration
Act 1953 and the Industry, Research and Development Act 1986.
Chapter 1 of this explanatory memorandum contains an introduction
to the new R&D tax incentive, while Chapters 2 to 5 explain the
amendments in detail.
Date of effect: The new R&D tax incentive applies for income years
starting on or after 1 July 2010.
Proposal announced: The Government announced this measure in the
2009-10 Budget.
Financial impact: On an underlying cash basis, the amendments in
these Bills are expected to be budget neutral over the new R&D tax
incentive's first four years of operation. After allowing for the
savings from the abolition of the existing R&D Tax Concession from
1 July 2010, this expected result reflects two factors that broadly
offset each other:
. an expected increase in number and tax cost of claims
resulting from the increased concessionality of the new
R&D tax incentive; and
. an expected contraction in the value of certain claims
based on eligibility criteria to better target the
incentive.
Tables 1.1 and 1.2 show the net impact of the interaction of these
factors.
Impact on fiscal balance
The fiscal balance recognises payments under a refundable tax
offset in the year in which the underlying activity occurs that
gives rise to the offset. The underlying cash balance recognises
these same payments a year later, when they are actually made by
the Australia Taxation Office. Because of this accounting
treatment, there appears to be a much larger impact on the fiscal
balance (shown in Table 1.1) than there is on the underlying cash
balance (shown in Table 1.2).
1. - Fiscal Balance
|2010-11 |2011-12 |2012-13 |2013-14 |2014-15 |
|-$850m |$190m |-$180m |-$110m |-$130m |
Note: That the fiscal balance presented above is larger than the
estimates presented in the 2009-10 Budget. This is mostly due to
an increase in uptake of the concession.
2. - Underlying cash
|2010-11 |2011-12 |2012-13 |2013-14 |2014-15 |
|- |$240m |-$120m |-$50m |-$70m |
Compliance cost impact: This measure provides a tax benefit above
the normal corporate income tax benchmark and, as the benefit is
voluntary, all associated compliance costs are also voluntarily
incurred.
There will be compliance costs associated with the change from the
former arrangements during the early stages of the new incentive,
but these will reduce as taxpayers become accustomed to the new
scheme and adjust their practices. The Government has provided the
administrative agencies with additional funding to ensure that they
are adequately resourced to support taxpayers through this
transition. Further, the Bills amend the law to grant Innovation
Australia additional advice-giving powers to give taxpayers greater
certainty.
The draft R&D provisions are shorter, clearer and simpler than the
existing R&D provisions, mainly because the four different benefits
available under the existing law are replaced with an entitlement
to a single tax offset. The Bills are less than one third of the
length of the corresponding provisions in the existing tax law.
Overall, once the new R&D tax incentive matures, the compliance
costs should represent an appropriate compromise between a broad-
based, self-assessment scheme and the need to protect the integrity
of the income tax system, and be lower than the comparative costs
of obtaining the current benefit of the R&D Tax Concession.
Chapter 1
Introduction to the new research and development tax incentive
Outline of chapter
1. The Tax Laws Amendment (Research and Development) Bill 2010 (Bill),
together with the supporting Bill, the Income Tax Rates Amendment
(Research and Development) Bill 2010 amend the law to provide a new
tax incentive for research and development (R&D). This chapter
provides an overview of the new R&D tax incentive.
1. The new R&D tax incentive provides eligible entities with a tax
offset for expenditure on eligible R&D activities and for the
decline in value of depreciating assets used for eligible R&D
activities. The new R&D tax incentive replaces the existing R&D
Tax Concession for income years commencing on or after 1 July 2010.
2. The operative rules for the new R&D tax incentive are primarily
contained in a new Division 355 of the Income Tax Assessment Act
1997 (ITAA 1997). The extensive and complex provisions in the
Income Tax Assessment Act 1936 (ITAA 1936) that govern the existing
R&D Tax Concession will be repealed.
3. The administrative rules for the new R&D tax incentive are
contained in a new Part III of the Industry Research and
Development Act 1986 (IR&D Act). It sets out the role of
Innovation Australia in relation to the administration of the new
R&D tax incentive.
Context of amendments
4. In the 2009-10 Budget, the Government announced that it would
replace the R&D Tax Concession with a new, streamlined tax
incentive. The Government issued a consultation paper titled The
new research and development tax incentive in September 2009. A
first exposure draft of the legislation for the new scheme was
released in December 2009. Following consultations with
stakeholders, a second exposure draft was released in March 2010.
The second exposure draft included changes to make the legislation
clearer and to remove unintended consequences. This Bill reflects
additional refinements following comments from and consultations
with stakeholders on the second exposure draft.
5. The new R&D tax incentive is the biggest reform to business
innovation support for more than a decade. It cuts red tape and
provides a more targeted incentive for companies to invest in R&D.
The new R&D tax incentive is also an opportunity to ensure that
public support for business R&D is consistent with the underlying
rationale for government intervention and delivers value for money
for taxpayers.
The case for public support for R&D
6. Innovation is recognised internationally as an important driver of
productivity and economic growth. It encompasses a wide range of
activities in the economy including workforce skills, venture
capital, knowledge transfer, technology uptake, management
practices and R&D.
7. In a global economy, companies invest in R&D to improve their
competitiveness and ongoing profitability. Broader economic
factors such as macroeconomic stability, competitive markets,
efficient credit markets and access to skilled labour are important
influences on a firm's decision to invest in R&D.
8. Knowledge produced by a firm's R&D often has benefits for other
firms or the economy as a whole. That is, the R&D can have a net
positive economic impact beyond the benefits accruing to the firm
doing the R&D. However, from an individual firm's point of view,
uncertain returns for them from R&D activities may mean that a firm
chooses not to undertake them. Where this happens, less R&D may
take place than would be desirable from a whole-of-economy
perspective.
9. A carefully designed incentive lowers the cost of doing R&D and
helps boost productivity and economic growth. To this end, the new
R&D tax incentive focuses assistance on activities that are likely
to deliver economy-wide benefits that would not be enjoyed in the
absence of public support. It also significantly improves the
incentive for smaller firms to undertake R&D.
Summary of new law
10. The new R&D tax incentive provides eligible entities with a tax
offset for expenditure on eligible R&D activities and for the
decline in value of depreciating assets used for eligible R&D
activities. The rate of the tax offset and whether it is
refundable depend primarily on the aggregated turnover of the R&D
entity.
R&D activities
11. Eligible R&D activities are categorised as either 'core' or
'supporting' R&D activities. Generally, only R&D activities
undertaken in Australia qualify for the new R&D tax incentive.
However, R&D activities conducted overseas also qualify in limited
circumstances where the activities cannot be undertaken in
Australia.
Core R&D
12. Core R&D activities are experimental activities:
. whose outcome cannot be known or determined in advance on
the basis of current knowledge, information or experience,
but can only be determined by applying a systematic
progression of work that:
- is based on principles of established science; and
- proceeds from hypothesis to experiment, observation and
evaluation, and leads to logical conclusions; and
. that are conducted for the purpose of acquiring new
knowledge (including knowledge or information concerning
the creation of new or improved materials, products,
devices, processes or services).
13. Under the R&D Tax Concession, core R&D activities had to involve
'innovation' (defined as involving an appreciable level of novelty)
or high levels of 'technical risk' (defined in terms of applying
the scientific method to close a knowledge gap). Four overlapping
tests were used to give meaning to these concepts.
14. The definition of 'core R&D activities' in this Bill uses clearer
language instead of relying on terms such as 'considerable (or
appreciable) novelty' and 'high levels of technical risk' and the
overlapping tests that were associated with these terms. In
essence, this new definition recognises that the taxpayer needs new
information (to solve a problem, develop a new product or improve a
process) and needs to do an experiment to discover that knowledge.
15. Further to this general principle, some activities are specifically
excluded from qualifying as core R&D activities. In this Bill the
list of specific exclusions is significantly shorter than the list
in the former law.
16. Chapter 2 provides further information about the definition of core
R&D activities and the exclusions list.
Supporting R&D
17. Supporting R&D activities are activities directly related to core
R&D activities or, in the case of production activities (or any
activities excluded from being core R&D activities), undertaken for
the dominant purpose of supporting core R&D activities.
18. Under the R&D Tax Concession, supporting R&D activities were
undertaken for a purpose directly related to conducting core R&D
activities.
19. The new definition of 'supporting R&D activities' imposes a
stricter test on activities that an entity is more likely to be
undertaking for normal operational reasons. However, such
activities remain eligible where the dominant purpose for
conducting them is to support core R&D activities.
20. Chapter 2 provides further information about the definition of
supporting R&D activities.
R&D conducted overseas
21. Generally, only R&D activities conducted in Australia qualify for
the incentive. Innovation Australia can approve an R&D activity to
be conducted overseas, but only where:
. there are physical limitations on an R&D activity being
conducted in Australia;
. the activity to be conducted overseas has a significant
scientific link to core R&D activities conducted in
Australia; and
. the expenditure on the activity to be conducted overseas
is less than that incurred on R&D activities conducted in
Australia.
22. Chapter 5 provides further information about the approvals that
Innovation Australia will be able to issue in relation to overseas
activities.
R&D entities
23. The following entities (known in this Bill as R&D entities) can
claim the new R&D tax incentive (provided they are not exempt
entities):
. corporations that are Australian residents for tax
purposes;
. foreign corporations that carry on R&D activities through
a permanent establishment in Australia; and
. public trading trusts with a corporate trustee.
24. R&D entities will be able to claim the new R&D tax incentive for
their expenditure on eligible R&D activities regardless of where
the resulting intellectual property is held. This will strengthen
the case for companies to conduct R&D activities in Australia.
25. Chapter 3 contains further information about the types of entities
eligible for the new R&D tax incentive.
R&D expenditure
26. The new R&D tax incentive provides R&D entities with a tax offset
for expenditure on eligible R&D activities and for the decline in
value of depreciating assets used for eligible R&D activities. The
tax offset is not subject to an expenditure cap.
27. The minimum expenditure threshold of $20,000 continues to apply
under the new R&D tax incentive, except in relation to expenditure
on R&D activities performed for an R&D entity by an entity
registered as a Research Service Provider and contributions to a
Cooperative Research Centre.
28. As an integrity measure, R&D entities are only able to obtain the
tax incentive for expenditure incurred for an associate entity when
they actually pay the amounts incurred.
29. The new R&D tax incentive also retains a feedstock rule consistent
with the existing R&D Tax Concession. However, under this Bill,
the feedstock adjustment takes the form of an increase in
assessable income, rather than a reduced deduction (or offset).
30. Where an R&D entity benefits from a government recoupment (such as
a grant or reimbursement) in relation to expenditures that are also
eligible for the R&D tax incentive, clawback applies to avoid a
double benefit. The clawback takes the form of extra income tax on
the recoupment, rather than a reduction in the deduction as under
the former law.
31. Chapter 3 explains in more detail when an R&D entity can claim a
tax offset for their expenditure on R&D activities.
R&D tax offsets
32. The rate of tax offset, and whether it is refundable, depends
primarily on the aggregated turnover of the R&D entity.
. A 45 per cent refundable tax offset is available to R&D
entities with an aggregated turnover of less than $20
million (unless they are a tax exempt entity or majority
owned or controlled by tax exempt entities).
. A 40 per cent non-refundable tax offset is available for
all other R&D entities. R&D entities accessing the non-
refundable tax offset can carry forward any unused offset
amounts, under the tax offset carry forward rules.
33. Providing tax offsets rather than enhanced deductions for R&D
provides entities with greater certainty about the after-tax
benefit of the incentive.
34. Chapter 3 contains further information on the operative rules for
the two tax offsets.
Worked examples
35. The following examples demonstrate the assistance available to
small innovative companies under the new R&D tax incentive,
compared to the R&D Tax Concession. More detailed examples are
contained in Chapters 2 and 3.
Example 1.1
Green Light manufactures solar powered outdoor lighting.
The company has an annual turnover of $4 million. During
2010-11 the company incurs $1 million of expenditure on
eligible R&D activities.
Based on its turnover (which is less than $5 million) and
R&D expenditure (less than $2 million), Green Light could,
under the existing law, have claimed a refundable tax offset
of $375,000 under the R&D tax offset.
. ($1,000,000 × 125% × 30% = $375,000)
Under the new R&D tax incentive, the company will be able to
receive a refundable tax offset of $450,000 when it lodges
its tax return for the income year.
. ($1,000,000 × 45% = $450,000)
Example 1.2
Big Ideas Inc has an annual turnover of $4 million. During
2010-11 the company incurs $2.5 million of expenditure on
eligible R&D activities.
Based on its turnover and R&D expenditure, Big Ideas would,
under the existing law, have missed out on the R&D tax
offset. While the company meets the turnover test, it has
exceeded the expenditure cap. Big Ideas would nevertheless
have been able to claim the 125 per cent R&D Tax Concession.
Under the new R&D tax incentive, Big Ideas will be able to
claim a refundable tax offset of $1,125,000 when it lodges
its tax return for the income year.
. ($2,500,000 × 45% = $1,125,000)
Example 1.3
NuStart Enterprises produces organic fertilisers. The
company has an annual turnover of $10 million but is
currently in a tax loss situation. The company incurs $1
million of expenditure on eligible R&D activities in 2010-
11.
Under the existing law, NuStart would only have been able to
claim the 125 per cent R&D Tax Concession on its
expenditure, allowing it to add $1,250,000 to its tax loss.
. ($1,000,000 × 125% = $1,250,000)
The potential benefit of this tax deduction is $375, 000,
which will only be enjoyed when the company has sufficient
profits to start paying income tax.
. ($1,250,000 × 30% = $375,000)
Under the new R&D tax incentive, the company will be able to
receive a refund of $450,000 when it lodges its tax return
for the income year.
. ($1,000,000 × 45% = $450,000)
Transitional provisions
36. The new R&D tax incentive applies to income years commencing on or
after 1 July 2010. Special transitional arrangements apply where
R&D activities straddle income years where the existing law and the
new law apply.
37. Chapter 4 provides further detail on the application, savings and
transitional provisions.
Administration
38. The new R&D tax incentive will operate largely on a self-assessment
basis.
39. Innovation Australia (the Board) has an enhanced role in
registering and assessing eligible R&D activities to increase
certainty for taxpayers. In particular, it will significantly
increase its advisory services, including through public guidance
and findings and private advance findings. These advisory services
will ensure that taxpayers are better informed about their
entitlements and obligations under the new incentive.
40. The Australian Taxation Office will continue to determine whether
an amount of expenditure is validly incurred for eligible R&D
activities, as registered with the Board.
41. Chapter 5 provides further information on the role of the
Innovation Australia in relation to the new R&D tax incentive.
Chapter 2
Meaning of research and development activities
Outline of chapter
42. This chapter sets out what will qualify as research and development
(R&D) activities for the purpose of attracting a tax offset under
the new R&D tax incentive.
43. The new R&D tax incentive retains some elements of the framework
for R&D activities that currently applies to the R&D Tax Concession
located in sections 73B to 73Z of the Income Tax Assessment
Act 1936 (ITAA 1936). (For example, the distinction between core
and supporting R&D activities continues.) However, these elements
have been refined so that the new scheme better aligns with the
rationale for providing a general subsidy for business R&D as
described in Chapter 1.
Context of amendments
44. The Government announced in the 2009-10 Budget that it would
replace the existing R&D Tax Concession with a new, more
streamlined R&D tax incentive from 1 July 2010.
45. Accompanying a tighter definition of 'eligible R&D activities', the
two core components of the new incentive are:
. a 45 per cent refundable R&D tax offset for R&D entities
with an aggregated turnover of less than $20 million;
and
. a non-refundable 40 per cent tax offset for larger R&D
entities.
46. The Government issued a consultation paper titled The new research
and development tax incentive in September 2009 and released
exposure draft legislation and explanatory material in December
2009.
47. A second exposure of revised draft legislation and explanatory
material was released for public comment in March 2010.
Comparison of key features of new law and current law
|New law |Current law |
|A distinction is made |A distinction is made |
|between core R&D |between core R&D |
|activities and supporting|activities (without that |
|R&D activities. |term being used) and |
| |supporting R&D activities|
| |(for a directly related |
| |purpose). |
|The definition of 'core |Core R&D activities are |
|R&D activities' focuses |defined in terms of |
|on the requirement for an|multiple overlapping and |
|experiment that is |interrelated tests |
|conducted using the |relating to |
|scientific method in |experimentation, |
|order to address a |innovation, technical |
|significant knowledge |risk, purpose and |
|gap. |scientific approach. |
|Supporting R&D must be |Supporting R&D must be |
|directly related to core |carried on for a purpose |
|R&D activities. |directly related to the |
| |carrying on of core R&D |
| |activities. |
|Production activities can|Production activities can|
|be supporting R&D |be supporting R&D |
|activities only if |activities. |
|undertaken for the | |
|dominant purpose of | |
|supporting core R&D | |
|activities. | |
|The list of activities |Listed activities are |
|specifically excluded |specifically excluded |
|from being core R&D |from being core R&D |
|activities has been |activities. |
|rationalised. | |
|Activities on the |Activities on the |
|exclusions list can |exclusions list can |
|qualify as supporting R&D|qualify as supporting R&D|
|activities if undertaken |activities. |
|for the dominant purpose | |
|of supporting core R&D | |
|activities. | |
|Developing, modifying or |In-house software is |
|customising software for |excluded from being a |
|the internal |core R&D activity by a |
|administration of |requirement that software|
|business functions is |development activities be|
|excluded from being core |for the purpose of supply|
|R&D activity. |to at least two other |
| |entities. |
Detailed explanation of new law
Object of new law
48. The rationale of the new R&D tax incentive lies in the potential
for R&D activities to generate new information that benefits the
wider Australian economy, while the risk of scientific and
technological uncertainty may discourage them from taking place. A
tax incentive that induces such R&D activities to proceed may
provide a public benefit (in the form of the spread of additional
knowledge) that ultimately exceeds the cost of the incentive.
[Schedule 1, item 1, subsection 355-5(1)]
49. Accordingly, the definition of R&D that is eligible for the tax
incentive entails the activities that are most likely to produce
economy-wide benefits that, in the absence of the incentive, might
not go ahead because of uncertain returns. [Schedule 1, item 1,
subsection 355-5(2)]
Meaning of R&D activities
50. The legislation makes a key distinction between 'core' and
'supporting' R&D activities. For R&D to be recognised as occurring
there must be an activity - or more typically a set of related
activities - that satisfies the criteria for core R&D. Once core
R&D has been identified, certain supporting activities may also
become R&D activities. [Schedule 1, item 1, section 355-20]
51. The following sections discuss the criteria for activities to
qualify as R&D as either core or supporting activities. Examples
of how the tests apply are consolidated in the final section of
this chapter.
Core R&D activities
52. The existence of core R&D depends on establishing that an
experiment (or set of related experiments) is taking place. An
experiment entails investigating causal relationships among
relevant variables to test a hypothesis or determine the efficacy
of something previously untried. Experiments may take place in a
range of settings, from a separate laboratory to an otherwise
normal production run. [Schedule 1, item 1, subsection 355-25(1)]
53. To qualify as core R&D activities, experiments will not merely
confirm what is already known, or have an outcome that can be known
or determined in advance. Rather, they will be activities whose
outcome can only be determined by employing a systematic
progression of work based on scientific principles and using an
approach that proceeds from hypothesis to experiment, observation
and evaluation and leads to logical conclusions. This approach is
generally known as the scientific method. [Schedule 1, item 1,
paragraph 355-25(1)(a)]
54. The requirement for the scientific method establishes a threshold
for the knowledge gap and the degree of uncertainty that an
eligible experiment must seek to address. The threshold will not
be met if the knowledge of whether something is scientifically or
technologically possible, or how to achieve it in practice, is
deducible by a competent professional in the field on the basis of
current knowledge, information or experience.
55. Further, the nature of the eligible experiment is such that there
will be a clear risk that the outcome of the experiment will not be
the desired one. The potential for this risk to deter firms from
undertaking knowledge-generating R&D underpins the rationale for
the R&D tax incentive.
56. Less rigorous knowledge discovery and problem solving techniques,
such as 'trial and error' alone will not be sufficient to qualify
as eligible experimentation. However, trial and error may form
part of an eligible experiment where the conditions for core R&D
are met. Trial and error can also qualify as a supporting activity
where it forms part of a decision to proceed to activities that
qualify as core R&D.
57. Experimental activities that qualify as core R&D must be for the
purpose of acquiring new knowledge or information. This
requirement reflects the R&D tax incentive's object of generating
the knowledge benefits that arise from conducting R&D - rather than
merely subsidising the application of the knowledge produced by
R&D. This is particularly relevant where trials are repeated or
prolonged, especially if carried out in a production context. The
distinction between conducting R&D and applying the results of it
(other than in further R&D) is a question of fact. 'New knowledge'
in this context means knowledge not already available in the public
arena at the time the activities are conducted, in the relevant
technology, on a reasonably accessible world wide basis.
[Schedule 1, item 1, paragraph 355-25(1)(b)]
58. The requirement can be met by the purpose of acquiring or
generating knowledge in the practical form of knowledge or
information about the creation of new or improved materials,
products, devices, processes or services. Where experimental
activities occur in the context of normal production activities,
the experiments may entail the direct production or use of an
actual material, product, device, process or service.
59. The need to employ the scientific method also reflects the degree
of novelty in the ideas being tested. That is, the knowledge being
sought must go beyond validating a simple progression from what is
already known and beyond merely implementing existing knowledge in
a different context or location. Rather, the gap between existing
knowledge and the hypothesis being investigated will be significant
enough to require application of the scientific method.
Scope of core R&D
60. Core R&D activities are part of the eligible experiment, rather
than being merely related to it. These are the activities whose
outcome is being determined in the context of applying the
scientific method. However, not all of the steps in the scientific
method will constitute experimental activities. Nor will an
activity fall within the scope of the experiment merely because the
experiment cannot take place without it.
61. The scope of eligible core R&D activities might be narrower than
what the firm views as its R&D 'project'. However, 'non-core'
activities can still qualify as an eligible R&D activities if they
meet the criteria for supporting R&D.
Supporting R&D activities
62. Activities that are directly related to core R&D activities, in
that they have a direct, close and relatively immediate
relationship with the experimental activities (but without being
part of the experiments themselves), can be supporting R&D
activities. Supporting R&D activities can occur before, at the
same time as, or after the experimental activities and at either a
proximate or remote location. [Schedule 1, item 1, subsection 355-
30(1)]
63. As a general rule, activities directly related to core R&D
activities can be eligible for the R&D tax incentive along with
their associated core R&D activities. This reflects the fact that
supporting activities will usually be required in order for the
targeted core R&D activities to take place. However, where
supporting activities would have been undertaken anyway for normal
operational reasons, they do not impose an additional cost on the
company that arises from its R&D activities and so the R&D tax
incentive is not intended for them. In particular, it is not
intended that the R&D tax incentive cross-subsidise normal
production activities. Accordingly, production activities will
only be eligible where the dominant (or sole) purpose for
conducting them is to support core R&D. Production activities are
those that produce goods and services, along with their directly
related activities. Production activities can range from a once-
off activity to mass production. [Schedule 1, item 1,
paragraphs 355-30(2)(b) and (c)]
64. This dominant purpose test also applies to activities that are on
the exclusions list (see below). [Schedule 1, item 1,
paragraph 355-30(2)(a)]
65. Dominant purpose means the prevailing or most influential purpose.
Implicit in the dominant purpose test is the acknowledgment that
activities can serve, or be conducted for, more than one purpose.
Accordingly, the fact that an activity serves a commercial
objective as well as being directly related to R&D does not
preclude it from qualifying as supporting R&D.
66. Conversely, the fact that certain activities are necessary in order
for core R&D to occur is not sufficient to show that those
activities are undertaken for the dominant purpose of supporting
core R&D. Nor will the test be satisfied merely because the
activities occur in close proximity (either time or location) to
the experimental activities. These qualifications can be
particularly significant where core R&D is conducted in the context
of normal production.
67. In discerning the purpose for undertaking an activity, regard must
be had to the overall circumstances within which the activity is
conducted. Being a purpose test, it is possible that activities
that are similar in appearance might qualify as supporting
activities in one context, but not in another. A critical
consideration will be the extent to which the activities in
question also achieve outcomes (particularly production or other
commercial goals) over and above assisting the conduct of the core
activities, and the importance of those outcomes.
68. Activities required to support an experiment that are in addition
to routine activities - such as additional monitoring or output
inspections - would normally be considered to be undertaken for the
dominant purpose of supporting the experiment. Factors such as the
extent to which normal production practices are disrupted or the
risk that production outcomes will be significantly compromised
will be relevant in determining whether the experimental activities
are taking advantage of an essentially normal production run, or
whether the production run is being conducted for the dominant
purpose of facilitating the experiment. The examples appended to
this chapter illustrate the considerations that can be relevant in
various contexts.
Exclusions list and core and supporting R&D
69. Certain activities continue to be excluded from being considered as
core R&D. [Schedule 1, item 1, subsection 355-25(2)]
70. However, the range of activities comprising the exclusions list has
been significantly rationalised on the basis that the clearer, more
robust definition of core R&D operates to appropriately target the
scope of the incentive.
71. Activities remaining include those undertaken for the purpose of
discovering and/or quantifying mineral and petroleum deposits; are
required to be undertaken to comply with statutory requirements or
relate to reproducing an existing product or process; as well as
research in social sciences, arts or humanities.
72. Other activities continue to be excluded on the basis that they
would not satisfy the core R&D definition due to them normally not
occurring as part of an experiment. These include market research,
market testing and market development activities; the undertaking
of management studies or efficiency surveys; and activities related
to the commercial, legal and administrative aspects of patenting
and licensing.
73. An activity undertaken by an R&D entity that is excluded from being
core R&D can still qualify as a supporting R&D activity if it is
undertaken for the dominant purpose of supporting core R&D.
[Schedule 1, item 1, paragraph 355-30(2)(a)]
Software
74. Software is subject to the same eligibility tests as other forms of
R&D, with the exception of certain 'in-house' software.
75. The existing exclusion for 'in-house' software comprising a
'multiple sales' requirement, has been removed, reflecting the fact
that ongoing developments in e-commerce and software distribution
methods have meant it no longer adequately reflects the original
policy intent.
76. A new software core R&D exclusion is incorporated into the
exclusions list. The exclusion clarifies that activities related
to the development, modification or customisation of software are
not eligible core R&D where the software is developed for the
dominant (or sole) purpose of internal business administration by
the entity (or connected entities) for which it was developed,
modified or customised. [Schedule 1, item 1, paragraph 355-
25(2)(h)]
77. The exclusion encompasses software that is for use in the day-to-
day administration of the business such as business application,
management information system and enterprise resource planning
software. The exclusion reflects the fact that such software
activities are site-specific, can usually be expected to be
undertaken by the relevant business without an incentive, and that,
consequently, the additional public benefit from subsidising such
activities is limited.
78. The exclusion does not extend to software developed in-house that
is of an applied nature, forming an integral part of an electrical
or mechanical device, such as home appliances or industrial
equipment. Similarly, the exclusion does not apply to software
activities undertaken to support a larger R&D project, and which
may qualify as supporting R&D activity.
Examples illustrating the R&D activities tests
79. The following examples use a range of fictitious technology and
business scenarios to illustrate the application of the tests for
core and supporting R&D. Not all elements of the tests are
comprehensively discussed in each example. Neither are the
activities that fall into core and supporting R&D exhaustively
listed.
EcoStartup
80. The following series of EcoStartup examples illustrates a
straightforward application of the core R&D and supporting R&D
tests in a non-production context.
EcoStartup I
81. Example 2.1 illustrates a pure R&D activity that precedes
commercial production and has no by-products.
1. : EcoStartup I
EcoStartup was formed to investigate the potential for a
chemical known as C23 to be added to petrol to reduce
greenhouse gas emissions. The company devises an R&D plan
and systematically conducts documented experiments to
investigate this idea, by measuring exhaust emissions
produced from a range of engines by different amounts of the
additive for fuels across a range of octane values. The
test batches are consumed in these experiments.
EcoStartup's project proves successful and the company then
decides to manufacture and sell the fuel additive.
Core R&D activities
The idea has a scientific basis, as C23 has several
analogous properties to a compound K32 - which is known to
reduce greenhouse gas emissions in cars but is only
available in limited quantities - so the hypothesis has a
scientific basis. C23 is widely available but normally used
as a paint additive; that it can serve as a fuel additive to
target greenhouse gas emissions would be new knowledge. The
related chemistry is complex and underdeveloped, such that
whether C23 can be used in this way cannot be determined in
advance from current knowledge.
EcoStartup is addressing a knowledge gap that can only be
resolved by applying the scientific method. The
experimental activities are conducted for the purposes of
acquiring new knowledge. The activities do not fall within
the scope of any items on the exclusions list. EcoStartup's
experimental activities are core R&D.
Supporting R&D activities
EcoStartup can also claim as supporting R&D activities those
that are directly related to core R&D. EcoStartup's
directly related activities include researching the
properties and applications of C23 and K32; mixing and
measuring the ingredients for the test batches; constructing
apparatus to capture and record exhaust emissions; and
developing a computer model to assist in interpreting the
results. These activities have a direct, close and
relatively immediate relationship with the actual
experimental activities that constitute the core R&D.
EcoStartup does not need to subject its supporting
activities to the dominant purpose test, as the supporting
activities are not activities on the core exclusions list
and are not of a kind that produces goods or services. Nor
do they contribute to activities that produce goods or
services. It is not relevant that the activities contribute
to experiments that, by their success, could lead to
subsequent production.
EcoStartup II
82. Example 2.2 illustrates the supporting activities test in relation
to incidental by-products.
1. : EcoStartup II
As a variation on EcoStartup I, assume that the number of
tests needed for each particular fuel batch is uncertain
prior to the experiments. Accordingly, each batch is made
sufficient to accommodate the maximum number of tests that
might be required. EcoStartup sells the leftovers to a
nearby oil refinery to blend away in its general production.
Supporting R&D activities
EcoStartup's supporting activity of blending the test
batches would be a production activity. Accordingly, that
activity will only qualify as a supporting R&D activity if
conducted for the dominant purpose of supporting the
experiments.
EcoStartup is not in the business of producing or selling
fuel. The quantities of fuel blended for the test batches
were justified by the analysis in the experimental plan and
the actual amounts that would be left over were uncertain
and incidental. Accordingly, the activity of preparing the
test batches was for the dominant purpose of supporting core
R&D.
Smartread
83. Example 2.3 illustrates the scope of the purpose test for core R&D
activities within the overarching commercial purpose of R&D and the
impact of using production facilities for supporting activities.
1. : Smartread
Smartread manufactures tyres. It also conducts an ongoing
research program testing new compounds with a view to
developing improved products that it can exploit
commercially. The test tyres are produced using Smartread's
normal production facilities (which only allow one compound
to be used in a given production run). The production
aspects of the compounds (such as how they function during
the moulding process) were not at issue for Smartread's
tests. Smartread's research program does not produce any
marketable outputs.
Core R&D activities
Although the research has an overriding commercial
objective, the relevant purpose of Smartread's experimental
activities is to create knowledge in the form of product
improvements. Accordingly, Smartread's experimental
activities can satisfy the tests for core R&D if they are
part of a valid application of the scientific method to
address a knowledge gap.
Supporting R&D activities
The cost of the activities involved in actually
manufacturing the test tyres (such as running the production
line) will be determined in the same way as a normal
production run, using normal accounting principles. That
is, plant costs, floorspace rent, labour and corporate
overheads will be attributed to the cost of the activity of
manufacturing the test tyres.
This activity of manufacturing the test tyres is directly
related to the experiments but constitutes a production
activity, so the dominant purpose test applies. In the
context of Smartread's experimental plan, the manufacture of
the test tyres does not have the prospect of producing
commercial outputs. The dominant purpose test is satisfied
so the activity is a supporting R&D activity and Smartread
is eligible for a tax offset on the costs attributable to
the activity.
Boulevard Mining
84. The following series of Boulevard Mining examples illustrates the
distinction between conducting and applying R&D in a production
environment.
Boulevard Mining I
85. Example 2.4 illustrates how the tests apply where existing
technologies are modified to apply in a novel application, adjacent
to normal production, with the experimental activities supported by
otherwise normal production activity.
1. : Boulevard Mining I
Boulevard Mining commences work on a previously unmined fork
in a coal seam at its Evans Range mine. It decides to use
the new fork to undertake an R&D project aimed at allowing
it to use wider tunnels, to increase the amount of coal that
can be safely and economically extracted from future
tunnels.
The project utilises existing knowledge about a new truss
design developed elsewhere for cantilevered stadium roofs
along with existing knowledge about safe tunnel widths for
black coal. The project investigates the extent to which
using the new truss design in various scales with various
modifications will allow tunnels to be widened, using
measurements of the forces being generated in the supported
tunnel structure.
Boulevard's mine plan indicates that the seam will be mined
regardless of the outcome of the experiments. The coal
extracted in the activity of creating the tunnel used for
the experiments is mixed and sold with the other output of
the mine.
Core R&D activities
The experimental activities pertain to addressing the
uncertainty over how the truss will function as a tunnel
support, rather than a cantilever roof support, to allow
significantly wider tunnels. The experiments are conducted
for the purpose of acquiring new knowledge.
The truss will be subject to forces of a significantly
different nature to those in its previous applications.
Further, how the truss design interacts with tunnel widths
and shapes cannot readily be determined using existing
knowledge of the properties of trusses and tunnels. Rather,
application of the scientific method is required in this
instance to address the gap in knowledge.
The experimental activities are core R&D activities.
Supporting R&D activities
In order for the experiments with the truss to take place,
tunnelling of various widths and shapes needs to be
undertaken into the coal seam. This tunnelling has a
direct, close and relatively immediate relationship with the
actual experimental activities. Accordingly, it is a
directly related activity.
However, in addition to creating a tunnel, the tunnelling
also produces coal, so the dominant purpose test applies.
In this instance, it is clear from the mine plan that the
dominant purpose of undertaking the tunnelling activities is
to allow the seam to be mined, rather than to support
experimental activities. Accordingly, the tunnelling
activity does not qualify as a supporting R&D activity.
This outcome would apply were Boulevard to sell the coal or
use the coal itself (for example, as fuel or as an input to
a coking oven) or stockpile it for later use.
Boulevard Mining II
86. Example 2.5 illustrates the tests where the knowledge gained from
experiments incorporating production activity is implemented in
subsequent customised applications that involve trial and error
that is systematically conducted and monitored.
1. : Boulevard Mining II
The project in Boulevard Mining I is successful and the
technique is applied throughout the Evans Range mine. Due
to the shape of the coal seam, the preferred tunnel width
varies throughout the mine. The optimal combined
specification of truss and tunnel shape for each preferred
tunnel width can only be finalised as the work is in
process. This work is systematically logged for future
reference.
The scope of core R&D activities at Evans Range only extends
to the amount of experimentation necessary to acquire the
new knowledge to create the improved process - not to the
determination of all of the various combinations of truss
scale and tunnel width used in the mine.
In this instance, it was found that the Boulevard Mining I
experiments with 10 combinations proved sufficient to
ascertain the relationship between the two factors and prove
the hypothesis that the truss can function as a tunnel
support to allow significantly wider tunnels. When using
the technique in other tunnel widths at the Evans Range
mine, the experimental results can be interpolated and, by
monitoring forces as the work is in progress, the structure
'fine tuned' by adding reinforcing segments or adjustments
to the tunnel shape.
Although these implementation activities entail a degree of
trial and error in applying the knowledge gained from the
Boulevard Mining I activities, they do not demand the
application of the scientific method.
Also, these subsequent activities are conducted for the
purpose of applying knowledge, rather than acquiring
knowledge.
Consequently, the implementation of the technique developed
in Boulevard Mining I does not constitute R&D activities.
Mimic Mining
87. Example 2.6 illustrates how the tests apply where the knowledge
gained from experiments incorporating production activity is
applied in a different location. Although unique circumstances
will be faced in different contexts, resolving how to apply known
technology in the face of those circumstances will not, of itself,
constitute R&D activities.
1. : Mimic Mining
Mimic Mining learns of the technique developed at the Evans
Range mine and wishes to apply it to a mine it owns in the
Oates Range that is of similar geological structure.
Boulevard Mining offers to sell its data and designs for a
commercially reasonable sum. Mimic Mining declines the
offer and instead replicates the experiments that had been
undertaken by Boulevard Mining.
Mimic Mining's experimental activities are not undertaken
for the purpose of generating new knowledge. The
experiments at Evans Range by Boulevard Mining have proven
the hypothesis that it is feasible to use the new truss
design to significantly widen tunnel sizes and have
established the relationship between truss and tunnel. This
information is available to Mimic Mining on a reasonably
accessible basis.
Consequently, Mimic Mining is not undertaking eligible R&D
activities. Rather, the adoption by Mimic Mining of the
Evans Range technique at Oates Range - along with similar
adoption by other mining companies - exemplifies the shared
benefits that the R&D tax incentive seeks to foster.
Boulevard Mining III
88. Example 2.7 illustrates, by way of contrast with Mimic Mining, that
resolving how to apply known technology in a fundamentally
different location can potentially constitute R&D activities.
1. : Boulevard Mining III
Boulevard Mining also has a mine in the Bowers Valley,
where, based on current knowledge, the coal is considered
too crumbly for the approach developed at the Evans Range
mine to be usefully applied. However, Boulevard Mining
conducts further experiments that discover the truss can,
with modification, still permit significant increases in
tunnel widths for crumbly coal seams.
This outcome could not be determined from the Evans Range
experiments and its feasibility could only be ascertained by
application of the scientific method. Although applying
existing knowledge from earlier R&D, the Bowers Valley
activities were conducted for the purpose of producing
knowledge, rather than merely to resolve routine problems in
applying knowledge.
As with the implementation of the approach at the Evans
Range mine in Boulevard Mining II, the scope of the Bowers
Valley mine R&D activity (including any supporting R&D
activity)would only extend to the extent necessary to
establish whether the truss could be used to significantly
increase tunnel width in crumbly coal seams and to ascertain
the relationship between truss and tunnel width. It would
not extend to determining the actual specifications when
applying the approach throughout the mine, which has similar
geological characteristics.
Boulevard Mining IV
89. Example 2.8 illustrates the dominant purpose test for supporting
activities where production activities are contingent upon the
outcome of the experimental activities and there is no 'Plan B'.
1. : Boulevard Mining IV
As a variation on Boulevard Mining I, Boulevard Mining
decides instead to conduct the tunnel support experiments
(which constitute R&D activities) at Marginal Prospect, a
new mine it is about to commence, rather than at Evans
Range. Should the experiments fail, the Marginal Prospect
Mine will not proceed at currently foreseeable coal prices.
In order for the experiments to occur, roads and access
tunnels need to be built, which will be used for ongoing
mining operations should the mine proceed. The company
banks on the experiments being successful, and builds the
roads to the standard necessary to service the mine over its
expected 10-year production life, and with numerous passing
bays to accommodate movement of significant output when the
mine is in full production. The company also commences
constructing a lengthy railway spur line to the mine and
coal train loading facilities.
Supporting R&D activities
The road and access tunnel construction activities are
directly related to the experimental activities. However,
because they are activities directly related to producing
coal, the dominant purpose test applies.
In discerning the dominant purpose for these supporting
activities, regard would be had to their place in the
company's overall activities and plans in relation to the
Marginal Prospect site.
In this instance, it is evident that, although the road and
access tunnel will initially be used for the experiment, the
company mainly envisaged them as infrastructure for future
mining operations. Accordingly, the construction activities
were not for the dominant purpose of supporting the core R&D
and so do not constitute supporting R&D activity.
Activities that maintain the road and supply light and
ventilation to the tunnels would qualify during the
experimental period.
Grandheap Mining
90. Example 2.9 illustrates applying the core R&D and supporting R&D
tests where the experimental activities are linked to live
production activities.
1. : Grandheap Mining
Grandheap Mining learns of new ground vibration sensors
developed for vulcanology. Grandheap undertakes reasonable
inquiries, but is unable to resolve whether and how it might
be practical to apply the technology to assist in optimising
slope angles for overburden heaps. Grandheap decides to
conduct experiments on the ability of this technology to
reliably identify incipient heap instability prior to a
collapse occurring.
Grandheap Mining conducts the experiments in the course of
its disposal of overburden at a working mine site, Compact
Gorge. Grandheap will apply the findings to minimise the
land area lost to overburden heaps at a range of open cut
mines it operates, by allowing slope angles to safely
approach more closely the actual angle at which the heap
would fail. Due to the restrictive geography of the Compact
Gorge site, minimising the number of overburden heaps will
be a key factor in maximising access to the minerals there.
Core R&D activities
At the initial stages it would be fairly straightforward to
demonstrate that the activities are being undertaken to test
the hypothesis that the new sensor technology can reliably
identify incipient heap instability.
As the number of experiments progresses, closer scrutiny
would be expected as to whether further heaps were still
part of the R&D activities related to resolving
technological uncertainty, or were more appropriately
considered to be the application of that technology to
resolve routine uncertainty about the optimal slope angle
for a particular heap. That is, whether the state of
knowledge had reached the point where, using the innovative
sensor technology, a competent professional in the field
could determine when the appropriate slope angle had been
reached.
Regard would be had to factors such as Grandheap's original
plan[1] for the R&D activities, the results obtained and the
evidentiary basis for the number of trials considered
necessary. Although Grandheap conducted all of the 'tests'
at Compact Gorge in a similar manner, it was found that the
state of knowledge had reached the point that the hypothesis
had been established. Accordingly, those latter activities,
despite their form and appearance, did not satisfy the
purpose test for core R&D.
The experimental activities would include 'incremental'
building of overburden heaps beyond the known safe slope
angle, along with clearing of overburden from collapsed
heaps.
Supporting R&D activities
Testing the vibration sensors at Compact Gorge requires a
supply of overburden. The activity of extracting overburden
and delivering it to the site of the experiments has a
sufficiently direct, close and relatively immediate
relationship with the experimental activities to be
considered directly related.
However, removing the overburden and carting it away from
the open cut contributes to mining activities, which are
production activities. Accordingly, the dominant purpose
test applies to the activities of removing and carting
overburden.
It is clear from Grandheap's mining plan that the overburden
would be removed regardless of the experiments with the
sensors, in order to access mineral deposits. Further,
there is no apparent difference between the activity of
removing overburden used in the experiments and removing
overburden subsequent to the experiments. In the context of
Grandheap's activities at Compact Gorge, the dominant
purpose of removing and carting the overburden is to access
mineral deposits rather than supporting the core R&D
activities. Accordingly, removing and carting the
overburden do not qualify as supporting R&D activities.
Similarly, basic heap building, which is not part of the
experimental activities, would fail the dominant purpose
test for supporting activities.
Matryosh-koala
91. The following series of Matryosh-koala examples illustrates the
tests where experimental activities occur within a normal
production run. The extent of the experiment relative to the
normal production activities can be a guide to the purpose of
activities.
Matryosh-koala I
92. Example 2.10 illustrates the tests for a small scale experiment
conducted in conjunction with a factory production run.
1. : Matryosh-koala I
Matryosh-koala operates a factory manufacturing koala-shaped
Russian dolls from wood. The production line produces the
seven sizes of doll halves in sets of bare forms, which it
then paints, glazes, assembles in the nested form and
packages. The speed of the production line is constrained
by the need to allow the paint on the dolls to dry before
the set of dolls can be coated in glaze, dried and nested
inside each other, prior to moving to the packaging stage of
the production line.
Matryosh-koala has learned of a new fast drying permeable
polymer glaze that is used to protect leather from
scratching while still allowing it to breathe. Matryosh-
koala conducts experiments on whether, in a production line
context, using this glaze might allow the dolls to be glazed
and nested before the paint has fully dried, such that the
paint does not smudge and does finish drying in storage.
Because the glaze serves to protect the design painted on
the dolls, the experiments will also investigate the maximum
thickness of glaze that will be permeable enough to allow
the paint beneath to dry.
A production line diversion is fitted with a spare glazing
unit and glaze tank, to allow several sets of test doll to
be coated with the permeable glaze in various formulations
and thicknesses in conjunction with a normal production run.
The diversion also contains a spare nesting machine to
allow the test doll halves to be nested at an earlier than
usual stage of the production line and set aside for
examination.
The test dolls will not be sold with the firm's normal
output, as they will be inconsistent due to the range of
glaze formulations and thicknesses being tested. Also, they
will be subject to considerable handling during the
inspections. Those not retained for future reference are to
be donated to a local preschool or destroyed.
These experiments had been preceded by removing several
dolls from a normal production run as they approach the
glazing machine, and spray coating them by hand with the
polymer glaze. The results were ambiguous, but suggested
the glaze might work as intended.
Core R&D activities
The experimental activities are for the purpose of acquiring
new knowledge about the drying and permeability properties
of the glaze - specifically the effect of nesting the doll
halves before the glaze has dried - for varying formulations
and thicknesses of glaze. The outcome of the experiment
cannot be determined from existing knowledge about the
glaze, and the application of the scientific method is
required to address the knowledge gap. Further, the
hypothesis can only be tested by replicating how the
materials would be handled in a production line context.
The experimental activities qualify as core R&D.
Operating the diversionary stage of the production line
where the test dolls are coated with the glaze and assembled
would form part of the experiment.
The less formal manual trial prior to the experiments proper
would also form part of the core R&D activities.
Supporting R&D activities
Matryosh-koala's experiment on an alternative glaze can only
be done on a production line, so activities involved in the
production run that have a direct, close and relatively
immediate relationship with the actual experimental
activities will be activities directly related to the core
R&D. However, being production activities, the dominant
purpose test applies.
The main production line is operated for the dominant
purpose of conducting the normal production run rather than
supporting the experiment. Consequently, its operation per
se will not fall within the scope of eligible supporting R&D
activities.
However, producing the painted doll halves used in the
glazing experiment would be eligible as a supporting
activity (as would acquiring the painted doll halves were
they sourced externally). Normal cost attribution rules
would be used to determine the cost of producing the test
dolls.
Matryosh-koala II
93. Example 2.11 illustrates the tests for an experiment conducted in
the midst of a full scale production run.
1. : Matryosh-koala II
Due to concerns over the viscosity and curing properties of
the test glaze, the experiment is next run at full scale, to
also test whether the glaze will clog the lengthy ducts
leading to the glaze applicator over the duration of a
typical production run. A range of formulations that proved
acceptable for the dolls in the first experiment will be
tested, for their feasibility with respect to the ducts.
The dolls produced in the experiment will again not be a
consistent product that can be sold through normal
distribution channels. However, Matryosh-koala agrees a
'job lot' price with an exporter that will ensure a
satisfactory margin over the cost of materials and running
the full production line.
Core R&D activities
The hypothesis being tested is that the various formulations
of glaze will remain sufficiently fluid over the duration of
a normal production run. The core R&D will therefore
include the processes from the glaze storage tanks through
to the nozzles on the glazing unit - these are the
activities whose outcome cannot be determined in advance.
Supporting R&D activities
The production line supplies and removes the dolls that the
test nozzles apply the glaze to, which has a direct, close
and relatively immediate relationship with the experimental
activities, and so running the production line is a directly
related activity. Because it is also a production activity,
the dominant purpose test applies.
In determining the dominant purpose for the production run,
several considerations are relevant. Running the production
line to some extent is necessary to supply dolls and move
them away from the glazing unit to a place where they can be
inspected, so there is a purpose of supporting the
experiment. However, that production run goes beyond the
needs of the experiment by also nesting the dolls and
packaging them - but the design of the production line makes
it impractical to not also perform those integrated
activities. A further important consideration is that
conducting the production run along with the experiment is
profitable in its own right - such that it would be done
regardless of whether necessary for the experiment - so
there is a commercial purpose.
In this instance, the determinative factor lies in the
reason why the production line needs to be run and the
related consequences. The requirements of the experiment
could not be met simply by running the nozzles into a bucket
for the duration of a normal production run. Glazing the
dolls is a part of the experiment itself, to test whether
the glaze has retained the necessary fluidity when exiting
the nozzles to apply evenly without flecking. The
production run differs significantly from a normal
commercial run due to the inconsistent glazing outturns that
the experiment anticipates, together with the risk of
flecking.
Together, these factors indicate that the dominant purpose
for running the production line is to support the
experiment, rather than to make commercial use of the
available glaze. Profitably disposing of the resulting
dolls is incidental to this dominant purpose.
Accordingly, the directly related activities in relation to
running the production line are for the dominant purpose of
supporting the experiment, so they qualify as supporting R&D
activities.
Matryosh-koala III
94. Example 2.12 illustrates the tests for an experiment conducted on a
portion of a production line that is run at full scale.
1. : Matryosh-koala III
Matryosh-koala adopts the experimental glaze, allowing it to
considerably shorten the paint and glaze drying sections of
its production line to free up floorspace for other
activities. A resulting tight turn causes recurring
problems for the chain that drives the conveyor belt through
this 10 metre section of the production line.
Matryosh-koala hypothesises that the optical recognition
device it uses in the quality control section of the line
can be modified to reliably detect chain movement anomalies
and trigger a mechanical jolt to set the chain back on its
cogs.
Modifications are devised and made to the optical
recognition device and related software and the mechanical
'kicker' designed and fabricated.
The system is brought up to satisfactory performance in
offline tests, but a lengthy test in the actual production
line is required to prove the hypothesis. Conducting the
test while undertaking a full production run ensures that
the test section of the production line is subject to
realistic loads.
Core R&D activities
The lengthy test with the production line running is a part
of the experiment, as its outcome cannot be determined in
advance. However, although running the production line as a
whole might be necessary for the experiment, only running
the 10 metre section encompassing the tight turn would form
part of the experiment.
The cost of the experiment would include a reasonable
apportionment of the cost of running the production line.
Matryosh-koala apportions on a 'length in metres' basis,
plus a loading for the extra power costs and maintenance
this section gives rise to because of the extra drag caused
by the tight turn.
Supporting R&D activities
Although running the full production line is, to some
extent, necessary for the experiment, it also serves the
commercial purpose of producing standard dolls. In
determining the dominant purpose for the production run,
regard would be had to the perceived likelihood that the run
would be normal from a production standpoint and the
implications for production costs were the line to be
subject to interruptions. Also relevant would be whether
actual doll production was necessary in order to provide a
realistic test load.
It was found that interruptions from the test equipment not
working as intended would be comparable with those that had
been experienced from the chain jumping off in the period
prior to the experiment. It was not credible that Matryosh-
koala would attempt a full production run if serious delays
were likely, due to the cost of the glaze that would need to
be pumped to waste out of the lengthy ducts. A realistic
test load could have been achieved without the risk of
painting and glazing doll halves, by using available halves
that had the correct weight but had been rejected at quality
control due to paint imperfections.
Accordingly, in the circumstances, it was found that the
dominant purpose of conducting a full production run was
commercial, rather than to support the experiment. That is,
Matryosh-koala, quite sensibly, took the economic
opportunity to piggyback the experiment onto a production
run.
Hayk Hockey Stix
95. Example 2.13 illustrates the tests where the experimental
activities are a subset of a long production run.
1. : Hayk Hockey Stix
Hayk Hockey Stix produces field hockey sticks in large
numbers for supply to a world market. Hayk experiments with
integrating a multi-axial scanner with an existing
numerically controlled laser guided cutting and rasping
machine. If successful, this will allow real time detection
of output that is outside of tolerances, allowing faulty
adult sticks to be recut - if necessary to a junior
specification - prior to leaving the machine.
Statistical analysis determines that in a production run of
1,000 sticks the cutting and rasping machine would generate
sufficient out-of-tolerance sticks to test, to the 95
per cent confidence level, whether the scanner can
accurately identify them.
Hayk has a large order, so it integrates the experiment into
a production run of 5,000 sticks. The production stage
itself consists of little more than the machine in question,
which accepts pre-cut lengths of timber and produces the cut
forms, which are rested for curing prior to further
processing.
Core R&D activities
Cutting and rasping the first 1,000 sticks of the 5,000
stick production run would be part of the experiment. The
cost of the experiment would include a reasonable
apportionment of the cost of running that production stage
over the 5,000 stick production run. Hayk apportions on a
'per stick' basis, plus a loading for stopping the line to
check for false positives.
Supporting R&D activities
The remainder of the 5,000 stick production run is
undertaken for the dominant purpose of commercial
production.
Tabby Marine
96. The following linked examples for Tabby Marine illustrate the tests
where R&D activities are conducted through the production of a
marketable product. In all three stages, the experimental
activities are conducted on prototypes that are intended for sale.
Tabby Marine I
97. Example 2.14 illustrates the tests where normal production
components are unsuccessfully matched with experimental ones,
increasing the overall cost of what ultimately turns out to be a
normal production unit.
1. : Tabby Marine I
Tabby Marine manufactures catamarans. Generally four boats
are under construction at any one time. Tabby experiments
with a novel combination of steering rudder and propeller
screw, in the hope of achieving increased speed without
sacrificing steering control. Trials with scale models were
considered, but found not to be an economical or reliable
option. Tabby constructs a prototype catamaran using its
usual design, but with the test rudder-screw assembly
fitted. The boat is otherwise fully fitted out as usual for
eventual sale. Trials are then conducted on open water.
The experiment fails and the vessel is refitted with a
conventional rudder and screw and sold for the usual price.
Tabby retains the rudder-screw assembly for possible further
experiments.
Core R&D activities
The experimental activities are deemed to satisfy the tests
for core R&D with respect to the need to apply the
scientific method to test a hypothesis about the test rudder-
screw assembly for the purpose of generating knowledge about
the creation of new/improved products.
The experimental activities principally entail developing
and testing the design using a computer model and,
separately, testing the fabricated assembly in sea trials.
These are the activities whose outcome cannot be determined
in advance.
Fabricating the rudder-screw assembly from the computer-
tested design was, in this instance, a routine step.
Consequently, it is not a core R&D activity, but may qualify
as a supporting R&D activity.
Supporting R&D activities
As the experiments pertain to testing how the rudder-screw
assembly operates with Tabby's standard hull design,
constructing the hull (and other boat elements that are
necessary for the experiments) would be directly related
activities and so potentially be eligible as supporting
activities. However, because they are production
activities, the dominant purpose test would also apply.
Although earmarked for the experiment, the conventional hull
was predominantly constructed with a view to the commercial
sale of a finished boat. The experiments would only affect
whether that boat would be sold with the experimental rudder-
screw assembly or a regular rudder and screw. Had the R&D
not been undertaken, the hull would have been constructed as
part of Tabby's normal business activities. The dominant
purpose of its construction was commercial and so
constructing the hull is not a supporting R&D activity.
Fitting out the catamaran has direct, close and relatively
immediate relationship with the experimental activities, by
aiding crew comfort. However, in the context of Tabby's
activities, the dominant purpose of the chosen fit out is to
assist completing the boat for eventual sale and so it does
not qualify as a supporting R&D activity.
Fabricating the rudder-screw assembly was a directly related
production activity that was only undertaken to support the
experiments on the design. As there would be no obvious
alternative use for the assembly (should it fail to perform
as hoped) the dominant purpose for constructing it was
clearly to support the experiments. Accordingly, along with
installing and removing the test rudder-screw assembly (to
allow a conventional rudder and screw to be fitted for the
ultimate sale), fabricating the test assembly would qualify
as a supporting R&D activity. This would still be a
qualifying supporting activity had the experiment been
successful and the boat sold with the test assembly.
Tabby Marine II
98. Example 2.15 illustrates the tests where modified production
components are matched with experimental ones in a follow-up
experiment that produces immediate commercial rewards.
1. : Tabby Marine II
In the following year, Tabby Marine attaches the removed
rudder-screw assembly to a second prototype catamaran with
modified hull segments. The tests are successful. The
prototype is sold at a premium and the modified catamaran
design, with the novel rudder-screw assembly, is put into
full production.
Had the modified hull segments been unsuccessful, it would
have been impractical to replace them with conventional
segments.
Core R&D activities
These experiments test a different hypothesis about the test
rudder-screw assembly and are still for the purpose of
generating new knowledge about the rudder-screw assembly
design.
The experimental activities principally entail developing
and testing the design for the modified hull segments using
a computer model[2] and testing, in sea trials, the
performance of the resulting catamaran hull in combination
with the rudder-screw assembly.
Fabricating the modified hull segments from the design
proved problematic due to tight curves in the design and the
need for joints accommodating segments entering at varying
angles. Tabby's boatbuilders tried several approaches,
consulted colleagues and researched boatbuilding articles to
overcome the challenges. These were not experimental
activities because the uncertainty was of a kind that could
be resolved by a competent professional in the field on the
basis of current knowledge, information or experience.
Supporting R&D activities
Although the modified catamaran incorporated mainly
conventional catamaran hull segments, it would not have been
a practical option to rebuild the boat with purely
conventional segments - all of the hull construction was
committed to the experimental design. Further, there was
significant uncertainty as to how marketable the finished
boat would be. Accordingly, constructing all of the hull
(not just the experimental segments) was for the dominant
purpose of supporting the experiment and so would qualify as
supporting R&D activity (inclusive of the failed attempts to
fabricate the modified segments).
Tabby Marine III
99. Example 2.16 illustrates the tests where a prototype fails and is
made from overspecified materials.
1. : Tabby Marine III
Tabby then experiments with applying the novel rudder-screw
assembly design to a similarly modified monohull boat. With
an eye to the luxury market, Tabby uses expensive timbers
when building this boat. Being optimistic, Tabby also
completes the fit out to a high standard, gold plating
numerous interior surfaces, prior to commencing sea trials.
The results for the monohull boat are disappointing and the
experiment is discontinued. The unsuccessful monohull
prototype is sold at a loss as being usable but with
performance limitations.
Core R&D activities
Again, these experiments test a different hypothesis about
the test rudder-screw assembly and, although applying
results from previous R&D, are still for the purpose of
generating new knowledge about the rudder-screw assembly and
modified hull segments. In this instance, application of
what is still only proven as catamaran hull technology to a
monohull is a significant step that requires scientific
experimentation to assess its feasibility.
Translating the catamaran hull modifications to the existing
monohull design, along with related computer testing, would
be included in core R&D as experimental activities for which
the outcome could not be determined in advance.
Supporting R&D activities
Constructing the modified monohull is a supporting R&D
activity as it was undertaken for the dominant purpose of
supporting the experiment. It is not relevant that the
materials used in the experimental activities (such as the
planking for the hull) were of a higher standard than
necessary to conduct the experiment.
The luxury fit out will not qualify as a supporting R&D
activity, as it was clearly conducted for the dominant
purpose of the commercial sale of the prototype. It is not
relevant that the experiment failed and the boat was sold at
a loss.
Whist Constructions
100. Example 2.17 illustrates the rules where experimental activities
are an integral part of an inherently one-off production task under
a fixed price contract.
1. : Whist Constructions
Whist Constructions enters into a fixed price contract to
construct a bridge across River Gorge. Whist tendered on
the basis of using a suspension bridge.
The type of rock to which the suspension cables must be
anchored has known weaknesses. Whist hopes to address this
weakness by an innovative approach to anchoring that would
only need holes drilled to a narrow diameter and would
spread the forces along the depth of the drill hole.
The anchor design is tested in situ at the point in the
construction schedule that anchors would normally be
inserted. As it was not economical to halt construction and
wait for load test results, the identical non-test anchors
were also fabricated in advance and installed as soon the
installation and activation procedure had been verified. As
usual, the anchors are closely monitored as the load
increases throughout construction of the remainder of the
bridge.
Core R&D activities
The hypothesis being tested is that the modified anchor
design - in conjunction with its installation and activation
method - will hold in this rock type when subjected to the
design forces of the bridge. In this instance, the
scientific approach is needed to determine whether this is
so. Further, significant uncertainty remained after
computer simulations.
Whist's experimental activities include developing and
finalising its original conception for the design using a
computer model, and installing the necessary number of test
anchors into the drill holes while closely monitoring their
activation. The experimental activities would also include
monitoring the test anchors as they were subjected to load.
However, the experimental activities do not extend to
installing and testing all of the anchors - only to the
extent necessary to acquire the new knowledge about the
improved product and related process (the new anchor design
and its installation). Beyond this, installing and
routinely testing anchors is part of the non-experimental
activities involved in building the bridge using the
knowledge gained from the experiment.
Supporting R&D activities
The core R&D activities (including final load testing on the
test anchors) can only be fully conducted by building a
complete bridge at a site such as River Gorge. However,
building the River Gorge bridge is not, for the most part, a
supporting R&D activity. The dominant purpose of the normal
bridge building activities is building a bridge in order to
fulfil Whist's contractual obligations.
Fabricating (or sourcing) the anchors would be directly
related to the experiment, as all of the anchors will either
be used in the experiment or contribute to the bridge's
completion, which allows the test anchors to be tested to
the full load. Fabricating sufficient test anchors to
conduct the experiment would be for the dominant purpose of
allowing the experiment to take place, and so would qualify
as a supporting R&D activity.
Anchors beyond those used in the actual experiment
contribute to finalising the bridge, and so facilitate the
full load test on the test anchors. They also, through
routine monitoring, provide a supplementary source of data.
However, as with the rest of the bridge (which also serves
to assist the full load test) the dominant purpose for
fabricating and installing the non-test anchors is the
commercial purpose of completing the bridge.
Two Wheels, E C Plus, and Sanctuary
101. The following examples illustrate the application of the rules in
relation to software development projects, including the
application of the software core R&D exclusion.
1. : Two Wheels
Two Wheels Ltd, undertakes a project to develop a new
gearbox for motorcycles. The project involves investigating
the potential for using multiple lay shafts within a gear
box in order to reduce its overall size without compromising
effectiveness. Such an approach has not been attempted
before and it is not known whether it will succeed.
Computer-aided engineering and simulation software is used
to explore how such a gearbox might be designed and
developed. While the software needs to be adapted for the
project in question, this is achieved using existing
application program languages, and is within the design
capabilities of the software used.
Core R&D activities
The outcomes of the software activities are not uncertain
and are not intended to achieve new knowledge in relation to
computer science as the adaptation is based on existing
knowledge. The software activities, by themselves, would
not constitute core R&D activities. However, assuming for
the example that the larger gearbox project itself
constitutes an eligible R&D project, the software activities
may constitute eligible supporting activities.
Supporting R&D activities
While developed for in-house use, the software is applied in
nature rather than related to the administration of the
business, and consequently would not have fallen within the
software exclusion were it core R&D. As such, under the
supporting R&D rules, Two Wheels only need demonstrate that
the software activity was directly related to the core R&D
project. The software activities are eligible as supporting
R&D activities.
2. : E C Plus
A software company, E C Plus Ltd, wants to develop a new
computer language that will simplify and streamline the
coding of on-line software applications without impacting on
functionality. E C Plus intends to release the language as
open-source in order to promote its uptake and thereby
support E C Plus's longer term business strategy. As the
proposed language differs significantly from those currently
used, a series of development, evaluation and testing
activities needs to be systematically undertaken to
ascertain whether its idea is workable, and if so, how it
performs relative to existing software applications.
Core R&D activities
Considerable uncertainty exists regarding the project, which
needs to be addressed through a structured series of
activities. These activities are conducted for the purpose
of generating new knowledge in relation to computer science
and information technology. The activities are core R&D.
Core R&D software exclusion
The software is not being developed for use by E C Plus or a
related or connected entity for internal business
administration purposes. The exclusion does not apply to
the project activities.
3. : Sanctuary
Sanctuary Ltd, a financial institution, intends to
reengineer its disparate systems for managing customer
accounts into one customer focused system.
As part of the project, Sanctuary also intends to build a
secure payment system that operates by providing customers
with a single-use encryption 'key' via a mobile device,
allowing them to access their accounts in a secure manner
over the Internet. Developing such a system will require an
experimental process to develop and effectively utilise the
advanced cryptographic algorithms and protocols such a
system will require.
During testing of the payment system, Sanctuary discovers
that a modification will need to be made to the new customer
accounts system for the payments system to operate in a
secure manner.
Core R&D activities
The outcome regarding the proposed new secure payment system
cannot be determined in advance, as it is dependent on the
successful development and operation of the envisaged new
secure algorithms and protocols. To address this
uncertainty, a systematic process involving design,
evaluation and testing is undertaken. The software is being
developed to provide a new service for customers, and not
for Sanctuary's internal administration, and so the core R&D
exclusion does not apply. The activities related to the
development of the secure payment system are core R&D.
The activities related to the re-engineering of customer
account software involve developing and/or modifying
software for the dominant purpose of use by Sanctuary for
its internal administration, and so are excluded from being
core R&D.
Supporting R&D activities
The activities related to customer accounts are software
activities for Sanctuary's internal administration and so
are subject to the dominant purpose test. That is, they may
be eligible as supporting R&D activity if the dominant
purpose for undertaking them was to support the core R&D
activities. In this case, the dominant purpose for the
integration of the disparate systems was to streamline
Sanctuary's customer accounts system. These activities are
not supporting R&D.
However, the additional modification made to the customer
accounts system following the testing of the payments system
was undertaken for the dominant purpose of supporting the
core R&D project. The modification activities qualify as
eligible supporting R&D activities.
Chapter 3
Tax offsets for research and development
Outline of chapter
102. Schedule 1 to the Tax Laws Amendment (Research and Development)
Bill 2010 (Bill) amends the Income Tax Assessment Act 1997 (ITAA
1997) and the Income Tax Assessment Act 1936 (ITAA 1936) to
introduce new research and development (R&D) tax offsets, which
have the following main features:
. the types of entity that are eligible for the offsets
(called an R&D entity in the new law) are a corporation
that is an Australian resident, a foreign corporation that
is carrying on R&D activities though a permanent
establishment in Australia and a public trading trust with
a corporate trustee;
. an R&D entity is entitled to a tax offset if the total of
its notional R&D deductions is at least $20,000;
. the main notional deductions are for:
- expenditure on registered R&D activities during the
income year; and
- the decline in value of a depreciating asset used for
registered R&D activities during the income year (if
certain other conditions are satisfied);
. the offset that an R&D entity is entitled to is a
refundable tax offset if the annual turnover of the entity
(and certain related entities) for that income year is
less than $20 million (and one or more exempt entities do
not own or control more than 50 per cent of the entity).
Otherwise, the R&D entity is entitled to a non-refundable
tax offset; and
. the quantum of the refundable tax offset is equal to
45 per cent of the total of notional R&D deductions while
the quantum of the non-refundable tax offset is equal to
40 per cent of the entity's total notional R&D deductions.
103. Amendments to the Income Tax Rates Act 1986 necessary for rules
about recoupment from government of R&D expenditures are contained
in the supporting Bill, the Income Tax Rates Amendment (Research
and Development) Bill 2010.
104. Part 1 of Schedule 3 to the Bill contains related amendments to the
tax offset rules in the ITAA 1997. Schedule 3 contains
consequential amendments to the ITAA 1997, most of which are
explained in this chapter because they are important to the overall
operation of the new R&D tax incentive. Other consequential
amendments in Part 3 of Schedule 3 are explained in Chapter 4. The
concept of R&D activities is discussed in detail in Chapter 2 of
this explanatory memorandum.
105. In this chapter, legislative references are to the ITAA 1997,
except where indicated.
Context of amendments
106. The existing law contains extensive and complex provisions
(sections 73B to 73Z of the ITAA 1936) dealing with R&D
expenditure. These deliver an array of deductions and a tax
offset, in different circumstances, which can be summarised as
follows:
. a base 125 per cent R&D tax concession that provides an
increased tax deduction for certain expenditure on
registered Australian-owned R&D activities;
. a 175 per cent premium R&D tax concession that provides an
additional deduction to the base concession for
expenditure that exceeds the average of the corporation's
previous three years of Australian-owned R&D expenditure;
. an R&D tax offset that allows small corporations to cash
out the value of deductions relating to Australian-owned
R&D, which is of benefit if they are in a tax loss
situation:
- the tax offset is (broadly) available to corporations
with an annual group turnover of less than $5 million
and whose aggregate R&D expenditure is greater than
$20,000 and whose group aggregate R&D expenditure is not
more than $2 million per year;
- eligible corporations can choose to receive the tax
offset in lieu of deductions available to them under
both the base concession and the 175 per cent premium;
and
. a foreign incremental tax concession that provides
deductions for foreign-owned R&D is as follows:
- 100 per cent deduction for the base expenditure amount;
and
- an additional 75 per cent deduction for additional
expenditure over the three-year average.
107. The Government announced in the 2009-10 Budget that it would
replace the existing R&D Tax Concession with a new, more
streamlined R&D tax incentive from 1 July 2010.
108. The two core components of the new incentive are:
. a 45 per cent refundable R&D tax offset for R&D entities
with an aggregated turnover of less than $20 million; and
. a non-refundable 40 per cent tax offset for larger R&D
entities. Accompanying this is a tighter definition of
'R&D activities'.
109. The Government issued a consultation paper titled The new research
and development tax incentive in September 2009.
Summary of new law
110. Under the new R&D incentive the main benefits are available as tax
offsets. The types of entity eligible for the offsets (called an
R&D entity in the new law) are a corporation that is an Australian
resident, a foreign corporation that is carrying on R&D activities
though a permanent establishment in Australia and a public trading
trust with a corporate trustee. An entity that is exempt from
income tax is not an R&D entity.
111. An R&D entity is entitled to a tax offset if the total of its
notional R&D deductions is at least $20,000. It is also entitled
to a tax offset for certain R&D expenditure incurred to a Research
Service Provider, regardless of the level of its notional
deductions. A notional deduction is an amount that an entity
cannot actually deduct because it is a step in working out the
entity's entitlement to a tax offset. (If the entity could
actually deduct the amount it would obtain a double benefit for the
same amount of expenditure or depreciation.)
112. An R&D entity is entitled to notional deductions for the following
(if certain other conditions are satisfied):
. expenditure on R&D activities during the income year;
. the decline in value of a depreciating asset used for R&D
activities during the income year; and
. a balancing adjustment for depreciating assets used for
R&D activities.
113. The R&D entity is entitled to a refundable tax offset if the annual
turnover of the entity (and certain related entities) for that
income year is less than $20 million (and one or more exempt
entities do not own or control more than 50 per cent of the
entity). Otherwise, the R&D entity is entitled to a non-refundable
tax offset.
114. The quantum of the refundable tax offset is equal to 45 per cent of
total notional R&D deductions while the quantum of the non-
refundable tax offset is equal to 40 per cent of the entity's total
notional R&D deductions.
Comparison of key features of new law and old law
|New law |Current law |
|The two core components |An array of deductions |
|of the new incentive are:|and a tax offset |
| |(summarised in |
|a non-refundable 40 per |paragraphs 3.5 to 3.8) |
|cent R&D tax offset; and |are available for |
| |eligible corporations. |
|a 45 per cent refundable |The primary benefit is an|
|R&D tax offset for |increased tax deduction |
|(broadly) R&D entities |equal to 125 per cent of |
|with an aggregated |certain expenditure on |
|turnover of less than $20|registered |
|million. |Australian-owned R&D |
| |activities. |
|The types of entity |The types of entity |
|eligible for the tax |eligible for the R&D |
|offsets (called R&D |concession are Australian|
|entities) are: |corporations and public |
|a corporation that is an |trading trusts. |
|Australian resident; | |
|a foreign corporation | |
|that is resident of a | |
|country with which | |
|Australia has a double | |
|tax agreement and carries| |
|on business through a | |
|permanent establishment | |
|in Australia; and | |
| | |
|a public trading trust | |
|with a corporate trustee.| |
| | |
|An entity that is exempt | |
|from income tax is not | |
|eligible for the tax | |
|offsets. | |
|An R&D entity is entitled|Entitlement to a tax |
|to a tax offset if the |offset or a 125 per cent |
|total of its notional R&D|deduction is generally |
|deductions is at least |limited to corporations |
|$20,000. |whose aggregate R&D |
|It is also entitled to a |expenditure is greater |
|tax offset for certain |than $20,000. There is |
|R&D expenditure incurred |an exception for certain |
|to a Research Service |R&D expenditure to a |
|Provider, or as a |registered research |
|monetary contribution to |agency. |
|a Cooperative Research |Entitlement to a tax |
|Centre, regardless of the|offset is limited to a |
|level of its notional |corporation with an |
|deductions. |annual group turnover of |
| |less than $5 million and |
| |whose group aggregate R&D|
| |expenditure is not more |
| |than $2 million per year.|
|An R&D entity can |125 per cent deductions |
|notionally deduct amounts|are available for: |
|under the R&D provisions |expenditure on R&D |
|for the income year for: |activities; |
|certain expenditure on |a decline in value of |
|registered R&D |depreciating assets used |
|activities; |for R&D activities; |
|a decline in value of |a balancing adjustment |
|depreciating assets used |for depreciating assets |
|for registered R&D |used for R&D activities; |
|activities; |R&D partnership |
|a balancing adjustment |expenditure; and |
|for those depreciating |a decline in value of R&D|
|assets used only for R&D |partnership assets. |
|activities; | |
|R&D expenditure incurred | |
|to an associate in an | |
|earlier income year and | |
|paid in the current | |
|income year; | |
|a decline in value of R&D| |
|partnership assets; and | |
|a monetary contribution | |
|to a Cooperative Research| |
|Centre. | |
|An R&D entity is entitled|A corporation is |
|to a refundable tax |(broadly) entitled to |
|offset if the annual |choose a refundable tax |
|turnover of the entity |offset if it has an |
|(and certain related |annual group turnover of |
|entities) for that income|less than $5 million and |
|year is less than $20 |its group aggregate R&D |
|million. |expenditure is not more |
|It is also necessary that|than $2 million per year.|
|one or more exempt | |
|entities do not control | |
|more than 50 per cent of |An entity cannot choose |
|the entity. |that offset if one or |
|Otherwise, the R&D entity|more exempt entities own |
|is entitled to a |or control more than 25 |
|non-refundable tax |per cent of the entity. |
|offset. | |
|The quantum of the |Where a corporation |
|refundable tax offset is |chooses to convert a 125 |
|equal to 45 per cent of |per cent deduction to a |
|the notional R&D |tax offset, that is |
|deductions. |equivalent to a tax |
|The quantum of the |offset worked out as 37.5|
|non-refundable tax offset|per cent of relevant |
|is equal to 40 per cent |amounts. |
|of the entity's notional | |
|R&D deductions. | |
|The deductions under the |A corporation can obtain |
|R&D provisions are |actual R&D deductions. |
|notional deductions. |However, where a |
|They are worked out as a |corporation chooses a tax|
|step in calculating an |offset instead of a |
|entitlement to an R&D tax|deduction, it cannot |
|offset. |actually deduct any |
| |amount under the R&D |
| |provisions for that |
| |income year. |
|The tax offset |A corporation's R&D |
|entitlements are not |deductions for |
|reduced for government |expenditure on R&D |
|grants or amounts |activities forming part |
|recouped from government.|of a project are reduced |
| |to 100 per cent where the|
|Instead, an entity must |corporation (or certain |
|pay extra income tax in |related entities) |
|relation to a recoupment |receives: |
|from an Australian |an Australian government |
|government of (or a grant|grant in respect of the |
|for) expenditure on R&D |project expenditure on |
|activities for which it |R&D activities; or |
|obtains an R&D tax |a recoupment of the |
|offset. |expenditure from an |
|The extra income tax is |Australian government. |
|equal to 10 per cent of | |
|the total of certain | |
|amounts spent on R&D | |
|activities (subject to a | |
|cap). | |
|The tax offset |Where goods or materials |
|entitlements are not |are produced or acquired |
|reduced for feedstock. |in order to be the |
|Instead, an amount is |subject of processing or |
|included in an R&D |transformation in R&D |
|entity's assessable |activities, a feedstock |
|income if it obtains R&D |adjustment (to 125 per |
|tax offsets for |cent R&D deductions) |
|expenditure on goods, |applies to reflect the |
|materials or energy |extent to which the value|
|transformed or processed |of the outputs from the |
|during R&D activities to |processing or |
|produce: |transformation offsets |
|marketable products; or |the cost of the goods or |
|products applied to the |materials. |
|R&D entity's own use. | |
Detailed explanation of new law
115. An R&D entity is entitled to a tax offset if the total of its
notional R&D deductions for an income year is at least $20,000.
116. If the aggregated turnover of the R&D entity for that income year
is less than $20 million (and one or more exempt entities do not
control more than 50 per cent of the entity), the entity is
entitled to a refundable tax offset equal to 45 per cent of the
notional R&D deductions. Otherwise the entity is entitled to a non-
refundable tax offset equal to 40 per cent of the notional R&D
deductions.
117. The main notional deductions are for certain expenditure on
registered R&D activities and the decline in value of a
depreciating asset used for registered R&D activities (if certain
other conditions are satisfied).
118. An R&D entity is also entitled to a tax offset for certain R&D
expenditure incurred to a Research Service Provider, or as a
monetary contribution to a Cooperative Research Centre, regardless
of the level of its notional deductions. Whether that offset is a
refundable 45 per cent offset or a non-refundable 40 per cent
offset also depends primarily on whether the aggregated turnover of
the entity is less than $20 million.
Types of entity that are eligible for R&D tax offsets
119. The following types of corporation, called an R&D entity in the new
law, are eligible to obtain an R&D tax offset if they satisfy the
following relevant conditions:
. a corporation incorporated under an Australian law;
. a corporation incorporated under foreign law that is an
Australian resident for income tax purposes; and
. a corporation incorporated under foreign law that:
- is a resident of a country with which Australia has a
comprehensive double tax agreement; and
- carries on business in Australia through a permanent
establishment (within the meaning of the term 'permanent
establishment' in that agreement).
[Schedule 1, item 1, section 355-35]
120. A public trading trust that has a body corporate acting as trustee
is also eligible for an R&D tax offset. Public trading trusts are
broadly taxed like a company for income tax purposes. [Schedule 1,
item 1, section 355-35 and Schedule 3, item 46, subsection 102T(9)]
121. Corporate limited partnerships are not eligible for an R&D tax
offset because they can have a partner other than a corporation.
[Schedule 3, item 45, section 94J of the ITAA 1936]
122. This Bill extends the types of entity eligible for the new R&D tax
offset compared with the existing R&D Tax Concession. Eligibility
under the existing R&D Tax Concession is limited to Australian
corporations and public trading trusts. The primary reason for
extending eligibility is so that the R&D provisions do not
discriminate against foreign corporations from a country with which
Australia has a comprehensive double tax agreement where that
corporation is an Australian resident or has a permanent
establishment in Australia. A tax information exchange agreement,
an agreement signed in conjunction with a tax information exchange
agreement that only allocates taxing rights over a few, limited
categories of income or an airline profits agreement is not a
comprehensive double tax agreement.
123. The Organisation for Economic Co-operation and Development Model
Tax Convention on Income and on Capital (OECD Model) contains a Non-
Discrimination Article. That article prevents discrimination on
the grounds of nationality by providing that nationals of one
country may not be treated less favourably, with respect to
taxation, than nationals of the other country in the same
circumstances. It also prevents more burdensome tax treatment of
tax residents of one country who have a permanent establishment in
the other country who are carrying on the same activities as tax
residents of that other country. Since 2003, Australia has
generally included Non-Discrimination Articles in its comprehensive
double tax treaties with 'carve outs' for certain Australian laws
(mainly anti-avoidance provisions and R&D).
124. From an R&D perspective, the broader eligibility in this Bill
includes only corporations that have a permanent presence in
Australia in that they are an Australian resident (regardless of
where they are incorporated) or have a permanent establishment here
through which that corporation carries on its business.
Entities ineligible for R&D tax offsets
125. An exempt entity, which is an entity all of whose income is exempt
from income tax, is not an R&D entity. The new R&D incentive is
not designed to deliver subsidies to exempt entities, which may be
eligible for grants under Government grant programs. [Schedule 1,
item 1, subsection 355-35(3)]
126. For a consolidated or multiple entry consolidated group (MEC
group), any purported registration by a subsidiary member is of no
effect (see detailed explanation in Chapter 5). Even without this
rule, in a consolidated or MEC group the head company (and not a
subsidiary) would get the R&D tax offset.
Entitlement to a tax offset and amount of the tax offset
To work out the total of notional deductions
127. To work out whether an R&D entity is entitled to an R&D tax offset
it is necessary to add up all the amounts that the entity can
notionally deduct under the R&D provisions for the income year for:
. R&D expenditure;
. decline in value of R&D assets;
. balancing adjustment for R&D assets;
. R&D expenditure to an associate in an earlier income year;
. decline in value of R&D partnership assets (where the
entity is a partner in certain partnerships);
. a balancing adjustment for R&D partnership assets; or
. as a monetary contribution to a Cooperative Research
Centre.
[Schedule 1, item 1, section 355-100]
When the total of notionally deductible amounts is at least $20,000
128. An R&D entity is entitled to a tax offset if the total of its
notional R&D deductions is at least $20,000. If the aggregated
turnover for the entity is less than $20 million, its tax offset is
equal to 45 per cent of the total deductions.
R&D entity controlled by exempt entities
129. If one or more exempt entities control the R&D entity in a way
described in section 328-125 (which is about where an entity is
connected with another entity) the entity's tax offset is equal to
40 per cent of the total deductions. In working out whether one or
more exempt entities control the R&D entity in a way described in
section 328-125, it is necessary to apply that section as if the
'control percentage' were 50 per cent, instead of 40 percent.
130. The 50 per cent threshold is double the 25 per cent cap that exists
under the current R&D tax offset. This will encourage
collaboration between exempt entities (such as universities) and
small firms while still providing some protection against the R&D
tax offset being used to fund non-business R&D (that receives
public support through other programs).
131. If the aggregated turnover for the entity is at least $20 million,
its tax offset is equal to 40 per cent of the total deductions.
132. Whether the tax offset is a refundable tax offset depends primarily
on the aggregated turnover of the entity and is explained in
paragraphs 3.41 and 3.42. [Schedule 1, item 1, section 355-100]
133. The existing law also contains a rule requiring an aggregate R&D
amount of at least $20,000. This threshold rule reflects that, in
general, a small amount of R&D expenditure is less likely to result
in significant innovation outcomes. Small claims also have the
potential to impose disproportionate administrative costs relative
to the benefit afforded to the claimant and the community.
Aggregated turnover
134. 'Aggregated turnover' is already defined in the income tax law in
the small business entity provisions (Division 328). Here, it is
the sum of the annual turnovers of the R&D entity, any entity
connected with the R&D entity and any entity affiliated with the
R&D entity, excluding any dealings between those entities.
135. 'Turnover' is also defined in the existing small business entity
provisions. The general rule is that an entity's annual turnover
for an income year is the total ordinary income that the entity
derives in the income year in the ordinary course of carrying on a
business. Therefore, if the R&D entity is not carrying on a
business at any time during the income year, its annual turnover is
nil. However, it would still be necessary to take into account the
annual turnover of any entity connected with the R&D entity and any
entity affiliated with the R&D entity.
1. : Entitlement to a tax offset where notional deductions are at
least $20,000
In the 2011-12 income year New Thingummies Pty Ltd, a
corporation incorporated in Australia, carries on a business
in Australia that includes R&D activities that it conducted
wholly in Australia. Its aggregated turnover for the income
year is $250,000.
New Thingummies incurs expenditure on R&D activities for
which it is entitled to a notional deduction of $180,000
(under section 355-205). It is also entitled to a notional
deduction of $20,000 for decline in the value of
depreciating assets (under section 355-305) but to no other
notional deductions under Division 355.
As the aggregated turnover of New Thingummies is less than
$20 million, it is entitled to a tax offset equal to $90,000
(45 per cent of $200,000). Also, as its aggregated turnover
is less than $20 million, the offset is a refundable tax
offset (see paragraphs 3.41 and 3.42).
When the total of notionally deductible amounts is less than
$20,000
136. If the total of the amounts that the entity can notionally deduct
under the R&D provisions for the income year is less than $20,000,
it can only obtain a tax offset in the limited circumstances
explained below. [Schedule 1, item 1, section 355-100]
Expenditure incurred to a Research Service Provider
137. An R&D entity can obtain an offset, regardless of the level of its
notional R&D deductions, for expenditure incurred to a Research
Service Provider (that is not an associate of the entity) for the
provider to provide services within a research field for which the
provider is registered under the Industry Research and Development
Act 1986 (IR&D Act). [Schedule 1, item 1, section 355-100]
138. The amount of the offset is equal to 45 per cent or 40 per cent
(depending primarily on the entity's aggregated turnover) of the
amount of expenditure satisfying these conditions. [Schedule 1,
item 1, section 355-100]
139. Research Service Provider has the same meaning it has in the IR&D
Act. In that Act the term means any body of persons, whether or
not incorporated, registered to provide services in one or more
specified research fields to registered R&D entities. [Schedule 1,
item 1, section 355-100]
140. There is a similar exception in the current law. The continuance
of the exception is intended to encourage entities that expend only
small amounts on R&D activities to use Research Service Providers.
[Schedule 1, item 1, section 355-100]
1. : Entitlement to a tax offset where notional deductions are less
than $20,000
In the 2011-12 income year Novel Methods Pty Ltd, a
corporation incorporated in Australia, carries on a business
in Australia and has an aggregated turnover for the income
year of $150,000.
Novel Methods is entitled to a notional deduction of $15,000
for expenditure it incurred to Ace Research Agency, a
Research Service Provider (that is not an associate of the
entity) for Ace Research Agency to provide a service in a
specified research field for which Ace Research Agency is
registered under the IR&D Act. It is not entitled to any
other notional deductions under Division 355.
Novel Methods is entitled to a tax offset of $6,750 (45 per
cent of $15,000), even though its total notional R&D
deductions are less than $20,000.
Expenditure incurred as a monetary contribution to a Cooperative
Research Centre
141. An R&D entity can also obtain an offset, regardless of the level of
its notional R&D deductions, for expenditure incurred as a monetary
contribution to a Cooperative Research Centre. (These
contributions are explained further in paragraphs 3.180 to 3.189.)
The amount of the offset is equal to 45 per cent or 40 per cent
(depending primarily on the entity's aggregated turnover but also
on whether the entity is controlled by exempt entities) of the
amount of expenditure satisfying these conditions. [Schedule 1,
item 1, subsections 355-100(1) and (2)]
Is the offset refundable or non-refundable?
142. Whether the tax offset to which an R&D entity is entitled is a
refundable tax offset depends on the aggregated turnover of the
entity (see paragraphs 3.33 and 3.34). If the aggregated turnover
for the income year is $20 million or more, the offset is a non-
refundable tax offset. If the aggregated turnover is less than
$20 million, the offset is a refundable tax offset, provided that
the entity is not (broadly) owned or controlled by one or more
exempt entities (with their affiliates). [Schedule 3, item 4,
section 67-30]
143. The rules applying to refundable tax offsets and non-refundable tax
offsets are explained in paragraphs 3.104 to 3.110.
R&D deductions are notional only
144. An R&D deduction to which an entity is entitled under the R&D
provisions in Division 355 is a notional deduction in that it is a
step in calculating an entity's tax offset entitlement. The entity
cannot actually deduct the relevant amount in working out its
taxable income (under section 4-15 of the ITAA 1997) because that
would result in a double benefit - a deduction and a tax offset -
for the same amount of expenditure or depreciation. [Schedule 1,
item 1, section 355-105]
145. Although deductions under Division 355 are not taken into account
in working out an entity's taxable income, those notional
deductions are treated as deductions for many purposes of the
income tax law. It is important to attract various rules in the
income tax law that apply in relation to deductions because there
is no similar legislative infrastructure for tax offsets. Thus, an
amount that an entity can deduct under the R&D provisions is
treated as an actual deduction for:
. a provision that prevents some or all of an amount being
deducted, for example:
- Division 26 (about some amounts that an entity cannot
deduct, or cannot deduct in full);
- Division 27 (effect of input tax credits on deductions);
- the forgiveness of commercial debt provisions (currently
in Schedule 2C to the ITAA 1936 but the Tax Laws
Amendment (Transfer of Provisions) Bill 2010 proposes to
transfer these provisions to Division 245 of the
ITAA 1997);
- Subdivision 57-G (denial of certain deductions) in
Schedule 2D (tax exempt entities that become taxable) of
the ITAA 1936; and
- the general anti-avoidance provisions in Part IVA of the
ITAA 1936;
. a provision that changes the income year in which an
amount can be deducted (for example, the prepayment rules
in Subdivision H of Division 3 of Part III of the ITAA
1936);
. a provision that includes an amount in assessable income
wholly or partly because an amount has been deducted (for
example, the rules about recoupment of deductible amounts
in Subdivision 20-A);
. the cost base rules in the capital gains and losses
provisions (commonly known as capital gains tax (CGT)) in
Parts 3-1 and 3-3;
. applying the R&D provisions to work out a tax offset
entitlement; and
. other provisions that refer to an entitlement to a tax
offset under the R&D provisions (for example, the
balancing adjustment provisions in sections 40-292 and 40-
293).
[Schedule 1, item 1, section 355-105]
146. Where one of those provisions requires or permits the Commissioner
of Taxation (Commissioner) to do a thing (for example, hold an
opinion, form a judgment, or make a determination), the
Commissioner can do that thing as if the R&D notional deduction is
an actual deduction. [Schedule 1, item 1, section 355-105]
147. For the avoidance of doubt, where the prepayment rules (in
Subdivision H of Division 3 of Part III of the ITAA 1936) apply to
work out the amount of an R&D deduction for expenditure, the amount
is treated as deducted under the deduction provisions for R&D
expenditure (section 355-205 or 355-480), not under the prepayment
rules. [Schedule 1, item 1, section 355-110]
1. : Application of prepayment rules to R&D deductions
In the 2011-12 income year Upfront Payments Pty Ltd, a
corporation incorporated in Australia, carries on a business
in Australia that includes R&D activities. Its aggregated
turnover for the income year is $800,000, which means that
it is a small business entity for the purposes of the income
tax law.
On 1 June 2012 Upfront Payments incurs expenditure of
$150,000 for services to be provided by a contractor over
three years (1,095 days). That expenditure satisfies the
conditions for a notional deduction for R&D expenditure set
out in section 355-205. For the purposes of Subdivision H
of Division 3 of Part III of the ITAA 1936 the deduction
under section 355-205 is treated as an actual deduction
(section 355-110).
Section 82KZM applies to the deduction under section 355-205
because:
. Upfront Payments is a small business entity (and has not
chosen not to apply section 82KZMD to the expenditure);
. the expenditure is not 'excluded expenditure' (as defined in
section 82KZL);
. the eligible service period for the expenditure is longer
than 12 months; and
. a deduction under section 355-205 would, apart from
section 82KZM, have been allowed in the year Upfront
Payments incurred the expenditure.
The effect of section 82KZM is that the deduction under
section 355-100 is spread over the service period. In the
2011-12 income year Upfront Payments is entitled to a
deduction for the expenditure under section 355-205 of
$4,110 ((30 / 1,095) × $150,000).
2. : Application of Part IVA to R&D deductions
During the 2012-13 income year Big Claims Pty Ltd incurs
expenditure of $10 million on an R&D activity in a way that
satisfies section 355-205 (when notional deductions for R&D
expenditure arise). Big Claims lodges its income tax return
for the 2012-13 income year, and thus self assesses, on the
basis that it is entitled to an R&D tax offset equal to $4.5
million (45 per cent of $10 million).
However, the notional deduction of $10 million was obtained
by Big Claims under a scheme that Big Claims entered into
for the dominant purpose of obtaining the notional
deduction. The notional deduction of $10 million is a tax
benefit obtained by Big Claims in connection with a scheme
to which Part IVA of the ITAA 1936 applies. For the
purposes of Part IVA, including the definition of 'tax
benefit', a notional R&D deduction is treated as if it were
an actual deduction (section 355-105).
Under section 177F (cancellation of tax benefits etc), the
Commissioner determines that the whole of the amount of $10
million is not a notional deduction allowable to R&D and
amends the assessment of Big Claims so that it is not
entitled to any tax offset for the income year.
Big Claims might nevertheless be able to establish an
entitlement to deduct the $10 million (or part thereof)
under section 8-1, assuming none of it is capital or of a
capital nature. Alternatively, the Commissioner might
decide that he should make a compensating adjustment to
permit a section 8-1 deduction under paragraph 177F(3)(b) of
the ITAA 1936.
Conditions applying to R&D expenditure, decline in value of R&D
depreciating assets and balancing adjustment for depreciating assets
Registration
148. To be eligible for an R&D notional deduction for expenditure on R&D
activities, the R&D entity must be registered under section 27A of
the IR&D Act for an income year for the activities on which it
incurs the expenditure. To be eligible for an R&D notional
deduction for a decline in value of a depreciating asset, the R&D
entity must be registered for the income year it holds the asset
for the purpose of conducting R&D activities. The registration
rules are discussed in more detail in Chapter 5. [Schedule 1, item
1, sections 355-205 and 355-305]
149. For the balancing adjustment for depreciating assets used only for
R&D activities, it is necessary that the R&D entity be registered
for the income year in which the balancing adjustment event happens
(see paragraphs 3.92 to 3.96). [Schedule 1, item 1, section 355-
315]
Where activities must be conducted
150. An R&D entity is eligible for notional deductions in relation to
R&D activities it conducts solely within Australia or an External
Territory. [Schedule 1, item 1, paragraphs 355-210(1)(a), 355-
215(a) and (b) and 355-220(1)(a) and (b)]
Overseas activities
151. An R&D entity is also eligible for notional R&D deductions for
an overseas R&D activity conducted for the R&D entity while a
finding by the Innovation Australia (the Board) under section 28C
of the IR&D Act is in force for the R&D activity. [Schedule 1,
item 1, paragraphs 355-210(1)(d) and (e)]
152. A number of conditions must be satisfied before the Board issues a
positive finding under section 28C in relation to an activity
conducted, or to be conducted, outside Australia and its External
Territories. The activities:
. must be R&D activities covered by positive findings under
section 28A;
. must have a significant scientific link to core R&D
activities conducted in Australia;
. must not be able to be conducted in Australia;
. must incur less expenditure than the related activities
conducted in Australia.
[Schedule 2, item 1, sections 28C and 28D of the IR&D Act ]
R&D expenditure that can be eligible for a notional R&D deduction
The standard case - activities conducted by or for the R&D entity
153. Generally, an R&D entity is only entitled to a tax deduction in
relation to R&D activities conducted for the entity (whether by the
R&D entity for itself or by another entity for it). Also, an
entity cannot deduct its expenditure on R&D activities if it
conducts those activities to a significant extent for another
entity. [Schedule 1, item 1, section 355-210]
154. This retains a key rule from the existing law commonly known as the
'on own behalf' rule. This rule is intended to limit eligibility
for a notional R&D deduction to where an R&D entity is the major
benefactor from the expenditure it incurs on the R&D activities.
In certain situations, the rule also prevents duplication of claims
by different R&D entities. [Schedule 1, item 1, section 355-210]
155. Determining the major benefactor of expenditure on R&D activities
involves examining the extent to which R&D activities are carried
out for the R&D entity compared to the extent to which they are
carried out for any other entity. This is tested by weighing up
three key criteria, namely who:
. 'effectively owns' the know-how, intellectual property or
other similar results arising from the R&D entity's
expenditure on the R&D activities;
. has appropriate control over the conduct of the R&D
activities; and
. bears the financial burden of carrying out the R&D
activities.
In short, the question of whether an R&D activity is conducted for
an R&D entity is a question of fact, determined by whether the
activity is conducted in substance to provide the majority of
knowledge benefits resulting from the activity, such as access to
intellectual property, to this entity.
156. Whether an R&D entity has effective ownership involves reviewing
all the circumstances surrounding the conduct of the relevant
activities and the ownership and control of, and/or ability to
utilise, the intellectual property or similar results obtained from
the expenditure on the R&D activities.
1. : Operation of 'on own behalf' rule
A Pty Ltd and B Pty Ltd are both R&D entities. They both
enter into a contract under which B Pty Ltd is to carry out
specified services that qualify as R&D activities under
Subdivision 355-A. A Pty Ltd has no expertise in the
particular R&D field, but has given broad direction to B Pty
Ltd in the contract about the specifications it wants
achieved by the work. A Pty Ltd is obliged to pay B Pty Ltd
for the cost of those services, irrespective of the results
obtained.
A Pty Ltd is the major benefactor of the R&D expenditure it
has incurred, through being the only entity which can access
intellectual property arising from the R&D activities, for
its own commercial purposes. B Pty Ltd does not benefit at
all in relation to this intellectual property or any other
knowledge benefits gained. B Pty Ltd conducts the R&D
activities for A Pty Ltd, and not to any extent for itself.
2. : Operation of 'on own behalf' rule where activities conducted
jointly
X Pty Ltd and Y Pty Ltd both operate in the same industry
and decide to pool their resources and undertake R&D
activities jointly in a field of common interest. They both
contribute equally to a pool of funds to fund the R&D
activities, on the understanding that they will both have
the same right to use the results of those activities in
their respective businesses on completion of the activities.
Despite conducting R&D activities jointly, X Pty Ltd and Y
Pty Ltd are not partners for income tax purposes. They do
not carry on a business in common and are not in receipt of
any income jointly.
The interests of X Pty Ltd and Y Pty Ltd in the know-how
developed from the expenditure on the R&D activities are the
same and commensurate with their respective expenditures.
So both entities have effective ownership of the results
arising from their own expenditures. Further, the
expenditure of each of X Pty Ltd and Y Pty Ltd is not a
recoupment or reimbursement of the other's expenditure, so X
Pty Ltd and Y Pty Ltd each bear their share of the financial
burden of the R&D activities. While the R&D activities
might be said in one sense, to be conducted for them both,
their joint input into what activities are carried on, their
sharing of the financial burden and the nature of their
respective interests in the results, where neither can
fetter use by the other, means that their separate
expenditures are not on R&D activities conducted to a
significant extent for the other.
The conclusion is that X Pty Ltd and Y Pty Ltd each conducts
R&D activities for itself and neither conducts R&D
activities to a significant extent for another entity.
Permanent establishments
157. Under Australia's comprehensive double tax treaties, the business
profits attributable to a permanent establishment of a foreign
resident are calculated as if the permanent establishment were an
entity that was separate and independent of the foreign corporation
(that is, the profits of the permanent establishment are determined
on the basis of arm's length dealings).
158. Where the R&D entity is a foreign corporation carrying on its
business through a permanent establishment in Australia and incurs
expenditure for the benefit of that permanent establishment, and
not to a significant extent for other parts of the body corporate
or another entity, the 'on own behalf' rule is satisfied.
[Schedule 1, item 1, paragraph 355-210(1)(a) and subsection 355-
210(2)]
R&D activities conducted for foreign corporations
159. The new incentive also retains an exception to the 'on own behalf'
rule that currently exists for certain activities conducted by the
R&D entity for one or more foreign corporations that are related to
the R&D entity (called foreign-owned R&D in the existing law).
Each of the foreign corporations for whom the activities are
conducted must be a resident of a country with which Australia has
a comprehensive double tax agreement. [Schedule 1, item 1,
subsection 355-210(1) and section 355-220]
160. Also, the R&D activities must be conducted under a written
agreement between the R&D entity and each foreign corporation for
the activities to be performed by:
. the R&D entity; or
. another entity directly or indirectly under another
agreement to which the R&D entity is a party.
[Schedule 1, item 1, section 355-220]
161. The written agreement(s) will identify the one appropriate eligible
R&D entity that is entitled to the offset. [Schedule 1, item 1,
paragraph 355-220(1)(d)]
162. Finally, R&D entities conducting the activities as a subcontractor
under a contract with a related R&D entity are ineligible for a tax
offset. In this way, double deductions under the new concession
for the same expenditure will be prevented. [Schedule 1, item 1,
paragraph 355-220(1)(e) and subsection 355-220(2)]
R&D activities conducted by a permanent establishment for other
parts of the foreign corporation
163. The new R&D incentive has an exception to the 'on own behalf' rule
for a permanent establishment of a foreign resident corporation
that corresponds to the above exception for R&D activities
conducted for a foreign corporation. [Schedule 1, item 1,
subsection 355-210(1) and section 355-215]
164. It applies where the permanent establishment incurs expenditure for
R&D activities conducted for the body corporate, but not for the
purposes of that permanent establishment. There must also be
written evidence of that. [Schedule 1, item 1, subsection 355-
210(1) and section 355-215]
Expenditure that is not eligible for a notional R&D deduction
165. The following types of expenditure are expressly excluded from
eligibility for a tax offset:
. expenditure incurred for interest (within the meaning of
interest in the withholding tax rules) payable to an
entity;
. expenditure that is not at risk; and
. expenditure on core technology.
[Schedule 1, item 1, section 355-225]
166. These types of expenditure do not warrant the enhanced tax benefits
available under the R&D tax offsets. They all need to be
considered under the normal deduction provisions of the income tax
law. [Schedule 1, item 1, section 355-225]
167. In the current law, these types of expenditure are eligible for
100 per cent deduction under the R&D provisions (except for core
technology expenditure which has a special treatment). Allowing
normal tax rules to apply to these expenditures is much simpler
than bringing the expenditures into the R&D regime and applying a
different rate of benefit. It also ensures that capital
expenditures, that under normal tax principles should be written
off over a number of years, do not receive the anomalous treatment
of being immediately deductible.
168. Expenditure that is not at risk is discussed in paragraphs 3.164
and 3.167.
Interest
169. Here, interest has the same broad meaning as it has in the
withholding tax rules in Division 11A of Part III of the ITAA 1936.
This includes an amount in the nature of interest (for example, a
discount on a security) and a dividend on a non-equity share.
Core technology expenditure
170. Expenditure is excluded from an R&D deduction if it is incurred in
acquiring technology for the purpose of R&D activities directed
towards obtaining new knowledge based on that technology or
creating new or improved things (for example, materials, products,
devices) based on that technology. This exclusion is aimed at
expenditure incurred by an R&D entity in 'bringing in' technology
that is already developed and does not extend to expenditure that
the entity incurs in developing technology itself.
Cost of a depreciating asset
171. Expenditure included in the cost of a depreciating asset (except an
intangible asset) for the purposes of working out notional decline
in value of the asset under the new R&D provisions is also excluded
from the R&D expenditure provision. This simply reflects the
priority of the R&D depreciating asset rules over the expenditure
rules. [Schedule 1, item 1, section 355-225]
Buildings
172. Expenditure incurred to acquire or construct a building (or part of
a building or an extension, alteration or improvement to a
building) is also ineligible for a notional R&D deduction. These
expenditures are considered under the normal rules applying to
buildings, especially Division 43. This accords with current
treatment of expenditure on buildings under the definition of
'research and development expenditure' in subsection 73B(1) of the
ITAA 1936. [Schedule 1, item 1, section 355-225]
173. There is an exception for expenditure on a building, or part of a
building, that is plant. That expenditure is specifically excluded
from Division 43 and so a building (or part thereof) that is plant
is subject to the depreciating asset rules in Division 40.
Consequently, an R&D entity may be able to obtain a notional R&D
deduction for the decline in value of a building, or more commonly
part of a building, that is plant. [Schedule 1, item 1, sections
355-225 and 355-305]
Entitlement to notional R&D deduction for R&D expenditure
174. An R&D entity is entitled to a notional R&D deduction for
expenditure to the extent that:
. the entity satisfies the conditions (about registration
and where activities must be conducted) applying to both
R&D expenditure and decline in value of R&D depreciating
assets (explained above);
. the expenditure is of a kind eligible for an R&D deduction
(also explained above); and
. the entity incurs expenditure during the income year
(other than an amount it incurs to an associate but does
not pay until a later income year) on one or more
registered activities.
[Schedule 1, item 1, section 355-205]
175. Thus, the general rule is that expenditure on R&D activities is
deductible for the income year it is incurred. There are
exceptions to this rule where:
. an amount of expenditure is incurred to an associate
(which has its normal broad meaning in the income tax
law); or
. the rules about prepayments of expenditure for services to
be provided over a period apply (explained further in
paragraphs 4.31 to 4.33).
176. Also, an R&D entity's entitlement to a notional deduction does not
arise until the entity is registered for the income year in which
it conducts the activities on which the entity incurs the
expenditure. However, the year of registration does not, of
itself, affect the income year for which the R&D entity is entitled
to a notional deduction. That is, once registration occurs, the
entitlement is for the income year in which the expenditure is
incurred, subject to the associate and prepayment rules referred to
above. [Schedule 1, item 1, section 355-205]
177. The words 'to the extent that' in the expenditure rule permit the
apportionment of undissected amounts of expenditure between R&D
activities and other activities. For example, where an R&D entity
incurs expenditure on salary and employer superannuation
contributions for an employee who works partly on R&D activities
(that satisfy the tests explained in Chapter 2) and partly on other
unrelated activities. [Schedule 1, item 1, section 355-205]
Expenditure incurred to an associate
178. If the R&D entity incurs an amount of expenditure to an associate
and pays the amount in the same year, that amount is deductible in
that year (assuming other conditions are satisfied). Payment has
its general legal meaning in the income tax law, which includes
constructive payment. Therefore, in working out whether an R&D
entity has paid an amount to another entity, and when the payment
is made, the amount is taken to be paid to the other entity when
the R&D entity applies or deals with the amount in any way on the
other's behalf, or as the other directs. [Schedule 1, item 1,
section 355-205]
179. However, if the R&D entity does not pay the amount incurred until a
later income year, the entity has a choice. The entity can choose
to deduct an amount (or, if relevant, obtain a non-R&D tax offset)
under the normal income tax provisions (for example, the general
deduction provision, section 8-1). The entity must make the choice
by the time it lodges its income tax return for the most recent
income year before the income year in which it paid the amount.
180. It would usually do this by claiming a deduction (or a non-R&D tax
offset) in its income tax return (although it could also do so by
requesting an amendment of an assessment to deduct the expenditure
in the income year it was incurred). Having claimed the deduction
(or obtained a tax offset) for this expenditure, the R&D entity
foregoes any entitlement to a notional R&D deduction in the year of
payment. This cannot be reversed, for example, by later requesting
an amendment of the assessment to disallow the deduction claimed.
[Schedule 1, item 1, sections 355-205 and 355-480]
181. If the entity does not choose to deduct the amount under the normal
income tax provisions and pays the amount to the associate in an
income year after it was incurred, the entity is entitled to a
notional R&D deduction in the year of payment. [Schedule 1, item
1, section 355-480]
1. : Expenditure incurred to an associate but not paid until a later
income year
Ingenious Plans Pty Ltd, a corporation incorporated in
Australia, carries on a business in Australia that includes
R&D activities. In the 2011-12 income year Ingenious Plans
incurs expenditure of $20,000 to an associate for the
associate to carry out R&D activities on its behalf.
However, Ingenious Plans does not pay the $20,000 until the
2012-13 income year.
Ingenious Plans is registered for the activities for the
income year in which they were conducted. The expenditure
also satisfies the various conditions in section 355-205 for
the expenditure to be deductible. Nevertheless, Ingenious
Plans cannot deduct the expenditure to the associate in the
2011-12 income year because the amount was not paid in that
income year.
In lodging its income tax return for the 2011-12 income year
Ingenious Plans did not take the expenditure to the
associate into account in working out the amount of a
deduction under any provision outside Division 355 or any
entitlement to a tax offset.
Ingenious Plans is entitled to a notional R&D deduction for
the expenditure of $20,000 for the 2012-13 income year.
Entitlement to notional deduction for the decline in value of R&D
depreciating assets
182. An R&D entity is entitled to a notional R&D deduction for the
decline in value of a depreciating asset if:
. the entity satisfies the conditions (about registration
and where the activities are conducted) applying to both
R&D expenditure and decline in value of R&D depreciating
assets (explained above);
. the entity used the asset during the income year for
conducting R&D activities; and
. the entity would be entitled to deduct an amount under the
depreciating asset provisions (Division 40) if those
provisions applied with certain changes.
[Schedule 1, item 1, section 355-305]
183. The entity cannot deduct an amount if the asset has been pooled
with other assets for working out deductions for depreciating
assets. Conversely, the entity cannot allocate a depreciating
asset to a low value pool or one of small business pools after the
R&D depreciating asset provisions have applied to the asset.
[Schedule 1, item 1, paragraph 355-305(1)(d); Schedule 3, item 24,
subsection 40-425(8); Schedule 3, item 99, subsection 328-175(9) of
the ITAA 1936]
Notional application of depreciating asset provisions
184. Working out whether the entity would be entitled to deduct an
amount under the depreciating asset provisions (Division 40) if
those provisions were applied with certain changes is called the
notional application of Division 40. This notional application is
for the purposes of working out the notional R&D deduction for the
decline in the value of a depreciating asset and any balancing
adjustment for a depreciating asset used only for R&D activities
(and also amounts excluded from deduction as R&D expenditure).
[Schedule 1, item 1, section 355-305]
Purpose of conducting R&D activities
185. The main change made in working out the notional Division 40
deduction is that references to the purpose of producing assessable
income or a taxable purpose are replaced with references to the
purpose of conducting one or more R&D activities (except in limited
specified cases). The object of this change is to work out the
notional Division 40 deduction based on its use for R&D activities.
The notional deduction is reduced to the extent that the asset is
used for a purpose other than R&D activities. The R&D entity may
be entitled to an actual Division 40 deduction for that other use
(for example, the other use is in carrying on a business for the
purpose of producing assessable income). [Schedule 1, item 1,
section 355-310]
Buildings and capital works other than buildings
186. The second change is to assume that Division 40 does not apply to a
building (or an extension, alteration or improvement to a building)
for which the entity can deduct an amount under the capital works
provisions in Division 43. Nor does it apply to a building (or an
extension, alteration or improvement to a building) for which the
entity could have deducted an amount under Division 43 if the
entity had started work before a particular date or used the
building for R&D activities. The object of the change is to
replace the rule in Division 40 that excludes capital works for
which you can get deduct amounts under Division 43. The result is
that an R&D entity can get an R&D deduction (and therefore, a tax
offset) for the decline in value of capital works that are not
buildings that it uses in R&D activities. [Schedule 1, item 1,
section 355-310]
Uses to ignore
187. In working out the notional deduction for decline in value of a
depreciating asset, it is necessary to ignore uses of the asset
that would not satisfy the various conditions. In particular, it
would be necessary to ignore uses for R&D activities that:
. were not registered for the income year in which they were
conducted;
. did not meet conditions about where activities must be
conducted; or
. did not satisfy the 'on own behalf' test.
[Schedule 1, item 1, sections 355-305 and 355-310]
Effective life
188. In working out the effective life of a depreciating asset it is
necessary to estimate the period that the asset can be used by an
entity for one or more of these:
. a taxable purpose;
. the purpose of producing exempt income or non-assessable
non-exempt income; or
. the purpose of conducting R&D activities, assuming that
this is reasonably likely.
[Schedule 3, items 18 to 20, subsections 40-95(9), 40-100(4) and 40-
105(1) to (3)]
189. This applies both for a taxpayer self assessing effective life and
for the Commissioner making a written determination of effective
life. [Schedule 3, items 18 to 20, subsections 40-95(9), 40-100(4)
and 40-105(1) to (3)]
190. Where it is reasonably likely that an asset will be used for the
purpose of conducting R&D activities, it is also necessary, in
having regard to the period within which the asset is likely to be
scrapped or abandoned, to disregard reasons attributable to
technical risk in conducting R&D activities. [Schedule 3, items 18
to 20, subsections 40-95(9), 40-100(4) and 40-105(1) to (3)]
191. There are similar rules about effective life, so far as they relate
to R&D activities, in the existing R&D provisions (section 73BG of
the ITAA 1936). Those rules apply for working out both notional
and actual deductions. In the new law, those provisions are
located in Division 40. Locating the rules about effective life in
one place should assist readers. As the rules apply for working
out actual Division 40 deductions as well as notional deductions
for the R&D provisions, there is no strong reason to locate the
rules in the R&D provisions.
No change in decline in value method
192. A taxpayer generally has a choice of two methods - the prime cost
method and the diminishing value method - in working out the
decline in value of a depreciating asset and cannot change methods.
If an R&D entity has previously worked out actual deductions under
Division 40 for an asset, it must use the same method in working
notional deductions under Division 40, and vice versa. [Schedule
3, item 17, subsections 40-65(6) and (7)]
Balancing adjustment for depreciating assets used only for R&D
activities
193. Where an R&D entity has used a depreciating asset only for R&D
activities; it is or has been entitled to R&D decline in value
deductions; and a balancing adjustment event happens (for example,
the entity sells or scraps the asset), a balancing adjustment is
worked out. This is necessary so that a taxpayer's income tax
position over time reflects the actual decline in value of the
assets, rather than the estimates on which depreciation deductions
have been based. The balancing adjustment results in a further
('catch-up') notional R&D deduction or an uplifted amount being
included in assessable income (to claw back excessive deductions).
[Schedule 1, item 1, section 355-315]
194. For this balancing adjustment to apply, it is also necessary that
the R&D entity be registered for the income year in which the
balancing adjustment event happens. Where an entity has ceased R&D
activities in a previous income year and scraps an asset in the
current income year, it is not appropriate for the entity to obtain
the enhanced benefits of the R&D provisions for the decline in
value that may have occurred (in whole or part) after R&D
activities ceased. Nor will an uplifted amount be included in
assessable income. [Schedule 1, item 1, section 355-315]
195. If the R&D entity would have been entitled to a balancing deduction
under the standard balancing adjustment provision of section 40-285
(assuming the changes discussed in paragraphs 3.83 to 3.91), the
entity is entitled to an R&D deduction of an equivalent amount.
That R&D deduction is included in the calculation of the entity's
tax offset. [Schedule 1, item 1, section 355-315]
196. Conversely, if an amount would have been included in assessable
income of the R&D entity under the standard balancing adjustment
provision of section 40-285 (assuming the changes discussed in
paragraphs 3.83 to 3.91), the sum of that amount (the section 40-
285 amount) plus an additional amount is included in the entity's
assessable income. The additional amount is included to reflect
that the R&D entity has obtained enhanced benefits in the form of
an offset at 40 or 45 per cent on the decline in value. [Schedule
1, item 1, section 355-315]
197. The additional amount is equal to one third of so much of the
section 40-285 amount as does not exceed the total decline in
value. The factor of one third is based on an offset rate of 40
per cent (rather than the higher 45 per cent rate that generally
applies to R&D entities with an aggregated turnover of less than
$20 million). [Schedule 1, item 1, section 355-315]
1. : Balancing adjustment for depreciating assets used only for R&D
activities
B Pty Ltd was incorporated in Australia and carries on a
business in Australia that includes R&D activities that it
conducts wholly in Australia. Its aggregated turnover for
each income year is under $20 million. B Pty Ltd has a
standard income year ending on 30 June.
On 1 July 2011, B Pty Ltd purchases a mass spectrometer for
use in carrying on its R&D activities. The unit costs
$30,000. B Pty Ltd assesses the effective life of the unit
as five years and chooses the prime cost method for
calculating its decline in value.
During the 2011-12 and 2012-13 income years, B Pty Ltd uses
the unit only in carrying on its R&D activities. It sells
the unit on 31 December 2012 for $15,000.
As B Pty Ltd only ever used the unit for undertaking R&D
activities, it will work out a balancing adjustment under
section 355-315. It is entitled to a notional deduction
equal to the amount calculated under subsection 40-285(2),
which is equal to the termination value less the adjustable
value. The termination value is $15,000. The adjustable
value is equal to the opening adjustable value less the
decline in value during the 2012-13 income year. The
opening adjustable value is $24,000. The decline in value
is $3,000. Accordingly, the adjustable value is $21,000.
B Pty Ltd is entitled to a notional deduction of
$6,000 ($21,000 - $15,000) under subsection 355-315(2).
Assuming B Pty Ltd has total notional R&D deductions over
$20,000 for 2012-13, B Pty Ltd is entitled to an offset of
$2,700 (45 per cent of $6,000) in respect of the sale of the
unit.
Balancing adjustment for assets used partly for R&D activities
198. A balancing adjustment must also be worked out where an R&D entity
has used a depreciating asset partly for R&D activities and partly
for another purpose that is a taxable purpose (for example, the
purpose of producing assessable income) under the capital allowance
provisions.
199. The existing balancing charge provision that covers this case,
section 40-292, is replaced by a similar provision that reflects
the new R&D provisions.
200. In working out reductions in the balancing adjustment amount for
non-taxable use, use for the purpose of conducting R&D activities
is assumed to be use for a taxable purpose. [Schedule 3, item 24,
section 40-292]
201. If the R&D entity is entitled to a balancing deduction under the
standard balancing adjustment provision of section 40-285, the
amount of the balancing deduction is increased. The amount is
increased by half if the R&D entity's aggregated turnover is less
than $20 million and one third in other cases. The factors by
which the deduction amount is increased are equivalent to the 45
per cent and 40 per cent rates at which the R&D tax offsets are
calculated. [Schedule 3, item 24, section 40-292]
202. If an amount is included in the R&D entity's assessable income
under section 40-285, the amount assessable is increased by one
third of an amount worked out under a formula. The factor of one
third is concessional for those R&D entities with an aggregated
turnover of at least $20 million but is used for simplicity
reasons. [Schedule 3, item 24, section 40-292]
203. The formula adjusts the amount worked out under section 40-285 so
that it does not exceed the asset's total decline in value. It
then applies a factor so that the amount being clawed back reflects
that proportion of the decline in value of the asset represented by
total notional R&D deductions. [Schedule 3, item 24, section 40-
292]
1. : Balancing adjustment for assets used partly for R&D activities
C Pty Ltd was incorporated in Australia and carries on a
business in Australia that includes R&D activities that it
conducts wholly in Australia. Its aggregated turnover for
each income year is under $20 million.
On 1 July 2011, C Pty Ltd purchases a mass spectrometer for
use in its business. The unit costs $30,000. C Pty Ltd
assesses the effective life of the unit as five years and
chooses the prime cost method for calculating its decline in
value. C Pty Ltd uses the unit 50 per cent of the time for
carrying on ordinary business activities and 50 per cent of
the time for carrying on R&D activities.
During the 2012-13 income year, C Pty Ltd sells the unit on
31 December 2012 for $15,000. C Pty Ltd is entitled to a
deduction under subsection 40-285(2) which is equal to the
termination value less the adjustable value. The
termination value is $15,000. The adjustable value is equal
to the opening adjustable value less the decline in value
during the 2012-13 income year. The opening adjustable
value is $24,000. The decline in value is $3,000.
Accordingly, the adjustable value is $21,000. C Pty Ltd is
entitled to a deduction of $6,000 ($21,000 - $15,000)
under section 40-285.
C Pty Ltd is also entitled to an additional deduction
because of section 40-292. As a result of the use of the
asset in R&D activities for 50 per cent of the time it has
been held by Company A, Company A has been entitled to
notional deductions of $4,500 (1/2 × ($6,000 + $3,000))
under section 355-305. Subsection 40-292(2) requires the
company to calculate an amount under subsection 40-292(5) as
follows:
Sum of R&D deductions × adjusted section 40-285 amount
Total decline in value
$4,500 × $6,000 = $3,000
$9,000
Subsection 40-292(3) provides that a company is entitled to
increase its section 40-285 deduction by the amount worked
out by multiplying the amount worked out under subsection 40-
292(5) by one half (because it has an aggregated turnover of
less than $20 million).
C Pty Ltd is entitled, under subsection 40-292(3), to
increase its section 40-285 deduction by 1/2 × $3,000 =
$1,500. Its total section 40-285 deduction is $7,500
($6,000 + $1,500).
Relationship between R&D depreciating asset rules and R&D
expenditure rules
204. The R&D depreciating asset rules have priority over the R&D
expenditure rules where an R&D entity incurs an amount of
expenditure that is included in the cost of a depreciating asset
for working out notional deduction for decline in value under
Subdivision 355-D. The object is that the notional deduction for
the expenditure and, therefore, the R&D tax offsets, should be
spread over the effective life of the assets. [Schedule 1, item 1,
sections 355-225 and 355-305]
Application of the tax offset rules
Refundable tax offsets
205. If the offset is a refundable tax offset the normal income tax
rules for refundable tax offsets apply. These include the priority
rules about how a taxpayer's tax offsets must be applied against
their basic income tax liability (subsection 63-10(1)). A
refundable tax offset is applied after all other tax offsets,
except the tax offset that arises from the payment of franking
deficit tax. If there is an excess the taxpayer is entitled to a
refund, subject to the rules in Divisions 3 (Treatment of payments,
credits and RBA surpluses) and 3A (Refunds of RBA surpluses and
credits) of Part IIB of the Taxation Administration Act 1953, which
cover how the Commissioner must apply credits, including refunds.
Under those rules the Commissioner may allocate the credit to a
running balance account or apply a credit against a particular tax
debt (for example, a goods and services tax debt).
206. The new refundable tax offset provision is included in Division 67,
which covers refundable tax offsets. [Schedule 3, items 2 to 4,
sections 67-23 and 67-30]
207. This Bill has been prepared on the basis that, to the extent the
refundable tax offset provides for the payment of refunds of unused
tax offset amounts, the offset is supported by the Commonwealth's
executive power. Nevertheless, specific savings rules have been
included to safeguard the refundable tax offset provisions if, in a
constitutional challenge, the High Court were to find that the
executive power did not support the payment of refunds in the
circumstances described.
208. The savings rules rely primarily on the Commonwealth's corporations
power in paragraph 51(xx) of the Constitution because it is
corporations (including a corporate trustee of a public trading
trust) that are entitled to a refundable tax offset. This is done
by providing that the application of the refundable tax offset
rules to an R&D tax offset also has effect as if references to an
R&D entity were to a constitutional corporation. Constitutional
corporation is already defined in the income tax law to mean a
corporation to which the corporations power applies or a body
corporate incorporated in a Territory. [Schedule 3, item 4,
subsection 67-30(2)]
209. The savings rules also rely on the Territories and external affairs
powers in respect of:
. an R&D entity incorporated in a Territory;
. an R&D entity with a registered office or principal place
of business in a Territory;
. R&D activities conducted solely in a Territory;
. R&D activities conducted solely outside Australia; or
. activities conducted solely for the dominant purpose of
supporting core R&D activities conducted (or to be
conducted) solely in a Territory.
[Schedule 3, item 4, subsections 67-30(2) and (3)]
210. Similar constitutional savings provisions are included in the IR&D
Act to safeguard Part III (functions relating to the R&D tax
offset) of that Act against constitutional challenge. [Schedule 2,
item 1, section 32C of the IR&D Act]
Non-refundable tax offsets
211. If the offset is not a refundable tax offset, it is applied before
refundable tax offsets but after all other tax offsets (such as a
foreign income tax offset). An R&D entity may carry forward a non-
refundable tax offset to a later year, provided that it satisfies
the standard rules about the carry-forward of tax losses
(Division 65). [Schedule 3, item 1, subsection 63-10(1)]
An R&D entity obtains a grant or other recoupment from an Australian
government
212. Subdivision 355-G adjusts the overall benefit an R&D entity
receives where activities eligible for the R&D tax incentive also
benefit from a government grant or other recoupment.
213. Where the recoupment essentially reimburses the entity for a
specific expenditure on an R&D activity, the entity could, in the
absence of a clawback adjustment, also enjoy the R&D tax incentive
on that expenditure, resulting in a double benefit.
214. The other case of interest is where an R&D entity spends its own
money on R&D activities along with a matching (often equivalent)
amount that is funded by a recoupment in the form of a grant.
Without a clawback adjustment, the R&D entity could enjoy both a
tax incentive and a matching grant in relation to the spending of
its own money, along with a tax incentive in relation to the
spending that was funded by the grant, resulting in a 'triple
benefit' accruing to the R&D entity's self-funded outlay.
215. In both cases, the clawback adjustment reduces the benefit from the
recoupment to reflect the extent to which it has been duplicated by
the R&D tax incentive. In this context, only the 'incentive
component' of an R&D tax offset is taken to provide a benefit. The
incentive component is the extent to which the tax offset rate is
greater than the company tax rate.
216. For simplicity, this clawback adjustment is effected by imposing
'extra income tax' on the recoupment (rather than actually
adjusting the grant or offset). As a further simplicity measure,
the incentive component of an R&D tax offset is taken to be 10
percentage points; that is, the R&D entity is taken to have
received the tax offset at the standard rate of 40 per cent, rather
than a possible 45 per cent.
217. Accordingly, clawback takes the form of extra income tax on the
recoupment, at the rate of 10 per cent, on an amount equal to the
amount related to the recoupment on which an offset is received.
1. : Matching grant spent wholly on R&D activities
Oulixeus Ltd receives a $1 million grant in relation to
eligible R&D activities that it conducts. The grant
requires Oulixeus to spend a total of $2 million (including
the grant money) on specified R&D activities, which it does
during the income year the grant was received. Oulixeus has
a turnover greater than $20 million.
Oulixeus receives an R&D tax offset of $800,000 on its
$2 million of project spending (40 per cent of $2 million).
However, to claim the offset, Oulixeus forwent a $2 million
tax deduction that would have provided a tax benefit worth
$600,000 (30 per cent of $2 million). The incentive
component of the tax offset is therefore $200,000 (10 per
cent of $2 million).
Oulixeus's $1 million outlay has given rise to a government
grant of $1 million and a $200,000 R&D tax incentive. The
grant is therefore worth more to Oulixeus than the R&D tax
incentive.[3]
The tax incentive is clawed back by a 10 per cent tax on an
amount equivalent to the project expenditure for which an
R&D tax offset was claimed. The extra income tax on the
grant is $200,000 (10 per cent of $2 million), which is
equivalent to the incentive component of the tax offset.
The project as a whole is left with an effective government
subsidy equivalent to the value of the grant.
When clawback applies
218. A clawback adjustment arises where an R&D entity receives, or
becomes entitled to receive, a recoupment (including a grant) from
an Australian government agency or State/Territory body that
relates to R&D activities. Recoupments received under the
Cooperative Research Centre program are exempt from clawback
adjustment. (Subdivision 355-K addresses how the R&D tax incentive
applies to Cooperative Research Centres.) [Schedule 1, item 1,
sections 355-435 and 355-440]
219. The first way a recoupment can be considered to relate to R&D
activities is where the recoupment explicitly relates to
expenditure that has been incurred on or in relation to certain
activities. This form of recoupment will be retrospective,
typically a reimbursement. A 'partial reimbursement' will be
treated as a recoupment of expenditure equal to the amount of the
recoupment. [Schedule 1, item 1, subparagraph 355-445(b)(i)]
1. : Reimbursement of R&D activities
Burgundy Bagasse Ltd conducts R&D activities in relation to
a new machine that pulls out grape vines and then shreds,
crushes and bales them. The activities for which the firm
receives the R&D tax incentive include trials on a vineyard
that it has been using to produce table wine. The firm also
receives a $500,000 reimbursement under a government vine-
pull scheme for specified costs that it incurred in removing
those vines, of which $400,000 were for expenditures
notionally deducted under the R&D tax incentive.
Clawback of $40,000 (10 per cent of $400,000) will apply in
relation to the R&D expenditures that are reimbursed under
the vine-pull scheme.
220. The other way a recoupment can be considered to relate to R&D
activities is where a condition of the recoupment is that a
specified amount (the mandated 'project expenditure') is spent on
(possibly a menu of) specified activities, and some of the
specified activities on which the mandated project expenditure is
ultimately spent are eligible R&D activities. This form of
recoupment is often referred to as a grant (see Example 3.10).
[Schedule 1, item 1, subparagraph 355-445(b)(ii)]
221. Grants are often made on a matching dollar-for-dollar basis,
whereby the mandated project expenditure is double the amount of
the grant. However, a recoupment can be treated as being of this
grant type whether the mandated project expenditure is equal to,
greater than, or less than the grant. Further, grants can be made
in an income year before, at the same time as or after the actual
project expenditure on R&D activities occurs.
222. Whether a retrospective recoupment is of the reimbursement or grant
type will depend on the relationship between the recoupment and the
past expenditure. Where a recoupment is given because a specified
amount has been spent on a specified activity, it will be a
reimbursement, including where the entitlement to a reimbursement
if the amount was spent was known in advance. Where a recoupment
is given on the condition that a specified amount is spent on one
or more specified activities, it will be a grant - including where
that condition had been partly or completely satisfied prior to the
R&D entity becoming entitled to the grant. [Schedule 1, item 1,
paragraph 355-445(b)]
223. To the extent that grant conditions allow, it is up to the grant
recipient to decide how to apply the mandated project expenditure.
This means that the recipient is free to apply the mandated project
expenditure against non-R&D activities first. Where the recipient
chooses to spend more on their 'project' than the grant mandates,
they are free to apply their 'extra' expenditure to R&D activities
first.
224. Whether either type of recoupment actually relates to R&D
activities will depend on whether the expenditure reimbursed or
required to be incurred is expenditure that results in an R&D tax
offset. That is, a tax offset arising from notional deductions
made under the R&D tax incentive arrangements for either the
expenditure itself or the decline in value of a depreciating asset.
This means that clawback cannot arise where the R&D entity does
not receive the R&D tax incentive for expenditure (or decline in
value) related to the recoupment. [Schedule 1, item 1,
paragraphs 355-450(1)(a) and (b)]
How to apply clawback
225. Clawback takes the form of extra income tax on the recoupment, by
reference to the expenditure that resulted in an R&D tax offset (or
by reference to the decline in value where the expenditure was for
a depreciating asset). The rate of extra income tax is specified
as 10 per cent in the Income Tax Rates Act 1986 (see below).
[Schedule 1, item 1, subsection 355-450(1)]
226. The extra income tax on a recoupment is payable for the year in
which the recoupment is received (the trigger year), regardless of
whether the related R&D tax offsets are received in the same,
earlier or later income years. This may result in retrospective
amendment of past income tax assessments. [Schedule 1, item 1,
paragraph 355-445(a) and subsection 355-450(1)]
227. Logically, clawback cannot exceed the incentive component of R&D
tax offsets received in relation to the recoupment, because the
rate of extra income tax is 10 per cent and the incentive is at
least 10 per cent of the same amounts. Similarly, clawback on a
reimbursement cannot logically exceed 10 per cent of the
reimbursement, because the reimbursement will always equal the
expenditure being reimbursed.
228. A cap applies to ensure that clawback cannot exceed the amount of a
grant that, on a pro-rata basis, is deemed to relate to R&D
activities on which the mandated project expenditure is ultimately
spent. This ensures that, in relation to R&D activities, a grant
recipient effectively receives the R&D tax incentive, rather than
the grant, where the R&D tax incentive is worth more than the
grant. [Schedule 1, item 1, subsection 355-450(3)]
229. Where a grant is to some extent repaid, this will reduce the cap,
potentially reducing the extra income tax in relation to the year
the grant was received. Grant amounts might be repaid due to a
breach of the grant conditions, or because the grant becomes
repayable in certain eventualities (such as successful
commercialisation of R&D). [Schedule 1, item 1, subsection 355-
450(3)]
1. : Grant clawback cap and repayment
Ulixestyle Pty Ltd applies to a competitive grants scheme
that provides 'top up' funding, and receives $1 million
toward its proposal to spend $10 million on final stage R&D
activities during 2010-11. The grant is repayable at
10 cents for every dollar on any sales over $5 million the
project generates within three years. Ulixestyle has a
turnover of $26 million from other products. Subsequently,
Ulixestyle attracts a further $2 million of equity.
In 2010-11 Ulixestyle spends $12 million on otherwise
deductible R&D activities for its project, including the
mandated $10 million. In relation to the mandated project
expenditure, Ulixestyle receives a $4 million R&D tax offset
of which $1 million is the incentive component. Ulixestyle
pays extra income tax of $1 million (10 per cent of $10
million).
After clawback, Ulixestyle is effectively left with a
benefit equal to the grant. The net amount of the
recoupment at the end of 2010-11 is $1 million and the ratio
of R&D expenditure to mandated project expenditure is one.
The cap on clawback is therefore $1 million ($1 million ×
10/10) and the maximum level of clawback has been reached
for this project.
Ulixestyle also received a further $800,000 R&D tax offset
in relation to the extra $2 million of non-mandated project
expenditure (40 per cent of $2 million) of which the
incentive component was $200,000 (10 per cent of $2 million)
- but this is not relevant for the clawback calculation or
the cap.
In 2011-12 Ulixestyle achieves sales of $6 million arising
from the project and so repays $100,000 of the grant. The
net amount of the recoupment is now $900,000. The mandated
project expenditure and the amounts notionally deducted in
relation to R&D expenditure are unchanged, so the cap is now
$900,000 (($1 million - $100,000) × 10/10).
Ulixestyle's 'extra income tax' payable on the recoupment
for 2010-11 (the trigger year) is reduced to the new cap,
resulting in a potential tax refund of $100,000 in relation
to 2010-11 (depending on outstanding tax liabilities).
Had the grant conditions required Ulixestyle to spend
$12 million, and that amount been spent on otherwise
deductible R&D activities, Uliexestyle would have received a
$4.8 million R&D tax offset in 2010-11, of which
$1.2 million would have been the incentive component. The
R&D tax incentive related to the grant would therefore be
worth more to Ulixestyle than the $1 million grant. In that
scenario, the clawback cap would have limited the extra
income tax to $1 million ($1 million × 12/12) at the end
of 2010-11, rather than a potential $1.2 million (10 per
cent of $12 million). After clawback, Ulixestyle would
effectively have been left with a benefit equal to the R&D
tax incentive.
Alternatively, had Ulixestyle instead received a $4 million
equity injection and so spent $2 million of the $12 million
mandated project expenditure on early stage
commercialisation activities (also allowed under the grant
conditions), the cap at the end of 2010-11 would have been
$833,333 ($1 million × 10/12). This reduction in the cap
has the effect of pro-rating the grant amount across the
mandated project expenditure and reducing the grant amount
considered to relate to R&D tax incentive amounts.
230. Where a reimbursement is to some extent repaid, the recoupment will
be taken to be of an expenditure that is smaller than the
expenditure that was originally recouped. The expenditure
considered to have been recouped is reduced by the amount of the
repayment. This would have the effect of reducing the extra income
tax for the year in which the recoupment was originally received.
[Schedule 1, item 1, subsection 355-450(2)]
1. : Reimbursement repaid
Further to Example 3.11, Burgundy Bagasse Ltd is audited on
its compliance with the vine-pull scheme requirements. Its
claim for fuel costs is disallowed because the ethylene
content was not sourced from grapevines. Burgundy Bagasse
has to repay $50,000.
Clawback in relation to the reimbursement would be $35,000
(10 per cent of ($400,000 - $50,000)), rather than
$40,000. This would be the outcome whether the repayment
was made in the same year as the R&D tax offset is received,
or a later year.
Recoupment obtained by related entity
231. The clawback rule's main operation is where the entity that
receives, or becomes entitled to receive, the recoupment is the R&D
entity that obtains the R&D tax offset. However, the rule also
applies where an entity receives, or becomes entitled to receive, a
recoupment of expenditure taken into account in working out tax
offsets obtained by certain related entities. [Schedule 1, item 1,
subsections 355-450(1) and (4)]
Relationship with core income tax rules
232. The extra income tax increases the basic income tax liability on
the entity's taxable income beyond the amount that is worked out by
simply applying the income tax rates to the entity's taxable
income. After that basic income tax liability is worked out, in
accordance with the normal rules, total tax offsets are subtracted
from the basic income tax liability. The requirement to pay extra
income tax operates in the same way as the requirement for primary
producers to pay extra income tax as an averaging adjustment under
Subdivision 392-C. [Schedule 3, item 54, section 4-25]
Amendments to the Income Tax Rates Act 1986
233. The supporting Bill, the Income Tax Rates Amendment (Research and
Development) Bill 2010 amends the Income Tax Rates Act 1986 to
provide that the rate of additional income tax payable under
Subdivision 355-G of the ITAA 1997 on all or part of a recoupment
is 10 per cent. [Schedule 1 to the supporting Bill, the Income Tax
Rates Amendment (Research and Development) Bill 2010, items 1 to 3,
subsection 12(7), sections 12B and 31 of the Income Tax Rates Act
1986]
Feedstock adjustment
234. Subdivision 355-H adjusts the R&D tax incentive that is effectively
afforded in relation to certain inputs, to reflect the value of
related outputs. The feedstock adjustment does not affect whether
an activity is an R&D activity eligible for the R&D tax incentive.
235. The feedstock adjustment applies in relation to goods or materials
(feedstock inputs) that are transformed or processed during R&D
activities that produce one or more tangible products (feedstock
outputs). [Schedule 1, item 1, paragraph 355-465(1)(a)]
236. The feedstock adjustment also applies in relation to any energy
that is input directly into the transformation or processing.
[Schedule 1, item 1, subparagraph 355-465(1)(b)(ii)]
237. Expenditure on the energy and expenditure (along with decline in
value of depreciating assets) on acquiring or producing the
feedstock inputs is claimed in the same way as other amounts in
relation to eligible R&D activities. The resulting R&D tax offsets
will stand, despite any feedstock adjustment in the same or a
different income year. A feedstock adjustment cannot arise in
relation to amounts for which no R&D tax offset is obtained. Here,
'obtains ... tax offsets' means tax offsets that are actually
assessed, either in a self assessment or an assessment made by the
Commissioner, rather than merely being entitled to a tax offset
under the law. [Schedule 1, item 1, paragraph 355-465(1)(b)]
238. The feedstock adjustment is triggered by selling (or otherwise
supplying to another entity) the feedstock output or a downstream
product. The adjustment can also be triggered when the entity
applies the feedstock output (or downstream product) to its own
use. However, a feedstock adjustment will not be triggered if the
use is for the purpose of transforming that product for supply.
[Schedule 1, item 1, paragraph 355-465(1)(c)]
Feedstock revenue
239. The feedstock adjustment involves a comparison of the amounts
claimed for feedstock inputs and energy with the 'feedstock
revenue' associated with related feedstock outputs. Where the
feedstock output is immediately sold, the figure used for
'feedstock revenue' will be the market value at that point.
240. Where amounts are absorbed into the feedstock output's cost between
the R&D activity that produced it and the point of sale, the
related 'snapshots' of the product's cost will be used to derive
the feedstock revenue figure from the market value of the
'marketable product' that is sold. Such additional cost amounts
could arise from transforming the feedstock output in some way, or
simply reflect holding costs. 'Marketable product' is a term used
in the feedstock provisions to mean the product when the firm sells
it or applies it to its own use (regardless of how 'marketable' it
might appear at that or an earlier stage).
241. The proportion of the market value at sale that is deemed to be
feedstock revenue will be the same as the proportion of the cost of
the marketable product that was included in the product's cost at
the feedstock output stage. A feedstock output that is immediately
sold without absorbing further costs will also be a marketable
product (in which case feedstock revenue will equal market value).
Feedstock revenue will be similarly derived where the feedstock
adjustment is triggered by a supply other than a sale, or by the
firm applying the feedstock output to its own use. [Schedule 1,
item 1, section 355-470]
The feedstock adjustment
242. The feedstock adjustment is done by including an amount in
assessable income for the income year in which the adjustment is
triggered. This accommodates the 'feedstock expenditure' on
feedstock inputs and energy being notionally deducted in the year
it is incurred and, where the marketable product does not arise in
that year, the feedstock adjustment being made in a later year
(without having to amend prior year tax assessments or make
problematic year-end valuations of outputs that might not be of
marketable form).
243. The feedstock adjustment is intended to 'claw back' the incentive
component of the R&D tax offset that is enjoyed on the recouped
feedstock expenditure. The incentive component is the excess of
the tax offset over the company tax rate - that is, the excess over
the tax benefit that would otherwise have been obtained from normal
tax deductions without the incentive.
244. The intended net outcome is that the R&D incentive is effectively
enjoyed on feedstock expenditure to the extent that it is not
offset by feedstock revenue. This is achieved by basing the
adjustment on the lesser of feedstock expenditure and feedstock
revenue.
. Where feedstock revenue exceeds the feedstock output's
related feedstock expenditure, the feedstock adjustment
will be based on the feedstock expenditure - because the
effective net cost of the feedstock inputs and energy was
nil.
. Where feedstock revenue is less than the feedstock
output's related feedstock expenditure, the feedstock
adjustment will be based on the feedstock revenue -
because the effective net cost of the feedstock inputs and
energy was reduced by that amount.
245. For simplicity, the feedstock adjustment only seeks to recover
10 percentage points of the R&D tax incentive enjoyed on the
feedstock expenditure claim. This means that a firm receiving the
45 per cent refundable tax offset (rather than the standard 40 per
cent non-refundable tax offset) on the feedstock expenditure will
effectively retain at least 5 percentage points of incentive on all
feedstock expenditure.
246. Also for simplicity, the feedstock adjustment is included in the
firm's assessable income. This means that the impact of the
adjustment will be deferred where a firm is in tax loss, including
where a refundable tax offset is or was received on the feedstock
expenditure.
247. Accordingly, the feedstock adjustment works by including in
assessable income an amount equal to one-third of the lesser of
feedstock expenditure and feedstock revenue. When multiplied by
the prevailing 30 per cent company tax rate, this will result in a
'negative tax benefit' equivalent to the 10 per cent tax benefit
from the incentive component of a 40 per cent tax offset in
relation to the feedstock expenditure (( × 30 per cent = 10 per
cent). [Schedule 1, item 1, subsection 355-465(2)]
248. Feedstock output can only lead to one feedstock adjustment. For
example where a feedstock adjustment is triggered by an R&D entity
applying a feedstock output to its own use - but not for the
purpose of transforming it for supply - and it is later sold (with
or without transformation), the sale will not trigger a further
feedstock adjustment. Similarly, where the entity applies a
feedstock output to its own use on a recurring basis, only the
first use can trigger the feedstock adjustment. [Schedule 1,
item 1, paragraph 355-465(3)(b)]
249. The feedstock provision applies in relation to both core and
supporting R&D activities that transform or process material
inputs, and is not confined to mass production activities.
1. : Feedstock output a marketable product
Lisowski Crushing Pty Ltd acquires granite boulders from an
adjacent quarry and crushes them into small stones for sale
to landscapers. Lisowski identifies a significant potential
market for 'mock dirt' that will not blow away. Lisowski
engages consultants to research and design a diorite
stamping head that will crush the granite to fine grains,
and has a set of the heads fabricated and fitted to a
stamping machine that has been suitably modified. It
conducts experiments on 10 tonnes of granite to test the
effectiveness of the diorite heads. The resulting
granulised granite is sold shortly after to the trade at a
special introductory price.
Feedstock expenditure of $10,000 is included in the $22,000
of notional deductions claimed by Lisowski for the R&D
activities. Lisowski Crushing has a turnover of $100
million per annum and receives a non-refundable tax offset
of $8,800 (40 per cent × $22,000). The potential for the
granite granules to be sold in either that or a subsequent
income year has no bearing on the size of this tax offset.
The 10 tonnes of granite granules are sold for $900 per
tonne. As this is an arm's length price the feedstock
revenue is $9,000. Because the feedstock revenue of $9,000
is less than the feedstock expenditure of $10,000, the
feedstock adjustment is based on the $9,000 feedstock
revenue figure. In addition to the $9,000 received from the
sale, a feedstock adjustment of $3,000 ($9,000 ( 3) is
included in Lisowski Crushing's assessable income. This
feedstock adjustment is made for the income year in which
the granite granules are sold, which might be the same year
as the R&D activities that produce them, or a later year.
The sale occurs in the same income year as the R&D
activities. Allowing for the $10,000 tax deduction forgone
in order to receive a 40 per cent tax offset on the
feedstock expenditure, the incentive component of the tax
offset was $1,000 ((40 per cent - 30 per cent) × 10,000),
which reduces Lisowski Crushing's income tax liability by
that amount. Including the feedstock adjustment in taxable
income increases Lisowski Crushing's income tax liability by
$900 (30 per cent × $3,000). The net 'tax benefit' of
$100 (1,000 - 900) is equivalent to only allowing the 10
per cent incentive on the $1,000 (10,000 - 9,000) 'net'
feedstock expenditure.
2. : Feedstock output subject to additional costs
As a variation on the preceding example, Lisowski Crushing
Pty Ltd is a medium sized business in tax loss with a $19
million turnover. Also, instead of selling the granulised
granite to the trade for $9,000, Lisowski eventually sells
it to a new interstate resort for $20,000 delivered, with
the sale taking place early in the income year following the
year in which the R&D activities occurred. At the end of
the R&D activities that produced it, the granulised granite
had a cost of $12,000, which had increased to $15,000 by the
time it was delivered and sold.
Because Lisowski has a turnover below $20 million it
qualifies for a 45 per cent refundable R&D tax offset. The
$22,000 of notional deductions results in a refundable tax
offset of $9,900 (45 per cent × $22,000). After being
applied against $1,900 of unrelated outstanding tax
liabilities that Lisowski Crushing had, a tax refund of
$8,000 cash was received.
The $12,000 cost of the granules when at the feedstock
output stage is eight-tenths of the $15,000 cost of the
granules when sold (12,000 ( 15,000 = 0.8). Therefore
the feedstock revenue for the feedstock output is deemed to
be $16,000 (0.8 × $20,000). As the feedstock revenue of
$16,000 is more than the feedstock expenditure of $10,000,
the feedstock adjustment is based on the $10,000 feedstock
expenditure figure. In addition to the $20,000 received
from the sale, a feedstock adjustment of $3,333 ($10,000 (
3) is included in Lisowski Crushing's assessable income.
Because Lisowski Crushing is in tax loss, the feedstock
adjustment has the effect of reducing the firm's
carryforward losses by $3,333, but has no immediate impact.
Lisowski retains the full $9,900 refundable tax offset (and
resulting $8,000 cash refund) that it had received in the
previous year, of which $4,500 (45 per cent of $10,000)
arose from the feedstock expenditure. When Lisowski
Crushing later becomes profitable, the feedstock adjustment
causes Lisowski's tax liability to be $1,000 more than it
otherwise would have been ($3,333 × 30 per cent). This
$1,000 is equivalent to a 10 per cent incentive component
that the standard 40 per cent R&D tax offset would have
afforded the $10,000 feedstock expenditure. In fact,
Lisowski had enjoyed a $1,500 incentive component under the
45 per cent refundable R&D tax offset.
Multiple feedstock inputs and outputs
250. A single feedstock output can result from the transformation or
processing of a number of feedstock inputs, and one feedstock input
can be transformed or processed into multiple feedstock outputs.
251. Where there are multiple feedstock outputs from an R&D activity,
the feedstock adjustment applies on an output by output basis. The
relevant feedstock expenditure for a specific feedstock output
would be the amount of feedstock expenditure that is reasonably
attributable to that feedstock output. This need not entail
feedstock expenditure being evenly attributed across disparate
joint outputs [Schedule 1, item 1, paragraph 355-465(2)(b)]:
. Treating each feedstock output separately has the effect
that, where R&D activities 'turn a profit' with respect to
one feedstock output, the surplus of that output's
feedstock revenue over related feedstock expenditure will
not carry across to net off amounts relating to other
feedstock outputs (if any).
. In practical terms, where an R&D activity produces a
number of substantially identical feedstock outputs (such
as ingots of gold produced by a processing experiment),
those outputs can be treated as if a single feedstock
output.[4]
. On the other hand, where multiple outputs of similar items
are of variable quality, the claimant is able to treat
faulty production units separately from successful
production units.
Sequential R&D activities
252. Where feedstock output from one R&D activity is feedstock input for
a subsequent R&D activity, no feedstock adjustment will apply in
relation to that feedstock output - the feedstock adjustment will
apply in relation to the feedstock output from the final R&D
activity in the chain. [Schedule 1, item 1, paragraph 355-
465(3)(a)]
253. Where by-products arise as feedstock outputs prior to the final R&D
activity in a chain of activities, feedstock adjustments can apply
in relation to those by-products:
. The relevant feedstock expenditure would be the amount of
feedstock expenditure that (if any) is reasonably
attributed to the by-product.
. A feedstock adjustment would not occur if the by-product
is itself a feedstock input to a subsequent experiment.
Feedstock revenue accruing to a related entity
254. The feedstock adjustment also applies where an entity related to
the R&D entity supplies (or applies to own use) the marketable
product, as if that were done by the R&D entity. This would, for
example, cover cases where a related entity (instead of the R&D
entity that incurs expenditure in acquiring the feedstock inputs)
is entitled to the marketable product. [Schedule 1, item 1,
section 355-475]
Integrity rules
255. Integrity rules apply to the following:
. expenditure incurred while not at arm's length [Schedule
1, item 1, section 355-400];
. disposal of R&D results [Schedule 1, item 1, section 355-
410];
. expenditure reduced to reflect group mark-ups [Schedule 1,
item 1, section 355-415]; and
. expenditure not at risk [Schedule 1, item 1, section 355-
405].
256. These rules correspond to similar integrity rules in the existing
R&D provisions.
Expenditure incurred while not at arm's length
257. If the expenditure incurred in a non-arm's length transaction or in
a transaction with an associate is greater than the market value of
the R&D activities, the expenditure is instead taken to have the
market value. [Schedule 1, item 1, section 355-400]
Relationship with international transfer pricing provisions
258. Section 136AB of the ITAA 1936 is amended to clarify the
relationship between the proposed non-arm's length transaction
section (section 355-400) and the international transfer pricing
provisions in Division 13 of Part III of the ITAA 1936. If section
355-400 and Division 13 could otherwise apply, the potential
operation of section 355-400 is to be disregarded. This leaves
Division 13 to apply comprehensively in the international area,
subject to the terms of any relevant double tax treaty. [Schedule
3, item 47, subsection 136AB(2) of the ITAA 1936]
259. The result is that the relationship of section 355-100 with
Division 13 is the same as that of section 70-20, the non-arm's
length rule for trading stock.
Disposal of R&D results
260. The assessable income of an R&D entity includes an amount if:
. it is entitled to a notional deduction for expenditure on
R&D activities or for using a depreciating asset for R&D
activities; and
. it receives, or becomes entitled to receive, an amount:
- for the results of any of the activities;
- from the grant of access to, or the right to use, any of
those results;
- attributable to the entity having incurred the
expenditure or having used the asset for R&D activities
(including an amount that it is entitled to receive
irrespective of the results of the activities); or
- from disposing of a CGT asset, or from granting a right
to occupy or use a CGT asset, where the disposal or
grant resulted in another entity acquiring a right to
access or use any of those results.
[Schedule 1, item 1, section 355-410]
261. The amount assessable is generally the amount received or
receivable. However, where the amount is from disposing of a CGT
asset that is a depreciating asset, or from granting a right to
occupy or use such an asset, the assessable income amount is the
amount received or receivable less the cost of the asset (just
before the disposal or grant). Where the amount is from disposing
of a CGT asset that is not a depreciating asset, the amount
assessable is the amount received or receivable less the cost base
of the asset (just before the disposal or grant). [Schedule 1,
item 1, section 355-410]
Reducing deductions to reflect mark-ups within groups
262. If one or more entities connected with the R&D entity incur R&D
expenditure for which the R&D entity can notionally deduct an
amount and that expenditure was incurred when those entities were
connected or affiliated with the R&D entity, then the amount that
the R&D entity can notionally deduct may be reduced. [Schedule 1,
item 1, section 355-415]
263. The amount notionally deducted by the R&D entity is reduced to the
extent that R&D expenditure paid to the connected entity or
affiliate exceeds the actual cost of the R&D goods or services to
the connected entity or affiliate (that is, the goods or services
are 'marked-up'). [Schedule 1, item 1, section 355-415]
264. Expenditure that is not notionally deductible because of the
operation of this 'mark up' rule may be deductible under the
ordinary deduction provisions of the law.
Expenditure not at risk
265. Expenditure that is not at risk (for example, if there is
guaranteed return under a financing arrangement or an indemnity) is
not eligible for a notional R&D deduction but the ordinary
deduction rules may apply. [Schedule 1, item 1, section 355-405]
266. Expenditure is not at risk to the extent that, when the expenditure
is incurred, the R&D entity (or an associate) could reasonably be
expected to receive an amount of consideration:
. as a result of the expenditure being incurred or because
of anything that happened before then; and
. irrespective of the results of the activities on which the
entity incurs the expenditure.
[Schedule 1, item 1, section 355-405]
267. The inclusion of the requirement that the entity reasonably expects
to receive the amount of consideration irrespective of the results
of the activities on which the entity incurs the expenditure is
consistent with the way the Commissioner has administered the
existing law about expenditure not at risk. For example, the
Commissioner would not apply the existing law where the expectation
of receiving consideration under a contract for the development and
sale of a product was based both on the terms and conditions of
that contract and also the entity's experience and technical
capability concerning the degree of confidence about successfully
performing that contract. Where this product development involved
R&D activities it cannot be said that the expectation of receiving
consideration under this contract exists irrespective of the
results of these activities. [Schedule 1, item 1, section 355-405]
268. As under the existing law, the rule about expenditure not at risk
does not apply to R&D activities conducted by the R&D entity for
one or more foreign corporations that are related to the R&D
entity. Nor does it apply to the corresponding permanent
establishment case - where activities are conducted by a foreign
corporation though a permanent establishment in Australia for other
parts of the corporation. [Schedule 1, item 1, subsection 355-
405(4)]
R&D partnerships
269. The proposed rules contain a group of rules (Subdivision 355-H)
that set out in detail how the tax offset rules apply to certain
partnerships called R&D partnerships.
270. An R&D partnership is a partnership in which each of partners is an
R&D entity. Here, partnership has its normal defined meaning,
which includes a general law partnership and an association of
persons in receipt of ordinary or statutory income jointly.
[Schedule 1, item 1, subsection 355-505(1)]
271. Similarly to the existing law, the partnership provisions have the
effect that the R&D tax offset is available to an R&D entity that
is a partner in an R&D partnership. Rather than being taken into
account in determining a partner's individual interest in the net
income or partnership loss of a partnership (under Division 5 of
Part III of the ITAA 1936), the benefits are directly available to
the individual partners that are R&D entities. [Schedule 1, item
1, sections 355-100 and 355-545]
272. A central concept in applying the R&D partnership provisions is the
partner's proportion of various amounts (for example, expenditure,
turnover or recoupment) attributable to the R&D partnership that
each partner is treated as entitled to, or bearing. The proportion
is the partner's interest in the net income or partnership loss of
the R&D partnership, unless the partners have agreed that the
partners should bear or be entitled to a different proportion.
[Schedule 1, item 1, subsection 355-505(2)]
R&D partnership expenditure
273. An R&D entity that is a partner in an R&D partnership is treated as
incurring that entity's partner's proportion of the expenditure
incurred by the partnership. This deeming rule enables the R&D
entity to get a notional deduction for that proportion of the
partnership's R&D expenditure if the other conditions for the
notional deduction (about registration, where the activities are
conducted, the 'on own behalf' rule (and its alternatives in
section 355-210) and excluded expenditure) are satisfied.
[Schedule 1, item 1, section 355-510]
274. An important condition that must still be met by the individual
partner is registration - the registration rules in the IR&D Act do
not provide for a partnership to register.
Activities conducted by the partnership treated as conducted by
each partner
275. To facilitate the R&D tax offset being available to each R&D entity
that is partner in an R&D partnership, there is also a set of
deeming rules that treat:
. a thing done by, or in relation to, a R&D partnership as
done by, or in relation to, the partner;
. R&D activities conducted by or for the R&D partnership as
if they were conducted by or for the partner (but not the
partnership) in a corresponding way;
. relationships that the R&D partnership has with other
entities in relation to the R&D activities as if the
partner had corresponding relationships with those other
entities; and
. such other changes as having been made to the R&D
provisions as are appropriate having regard to that
partner's proportion of amounts attributable to the R&D
partnership.
[Schedule 1, item 1, section 355-515]
A partner's aggregated turnover
276. Under the existing aggregated turnover rules (in Division 328 of
the ITAA 1997), if an R&D entity is a partner in an R&D partnership
the entity's aggregated turnover can include the whole of the
annual turnover of the partnership (for example, if the partner
controls the partnership in the way described in section 328-125).
If an R&D entity's aggregated turnover does not so include the
whole of the annual turnover of a partnership, for the new R&D
provisions it includes the partner's proportion of the R&D
partnership's annual turnover. [Schedule 1, item 1, section 355-
530]
1. : R&D partnership
A Pty Ltd is in a general law partnership with B Pty Ltd and
C Pty Ltd. A Pty Ltd, B Pty Ltd and C Pty Ltd were all
incorporated in Australia. As part of the partnership's
business, the partnership incurs expenditure of $150,000
during the 2012-13 income year on R&D activities. The
partnership conducts those R&D activities in Australia for
the partnership (and not for one or more other entities).
Each of A Pty Ltd, B Pty Ltd and C Pty Ltd registers for
those R&D activities for the 2012-13 income year.
The annual turnover of the partnership for that income year
is $6 million and, apart from the partnership, the
aggregated turnover of A Pty Ltd would be nil.
The partnership of A Pty Ltd, B Pty Ltd and C Pty Ltd is an
R&D partnership because each is an R&D entity (being a body
corporate incorporated under an Australian law). The
aggregated turnover of A Pty Ltd for the 2012-13 income year
is $2 million (1/3 of $6 million).
A Pty Ltd is treated as incurring expenditure of $50,000
(1/3 of $150,000) during the 2012-13 income year on the R&D
activities for which A Pty Ltd is actually registered
(section 355-505). The R&D activities are also treated as
conducted by or for A Pty Ltd in Australia (section 355-
515). Therefore, A Pty Ltd is entitled to a notional
deduction of $50,000 for the 2012-13 income year (assuming
that no other provision applied to limit or exclude the
notional deduction).
As the aggregated turnover of A Pty Ltd is less than $20
million, it is entitled to a tax offset equal to $22,500 (45
per cent of $50,000), assuming A Pty Ltd is not entitled to
any other notional R&D deductions.
Other partnership rules
277. The partnership rules also contain special rules about:
. notional deductions for a decline in the value of
depreciating assets of R&D partnerships [Schedule 1, item
1, section 355-520];
. balancing adjustments for R&D partnership assets only used
for R&D activities [Schedule 1, item 1, section 355-525];
. balancing adjustments for R&D partnership assets used both
for general tax purposes and R&D activities [Schedule 3,
item 24, section 40-293];
. disposal of R&D results for R&D partnerships [Schedule 1,
item 1, section 355-535]; and
. recoupment of expenditure incurred by an R&D partnership
[Schedule 1, item 1, section 355-540].
278. Where an association of persons is in receipt of income jointly but
is not a general law partnership (commonly called a tax law
partnership), the Australian Taxation Office (ATO) interprets the
decline in value provisions in Division 40 as applying to the
individual persons, not the tax law partnership.
Associations of persons that are neither general law partnerships
nor tax law partnerships
279. Under the existing law, in determining whether a relationship
between persons for the purpose of engaging in R&D activities is a
partnership, the engaging by those persons in R&D activities is
treated as carrying on a business with a view to profit (subsection
73(3B) of the ITAA 1936). This deeming rule is stated as applying
'for the purposes of this Act' (for example, the rule applies for
the purposes of Division 5 (Partnerships) of Part III of the ITAA
1936).
280. It is not clear that the rule in subsection 73(3B) does anything
useful. The R&D expenditure is effectively attributed to the
individual partners anyway (under subsection 73(3A)). Subsection
73(3B) effectively requires persons to lodge a partnership return
(for non-R&D deductions) even though they are neither general law
partners nor in receipt of income jointly. Accordingly, the new
law does not contain a provision equivalent to subsection 73B(3B).
Cooperative Research Centres
281. The Cooperative Research Centre program is a program administered
by the Commonwealth that links researchers with industry to focus
R&D efforts on addressing major challenges and progressing towards
utilisation and commercialisation. A Cooperative Research Centre
is an incorporated or unincorporated organisation, formed
through medium to long-term collaborative partnerships between
publicly funded researchers and end users. Cooperative Research
Centres must comprise at least one Australian end-user (either from
the private, public or community sector) and at least one
Australian higher education institution (or research institute
affiliated with a university).
282. Taxpayers and the ATO have encountered difficulties in applying the
existing partnership rules to Cooperative Research Centres because
of the complexity of the existing law. In particular, difficult
issues have arisen in relation to determining the true nature of
the structure adopted and on whose behalf the activities are
carried out within that structure, as well as in ascertaining the
timing of any available R&D deductions. These issues are
compounded because Cooperative Research Centres are not all
required to adopt the same structure, so each one needs to be
considered on its own facts.
283. This Bill contains a new simpler treatment for entities
participating in a Cooperative Research Centre. The key change is
that notional deductions arise when monetary contributions are made
under the program rather than when those contributions are actually
expended on the R&D activities of the centre.
284. An R&D entity is entitled to a notional R&D deduction for a
monetary contribution it incurs under the program if the entity is
registered for the activities on which the contribution is spent.
The notional deduction does not arise until the entity is actually
registered, which in some cases could be for an income year after
the R&D entity incurs the contribution. However, the notional
deduction for the monetary contribution still applies to the income
year in which the contribution was incurred. [Schedule 1, item 1,
subsection 355-580(1)]
285. An R&D entity's entitlement to a tax offset in relation to a
notional deduction for an amount contributed to a Cooperative
Research Centre is (like certain R&D expenditure incurred to a
Research Service Provider) regardless of the level of its total
notional deductions. [Schedule 1, item 1, subsection 355-100(2)]
286. The Commonwealth's contributions to a Cooperative Research Centre
do not qualify for an 'up front' notional R&D deduction for a
monetary contribution. Although a contribution by the Commonwealth
would not ordinarily be considered to be expenditure incurred by an
R&D entity under the Cooperative Research Centre program, a
specific rule is included to rule out any possible technical
argument to the contrary. A company operating a Cooperative
Research Centre under the incorporated model would be eligible for
a notional deduction for a monetary contribution out of its own
funds but not for the contribution of Commonwealth funds.
[Schedule 1, item 1, subsection 355-580(2)]
287. It is intended that program conditions be used to limit Cooperative
Research Centres to spending contributions by R&D entities on R&D
activities eligible for a tax offset.
288. To prevent double benefits in respect of the same amounts, an R&D
entity cannot obtain a notional R&D deduction for:
. a monetary contribution, other than under the specific
rule about monetary contribution to a Cooperative Research
Centre;
. expenditure incurred under the Cooperative Research Centre
program out of monetary contributions of an R&D entity; or
. decline in value of an R&D depreciating asset whose cost
includes expenditure incurred under the Cooperative
Research Centre program out of monetary contribution that
is notionally deductible.
[Schedule 1, item 1, subsections 355-580(3) and (4)]
289. Where an entity makes a non-monetary contribution (for example, a
depreciating asset or the work of an employee) to a Cooperative
Research Centre, the normal R&D provisions would apply. In
practice, it is tax-exempt entities that commonly make non-monetary
contributions and those entities are not eligible for an R&D tax
offset.
1. : Incorporated Cooperative Research Centre
Company A is a participant in an incorporated Cooperative
Research Centre. In the 2012-13 income year Company A
incurs a liability of $100,000 under the participant
agreement to Company O, which operates the Cooperative
Research Centre. Company O spends the $100,000 on R&D
activities during the income year. The Board registers
Company A for those R&D activities two months after the end
of the 2012-13 income year.
When Company A lodges its income tax return five months
after the end of the 2012-13 income year, it is entitled to
a notional deduction of $100,000 for its monetary
contribution. It incurred the monetary contribution during
the 2012-13 income year and is registered for the R&D
activities on which the contributions were spent.
290. Expenditure under the Cooperative Research Centre program out of
Commonwealth funding (including as part of the cost of a
depreciating asset) is not eligible for the R&D tax offset. The
reasons are:
. the availability of a second benefit (in the form of the
tax offset) for spending Commonwealth funds is not
justified in principle (the Commonwealth is giving
generous assistance in the form of the Cooperative
Research Centre grant and the 'up front' tax offset to the
participants); and
. if an offset were available, the simplification benefits
of providing access to the R&D tax offset at the
contribution stage would not be realised because it would
be necessary to trace all the actual expenditures by the
Cooperative Research Centre to each eligible R&D activity
- this would add significantly to the compliance burden.
[Schedule 1, item 1, subsections 355-580(3) and (4)]
Consolidated groups
291. Under Part 3-90 of the ITAA 1997 subsidiary members of a
consolidated group or MEC group are treated as part of the head
company of the group for income tax purposes.
292. Therefore, as is the case under the existing law, Division 355 will
apply to a consolidated group or MEC group as if it were a single
entity. This means that, for example:
. expenditure incurred by the subsidiary on R&D activities
is taken to be incurred by the head company;
. R&D activities conducted for the subsidiary by a third
party are taken to have been conducted for the head
company; and
. R&D activities conducted by one member of the group for
another member of the same group are taken to have been
conducted by the head company on its own behalf.
293. If an entity joins a consolidated group or MEC group part way
through an income year, the joining entity must work out the amount
of income tax payable on its taxable income for the period before
the joining time as if it were an income year (section 701-30).
The joining entity will be entitled to R&D tax offsets that relate
to R&D activities undertaken before the joining time provided that
it is a registered R&D entity for the income year.
294. The head company of the group will be entitled to R&D tax offsets
that relate to R&D activities undertaken after the joining time
provided that it is a registered R&D entity for the income year.
295. The head company of the group must be a registered R&D entity for
the income year as the joining entity's status as a registered R&D
entity is not imputed to the head company. In this regard, any
purported registration by a subsidiary member of a consolidated
group or MEC group is of no effect (subsection 31(1) of the IR&D
Act). Similarly, any finding under Part III of the IR&D Act (about
registrations etc.) on application by an entity is of no effect to
the extent that the finding is for an activity conducted when the
entity was a subsidiary member of a consolidated group or MEC group
(subsection 31(2) of the IR&D Act). For a detailed explanation,
see Chapter 5.
296. The existing R&D law contains rules to ensure they operate
effectively for consolidated groups and MEC groups (sections 73BAA
to 73BAG of the ITAA 1936). Insofar as they remain relevant, these
provisions are replicated in the new law.
297. The new law replicates the existing provisions that clarify the
history that is taken into account for the purposes of working out
the aggregated turnover of:
. the head company after a subsidiary member has joined its
consolidated group or MEC group; and
. an entity after it ceases to be a member of the group.
[Schedule 3, item 105, sections 716-505 and 716-510]
298. Section 355-220, which is about R&D activities conducted for a
foreign entity, applies if, so far as is relevant, the R&D
activities are conducted under a written agreement which is binding
on the R&D entity and each foreign corporation. A new provision is
being inserted to clarify that the section applies to the head
company of a consolidated group or MEC group as if the head company
were bound by an agreement during any period that a subsidiary
member of the group is bound by the agreement. [Schedule 3, item
105, section 716-500]
Imputation
299. Generally, a franking debit arises in an entity's franking account
when, so far as is relevant, the entity receives a refund of income
tax (item 2 in the table in section 205-30 of the ITAA 1997). A
refund of income tax includes the amount of any tax offset which
the entity is entitled to under Division 355, to the extent that
the tax offset is refunded to the entity. [Schedule 3, items 94
and 95, section 205-35]
300. If a company's franking account is in deficit at the end of an
income year, the entity is liable to pay franking deficit tax
(section 205-45). A company's franking account could be in deficit
at the end of an income year because a franking debit arises when
the entity receives a refund of a tax offset which the entity is
entitled to under Division 355. This would have the effect of
immediately clawing back the tax offset that is refunded.
301. To prevent this outcome, a franking debit will not arise in an
entity's franking account under item 2 in the table in section 205-
30 to the extent that a refund of income tax is attributable to the
refund of a tax offset which the entity is entitled to under
Division 355. The franking debit is effectively deferred.
[Schedule 3, item 93, subsection 205-30(2)]
302. Generally, a franking credit arises in an entity's franking account
when, so far as is relevant, the entity pays a pay as you go (PAYG)
instalment or income tax (items 1 and 2 in the table in section 205-
15). However, where a debit has not been made to an entity's
franking account because a refund of income tax is attributable to
the refund of a tax offset which the entity is entitled to under
Division 355, a franking credit will not arise in respect of the
payment of a PAYG instalment or income tax until these deferred
franking debits are recovered. [Schedule 3, items 91 and 92,
subsections 205-15(1) and (4)]
1.
Radical Innovations Pty Ltd is an R&D entity.
In year 1, Radical Innovations Pty Ltd incurs $100,000 R&D
expenditure, has no taxable income and is entitled to a
refundable tax offset under Division 355 of $45,000.
Consequently, the company receives a refund of income tax of
$45,000. Paragraph 205-30(2)(b) ensures that a debit does
not arise in its franking account under item 2 in the table
in subsection 205-30(1) as a result of the refund.
In year 2, Radical Innovations Pty Ltd does not incur any
R&D expenditure and its taxable income is $100,000. The
company pays income tax of $30,000, which gives rise to a
credit in its franking account of $30,000 less any amount
worked out under the method statement in subsection 205-
15(4). The steps in that method statement are worked out as
follows:
Step 1: Identify any income years before the payment of
tax was made for which the company received a refund of
income tax - year 1.
Step 2: Add up the part of the refund that is
attributable to a tax offset that is subject to the
refundable tax offset rules - $45,000.
Step 3: Subtract any reduction under subsection 205-15(4)
of a franking credit for any earlier payment by the entity
- nil.
The result after applying the method statement for year 2 is
$45,000. Therefore, the franking credit of $30,000 is
reduced, but not below zero. Consequently, no franking
credit arises in Radical Innovations Pty Ltd's franking
account in year 2.
In year 3, Radical Innovations Pty Ltd does not incur any
R&D expenditure and its taxable income is $120,000. The
company pays income tax of $36,000, which gives rise to a
credit in the company's franking account of $36,000 less any
amount worked out under the method statement in subsection
205-15(4). The steps in that method statement are worked
out as follows:
Step 1: Identify any income year before the payment of
tax was made for which the company received a refund of
income tax - year 1.
Step 2: Add up the part of the refund that is
attributable to a tax offset that is subject to the
refundable tax offset rules - $45,000.
Step 3: Subtract any reduction under subsection 205-15(4)
of a franking credit for any earlier payment by the entity
- $30,000.
The result after applying the method statement for year 3 is
$15,000. Therefore, the franking credit of $36,000 is
reduced by $15,000. As the deferred franking debits are now
fully recovered, a franking credit of $21,000 arises in
Radical Innovations Pty Ltd's franking account in year 3.
Other matters
Assessments and objections
303. The primary meaning of assessment is the ascertainment of the
amount of taxable income (or that there is no taxable income) and
the tax payable thereon (or that there is no tax payable)
(subsection 6(1) of the ITAA 1936).
304. Under the core provisions of the income tax law, section 4-10
governs how to work out how much income tax you must pay for an
income year. In subsection 4-10(3), step 3 is working out your tax
offsets for the income year. Working out the amount of tax
offsets, including any refundable tax offsets, is a step in working
out your income liability and, therefore, part of the assessment
process.
305. That means that, under the existing law, the amount of a refundable
tax offset is covered by a notice of assessment. If a taxpayer is
dissatisfied with the amount of a tax offset under an assessment
for the taxpayer, the taxpayer may object against the assessment
under section 175A of the ITAA 1936. However, subsection 175A(2)
prevents a taxpayer objecting against a 'nil assessment' unless the
taxpayer is seeking an increase in its liability.
306. This Bill amends the law so that an R&D entity can object against a
nil assessment in relation to the amount of an R&D refundable tax
offset. This is in addition to the existing objection rights.
[Schedule 1, item 1, section 355-700]
Findings of the Board which are binding on the Commissioner
307. The Commissioner is bound by the following findings of the Board
where the finding is set out in a certificate given by the Board to
the Commissioner and the finding is made within four years after
the end of the income year (or the last of the relevant income
years):
. a finding under section 27J of the IR&D Act about an R&D
entity's registration;
. a finding under section 27B of the IR&D Act about an R&D
entity's application for registration;
. an advance finding under section 28A of the IR&D Act about
the nature of activities; or
. a finding under section 28E of the IR&D Act about whether
particular technology is core technology.
[Schedule 1, item 1, section 355-705]
308. For a finding about an R&D entity's registration, the Commissioner
is bound for the purposes of an assessment of the entity for the
income year(s) for which the finding is made. For a finding about
activities yet to be completed, the Commissioner is bound for the
purposes of an assessment of the entity for the income year in
which the entity applied for the advance finding and the next two
income years. For a finding about an activity completed in the
income year an R&D entity applies for the finding, the Commissioner
is bound for the purpose of an assessment of the application year.
[Schedule 1, item 1, section 355-705]
Amendment of assessments
309. Currently the Commissioner has an unlimited period to amend an
assessment to increase the liability of a taxpayer to give effect
to existing R&D provisions in the ITAA 1936. The unlimited period
is repealed, which is consistent with the principles in the
Treasury discussion paper titled Review of Unlimited Amendment
Periods in the Income Tax Laws. [Schedule 3, item 48, subsection
170(10A)]
310. In the new law, the Commissioner generally has a period of
four years to amend an assessment to give effect to the R&D
provisions. To achieve this for all types of an R&D entity, it
will be necessary to amend the Income Tax Regulations 1936 after
the new R&D provisions are enacted.
311. The Board effectively has a time limit of four years from the end
of the relevant income year to make a finding about registration
under Division 2 of Part III of the IR&D Act. [Schedule 1, item 1,
sections 355-705 and 355-710]
312. There are also special contingent amendment periods, allowing the
Commissioner to amend an assessment outside the normal periods set
out in section 170 of the ITAA 1936, where:
. The Board gives the Commissioner a certificate setting
out a finding about registration, activities outside
Australia or core technology (and that finding was made
within four years after the end of the income year or the
last of the relevant income years); or
. a decision about an R&D entity is made on internal review
(under section 30D of the IR&D Act), or by the
Administrative Appeal Tribunal (including under
subsections 34D(2), 42C(2) or 43(1) or section 42D of the
Administrative Appeal Tribunal Act 1975), or a court.
313. Where a certificate setting out a finding is given to the
Commissioner, the Commissioner has a period of two further years to
amend an assessment if giving effect to the certificate increases
the R&D entity's liability. However, the Commissioner may amend an
assessment at any time to give effect to the finding by reducing
the R&D entity's liability. [Schedule 1, item 1, section 355-710]
314. Where a decision is made on review, by the Administrative Appeal
Tribunal or by a court, the Commissioner may amend the R&D entity's
assessment at any time to give effect to the decision. This is
consistent with the general approach for decisions on review or
appeal (in item 6 of the table in subsection 170(1) of the ITAA
1936). [Schedule 1, item 1, section 355-710]
Relationship of R&D provisions to other income tax provisions
315. The R&D provisions in Division 355 have priority over other offset
and deduction provisions, except where specifically indicated. So,
where an entity's expenditure (or use of a depreciating asset)
satisfies the conditions for a notional R&D deduction and also
another deduction (or tax offset), the entity is entitled to the
R&D deduction but not the other deduction or tax offset. This is
consistent with the general scheme of the income tax law (for
example, under the 'no double deduction rule' in section 8-10) that
taxpayers are not entitled to a double benefit for the same amount
of a loss, outgoing or other detriment. [Schedule 1, item 1,
section 355-715]
Chapter 4
Application rules, transitional rules and consequential amendments for the
new tax offsets
Outline of chapter
316. Schedule 4 to the Tax Laws Amendment (Research and Development)
Bill 2010 (Bill) contains the application, savings and transitional
provisions for the new research and development (R&D) tax offsets.
These provisions:
. apply the new R&D provisions to work out an R&D tax offset
for an assessment of income tax for an income year
commencing on or after 1 July 2010;
. ensure that, despite the repeal of the existing R&D
provisions, those R&D provisions can still apply, and be
administered, for certain things done (for example,
expenditure incurred) before the repeal of the existing
provisions; and
. establish special transitional arrangements to broadly
address some situations that straddle income years where
the existing law and the new provisions apply.
317. Parts 2 to 6 of Schedule 3 to this Bill contain consequential
amendments to the Income Tax Assessment Act 1997 (ITAA 1997), the
Income Tax Assessment Act 1936 (ITAA 1936), the Income Tax
(Transitional Provisions) Act 1997 (IT(TP) Act 1997) and the
Taxation Administration Act 1953 (TAA 1953) that are necessitated
by the enactment of the new R&D provisions.
318. In this chapter, legislative references are to the ITAA 1997,
except where indicated.
Application, savings and transitional provisions
Application of new law
319. The main application rule is that new R&D provisions apply to work
out an R&D tax offset for an assessment of income tax for an income
year commencing on or after 1 July 2010. Consequently, the things
eligible for a tax offset under the new provisions are:
. expenditure incurred in an income year commencing on or
after 1 July 2010; and
. the use of depreciating assets in an income year
commencing on or after 1 July 2010.
[Schedule 4, subitem 1(1)]
320. There are also supplementary application rules, consistent with the
main rule, to ensure that for any things that do not affect an
assessment, the new R&D provisions also apply to an income year
commencing on or after 1 July 2010. [Schedule 4, subitem 1(1)]
321. The existing R&D provisions in sections 73B to 73Z of the ITAA 1936
are repealed. This change and other repeals in this Bill apply on
the same basis as the inclusion of the new R&D provisions described
above. Therefore, the existing R&D provisions apply to assessments
for income years commencing before 1 July 2010. [Schedule 3, item
44 and Schedule 4, subitem 1(1)]
322. The general result that the application, savings and transitional
provisions are designed to produce is that:
. the existing R&D provisions apply to expenditure incurred,
and the use of depreciating assets, in an income year
commencing before 1 July 2010; and
. the new provisions apply to expenditure incurred, and the
use of depreciating assets, in an income year commencing
on or after 1 July 2010.
Savings provisions
323. The Bill includes savings provisions to ensure that, despite the
repeal of the existing R&D provisions, those R&D provisions can
still apply, and be administered, for:
. any act done or omitted to be done (for example,
expenditure incurred);
. any state of affairs existing;
. any period (for example, an income year) ending,
before the repeal of the existing provisions. [Schedule 4, item 2]
324. To this end, the Bill includes savings provisions to:
. prevent the making or amending of an assessment being
affected by anything that is repealed or amended by this
Bill, if the assessment relates to a period or event
before the repeal or amendment;
. preserve powers, duties, rights and obligations in
relation to the time before the repeal or amendment, if a
right or obligation already existed before the repeal or
amendment; and
. ensure that powers, duties, rights and obligations can
still come into existence after the repeal or amendment if
they relate to an earlier period or event. (For example,
an eligible company may object under Part IVC of the TAA
1953 in an income year commencing on or after 1 July 2010
about a notice given under section 73IA of the ITAA 1936
for an income year commencing before 1 July 2010.)
[Schedule 4, subitem 3(1)]
325. The existing R&D provisions can also apply, even though repealed,
where a state of affairs exists in an income year starting on or
after 1 July 2010 in relation to a state of affairs existing, act
done or period ending before the end of an income year starting
before 1 July 2010. Examples of this include:
. an amount may be included in an eligible company's
assessable income under subsection 73B(27A) of the
ITAA 1936 for an income year commencing on or after 1 July
2010 if the company receives in that income year an amount
for the results of R&D activities for which the company
was entitled to deductions for R&D expenditure under
section 73B of the ITAA 1936 in an income year commencing
before 1 July 2010; and
. an eligible company's deduction under section 73B of the
ITAA 1936 for R&D expenditure incurred during an income
year commencing before 1 July 2010 is reduced because of
section 73C of that Act if, in an income year commencing
on or after 1 July 2010, the company receives a recoupment
of that expenditure from the Commonwealth.
The continued application of the existing provisions in these cases
is consistent with the general approach that the existing law
applies in relation to expenditure incurred in the income year
starting before 1 July 2010. [Schedule 4, subitem 3(2)]
326. The above rules about assessments and powers, duties, rights and
obligations specifically extend to the repeal of two provisions
about an administrative penalty for failing to give details of an
initial clawback amount (subsection 286-75(3) and paragraph 286-
80(2)(b) of Schedule 1 to the TAA 1953). This has been done for
the avoidance of doubt. [Schedule 4, subitem 3(3)]
327. As a matter of caution, savings rules have also been included to:
. preserve the effect of an assessment (for example, the
evidentiary effect); and
. disregard the repeal of a provision for the purposes of
another provision dependent on the repealed provision, as
a precaution against the possibility that a repealed
provision was an element in the operation of another
provision that is still operative.
[Schedule 4, items 4 and 5]
328. Neither the existence nor the content of the savings provisions
changes the scope or application of section 8 of the Acts
Interpretation Act 1901. That section provides, among other
things, that the repeal of a provision does not affect its previous
operation, the existence of any rights or liabilities it created or
any investigation of, or penalties for, breaches of the provision.
[Schedule 4, item 6]
Transitional provisions
329. In addition to the application and savings provisions, some special
transitional arrangements are necessary. Broadly, these address
some situations that straddle:
. one or more income years where the existing law applied;
and
. one or more income years where the new law applies.
330. In this section, 'old law income year' means an income year
commencing before 1 July 2010 and 'new law income year' means an
income year commencing on or after 1 July 2010.
Depreciating assets
331. Under the existing law, an R&D deduction is allowed for decline in
value of a tangible depreciating asset used for R&D activities. If
that asset is also used for R&D activities in an income year
starting on or after 1 July 2010, the new R&D provisions about
notional deductions for the decline in value of R&D depreciating
assts apply. Thus, tangible depreciating assets are eligible for
the new rules, regardless of when they were acquired. To
facilitate this, a number of special provisions are necessary to
ensure that:
. the normal rules that limit the ability of an R&D entity
to change the method of calculating decline in value apply
[Schedule 4, item 10, section 40-67 of the IT(TP) Act
1997];
. a determination or calculation of effective life that was
made under the existing law continues to apply [Schedule
4, item 11, section 40-105 of the IT(TP) Act 1997]; and
. an entity cannot allocate a depreciating asset to a low
value pool or one of the small business pools after the
existing R&D decline in value provisions have applied to
the asset [Schedule 4, item 13, section 40-430 of the
IT(TP) Act 1997].
332. There are also transitional balancing adjustment provisions to
cover cases where:
. an R&D entity or an R&D partnership used a depreciating
asset for R&D activities when the existing R&D provisions
applied and when the new R&D provisions applied; and
. a balancing adjustment event happens in an income year
starting on or after 1 July 2010.
Asset used only for R&D activities
333. If an asset used only by an R&D entity for R&D activities has a
termination value less than its adjustable value, the entity is
entitled to a notional deduction worked out under section 355-315
of the new law. In doing so, the use of the asset for the purpose
of conducting R&D activities in old law income years is treated in
the same way as the use of the asset for the purpose of conducting
R&D activities in new law income years. [Schedule 4, item 15,
section 355-320 of the IT(TP) Act 1997]
334. If the asset's termination value is greater than its adjustable
value, an amount is included in assessable income under
subsection 355-315(3) of the ITAA 1997. The calculation is similar
to that where the asset is used only under the new law except that
it takes into account that deductions under the old law were only
uplifted by 25 per cent. For simplicity, deductions under the new
law are treated as uplifted by one third (based on an offset rate
of 40 per cent (rather the higher 45 per cent rate that generally
applies to R&D entities with an aggregated turnover of less than
$20 million). [Schedule 4, item 15, section 355-320 of the
IT(TP) Act 1997]
335. There is a corresponding transitional balancing adjustment
provision for R&D partnerships, which for individual partners
allows a further notional R&D deduction or includes an amount in
assessable income. [Schedule 4, item 15, section 355-325 of the
IT(TP) Act 1997]
Assets used partly for R&D activities
336. If an asset used partly by an R&D entity for R&D activities has a
termination value less than its adjustable value, the entity is
entitled to a deduction worked out under section 40-292 of the ITAA
1997. In applying section 40-290 of the ITAA 1997, the use of the
asset for the purpose of conducting R&D activities in old law
income years is treated in the same way as the use of the asset for
the purpose of conducting R&D activities in new law income years.
[Schedule 4, item 12, section 40-292 of the IT(TP) Act 1997]
337. There is a corresponding transitional balancing adjustment
provision for R&D partnerships, which for the partnership (not the
individual partners) allows a deduction or includes an amount in
assessable income. [Schedule 4, item 12, section 40-293 of the
IT(TP) Act 1997]
Registration
338. In determining whether an entity qualifies for an R&D tax offset,
it is necessary for a variety of provisions that the concept of
registration also includes registration under the existing
registration provisions. Those provisions include:
. section 355-205, which allows a notional deduction for R&D
expenditure; and
. section 43-35, which allows an actual deduction for
building works used for R&D activities.
[Schedule 4, item 15, section 355-200 of the IT(TP) Act 1997]
Prepayments of R&D expenditure
339. The existing law has specific rules for expenditure defined as
'advance R&D expenditure' under subsection 73B(1) of the ITAA 1936.
Those specific rules broadly spread the amount of a deduction over
a number of income years where expenditure is incurred to a
registered research agency for services to be provided over a
period of 13 months. A special transitional rule will ensure that
the existing law continues to apply to that expenditure actually
incurred in an income year starting before 1 July 2010 but taken by
subsection 73B(11) to be incurred in an income year starting on or
after 1 July 2010. To ensure this result, registration under the
new registration rules is taken into account. [Schedule 4, item
15, section 355-550 of the IT(TP) Act 1997]
Expenditure reduced to reflect group mark-ups
340. A transitional rule ensures that for the purposes of the integrity
rule about intra-group mark-ups (section 355-415), the calculation
of any reduction in the amount of the notional deduction disregards
any amount that has already been taken into account under the
corresponding rule in the existing law. [Schedule 4, item 15,
section 355-415 of the IT(TP) Act 1997]
Undeducted core technology expenditure
341. As explained in Chapter 3 (in paragraphs 3.64 to 3.66 and 3.69) the
special treatment of core technology expenditure under the existing
law is to cease and normal income tax treatment is to apply.
Special transitional arrangements will ensure that any undeducted
core technology expenditure is eligible for deduction.
342. If the core technology is a depreciating asset (for example, a
patent), the provisions for deducting amounts for depreciating
asset will apply on the basis that the opening adjustable amount is
the amount of undeducted expenditure in relation to the asset.
[Schedule 4, item 15, sections 355-600 and 355-605 of the IT(TP)
Act 1997]
343. If any core technology is not a depreciating asset, the undeducted
expenditure is deductible in equal proportions over five income
years, starting in the first income year commencing on or after
1 July 2010. This is somewhat similar to the treatment of certain
business capital expenditure that is not otherwise taken into
account (under section 40-880 of the ITAA 1997). [Schedule 4, item
15, sections 355-600 and 355-610 of the IT(TP) Act 1997]
Consequential amendments
344. Some amendments to provisions of the income tax law outside the new
R&D provisions (in Division 355) are explained in Chapter 3 because
they are important to the overall operation of the new R&D tax
incentive. Examples include the amendments to the tax offset rules
and to the depreciating asset rules in relation to their use for
R&D activities.
345. This chapter explains the other consequential amendments.
Prepayments of expenditure for services
346. As discussed in Chapter 3 under the heading 'R&D deductions are
notional only' in paragraphs 3.43 to 3.46, the deductions under
Division 355 are treated as actual deductions for the purposes of
the rules about the period of deductibility of certain advance
expenditure (in Subdivision H of Division 3 of Part III of the ITAA
1936).
347. To ensure that the advance expenditure provisions can apply to the
new R&D provisions in a similar way that they apply to the
expenditure under the existing R&D provisions, the Bill makes a
series of amendments to the advance expenditure provisions. These
involve changes in section references and terminology to those used
in the new law. [Schedule 3, items 6 to 14, sections 82KZL, 82KZM,
82KZMA, 82KZME and 82KZMF of the ITAA 1936]
348. The advance expenditure provisions are also amended to ensure that
they can apply to R&D expenditure deductible under section 355-205
where that expenditure is capital. There is no sound reason to
exclude capital expenditure that is deductible under the R&D
provisions. Indeed, an additional reason why the advance
expenditure provisions should apply is that capital expenditure
would not be immediately deducted under ordinary tax principles.
[Schedule 3, item 5, definition of 'excluded expenditure' in
subsection 82KZL(1) of the ITAA 1936]
Recoupment of deductible expenditure
349. As explained in Chapter 3 under the heading 'R&D deductions are
notional only' in paragraphs 3.43 to 3.46, the deductions under
Division 355 are treated as actual deductions for the purposes of
the rules about recoupment of deductible expenses in Subdivision 20-
A.
350. The recoupment provisions in Subdivision 20-A are also amended so
that they can apply generally to the recoupment of amounts
deductible under the R&D provisions in Division 355. Without the
amendment, Subdivision 20-A would apply only where the recoupment
was by way of insurance or indemnity. [Schedule 3, items 69 and
70, section 20-30]
351. The recoupment provisions in Subdivision 20-A can only include an
amount in assessable income up to the amount received by the
taxpayer as recoupment. The proposed claw back provisions
(discussed above) can recover the enhanced benefit received by a
taxpayer but are limited to where the recoupment (or grant) is from
an Australian government agency. So, where a recoupment is
received other than from an Australian government agency,
provisions are needed to ensure that the taxpayer has not obtained
a benefit where it has incurred no net expenditure.
Capital works
352. The capital works provisions in Division 43 are amended to:
. replace references to the existing R&D provisions with
references to the new R&D provisions; and
. reflect the terminology used in the new provisions.
[Schedule 3, items 26 to 41, sections 43-35, 43-70, 43-90, 43-100,
43-140, 43-195, 43-210 and 43-215]
Capital gains and losses
353. As explained under the heading 'R&D deductions are notional only'
in paragraphs 3.43 to 3.46, notional R&D deductions are treated as
actual deductions for the cost base rules in the capital gains and
losses provisions (commonly known as capital gains tax (CGT)).
Consequently, the existing provisions that exclude certain
deductible expenditure from the cost base or reduced cost base of a
CGT asset apply to expenditure that is notionally deductible under
the new R&D provisions.
354. There are consequential amendments to the CGT provisions to:
. replace references to the existing R&D provisions with
references to the new R&D provisions; and
. reflect the terminology used in the new provisions.
[Schedule 3, items 73 to 90, sections 104-235, 104-240, 108-55, 110-
45, 118-24 and 118-35]
Definitions
355. The amendments to the taxation law discussed in this chapter have
necessitated the inclusion of various new definitions in the
Dictionary in the ITAA 1997 (and the repeal or amendment of some
others). The substantive effects of these changes are discussed in
Chapter 3. [Schedule 1, items 2 to 10, subsection 995-1(1)]
Checklists
356. The amendments to the taxation law have necessitated the amendment
of various checklists in the ITAA 1997. [Schedule 3, items 55 to
70, sections 9-5, 10-5, 12-5, 13-1 and 20-5]
Other consequential amendments
357. There are also consequential amendments to various other
provisions of the tax law to:
. replace references to the existing R&D provisions with
references to the new R&D provisions;
. reflect the terminology used in the new provisions; and
. reflect the repeal of various existing R&D provisions,
where there are no corresponding new provisions.
[Schedule 3, items 49 to 53, 71, 72, 96 to 98, 100 to 111]
Chapter 5
Administrative arrangements for the research and development tax incentive
Outline of chapter
358. Schedule 2 to the Tax Laws Amendment (Research and Development)
Bill 2010 (Bill) amends the Industry Research and Development Act
1986 (IR&D Act) to provide a framework to support:
. the registration and assessment of activities as research
and development (R&D) activities by Innovation Australia
(the Board);
. the recognition and registration of research agencies,
known as Research Service Providers, by the Board; and
. internal review of decisions made by the Board and, if
necessary, the subsequent review of these decisions by the
Administrative Appeals Tribunal (AAT).
Context of amendments
359. The new R&D tax incentive will operate on a self assessment basis:
entities will assess for themselves whether they are eligible under
the rules contained in new Division 355 of the Income Tax
Assessment Act 1997 (ITAA 1997).
360. A key function of the Board will be to enhance the integrity of the
program by managing a process of registration for activities.
Registration allows the Board to undertake risk assessment and
compliance work, complementing integrity measures undertaken by the
Commissioner of Taxation (Commissioner). In conducting this risk
assessment and compliance work, the Board will confirm or reject an
R&D entity's self assessment of certain activities as 'core' or
'supporting' R&D activities as defined under new Division 355 of
the ITAA 1997.
361. The Board will also have a function in examining and making
findings about R&D conducted outside Australia or the external
Territories (overseas activities), to enable R&D entities to access
an R&D tax offset for certain types of activities that are
conducted overseas.
362. To provide certainty for R&D entities, the Board will also be able
to provide public advice and advisory materials, make generalised
public findings about whether activities are core R&D or supporting
R&D activities. Public advice issued by the Board will be binding
on the Board, but not the Commissioner. R&D entities may apply for
private findings before or after an activity is registered by the
Board. Taken together this enhanced advisory framework will ensure
that the new tax incentive is targeted appropriately and
administered effectively.
363. The Board will also have a role in ensuring a minimum standard of
qualification and capability of entities registered as Research
Service Providers. The Board must maintain a register of Research
Service Providers.
364. The new arrangements will appear as new Part III of the IR&D Act,
which will replace existing Part IIIA. Although the R&D Tax
Concession will be discontinued from the end of the 2009-10 income
year, the Board will still require ongoing powers in relation to
activities conducted prior to the end of the 2009-10 income year.
These powers will be saved to ensure the Board is able to continue
to carry out its duties with respect to activities conducted under
the R&D Tax Concession.
Summary of new law
Registration of research and development activities
365. In order to claim a tax offset for R&D activities conducted in
Australia or the external Territories, R&D entities will need to
register their activities with the Board. While registration is a
precondition of eligibility for the tax offset, registration does
not, by itself, render the activities that are the subject of the
registration of eligible R&D activities.
366. The R&D tax incentive operates on a self assessment basis; that is,
an R&D entity will assess for itself whether the activities
conducted in an income year are eligible R&D activities as defined
under new Division 355 of the ITAA 1997. As part of this process,
R&D entities will be required to separately identify core and
supporting R&D activities. However, the Board is able to make
findings about activities that confirm or reject an R&D entity's
self assessment of its activities. Board findings about whether
activities are R&D activities can arise in three ways:
. the Board may make findings about an application for
registration, or activities that have been registered, of
its own accord;
. the Board must examine and make findings on activities
that have been registered if it is requested to do so by
the Commissioner; and
. the Board may make findings on whether registered
activities are R&D activities upon application by an R&D
entity.
367. Findings by the Board that activities are or are not core R&D or
supporting R&D activities are binding on the Commissioner when
making a decision in relation to whether expenditure associated
with the activities is or is not R&D expenditure and claimable
under the R&D tax incentive rules. The Board may also release
policy guidance about how it makes determinations in relation to
the nature of activities.
368. R&D entities which disagree with a finding made by the Board may
request an internal review of the finding by the Board. The
Commissioner may also request an internal review of a finding (see
paragraph 1.20).
Advance findings
369. An R&D entity may request a finding about the nature of activities
before it is possible to register these activities. These advance
findings can be sought in relation to an activity where an R&D
entity:
. has completed the activity in an income year (but before
it is possible to register the activity);
. has yet to complete the activity in an income year; or
. has yet to conduct the activity, but can reasonably be
expected to do so in the current or next two income years.
370. The ability of the Board to make an advance finding is intended to
increase certainty for R&D entities in relation to whether the
Board considers certain activities to be core R&D activities or
supporting R&D activities, before the entity applies to register
the activity.
Findings about overseas activities
371. R&D entities must apply to the Board for a finding about activities
being conducted or proposed to be conducted, outside Australia or
the external Territories, if the R&D entity wishes to claim a tax
offset in relation to expenditure on those activities. The Board
will give a positive finding in relation to these activities if it
is satisfied that certain requirements are met, including the
requirement that the activities are covered by an advance finding
(see paragraphs 1.12 and 1.13) and also that they cannot be
conducted in Australia or the external Territories.
372. Claims for a tax offset in relation to expenditure on overseas
activities may only be made where a positive finding about the
overseas activities is in force. Findings are in force in the
income year in which the application for the finding is made.
Findings about core technology
373. An R&D entity or the Commissioner may apply to the Board for a
finding that particular technology is or is not core technology.
Technology is core technology if a purpose of R&D activities was or
is to obtain new knowledge, make improvements or continue the
development of that technology.
374. The effect of a finding by the Board that technology is core
technology is that the tax offset will not be available for
expenditure incurred on acquiring the technology or the right to
use technology.
Registration of entities as Research Service Providers
375. The Board may register an entity as a Research Service Provider
capable of providing services in one or more specified fields of
research if the Board is satisfied that the entity meets certain
criteria (which will be specified in regulations made under the
IR&D Act). The Board will maintain a register of Research Service
Providers and make this register available for inspection on the
internet, and publish a list of Research Service Providers in its
annual report.
376. As a transitional arrangement for the 2010-11 income year,
Australian research agencies who are registered under section 39F
of the current IR&D Act on 30 June 2010 will be taken to
automatically be registered as Research Service Providers. These
entities, and new entities which are registered in the future, will
need to renew their registration on an annual basis. Registration
will apply for an income year, rather than for a year from the time
of application.
Review of Board decisions
377. Certain decisions by the Board are reviewable decisions and any
entity whose interests are affected will have the right to request
an internal review of the decision within 28 days (or further
period allowed by the Board). The Commissioner can also request an
internal review of these decisions at any time. Applications may
also be made to the AAT for a review of an internal review
decision.
Comparison of key features of new law and current law
|New law |Current law |
|The new Part III of the |The current Part IIIA of |
|IR&D Act specifies the |the IR&D Act specifies |
|powers of the Board in |the powers of the Board |
|relation to the new R&D |in relation to the R&D |
|tax incentive. |Tax Concession. |
|The Board may register |The Board may register |
|core and supporting R&D |R&D activities upon |
|activities upon |application by eligible |
|application by R&D |companies, including |
|entities. Head entities |subsidiaries. The Board |
|must register instead of |cannot revoke a |
|any of their subsidiaries|registration. |
|which would otherwise be | |
|entitled to registration.| |
|The Board may revoke an | |
|entity's registration in | |
|certain circumstances. | |
|The Board may make |The Board may issue |
|findings on whether |certificates in relation |
|activities are (or are |to whether registered |
|not) core R&D activities |activities are R&D |
|and whether activities |activities. Findings can|
|are (or are not) |be made at the discretion|
|supporting R&D |of the Board and must be |
|activities. |made at the request of |
|Registrations are |the Commissioner. |
|automatically varied to | |
|be consistent with the | |
|Board's findings. | |
|Findings may be made at | |
|the discretion of the | |
|Board, or on application | |
|by an R&D entity, and | |
|must be made at the | |
|request of the | |
|Commissioner. | |
|An R&D entity, or an |An eligible company may |
|entity nominated in |request an advance |
|regulations acting on |registration that |
|behalf an R&D entity, may|provides it with a right |
|request an advance |to register its R&D |
|finding to confirm that |activities. Advance |
|an activity which is not |registration decisions |
|yet able to be registered|have effect for up to |
|is a core or supporting |three years. |
|R&D activity, if the | |
|activity was completed in| |
|the income year in which | |
|the application is made | |
|or if the activities can | |
|reasonably be expected to| |
|be conducted or completed| |
|within three years. | |
|An R&D entity must apply |An eligible company must |
|to the Board for a |apply to the Board for a |
|finding if it wishes to |provisional certificate |
|claim a tax offset in |in relation to overseas |
|relation to activities |R&D activities before the|
|conducted outside |commencement of those |
|Australia or the external|activities if it wishes |
|Territories. The Board |to claim a deduction |
|must be satisfied that |under the R&D Tax |
|the activities satisfy a |Concession for those |
|number of conditions, |activities. The overseas|
|including that the |activity must be part of |
|activities are the |a larger Australian |
|subject of a positive |project and overseas |
|advance finding, and |expenditure must not |
|cannot be conducted in |exceed 10 per cent of |
|Australia or the external|total project |
|Territories. |expenditure. |
|The Commissioner or an |The Commissioner may ask |
|R&D entity may ask the |the Board to issue a |
|Board to make a finding |certificate stating |
|that particular |whether particular |
|technology is or is not |technology is or is not |
|core technology for R&D |core technology in |
|activities. |relation to R&D |
| |activities. |
|The Board may register |The Board may register |
|Research Service |Australian research |
|Providers for an income |agencies for a period of |
|year. Registrations may |12 months. |
|be renewed at the same | |
|time every year. | |
Detailed explanation of new law
Registration of activities
378. Registration of R&D activities that were conducted in the previous
income year is a precondition of eligibility for the R&D tax
offset. On application by an R&D entity, the Board must make a
decision to register, or refuse to register, core R&D activities
and supporting R&D activities conducted during an income year.
[Schedule 2, item 1, subsection 27A(1)]
379. Supporting R&D activities are defined in section 355-30 of the ITAA
1997 by reference to their connection to specific core R&D
activities. Consistent with this, where the Board registers a
supporting R&D activity, the registration must also specify the
core R&D activity or activities to which the supporting activity is
connected. [Schedule 2, item 1, subsection 27A(3)]
380. Where the connected core R&D activities are not conducted in the
same income year as the supporting R&D activities, the registration
must identify the income year in which those core activities were
registered or are proposed to be registered. The connected core
R&D activities can be undertaken in a past, present or future
income year. If the connected core R&D activities were undertaken
prior to the end of the R&D Tax Concession under section 73B of the
Income Tax Assessment Act 1936, the core R&D activities must have
been registered under section 39J of the current IR&D Act and must
satisfy the definition of core R&D activities contained in
section 355-25 of the ITAA Act 1997. [Schedule 2, item 1,
subsection 27A(3) and Schedule 4, item 16]
381. The Board's decision to register activities for an R&D entity must
be made consistently with any findings that have been made by the
Board about the application under subsection 27B(1), and any
advance findings about the activities already in force under
subsection 28A(1). This means that, for example, the Board cannot
register an R&D entity for particular activities if it has already
made a finding that those activities are not R&D activities.
[Schedule 2, item 1, subsection 27A(2)]
382. An applicant that wishes to be registered will be required to self
assess whether or not it is an R&D entity. R&D entities are
defined in section 355-35 of the ITAA 1997. While an entity may
otherwise be eligible to be an R&D entity, the entity's
registration will have no effect under section 27A to the extent
that it is a subsidiary member of a consolidated group or multiple
entry consolidated group (MEC group). [Schedule 1, item 1, section
355-35 and Schedule 2, item 1, section 31]
383. If the Board becomes aware that it has registered R&D activities of
an entity that is not an R&D entity (for example, because the body
is an unincorporated joint venture), the registration can be
revoked by the Board. An R&D entity may also request to have its
registration revoked. [Schedule 2, item 1, section 27N]
384. The Board must notify the R&D entity of its decision to register or
refuse to register the R&D entity for activities for an income
year. [Schedule 2, item 1, section 27C]
385. As the new R&D tax incentive is a self assessment regime, the
majority of applications to the Board will be registered without
formal examination in relation to the activities conducted in the
income year in question. Therefore, registration of activities
does not, by itself, render the activities that are the subject of
the registration eligible R&D activities.
Applications for registration of activities
386. Applications for registration must be made within:
. ten months after the end of the income year in which the
activities were conducted [Schedule 2, item 1,
subparagraph 27D(c)(i)]; or
. a further period allowed by the Board, in accordance with
the decision-making principles [Schedule 2, item 1,
subparagraph 27D(c)(ii)].
387. The responsible Minister will make, by legislative instrument, the
decision-making principles under section 32A, which will apply to
the Board's decision about whether to accept an application outside
the 10-month period.
388. The Board will determine and publish the approved form for
applications. Applications will be reviewed to ensure that they
are in accordance with the approved form and that all information
required by that form has been supplied, as failure to do so may
result in the Board refusing to register the applicant's
activities. [Schedule 2, item 1, paragraph 27D(a)]
389. Regulations may specify certain information or other material which
must be included in an approved form. [Schedule 2, item 1,
subsection 32(3)]
390. It may be necessary for a fee to accompany an application for
registration. The amount of the fee, if any, will be specified in
regulations and will be determined by reference to the cost of
providing the registration service. [Schedule 2, item 1, paragraph
27D(b)]
Findings about applications
391. The Board may choose to consider an application in more detail and
make a formal finding in relation to all or some of the activities
mentioned in the application. These findings may impact on the
registration of the R&D entity and its activities. [Schedule 2,
item 1, section 27B]
392. The Board may make one or more of the following findings in
relation to an application by an R&D entity:
. that all or part of an activity mentioned in the
application was a core R&D activity (if the Board is
satisfied that the activity meets the definition in
section 355-25 of the ITAA 1997) and was conducted during
the income year [Schedule 2, item 1, paragraph 27B(1)(a)];
. that all or part of an activity mentioned in the
application was not a core R&D activity (if the Board is
not satisfied that the activity meets the definition in
section 355-25 of the ITAA 1997) or was not conducted
during the income year [Schedule 2, item 1,
paragraph 27B(1)(b)];
. that all or part of an activity mentioned in the
application was a supporting R&D activity in relation to
an identified core R&D activity (if the Board is satisfied
that the activities meet the definitions in sections 355-
25 and 355-30 of the ITAA 1997) and was conducted during
the income year [Schedule 2, item 1, paragraph 27B(1)(c)];
and/or
. that all or part of an activity mentioned in the
application was not a supporting R&D activity (if the
Board is not satisfied that the activity meets the
definition in section 355-30 of the ITAA 1997), was not
conducted during the income year or was not conducted in
relation to past (registered), present (will be
registered) or future (could be registered) core R&D
activities [Schedule 2, item 1, paragraph 27B(1)(d)].
393. In making its findings, the Board is not confined by the manner in
which the R&D entity categorises particular actions as
'activities'. If the Board considers that some part of an activity
nominated by the applicant as an R&D activity meets the definition
but another does not, the Board may make a positive finding in
relation to that part of the activity that it considers does meet
the definition.
394. In addition, in making its finding, the Board is not confined by
the R&D entity's classification of an activity as a core R&D
activity or a supporting R&D activity. If the Board considers that
an activity classified by the R&D entity as a core R&D activity is
a supporting R&D activity (or vice versa), the Board may register
the activity as appropriate.
395. If the Board makes a finding, it may specify in the finding the
period during which the finding applies; that is, the times during
the income year that it is satisfied the entity was conducting the
R&D activity. For example, the entity might have been carrying out
an activity for the entire income year, but for only part of that
year it was carried out for the dominant purpose of supporting a
core R&D activity, and thus it was only an R&D activity for certain
times. [Schedule 2, item 1, subsection 27B(2)]
396. The Board need not consider every activity in an application for
registration. The Board may make findings in relation to some
activities nominated in an application, while not making findings
about others that, despite not making a finding, the Board is
satisfied are R&D activities.
397. The activities in the application may be the subject of an earlier
advance finding under subsection 28A(1). In this circumstance, the
advance finding will prevail over a finding under subsection 27B(1)
to the extent of any inconsistency. This means that an R&D entity
can rely on an advance finding provided that it conducts the R&D
activities as described in that finding. However, if the
activities conducted are materially different to those described in
an advance finding, the advance finding does not apply to the
actual activities conducted and the Board may make a finding under
section 27B about those activities without breaching the
consistency rule. [Schedule 2, item 1, subsection 27B(3) and
section 32B]
Positive findings
398. The Board is able to make positive findings in respect of
activities within an application; namely, that the activities
identified by the applicant are R&D activities. It makes these
findings if it is satisfied, on the basis of the information
provided, that the activity meets the definitions in section 355-25
or 355-30 of the ITAA 1997, as relevant. The Board may also
release policy guidance about how it applies this test.
399. In relation to a finding that an activity is a supporting activity,
the Board would ordinarily also satisfy itself that the nominated
core activity to which the supporting activity relates meet the
definition of a 'core R&D activity'. The Board need not make a
finding in order to satisfy itself with regards to related core
activities.
400. The core activity may be undertaken in a past, present or future
income year. If the relevant core activity will not be undertaken
until a later income year (and hence cannot be registered yet), the
Board will need to satisfy itself as to whether, if that nominated
core activity were to be carried out in the same income year as the
supporting activity, it would meet the definition of a 'core R&D
activity'. [Schedule 2, item 1, subparagraph 27B(1)(c)(ii)]
401. A positive finding by the Board in respect of particular activities
is confirmation of the applicant's self assessment that nominated
activities are R&D activities. Once the Board has made such a
finding, the Commissioner is bound to treat the activities which
are the subject of the finding as R&D activities when determining
whether expenditure incurred in relation to the activity in
question is R&D expenditure for the purposes of Division 355 of the
ITAA 1997. However, the Commissioner may request a review of a
finding. [Schedule 1, item 1, subparagraph 355-705(1)(a)(i) and
Schedule 2, item 1, subsection 30C(4)]
402. It is not necessary for the applicant to have a finding in respect
of its activities in order to be eligible to claim a tax offset.
It is only necessary that those activities be registered.
Negative findings
403. The Board can make negative findings in respect of activities
within an application if it is not satisfied that it should make a
positive finding; for example, if it is not satisfied that a
nominated activity meets the relevant tests in section 355-25 or
355-30 of the ITAA 1997 as noted above.
404. There are a number of reasons why the Board might not be satisfied
that the activity meets the relevant definition:
. The Board may be of the opinion that the activity fails
one or more components of the tests in the ITAA 1997. For
example, an activity may have been nominated as a core
activity, but the Board may not be satisfied that it
satisfies the definition of core R&D activities in
subsection 355-25(1) of the ITAA 1997, or may be satisfied
that it is an activity of the type specified in
subsection 355-25(2) of the ITAA 1997.
. For supporting R&D activities, the Board might consider
that the dominant purpose of the relevant activity was not
to support a core activity. Additionally, if the Board
makes a negative finding in relation to particular
nominated core R&D activities, any activities conducted in
support of those activities would likewise not be eligible
for registration as supporting R&D activities.
. The Board may have insufficient evidence available to it
to be satisfied that the activity is an R&D activity.
This may be because the applicant did not provide all
required information (see paragraphs 1.49 to 1.51), or
because the information made available is not sufficient
to satisfy the Board in the circumstances of the case.
405. The Board may also find that, despite the described activity
appearing to meet the definition of R&D activities, the activity
was in fact not conducted during the income year. [Schedule 2,
item 1, subsection 27B(1)]
Additional information requests
406. The Board has the power to request, in writing, that the applicant
provide it with any additional information it requires for the
purposes of making a decision. The Board can ask that the
applicant provide the additional information in a particular format
which is acceptable to it in the circumstances. [Schedule 2,
item 1, section 27E and subsection 32(2)]
407. The Board may require that the information be provided in the
approved form within 30 days or a further period allowed in
accordance with decision-making principles. [Schedule 2, item 1,
section 27E]
408. If the Board is still unable to make a positive finding on the
information provided, or the applicant does not provide the further
information as requested, the Board may reach a negative finding on
the basis that it is not satisfied that the activity meets the
relevant definition.
Consequence of findings
409. If the findings made by the Board confirm all aspects of the
application that the Board considered, the Board will register all
those activities for the applicant for the income year. Any other
activities nominated in the application for the applicant for the
income year which are not the subject of a finding are nonetheless
registered as they are not the subject of a negative finding.
[Schedule 2, item 1, subsection 27A(2)]
410. If the findings made by the Board are inconsistent with the
application (that is, the Board makes negative findings about some
activities nominated by the applicant), the Board will only
register the applicant in relation to those activities for which it
makes positive findings (that is, activities which the Board is
satisfied meet the definition of core R&D activity or supporting
R&D activity). [Schedule 2, item 1, subsection 27A(2)]
411. If the findings made by the Board are entirely inconsistent with
the application (that is, the Board determines that no activities
nominated by the applicant are core R&D or supporting R&D
activities), the Board will refuse to register the applicant in
respect of any activities. [Schedule 2, item 1, subsection 27A(2)]
412. The Board must inform an applicant in writing of the Board's
decision about an application for registration of activities.
Where the Board has registered the nominated activities without
making any findings, it is only necessary to provide notice of
registration to the applicant. [Schedule 2, item 1, subsection
27C(1)]
413. If the Board has made one or more findings as part of the
registration process, it must provide a copy of the notice to both
the applicant and the Commissioner. The notice must include a
certificate in respect of each finding, which sets out:
. a description of each finding;
. the Board's reasons for the finding;
. the activity affected by the finding; and
. any other matters (if any) specified in the regulations.
[Schedule 2, item 1, subsection 27C(2)]
414. The notice must also inform the applicant of its right to have each
decision (the decision whether or not to register, and the decision
in respect of each finding) reviewed under Division 5.
[Schedule 2, item 1, section 30B]
415. If the Board fails to comply with these notice requirements,
however, it does not affect the validity of the Board's findings.
If the Board makes more than one finding in relation to an
application, there is no need for the Board to issue separate
documents relating to each finding. All certificates can be
contained in the same document. [Schedule 2, item 1, section 27C]
416. If the Board is in a position to make a finding about activities
under both sections 27B and 28A, the Board need not make two
separate findings. For example, an R&D entity may apply for an
advance finding about completed activities late in an income year,
then apply for registration as soon as it is able to in the
following income year before the Board has made a finding in
relation to the advance finding request.
Post registration process
417. The Board is able to examine the registration of an R&D entity with
a view to confirming that the registered activities are R&D
activities. This examination can take place at any time, in
relation to a registration year (that is, the income year in which
the activities were conducted). However, a finding by the Board
only binds the Commissioner for the purposes of an R&D entity's
income tax assessment for the income year if the finding is made
within four years after the end of the income year (by operation of
subsections 355-705(1) and 355-710(1) of the ITAA 1997).
418. There are three circumstances in which the Board would examine a
registration:
. The Board may examine a registration at its own
discretion, at any time [Schedule 2, item 1, subsection
27F(2)].
. The Board must examine a registration if requested to do
so by the Commissioner. In these circumstances, the Board
will check whether activities that are the subject of the
request are registered activities, and if so, make a
finding about whether these activities are core or
supporting R&D activities. This examination can take
place at any time, in relation to a registration year
[Schedule 2, item 1, paragraph 27F(3)(a)].
. The Board must examine a registration if an R&D entity
applies (in the approved form, and accompanied by the fee,
if any, specified in regulations) for particular findings.
In relation to each activity that is the subject of the
request, the Board must either make a finding about the
activity, or refuse to make a finding, in response to the
application [Schedule 2, item 1, paragraphs 27F(3)(b) and
27F(4)(b) and section 27G].
419. A finding made by the Board may differ from that sought (for
example, the Board might make a negative finding about an activity
where the applicant sought a positive finding, or it might make a
positive finding in relation to some but not all of the activity).
The Board may also refuse to make a finding that is requested by an
R&D entity if that is consistent with the decision-making
principles made under section 32A. [Schedule 2, item 1, section
27F]
420. As a result of an examination under section 27F, the Board may make
one or more of the following findings in relation to the entire
registration (that is, all activities registered by the entity), or
part of the registration (only some of the activities) of an R&D
entity:
. that all or part of a registered activity was a core R&D
activity (if the Board is satisfied that the activity
meets the definition in section 355-25 of the ITAA 1997)
and was conducted during the income year in which the
activity was registered [Schedule 2, item 1, paragraph
27J(1)(a)];
. that all or part of a registered activity was not a core
R&D activity (if the Board is not satisfied that the
activity meets the definition in section 355-25 of the
ITAA 1997) or was not conducted during the income year in
which the activity was registered [Schedule 2, item 1,
paragraph 27J(1)(b)];
. that all or part of a registered activity was a supporting
R&D activity in relation to an identified core R&D
activity (if the Board is satisfied that the activities
meet the definitions in sections 355-25 and 355-30 of the
ITAA 1997) and was conducted during the income year in
which the activity was registered [Schedule 2, item 1,
paragraph 27J(1)(c)]; and/or
. that all or part of a registered activity was not a
supporting R&D activity (if the Board is not satisfied
that the activity meets the definition in section 355-30
of the ITAA 1997), was not conducted during the income
year or was not conducted in relation to past
(registered), present (will be registered) or future
(could be registered) core R&D activities [Schedule 2,
item 1, paragraph 27J(1)(d)].
421. If the Board makes a finding, it may specify in the finding the
period during which the finding applies; that is, the times during
the income year that it is satisfied the entity was conducting the
R&D activity. For example, the entity might have been carrying out
an activity for the entire income year, but for only part of that
year it was carried out for the dominant purpose of supporting a
core R&D activity, and thus it was only an R&D activity for certain
times. [Schedule 2, item 1, subsection 27J(2)]
422. In some circumstances, the Board may already have considered some
or all of the registered activities of an R&D entity (for example,
because the Board granted an advance finding in respect of the
activities under section 28A). In these circumstances, the earlier
finding will prevail over a new finding under subsection 27J(1) to
the extent of any inconsistency. This ensures that an R&D entity
can rely on a finding, once made, in respect of its activities.
[Schedule 2, item 1, section 32B]
423. However, if the activities conducted are materially different to
those described in an advance finding, the activities conducted are
not covered by the finding and the Board may make a finding under
section 27J about those activities without breaching the
consistency rule.
Positive findings
424. The Board is able to make positive findings in respect of the
activities it examines; namely, that the activities registered in
relation to the R&D entity are R&D activities (either core or
supporting). It will make these findings if it is satisfied, on
the basis of the information provided, that the activity meets the
definitions set out in section 355-25 or 355-30 of the ITAA 1997,
as relevant. The Board may also release policy guidance about how
it applies this test.
425. In relation to a finding that an activity is a supporting activity,
the Board would ordinarily also make a finding about the core
activity to which the supporting activity relates. If the relevant
core activity will not be undertaken until a later income year (and
hence cannot be registered yet), the Board will need to satisfy
itself that the nominated core activity to which the supporting
activity relates meet the definition of a 'core R&D activity'. The
Board need not make a finding in order to satisfy itself with
regards to related core activities.
426. The core activity may be undertaken in a past, present or future
income year. If the relevant core activity will not be undertaken
until a later income year (and hence cannot be registered yet), the
Board will need to decide whether, if that nominated core activity
were to be carried out in the registration year (that is, the same
income year as the supporting activity), it would meet the
definition of a 'core R&D activity'. [Schedule 2, item 1,
paragraph 27J(1)(c)]
427. A positive finding by the Board in respect of particular activities
is confirmation of the applicant's self assessment that nominated
activities are R&D activities. Once the Board has made such a
finding, the Commissioner is bound to treat the activities that are
the subject of the finding as R&D activities when determining
whether expenditure incurred in relation to the activities in
question is R&D expenditure for the purposes of Division 355 of the
ITAA 1997. However, the Commissioner may request a review of a
finding. [Schedule 1, item 1, subparagraph 355-705(1)(a)(ii) and
Schedule 2, item 1, subsection 30C(4)]
Negative findings
428. The Board can make negative findings in respect of activities
registered by the entity if it does not have the necessary level of
satisfaction to make a positive finding; that is, if it is not
satisfied that a registered activity meets the relevant definition
in the ITAA 1997.
429. There are a number of reasons why the Board might not be satisfied
that the activity meets the relevant definition:
. The Board may be of the opinion that the activity fails
one or more components of the tests in the ITAA 1997. For
example, an activity may have been nominated as a core
activity, but the Board may not be satisfied that it
satisfies the definition of core R&D activities in
subsection 355-25(1) of the ITAA 1997, or may be satisfied
that it is an activity of the type specified in
subsection 355-25(2) of the ITAA 1997.
. For supporting R&D activities, the Board might consider
that the dominant purpose of the relevant activity was not
to support a core activity. Additionally, if the Board
makes a negative finding in relation to particular
nominated core R&D activities, any activities conducted in
support of those activities would likewise not be eligible
for registration as supporting R&D activities.
. The Board may have insufficient evidence available to it
to be satisfied that the activity is an R&D activity.
This may be because the applicant did not provide all
required information (see paragraphs 1.74 to 1.76), or
because the information made available is not sufficient
to satisfy the Board in the circumstances of the case.
430. The Board may also find that, despite the described activity
appearing to meet the definition of R&D activities, activity was in
fact not conducted during the income year. [Schedule 2, item 1,
subsection 27J(1)]
Additional information about examinations
431. To facilitate an examination, the Board may request additional
information, or types of information, about an R&D entity's
registration from that entity. The request must be in writing and
may specify the period within which the additional information it
requires must be provided (30 days, or such longer period as the
Board allows, in accordance with the decision-making principles).
[Schedule 2, item 1, section 27H]
432. The Board can ask that the applicant provide the additional
information in a particular format which is acceptable to it in the
circumstances. [Schedule 2, item 1, subsection 32(2)]
433. If the Board is still unable to reach a positive finding on the
basis of information provided, or the R&D entity does not provide
the further information, the Board may reach a negative finding on
the basis that it is not satisfied that the activity meets the
relevant definition.
Consequence of findings
434. If the findings made by the Board confirm all aspects of a
registration that the Board considered, the registration remains
unchanged.
435. If any findings made by the Board under section 27J are
inconsistent with a registration of an R&D entity's activities, the
registration is automatically varied so that it is consistent with
the finding. Registrations will only be automatically varied as a
consequence of a valid finding which is in force. If the Board
makes a finding which is deemed to have no effect under section 32B
because it is inconsistent with an earlier finding by the Board,
this will have no effect on the entity's registration. [Schedule
2, item 1, sections 27L and 32B]
436. Automatic variation under section 27L is intended to align an R&D
entity's registration with any findings that are made by the Board.
For example, if the Board makes a finding under section 27J that
particular registered activities are not R&D activities, the
entity's registration is automatically varied so that the activity
the subject of the finding is not a registered activity. [Schedule
2, item 1, section 27L]
437. The Board must inform an R&D entity and the Commissioner in writing
of the Board's findings in respect of any of the entity's
registered activities which were examined by the Board. [Schedule
2, item 1, subsection 27K(1)]
438. The notice must include a certificate in respect of each finding,
which sets out:
. a description of each finding;
. the Board's reasons for the finding;
. the registered activity affected by the finding;
. the effect of the finding on the entity's registration;
and
. any other matters (if any) specified in the regulations.
[Schedule 2, item 1, subsection 27K(2)]
439. The notice must also inform the applicant of its right to have each
decision (the decision in respect of each finding) reviewed under
Division 5. [Schedule 2, item 1, section 30B]
440. The Board must also notify an R&D entity in writing of a decision
refusing to make a finding in response to an application by the
entity. The notice must include the Board's reasons for refusing
to make a finding. The reasons for refusing to make a finding must
be consistent with the decision-making principles. [Schedule 2,
item 1, paragraph 27F(4)(b), subsection 27K(3) and section 32A]
441. If the Board fails to comply with these notice requirements,
however, it does not affect the validity of the Board's findings,
or the status of the entity's registration as varied by the Board.
If the Board makes more than one finding in relation to a
registration, there is no need for the Board to issue separate
notices relating to each finding. All certificates can be
contained in the same document. [Schedule 2, item 1, subsection
27K(4)]
Variations of registration
442. A registered R&D entity may request a variation to its registration
by way of application in the approved form, and payment of the fee
(if any) specified in the regulations. This could involve removing
particular activities, reclassifying activities as core or
supporting activities, or amending the times during which
activities were conducted, but cannot involve adding additional
activities. Additional activities can only be added through the
normal application process.
443. If the Board is satisfied that the requested variation is
consistent with any valid findings it has made under sections 27B,
27J or 28A, and the variation is justified in accordance with the
decision-making principles, the Board may vary the registration.
The Board may request additional information from the R&D entity to
assist with its decision, if necessary. Such a request may be made
in the same way as a request under section 27E (that is, it may
request for specified information, or kinds of information, and may
ask that the information be given in the approved form and within a
prescribed timeframe). [Schedule 2, item 1, section 27M]
444. A registration that has been varied, either because of a Board
finding or on request of the entity, is deemed always to have
existed as varied. This rule reflects the fact that although
activities may have been miscategorised by the R&D entity in its
registration, the Board's decision does not itself change the
nature of the activities. While an entity is able to rely upon
self assessment to register activities, if those activities are
later found by the Board to have been registered incorrectly, the
entity cannot purport to claim expenditure in relation to those
activities in the registration year. This rule also prevents
administrative complexity resulting from maintaining two or more
different variations of the same registration during one income
year. [Schedule 2, item 1, section 27L and subsection 27M(4)]
Revoking registrations
445. The Board may revoke the registration if it is satisfied that there
was no time at which an entity was an R&D entity when a registered
activity was conducted. It may also revoke an entity's
registration on request of the R&D entity. Such a request must be
in the approved form, and accompanied by the fee, if any,
prescribed in the regulations. [Schedule 2, item 1, section 27N]
446. The revoking of a registration for an income year has the effect
that the activities that are the subject of the registration are
taken never to have been registered. This reflects the fact that a
registration is in respect of a particular year of income. If an
entity was not eligible to be registered by the Board at any time,
or the entity does not wish to be registered for an income year,
the entity cannot purport to claim expenditure at any time in
relation to any activities in that income year. [Schedule 2, item
1, subsection 27N(4)]
447. A decision by the Board to revoke a registration is reviewable.
The Board must notify the entity and the Commissioner if it revokes
a registration and the reason for the revocation. [Schedule 2,
item 1, sections 27N, 30A and 30B]
Other findings
448. In addition to findings about applications to register and findings
about registration, the Board may also make findings under Division
3 in relation to:
. advance findings - whether an activity:
- that has been completed (but is not yet able to be
registered);
- is being conducted in the income year in which the
application for the finding is made; or
- that has yet to be conducted (but it is reasonable to
expect that the activity will be conducted in the income
year in which the application for the finding is made or
the next two income years), is an R&D activity;
. findings in relation to overseas activities - whether an
activity cannot be conducted in Australia or the external
Territories; and
. findings in relation to core technology - whether a
particular technology is core technology for R&D
activities.
449. R&D entities (and, in some circumstances, entities specified in
regulations under section 28B acting on behalf of R&D entities) may
apply to the Board to make any or all of the above findings. All
applications for these findings must be in the approved form and
accompanied by a fee (if any) specified in the regulations.
[Schedule 2, item 1, section 28G]
450. The Commissioner may request that the Board make findings in
relation to core technology. The Board must comply with such a
request. [Schedule 2, item 1, subsection 28E(3)]
451. The Board has the power to request that any additional information
it requires to make a finding under Division 3 be provided to it.
It can require that this information be provided in the approved
form, and within 30 days after the request was given or any further
period allowed (in accordance with the decision-making principles).
[Schedule 2, item 1, section 28H]
452. The Board must give notice to an R&D entity about each of its
decisions in relation to the nature of activities (advance findings
under section 28A, whether an activity cannot be conducted in
Australia or the external Territories (findings under section 28C)
or decisions about core technology (findings under section 28E).
This includes a decision to make one or more findings, or a
decision to refuse to make a finding.
453. The notice must include a certificate in relation to each finding
(if any) that sets out:
. a description of the finding;
. the Board's reasons for the finding;
. a description of the activity or technology affected by
the finding; and
. any other matters (if any) specified in the regulations.
454. The Board must give the Commissioner a copy of the notice if the
notice includes one or more certificates. If the Board makes more
than one finding, there is no need for the Board to issue separate
documents relating to each finding. All certificates can be
contained in the same document. [Schedule 2, item 1, section 28F]
455. The notice must also advise the applicant of its review rights in
respect of the decision (whether that is a decision to make or
refuse to make a finding). [Schedule 2, item 1, section 30B]
456. If the Board fails to comply with these notice requirements,
however, it does not affect the validity of the Board's findings.
[Schedule 2, item 1, subsections 28F(5) and 30B(3)]
Advance findings
457. An R&D entity may apply to the Board for an advance finding in
relation to activities that are not yet able to be registered.
458. An R&D entity may request that the Board make an advance finding in
relation to one or more activities that have been completed during
the income year. This occurs where an R&D entity completes an
activity in an income year and, in that same income year, wishes to
apply to the Board for a finding in order to seek certainty about
the nature of the activity. This application can only be made
before it is possible to register the activity under section 27A.
[Schedule 2, item 1, paragraph 28A(2)(a)]
459. An R&D entity may also request that the Board make an advance
finding in relation to activities that are in the process of being
conducted, but is not completed within the year in which the R&D
entity applies for an advance finding, or which it has not yet
conducted. The Board will only give an advance finding in relation
to activities that have not yet been conducted if it is satisfied
that, on an objective basis, it is reasonable to expect that the
activities will be conducted in the current or next two income
years. [Schedule 2, item 1, subsection 28A(2)]
460. Where the Board makes an advance finding about an activity that has
been completed or is being conducted within the year in which the
R&D entity applies for an advance finding, the Board may specify in
the finding the period during which the finding applies; that is,
the times during the income year that it is satisfied the entity
was conducting the R&D activity. [Schedule 2, item 1,
subsection 28A(3)]
461. Additionally, an entity (or a class of entity) specified in the
regulations will be able to apply for an advance finding on behalf
of one or more R&D entities, provided that the entity has the
written consent of the R&D entity or entities. Such an entity may
make a single application on behalf of multiple R&D entities, where
the application relates to the same activity, and that application
is treated as if each R&D entity had made a separate application.
In these circumstances, the Board would, for example, issue
findings to each R&D entity, and give notice of decisions to the
R&D entities. For example, regulations might be made which permit
a Research Service Provider to make such an application, so that
the Research Service Provider can provide certainty to R&D entities
for whom it carries out a particular activity that the activity is
an R&D activity and can be registered by the entities under section
27A. [Schedule 2, item 1, section 28B]
462. The Board may make one or more of the following findings in respect
of an activity:
. that the activity is a core R&D activity (if it is
satisfied that the activity meets the definition in
section 355-25 of the ITAA 1997);
. that the activity is a supporting R&D activity (if it is
satisfied that the activity meets the definition in
section 355-30 of the ITAA 1997) in relation to one or
more core R&D activities for which the R&D entity is or
could be registered; or
. that the activity is neither a core R&D activity nor a
supporting R&D activity (if it is not satisfied that the
activity meets the definition of core R&D activity or
supporting R&D activity).
[Schedule 2, item 1, subsection 28A(1)]
463. In making a decision in response to an application, the Board is
not confined by the characterisation of actions by the R&D entity
as a particular 'activity'. If the Board considers that only part
of what is described by the R&D entity in its application as a
single 'activity' satisfies the requirements set out in subsection
28A(1), the Board may make a finding in relation to the part of the
activity it considers meets the requirements. This part then
becomes 'the activity' for the purposes of the positive finding and
the entity's registration.
464. The Board may refuse to make an advance finding that is requested
by an R&D entity in relation to all or part of an activity if it is
justified in accordance with the decision-making principles.
[Schedule 2, item 1, paragraph 28A(1)(d)]
465. An advance finding remains in force for the income year in which it
is made, and the next two income years.
466. An advance finding is not the same as registration and is not a
substitute for registration. The R&D entity will need to register
the activities that are subject to the advance finding in relation
to each income year in which the activities are conducted in order
to be eligible to claim an R&D tax offset in relation to
expenditure on those activities. The Board must register the
activities consistently with any advance findings that it has made
under section 28A. [Schedule 2, item 1, subsection 27A(2)]
467. Once made by the Board, an advance finding binds the Commissioner
for the year the application was made, and the next two income
years, by operation of subsection 355-705(2) of the ITAA 1997. For
example, assuming that other requirements for claiming the R&D tax
offset are met, if the Board makes a positive advance finding (that
activities are R&D activities) and those activities are later
registered, the Commissioner is bound to treat the activities as
R&D activities when making a decision about whether expenditure
associated with the activity is R&D expenditure for the purposes of
new Division 355 of the ITAA 1997.
468. A finding is only binding in respect of the assessment of the R&D
entity. It cannot be used by another entity in relation to
activities conducted by that other entity. [Schedule 1, item 1,
subsection 355-705(2)]
469. An advance finding only relates to the activity nominated by the
R&D entity and which is made subject to a finding by the Board. If
the R&D entity, having received an advance finding, conducts an
activity which differs materially from that described in the
advance finding, the advance finding will not apply to the activity
conducted. The R&D entity cannot rely on that finding in respect
of this new activity (nor is the Commissioner bound to treat it as
an R&D activity).
470. While an advance finding in respect of particular activities made
by the Board under section 28A is in force, a later finding in
respect of those activities has no effect to the extent of any
inconsistency. This applies to a later, inconsistent, finding
under section 28A (Advance findings), section 27B (Findings about
applications for registration) or section 27J (Findings about a
registration). [Schedule 2, item 1, section 32B]
471. However, if the activities are materially different ('different
activities') to those described in an advance finding (for example,
the R&D entity changes its plans in relation to activities to be
conducted), the R&D entity may apply for an advance finding in
relation to the different activities.
472. That an activity conducted is materially different to the activity
described in the advance finding has no bearing on whether the
activity conducted is or is not an R&D activity. The Board need
not make findings about the activity conducted in determining
whether to register the activity conducted, but may do so without
breaching the consistency rule in section 32B.
Findings about activities to be conducted outside Australia
473. Generally, the R&D tax incentive is intended to support activities
conducted in Australia or the external Territories. However, in
certain circumstances, a tax offset is available for activities
conducted outside Australia or its external Territories.
474. An R&D entity may only claim a tax offset in respect of expenditure
on R&D activities conducted outside Australia or the external
Territories if it has a finding from the Board under section 28C in
relation to those activities (paragraph 355-210(1)(d) of the ITAA
1997). Upon application to the Board by an R&D entity in relation
to an activity, the Board must either:
. make a finding that that all specified conditions are met
in relation to all or part of the activity (the overseas
activity) [Schedule 2, item 1, paragraph 28C(1)(a)];
. make a finding that that one or more of the specified
conditions are not met in relation to all or part of the
activity [Schedule 2, item 1, paragraph 28C(1)(b)]; or
. refuse to make a finding about the activity (if a refusal
is justified in accordance with the decision-making
principles) [Schedule 2, item 1, paragraph 28C(1)(c)].
475. The effect of the first kind of finding (a finding that all
conditions are satisfied - a positive finding) is that a tax offset
may be available in respect of expenditure in relation to those
activities from the time the finding is in force.
476. A finding under section 28C is in force in the income year in which
the application for the finding is made and is valid for the
duration of the overseas activity. The tax offset will not be
available in respect of expenditure on those activities if the
Board makes a negative finding or refuses to make a finding, or for
activities which are completed before any finding under section 28C
is in force. [Schedule 2, item 1, subsections 28C(2)]
477. In order to make a positive finding, the Board must be satisfied
that the activity meets certain criteria:
. The Board must be satisfied, at the time it makes a
finding about an activity under section 28C, that the
activity is covered by a positive finding under paragraph
28A(1)(a) or (b) (an advance finding that an activity is
an R&D activity). In practice, seeking a finding under
section 28C will involve seeking a finding under section
28A simultaneously [Schedule 2, item 1,
subsection 28D(1)].
. The Board must be satisfied that the overseas activity has
a significant scientific link to one or more Australian
core R&D activities:
- Australian core activities are activities that have been
conducted, are in the process of being conducted, or are
to be conducted within Australia or its External
Territory. The activities must be registered under
section 27A for an income year, or the Board must be
satisfied (on an objective basis) that they are
reasonably likely to be conducted and be registered
under section 27A for an income year [Schedule 2, item
1, subsection 28D(2)].
- The presence of a significant scientific link means that
the Australian core activities cannot be completed
without the overseas activity being conducted, and the
conditions (if any) specified in the regulations are met
[Schedule 2, item 1, subsection 28D(3)].
. The Board must be satisfied that the activity cannot be
conducted in Australia or its external Territories, for
one or more of the following reasons [Schedule 2, item 1,
subsection 28D(4)]:
- conducting the activity requires access to a facility,
expertise or equipment that is not available in
Australia or the external Territories;
- the activity is precluded from being conducted in
Australia or the external Territories due to the
operation of quarantine laws;
- conducting the activity requires access to a population
of humans, fauna or flora not available in Australia or
the external Territories;
- conducting the activity requires access to a
geographical or geological feature not available in
Australia or the external Territories; or
- any other reasons (if any) specified in regulations.
. The Board must be satisfied that the Australian core
activities and supporting activities will entail a greater
financial commitment than the total overseas activities.
That is [Schedule 2, item 1, subsection 28D(5)]:
- the total amount (including actual and reasonably
anticipated amounts in all income years) to be spent by
any entity on any overseas activities (core and
supporting activities) and other activities conducted
overseas which have a significant scientific link to the
Australian core activities;
must be less than
- the total amount (including actual and reasonably
anticipated amounts in all income years) to be spent on
the Australian core activities, and supporting R&D
activities conducted or to be conducted to which those
overseas activities are linked under the significant
scientific link test, and activities which are
supporting R&D activities in relation to those core
activities.
478. The total amount, including actual and reasonably anticipated
amounts in all income years, on activities conducted overseas
includes expenditure incurred on:
. overseas activities (that is, activities which satisfy all
conditions under section 28D) [Schedule 2, item 1,
paragraph 28D(5)(a)]; and
. activities to be conducted overseas which also have a
significant scientific link to the Australian core
activities, but which are not overseas activities as
defined (for example, because they are anticipated to be
conducted outside the timeframe required by paragraph
28A(2)(c)) [Schedule 2, item 1, paragraph 28D(5)(b)].
479. In making a finding under subsection 28D(1), the Board is not
confined by the characterisation of actions by the R&D entity as a
particular 'activity'. If the Board considers that only part of
what is described by the R&D entity in its application as a single
activity satisfies the requirements set out in subsection 28D(1),
the Board may make a finding in relation to the part of the
activity that it considers meets the requirements. This part then
becomes the 'overseas activity' for the purposes of the finding.
Core technology findings
480. An R&D entity or the Commissioner may apply to the Board for a
finding that particular technology is or is not core technology.
Upon request by the R&D entity or the Commissioner in relation to
R&D activities, the Board must do one of the following things:
. make a finding that the technology is core technology for
the R&D activities;
. make a finding that technology is not core technology for
the R&D activities; or
. refuse to make a finding about the technology and the R&D
activities (if justified in accordance with the decision-
making principles).
[Schedule 2, item 1, subsection 28E(1)]
481. Technology is core technology for R&D activities if:
. a purpose of the R&D activities was or is:
- to obtain new knowledge based on that technology; or
- to create new or improved materials, products, devices,
processes, techniques or services to be based on that
technology; or
. the R&D activities were or are an extension, continuation,
development or completion of the activities that produced
the technology.
[Schedule 2, item 1, subsection 28E(2)]
482. Unlike other positive findings under this Part, a finding by the
Board that technology is core technology is disadvantageous to the
R&D entity concerned, because the effect of the finding is that the
tax offset will not be available for expenditure incurred on
acquiring the technology or the right to use the technology (see
subsection 355-225(2) of the ITAA 1997).
483. The Board must make a finding if requested to do so by the
Commissioner. The Board may also make a finding in respect of the
technology and the activities on its own initiative. [Schedule 2,
item 1, subsections 28E(3) and (4)]
484. The Commissioner might seek a finding in the course of determining
the availability of an offset for expenditure on the R&D
activities, or an R&D entity might seek a negative finding to
obtain certainty that its expenditure will not be excluded.
Registration of entities as Research Service Providers
485. The Board has a role in the R&D tax incentive to ensure a minimum
standard of capability in the provision of contracted R&D by
Research Service Providers. It will make the list of Research
Service Providers publicly available for the use of R&D entities
wishing to access Research Service Provider services.
486. R&D entities which use the services of a Research Service Provider
are not required to meet the $20,000 expenditure threshold
requirement for R&D expenditure by operation of section 355-100 of
the ITAA 1997. This is intended to enable R&D entities to access
expertise in Australia's public and private R&D organisations, to
reduce unnecessary duplication of R&D facilities, and to improve
the overall effectiveness of Australia's R&D effort through
collaboration.
487. The Board ensures this minimum standard by granting registration to
entities that satisfy the criteria set out in the regulations.
Registration is given in respect of specified fields of research
which the organisation has shown that it is capable of undertaking.
[Schedule 2, item 1, section 29A]
488. Entities wishing to become Research Service Providers must apply to
the Board for registration as a Research Service Provider qualified
to provide services in one or more specified research fields to
registered R&D entities. An application for registration must be
in the approved form and be accompanied by a fee (if any)
prescribed in regulations for this purpose. [Schedule 2, item 1,
section 29B]
489. Upon receipt of an application by an entity, the Board must decide
whether to register or refuse to register the entity as a Research
Service Provider. Regulations will specify the criteria the entity
must meet to satisfy the Board that it is capable of providing
services to R&D entities in one or more specified fields of
research. Specified fields of research will be prescribed in the
regulations. [Schedule 2, item 1, section 29A and item 22]
490. The Board may request that further information be provided about an
application for a Research Service Provider registration and may
request that information be provided within 30 days after the
request was given. If the applicant fails to comply with the
request, the Board can refuse to consider the application. The
Board will make a decision about whether to accept information
outside the period specified in the notice in accordance with the
decision-making principles. [Schedule 2, item 1, section 29C and
subsection 29F(3)]
491. The Board may also need to make inquiries for the purpose of
determining whether the applicant meets the criteria for a Research
Service Provider registration in relation to an application for
registration. It may notify the entity in writing of its intention
to do so and may require that the entity pay up to $1,000 (or any
higher amount prescribed by regulations) towards the cost of
determining whether the applicant meets the criteria for
registration. The Board may refuse to consider the application for
registration or variation until this fee is paid. [Schedule 2,
item 1, section 29D and subsection 29F(3)]
492. Registrations are valid up until the end of the financial year in
which the application is lodged. However, if an applicant becomes
registered as a Research Service Provider in May or June of a
financial year, then the registration will be valid until the end
of the following financial year. [Schedule 2, item 1, subsection
29E(1)]
493. At least two months before the end of each financial year, the
Board must give a notice to each Research Service Provider, asking
if it wishes to continue to be registered under section 29A, and
attaching an approved continuation of registration form. The form
will include a statement about whether the Research Service
Provider wishes to continue and is capable of continuing to be a
Research Service Provider, and whether there is any variation to
the approved fields of research in relation to which it wishes to
be registered. The Board may revoke the registration in question
if the Research Service Provider does not return the completed form
within 30 days or any further period allowed by the Board (in
accordance with the decision-making principles). Revocation will
take effect at the end of that financial year. [Schedule 2, item
1, subsections 29E(2) and (3)]
494. In certain cases Research Service Providers may wish to vary their
registrations. This might occur where a Research Service Provider
wishes to change the fields of research in relation to which it is
registered. For example, a senior researcher who specialises in a
particular research field for a Research Service Provider retires
and the Research Service Provider is unable to find a replacement.
As the Research Service Provider is no long able to provide
research services in that particular field, it applies to the Board
to vary its registration as a Research Service Provider under
section 29F. The variation would involve the removal of the
particular research field from the Research Service Providers
listed fields of research.
495. The Board may vary the registration where the Research Service
Provider applies for the variation and the Board is satisfied that
the Research Service Provider would still meet the eligibility
criteria in the regulations if the registration were varied as
requested. [Schedule 2, item 1, subsection 29F(1)]
496. Applications for variation of registrations must be in the approved
form and accompanied by the fee (if any) specified in the
regulations. [Schedule 2, item 1, subsection 29F(2)]
497. The Board may request information about an application for
variation of registration, or make inquiries about such an
application, in the same manner as in relation to applications for
registration. [Schedule 2, item 1, subsection 29F(3)]
498. The Board may also vary a registration without the request of the
Research Service Provider if it is satisfied that the Research
Service Provider does not meet the criteria for registration in the
regulations in so far as those criteria relate to a research field
for which the provider is registered. For example, a Research
Service Provider may be unable to provide a service to an R&D
entity in a research field for which it is registered. Upon being
made aware of this situation, the Board may investigate the
Research Service Provider to form its own conclusion as to the
Research Service Provider's capability in relation to the
particular research field. Although the Board may reach agreement
with the Research Service Provider in relation to the Research
Service Provider's capability in relation to the particular
research field, the Board may also conclude that the Research
Service Provider is not capable of providing services in relation
to the particular research field and vary the Research Service
Provider's registration accordingly under section 29G. [Schedule
2, item 1, section 29G]
499. The Board may also revoke a registration if a Research Service
Providers requests the Board to do so, or if the Board is satisfied
that the Research Service Provider:
. no longer meets the criteria for registration in relation
to any field of research; or
. has breached a requirement of registration prescribed in
the regulations.
A revocation or variation of a registration of a Research Service
Provider is prospective. This is, a decision by the Board to
revoke or vary the registration of a Research Service Provider will
have effect from the date of the notice, taking account of the
application of section 29 of the Acts Interpretation Act 1901.
[Schedule 2, item 1, section 29H]
500. The Board is required to notify a Research Service Provider in
writing of any decision whether or not to register the entity, or a
decision to vary or revoke its registration. The notice must also
set out the reasons for the Board's decision in question and inform
the Research Service Provider of its right to have the decision
reviewed. [Schedule 2, item 1, section 30B]
501. The Board is also required to maintain a register of Research
Service Providers, which must include details of registrations in
force and registrations that have been revoked under Division 4 (in
the current or previous financial year). It is intended that the
register will contain the name of each registered Research Service
Provider, the field of research for which it has been approved, and
contact details. This register must be made available to the
public via the Internet, and published in the Board's annual
report. The keeping of this register may assist R&D entities in
decisions about subcontracting R&D activities. Subsection 29J(2)
notes that the register is not a legislative instrument within the
meaning of section 5 of the Legislative Instruments Act 2003. The
register is merely an administrative record and is not legislative
in character. [Schedule 2, item 1, section 29J and item 37]
502. As a transitional arrangement for 2010-11, entities registered on
30 June 2010 as Australian research agencies under section 39F of
the current IR&D Act will be deemed to be registered as Research
Service Providers, for the fields of research they were registered,
from the commencement of this Part. From the 2011-12 income year
onwards, these entities will need to be registered under Division 4
in order to continue to operate as Research Service Providers.
[Schedule 4, item 17]
Review of the Board decisions
503. Most decisions made by the Board in its function relating to the
R&D tax incentive can be reviewed through an internal review
process. The list of reviewable decisions in this regard is set
out in section 30A. Examples of reviewable decisions include:
. decisions relating to applications by R&D entities to
register activities as R&D activities;
. decisions relating to registration of R&D activities,
including variations and revocations of registrations;
. decisions relating to findings that activities are or are
not R&D activities;
. decisions relating to applications or registrations of
Research Service Providers (including variation,
revocation and extensions of time); and
. decisions to provide an extension of time for making an
application or for providing further information.
An example of a non-reviewable decision is a decision to allow a
different amount of addition time to that requested by an R&D
entity. [Schedule 2, item 1, section 30A]
504. When the Board makes a reviewable decision, as listed under section
30A, it is required to give written notice of the making of the
decision, the reasons for the decision and the entity's right to
have the decision reviewed under Division 5. However, a failure of
the Board to give such notice does not affect the validity of the
underlying decision.
505. Some provisions of the IR&D Act already expressly require notice to
be given of a particular decision which is a reviewable decision
(such as the notices required under section 27C, 27K, or 28F).
These notices will fulfil the requirements of section 30B if they
include the information listed in that section (that is, it is not
necessary to provide a second notice under section 30B). Where the
provision relating to a particular decision does not expressly
provide for the notice requirement, however, the notice must be
given in accordance with section 30B. [Schedule 2, item 1,
section 30B]
Applications for internal review of reviewable decisions
506. An application for internal review of a decision can be made by or
on behalf of an entity affected by a reviewable decision. This
application must be made in the approved form, within 28 days after
the entity to which the decision relates, is notified of the
Board's decision, unless the Board has allowed an extension to this
time period in accordance with the decision-making principles.
[Schedule 2, item 1, section 30C]
507. The Commissioner may also apply for a review of a reviewable
decision at any time after the reviewable decision is made.
[Schedule 2, item 1, subsection 30C(4)]
508. In reviewing its decision, the Board is not limited to considering
only the information it had at the time the reviewable decision was
made. It is able to consider new information that has come to
light since the reviewable decision was made. Any new information
that an entity wishes to be considered as part of the review should
be provided to the Board as part of the application for internal
review. [Schedule 2, item 1, subsections 30C(2) and (3)]
509. If the Board receives an application for review of a reviewable
decision, it must review the original decision and make a decision
to:
. confirm the reviewable decision;
. vary the reviewable decision; or
. set aside the reviewable decision and make a new one in
its place.
[Schedule 2, item 1, subsection 30D(2)]
510. If the Board does not make a decision within 90 days of receiving
an application for review, then the Board is taken to have made a
decision confirming the reviewable decision. Where a decision is
taken to have been made for this reason, the Board is required to
notify the entity that sought the review. However, the deemed
decision is disregarded if the Board makes a decision after the
expiration of the 90 days, and an application for review of the
deemed decision by the AAT has yet to be made. [Schedule 2,
item 1, subsections 30D(3) and (4)]
511. Under the Administrative Appeals Tribunal Act 1975 (AAT Act),
notice of an internal review decision must be given to any person
whose interests are affected by the decision. Additionally,
written notice of an internal review decision, including reasons
for the decision, must be given to the Commissioner specifically
under subsection 30D(6).
512. The Board's decisions determine the entity's registration status or
the nature of an entity's activities for a particular year of
income. As decisions, including review decisions, have impact for
an entire year of income, it is necessary that internal review
decisions take effect on the day on which the original reviewable
decision took effect. [Schedule 2, item 1, subsection 30D(5)]
Review by the Administrative Appeals Tribunal
513. Where the Board has made, or is taken to have made by the operation
of subsection 30D(3), an internal review decision, applications may
be made to the AAT for review of that internal review decision in
accordance with section 29 of the AAT Act. Where the Board is
taken to have made a decision because of the operation of
subsection 30D(3), applications must be made within 28 days
starting on the day on which the internal review decision is taken
to have been made. This ensures that the lack of a decision by the
Board does not prevent entities having recourse to the AAT.
[Schedule 2, item 1, subsection 30E(3)]
514. Due to the commercially sensitive nature of R&D conducted by
entities, hearings of proceedings for review of internal review
decisions are to be held in private. The AAT may also give
directions as to who may be present during all or part of a hearing
of the proceedings and also give directions of a kind mentioned in
paragraphs 35(2)(aa), (b) or (c) of the AAT Act, which relate to
the publication or disclosure of information. [Schedule 2, item 1,
section 30(E)]
515. Variations or substitutions of internal review decisions by the AAT
take effect from the day on which the reviewable decision took
effect (that is, the decision is treated as if it were always made
in the form made by the AAT).
Other matters
Research and development entities joining and leaving consolidated
groups
516. For administrative simplicity, it is intended that only the head
company of a consolidated or MEC group will be considered to be the
R&D entity with respect to R&D activities conducted by any entities
in the group for an income year. To facilitate this, only that
head company, and not any of the subsidiary companies, will be
recognised as registered under section 27A in respect of activities
conducted by any member of the group. This is the case even if the
activities are conducted entirely by a subsidiary member of the
group. [Schedule 2, item 1, subsection 31(1)]
517. In addition, a finding, made for an R&D entity which is a
subsidiary of a consolidated or MEC group with a head company which
is an R&D entity, has no effect in relation to activities conducted
while the subsidiary is a member of the group. [Schedule 2, item
1, subsection 31(2)]
518. Because of these two rules, there is no value in an R&D entity
which is a subsidiary of a consolidated or MEC group seeking
registration or findings while it is a subsidiary of a consolidated
or MEC group.
519. When an R&D entity (the joining entity) joins a consolidated or MEC
group part way through an income year, it can be registered in
respect of the R&D activities that it has carried out only in
relation to that part of the year that it was not part of the
corporate group. The head company will need to register in respect
of the activities for the part of the year that they were conducted
by an entity in its group.
520. Additionally, findings which related to the joining entity are
deemed to apply to the head company. For example, if the Board has
made an advance finding (the actual finding) in relation to an
activity to be conducted by the joining entity, a corresponding
advance finding (the deemed finding) will apply to the head company
from the time the joining entity joins the consolidated group.
That deemed finding would cease to apply to the head company if the
joining entity leaves the group. [Schedule 2, item 1, section 31A]
1. : Registration and findings when joining a consolidated or MEC
group
Company A, which is an R&D entity, receives a positive
advance finding in relation to a particular activity. It
begins conducting that activity on 1 July 2012 and completes
the activity on 30 June 2013. It is wholly acquired by
another R&D entity (Company B) on 1 October 2012. Together,
the two entities form a consolidated group with Company B as
the head company.
Section 31 operates so that Company A may register its
activity and rely on the advance finding to claim
expenditure in relation to the activity between 1 July 2012
and 30 September 2012. Section 31 treats the activity as if
it is not registered, and the finding is not in effect,
1 October 2012 onwards.
Company B may also register the activity. Section 31A
operates to create a deemed finding which Company B can rely
on from 1 October 2012 to 30 June 2013. Company B is able
to claim expenditure in relation to the activity between
from 1 October 2012 to 30 June 2012.
521. Similarly, when an entity leaves a consolidated or MEC group (the
leaving entity) and becomes an R&D entity in its own right (that
is, section 31 no longer prevents registration or any findings in
relation to that R&D entity being effective), findings that were
made while the leaving entity was a member of the group, in respect
of activities to be conducted by the leaving entity, are taken to
apply to the leaving entity. The original finding will then cease
to apply to the head company. [Schedule 2, item 1, section 31B]
522. For example, if the Board has made an advance finding in relation
to an activity, if the leaving entity conducts the activity after
it leaves the group, the advance finding will apply to the leaving
entity from the time it leaves the consolidated group and will
cease to apply to the consolidated group.
1. : Registration and findings when leaving a consolidated group
Company Y is a wholly owned subsidiary of Company X.
Together, the two entities form a consolidated group with
Company X as the head company.
Company X receives an advance finding in relation to
activities conducted by Company Y from 1 July 2012 to 30
June 2013 as part of the consolidated group. On 1 December
2012, Company Y is sold to another entity, which is not an
R&D entity.
Company X may register the activity and rely on the advance
finding to claim expenditure in relation to the activity
between 1 July 2012 and 30 November 2012. Paragraph
31B(2)(c) operates to cease the effect of the finding as at
1 December 2012.
Company Y may also register the activity, and rely on the
continuing finding which comes into effect under paragraph
31B(1)(a), to claim expenditure in relation to the activity
between 1 December 2012 and 30 June 2013.
Approved forms
523. There is a requirement for certain things to be in the relevant
approved form in several provisions in Part III. For example,
applications for registration of R&D activities under section 27D,
and applications of internal review under section 30C. The Board
may also choose to require that particular information be given in
the approved form in certain circumstances (for example, further
information requested under section 27E).
524. A thing is in the approved form if it is in writing in a form
approved by the Board, and includes the information required by the
form and any other material required by the form (including
documents). [Schedule 2, item 1, subsection 32(2)]
525. The Board may approve a form in writing. Regulations may also
specify information or other material which must be required by the
form. For example, the regulations might require approved forms to
provide registration data such as R&D expenditure on core and
supporting R&D activities, which should be recorded consistently
over time. [Schedule 2, item 1, subsection 32(3)]
526. Forms approved by the Board are not legislative instruments as
defined by section 5 of the Legislative Instruments Act 2003 as
they are administrative in nature.
Decision-making principles
527. The Minister is empowered to make principles with which the Board
must comply in making certain decisions under Part III. These
decisions are:
. whether to allow a further period for something to be
given other than the specified period in Part III;
. whether refusing to make a finding sought under Part III
is justified; and
. whether a proposed variation under section 27M is
justified.
528. The Minister will make these decision-making principles by way of a
legislative instrument. [Schedule 2, item 1, section 32A]
Inconsistency between findings
529. A finding made under Part III in relation to an R&D entity has no
effect to the extent of any inconsistency with a finding already in
force in relation to the R&D entity. This means that entities can
rely on earlier findings made by the Board, as these findings
cannot be overridden by later findings under the same or a
different provision. [Schedule 2, item 1, section 32B]
530. For example, if the Board makes an advance finding under subsection
28A(1) that particular activities proposed to be conducted by an
R&D entity are core R&D activities, a later finding by the Board
under subsection 27B(1) that those activities are supporting R&D
activities when they are registered the following year has no
effect. The registration is automatically varied to be consistent
with the advance finding.
Consequential amendments
531. Part 2 of Schedule 2 introduces a number of defined terms to
subsection 4(1) of the IR&D Act. These terms are required for the
operation of the new Part III of the IR&D Act, and many rely on
definitions in the ITAA 1997. [Schedule 2, items 5, 7 to 9, 12, 14
to 19, 22 to 27]
532. Part 2 of Schedule 2 repeals the following obsolete terms from
subsection 4(1) of the IR&D Act:
. approved research institute;
. company;
. finance scheme guidelines; and
. research and development activities.
533. These terms are no longer required under the new R&D tax incentive.
[Schedule 2, items 4, 6, 13, 20]
534. As a consequence of the new Part III, the reporting requirements in
the Board's annual report have been amended. The Board will now
report on the number of applications for registration under section
27A of the IR&D Act and the amount of offsets involved. Its report
must also include an analysis of the R&D tax offset scheme for the
financial year, and provide a list of current Research Service
Providers and their fields of research, as well as Research Service
Providers deregistered in the current and previous income years, as
at the end of the year. [Schedule 2, items 36 and 37]
535. Amendments to the information-sharing provisions of the IR&D Act
will permit the Board to disclose information to other government
agencies, in particular the Australian Taxation Office, to
facilitate whole-of-government input, as necessary, for
administration of the R&D tax offset. [Schedule 2, items 38 to 41]
536. Regulations may specify fees for making applications to the Board
under Part III and a method for indexing the fees. These fees must
not amount to taxation. [Schedule 2, item 43]
Application and transitional provisions
537. Part III of the IR&D Act will apply in relation to income years
commencing on or after 1 July 2010. Section 29E of the IR&D Act
(as inserted by Schedule 2) applies in relation to financial years
commencing on or after 1 July 2010. [Schedule 4, item 1]
538. The R&D Tax Concession will be discontinued from 1 July 2010.
However, the Board will still require powers in relation to the R&D
Tax Concession after this date, and some provisions in Part IIIA
will be preserved in transitional arrangements. The Board will,
for example, continue to register R&D activities that were
conducted in the 2009-10 income year under section 39J of Part
IIIA. In the income years following 2009-10, the Board will
continue to undertake assessments and reviews under Part IIIA as
necessitated by circumstances. [Schedule 4, items 2 and 3]
539. Entities registered as Australian research agencies under
section 39F of the current IR&D Act on 30 June 2010 are taken to be
registered under new section 29A as Research Service Providers.
[Schedule 4, item 17]
Index
Schedule 1: Main components of new R&D incentive
|Bill reference |Paragraph |
| |number |
|Item 1, subsection 355-5(1) |2.7 |
|Item 1, subsection 355-5(2) |2.8 |
|Item 1, section 355-20 |2.9 |
|Item 1, subsection 355-25(1) |2.11 |
|Item 1, paragraph 355-25(1)(a) |2.12 |
|Item 1, paragraph 355-25(1)(b) |2.16 |
|Item 1, subsection 355-25(2) |2.28 |
|Item 1, paragraph 355-25(2)(h) |2.35 |
|Item 1, subsection 355-30(1) |2.21 |
|Item 1, paragraphs 355-30(2)(b) and (c) |2.22 |
|Item 1, section 355-35 |5.25 |
|Item 1, paragraph 355-30(2)(a) |2.23, 2.32 |
|Item 1, section 355-35 |3.18, 3.19 |
|Item 1, subsection 355-35(3) |3.24 |
|Item 1, section 355-100 |3.26, 3.31, |
| |3.35, 3.36, |
| |3.37, 3.38, |
| |3.39 |
|Item 1, sections 355-100 and 355-545 |3.170 |
|Item 1, subsections 355-100(1) and (2) |3.40 |
|Item 1, subsection 355-100(2) |3.184 |
|Item 1, section 355-105 |3.43, 3.44, |
| |3.45 |
|Item 1, section 355-110 |3.46 |
|Item 1, section 355-205 |3.73, 3.75, |
| |3.76, 3.77 |
|Item 1, sections 355-205 and 355-305 |3.47 |
|Item 1, sections 355-205 and 355-480 |3.79 |
|Item 1, section 355-210 |3.52, 3.53 |
|Item 1, subsection 355-210(1) and |3.62, 3.63 |
|section 355-215 | |
|Item 1, subsection 355-210(1) and section |3.58 |
|355-220 | |
|Item 1, paragraphs 355-210(1)(a), 355-215(a)|3.49 |
|and (b) and 355-220(1)(a) and (b) | |
|Item 1, paragraph 355-210(1)(a) and |3.57 |
|subsection 355-210(2) | |
|Item 1, paragraphs 355-210(1)(d) and (e) |3.50 |
|Item 1, section 355-315 |3.48, 3.92, |
| |3.93, 3.94 |
|Item 1, section 355-220 |3.59 |
|Item 1, paragraph 355-220(1)(d) |3.60 |
|Item 1, paragraph 355-220(1)(e) and |3.61 |
|subsection 355-220(2) | |
|Item 1, section 355-225 |3.64, 3.65, |
| |3.70, 3.71 |
|Item 1, sections 355-225 and 355-305 |3.72, 3.103 |
|Item 1, section 355-305 |3.81, 3.83 |
|Item 1, sections 355-305 and 355-310 |3.86 |
|Item 1, paragraph 355-305(1)(d); |3.82 |
|Item 1, section 355-310 |3.84, 3.85 |
|Item 1, section 355-315 |3.95, 3.96 |
|Item 1, section 355-400 |3.154, 3.156 |
|Item 1, section 355-405 |3.154, 3.164, |
| |3.165, 3.166 |
|Item 1, subsection 355-405(4) |3.167 |
|Item 1, section 355-410 |3.154, 3.159, |
| |3.160 |
|Item 1, section 355-415 |3.154, 3.161, |
| |3.162 |
|Item 1, sections 355-435 and 355-440 |3.117 |
|Item 1, paragraph 355-445(a) and |3.125 |
|subsection 355-450(1) | |
|Item 1, paragraph 355-445(b) |3.121 |
|Item 1, subparagraph 355-445(b)(i) |3.118 |
|Item 1, subparagraph 355-445(b)(ii) |3.119 |
|Item 1, subsection 355-450(1) |3.124 |
|Item 1, paragraphs 355-450(1)(a) and (b) |3.123 |
|Item 1, subsections 355-450(1) and (4) |3.130 |
|Item 1, subsection 355-450(2) |3.129 |
|Item 1, subsection 355-450(3) |3.127, 3.128 |
|Item 1, paragraph 355-465(1)(a) |3.134 |
|Item 1, paragraph 355-465(1)(b) |3.136 |
|Item 1, subparagraph 355-465(1)(b)(ii) |3.135 |
|Item 1, paragraph 355-465(1)(c) |3.137 |
|Item 1, subsection 355-465(2) |3.146 |
|Item 1, paragraph 355-465(2)(b) |3.150 |
|Item 1, paragraph 355-465(3)(a) |3.151 |
|Item 1, paragraph 355-465(3)(b) |3.147 |
|Item 1, section 355-470 |3.140 |
|Item 1, section 355-475 |3.153 |
|Item 1, section 355-480 |3.80 |
|Item 1, subsection 355-505(1) |3.169 |
|Item 1, subsection 355-505(2) |3.171 |
|Item 1, section 355-510 |3.172 |
|Item 1, section 355-515 |3.174 |
|Item 1, section 355-520 |3.176 |
|Item 1, section 355-525 |3.176 |
|Item 1, section 355-530 |3.175 |
|Item 1, section 355-535 |3.176 |
|Item 1, section 355-540 |3.176 |
|Item 1, subsection 355-580(1) |3.183 |
|Item 1, subsection 355-580(2) |3.185 |
|Item 1, subsections 355-580(3) and (4) |3.187, 3.189 |
|Item 1, section 355-700 |3.205 |
|Item 1, section 355-705 |3.206, 3.207 |
|Item 1, sections 355-705 and 355-710 |3.210 |
|Item 1, subparagraph 355-705(1)(a)(i) |5.44 |
|Item 1, subparagraph 355-705(1)(a)(ii) |5.70 |
|Item 1, subsection 355-705(2) |5.111 |
|Item 1, section 355-710 |3.212, 3.213 |
|Item 1, section 355-715 |3.214 |
|Items 1 to 3, subsection 12(7), sections 12B|3.132 |
|and 31 of the Income Tax Rates Act 1986 | |
|Items 2 to 10, subsection 995-1(1) |4.40 |
Schedule 2: Innovation Australia's role
|Bill reference |Paragraph |
| |number |
|Item 1, subsection 27A(1) |5.21 |
|Item 1, subsection 27A(2) |5.24, 5.52, |
| |5.53, 5.54, |
| |5.109 |
|Item 1, subsection 27A(3) |5.22 |
|Item 1, subsection 27A(3) |5.23 |
|Item 1, section 27B |5.34 |
|Item 1, subsection 27B(1) |5.48 |
|Item 1, paragraph 27B(1)(a) |5.35 |
|Item 1, paragraph 27B(1)(b) |5.35 |
|Item 1, paragraph 27B(1)(c) |5.35 |
|Item 1, subparagraph 27B(1)(c)(ii) |5.43 |
|Item 1, paragraph 27B(1)(d) |5.35 |
|Item 1, subsection 27B(2) |5.38 |
|Item 1, subsection 27B(3) and section 32B |5.40 |
|Item 1, section 27C |5.27, 5.58 |
|Item 1, subsection 27C(1) |5.55 |
|Item 1, subsection 27C(2) |5.56 |
|Item 1, sections 28C and 28D of the IR&D Act|3.51 |
|Item 1, paragraph 27D(a) |5.31 |
|Item 1, paragraph 27D(b) |5.33 |
|Item 1, subparagraph 27D(c)(i) |5.29 |
|Item 1, subparagraph 27D(c)(ii) |5.29 |
|Item 1, section 27E and subsection 32(2) |5.49 |
|Item 1, section 27E |5.50 |
|Item 1, section 27F |5.62 |
|Item 1, subsection 27F(2) |5.61 |
|Item 1, paragraph 27F(3)(a) |5.61 |
|Item 1, paragraphs 27F(3)(b) and 27F(4)(b) |5.61 |
|and section 27G | |
|Item 1, paragraph 27F(4)(b), |5.83 |
|subsection 27K(3) and section 32A | |
|Item 1, section 27H |5.74 |
|Item 1, subsection 27J(1) |5.73 |
|Item 1, paragraph 27J(1)(a) |5.63 |
|Item 1, paragraph 27J(1)(b) |5.63 |
|Item 1, paragraph 27J(1)(c) |5.63, 5.69 |
|Item 1, paragraph 27J(1)(d) |5.63 |
|Item 1, subsection 27J(2) |5.64 |
|Item 1, subsection 27K(1) |5.80 |
|Item 1, subsection 27K(2) |5.81 |
|Item 1, subsection 27K(4) |5.84 |
|Item 1, sections 27L and 32B |5.78 |
|Item 1, section 27L |5.79 |
|Item 1, section 27L and subsection 27M(4) |5.87 |
|Item 1, section 27M |5.86 |
|Item 1, section 27N |5.26, 5.88 |
|Item 1, sections 27N, 30A and 30B |5.90 |
|Item 1, subsection 27N(4) |5.89 |
|Item 1, subsection 28A(1) |5.105 |
|Item 1, paragraph 28A(1)(d) |5.107 |
|Item 1, subsection 28A(2) |5.102 |
|Item 1, paragraph 28A(2)(a) |5.101 |
|Item 1, subsection 28A(3) |5.103 |
|Item 1, section 28B |5.104 |
|Item 1, paragraph 28C(1)(a) |5.117 |
|Item 1, paragraph 28C(1)(b) |5.117 |
|Item 1, paragraph 28C(1)(c) |5.117 |
|Item 1, subsections 28C(2) |5.119 |
|Item 1, subsection 28D(1) |5.120 |
|Item 1, subsection 28D(2) |5.120 |
|Item 1, subsection 28D(3) |5.120 |
|Item 1, subsection 28D(4) |5.120 |
|Item 1, subsection 28D(5) |5.120 |
|Item 1, paragraph 28D(5)(a) |5.121 |
|Item 1, paragraph 28D(5)(b) |5.121 |
|Item 1, subsection 28E(1) |5.123 |
|Item 1, subsection 28E(2) |5.124 |
|Item 1, subsection 28E(3) |5.93 |
|Item 1, subsections 28E(3) and (4) |5.126 |
|Item 1, section 28F |5.97 |
|Item 1, subsections 28F(5) and 30B(3) |5.99 |
|Item 1, section 28G |5.92 |
|Item 1, section 28H |5.94 |
|Item 1, section 29A |5.130 |
|Item 1, section 29A and item 22 |5.132 |
|Item 1, section 29B |5.131 |
|Item 1, section 29C and subsection 29F(3) |5.133 |
|Item 1, section 29D and subsection 29F(3) |5.134 |
|Item 1, subsection 29E(1) |5.135 |
|Item 1, subsections 29E(2) and (3) |5.136 |
|Item 1, subsection 29F(1) |5.138 |
|Item 1, subsection 29F(2) |5.139 |
|Item 1, subsection 29F(3) |5.140 |
|Item 1, section 29G |5.141 |
|Item 1, section 29H |5.142 |
|Item 1, section 29J and item 37 |5.144 |
|Item 1, subsection 30C(4) |5.44 |
|Item 1, subsection 30C(4) |5.70 |
|Item 1, section 31 |5.25 |
|Item 1, section 30A |5.146 |
|Item 1, section 30B |5.57, 5.82, |
| |5.143, 5.148, |
| |5.98 |
|Item 1, section 30C |5.149 |
|Item 1, subsection 30D(2) |5.152 |
|Item 1, subsections 30C(2) and (3) |5.151 |
|Item 1, subsection 30C(4) |5.44, 5.70, |
| |5.150 |
|Item 1, subsections 30D(3) and (4) |5.153 |
|Item 1, subsection 30D(5) |5.155 |
|Item 1, section 30E |5.157 |
|Item 1, subsection 30E(3) |5.156 |
|Item 1, section 31 |5.25 |
|Item 1, subsection 31(1) |5.159 |
|Item 1, subsection 31(2) |5.160 |
|Item 1, section 31A |5.163 |
|Item 1, section 31B |5.164 |
|Item 1, subsection 32(2) |5.75, 5.167 |
|Item 1, subsection 32(3) |5.32, 5.168 |
|Item 1, section 32A |5.171 |
|Item 1, section 32B |5.65, 5.172, |
| |5.113 |
|Item 1, section 32C of the IR&D Act |3.109 |
|Items 4, 6, 13 and 20 |5.176 |
|Items 5, 7 to 9, 12, 14 to 19 and 22 to 27 |5.174 |
|Items 36 and 37 |5.177 |
|Items 38 to 41 |5.178 |
|Item 43 |5.179 |
Schedule 3: Other amendments relating to new R&D incentive
|Bill reference |Paragraph |
| |number |
|Item 1, subsection 63-10(1) |3.110 |
|Items 2 to 4, sections 67-23 and 67-30 |3.105 |
|Item 4, section 67-30 |3.41 |
|Item 4, subsection 67-30(2) |3.107 |
|Item 4, subsections 67-30(2) and (3) |3.108 |
|Item 5, definition of 'excluded expenditure'|4.33 |
|in subsection 82KZL(1) of the ITAA 1936 | |
|Items 6 to 14, sections 82KZL, 82KZM, |4.32 |
|82KZMA, 82KZME and 82KZMF of the ITAA 1936 | |
|Item 17, subsections 40-65(6) and (7) |3.91 |
|Items 18 to 20, subsections |3.87, 3.88, |
|40-95(9), 40-100(4) and 40-105(1) to (3) |3.89 |
|Item 24, subsection 40-425(8) |3.82 |
|Item 24, section 40-292 |3.99, 3.100, |
| |3.101, 3.102 |
|Item 24, section 40-293 |3.176 |
|Item 24, subsection 40-425(8) |3.82 |
|Items 26 to 41, sections 43-35, 43-70, |4.37 |
|43-90, 43-100, 43-140, 43-195, 43-210 and | |
|43-215 | |
|Item 44 and Schedule 4, subitem 1(1) |4.6 |
|Item 45, section 94J of the ITAA 1936 |3.20 |
|Item 46, subsection 102T(9) |3.19 |
|Item 47, subsection 136AB(2) of the |3.157 |
|ITAA 1936 | |
|Item 48, subsection 170(10A) |3.208 |
|Items 49 to 53, 71, 72, 96 to 98, 100 to 111|4.42 |
|Item 54, section 4-25 |3.131 |
|Items 55 to 70, sections 9-5, 10-5, 12-5, |4.41 |
|13-1 and 20-5 | |
|Items 69 and 70, section 20-30 |4.35 |
|Items 73 to 90, sections 104-235, 104-240, |4.39 |
|108-55, 110-45, 118-24 and 118-35 | |
|Items 91 and 92, subsections 205-15(1) and |3.201 |
|(4) | |
|Item 93, subsection 205-30(2) |3.200 |
|Items 94 and 95, section 205-35 |3.198 |
|Item 99, subsection 328-175(9) of the |3.82 |
|ITAA 1936 | |
|Item 105, section 716-500 |3.197 |
|Item 105, sections 716-505 and 716-510 |3.196 |
Schedule 4: Application, savings and transitional provisions
|Bill reference |Paragraph |
| |number |
|Item 1 |5.180 |
|Item 2 |4.8 |
|Items 2 and 3 |5.181 |
|Items 4 and 5 |4.12 |
|Item 6 |4.13 |
|Item 10, section 40-67 of the IT(TP) Act |4.16 |
|1997 | |
|Item 11, section 40-105 of the IT(TP) Act |4.16 |
|1997 | |
|Item 12, section 40-292 of the IT(TP) Act |4.21 |
|1997 | |
|Item 12, section 40-293 of the IT(TP) Act |4.22 |
|1997 | |
|Item 13, section 40-430 of the IT(TP) Act |4.16 |
|1997 | |
|Item 15, section 355-200 of the IT(TP) Act |4.23 |
|1997 | |
|Item 15, section 355-320 of the IT(TP) Act |4.18, 4.19 |
|1997 | |
|Item 15, section 355-325 of the IT(TP) Act |4.20 |
|1997 | |
|Item 15, section 355-415 of the IT(TP) Act |4.25 |
|1997 | |
|Item 15, section 355-550 of the IT(TP) Act |4.24 |
|1997 | |
|Item 15, sections 355-600 and 355-605 of the|4.27 |
|IT(TP) Act 1997 | |
|Item 15, sections 355-600 and 355-610 of the|4.28 |
|IT(TP) Act 1997 | |
|Item 16 |5.23 |
|Item 17 |5.145, 5.182 |
|Subitem 1(1) |4.4, 4.5 |
|Subitem 3(1) |4.9 |
|Subitem 3(2) |4.10 |
|Subitem 3(3) |4.11 |
-----------------------
[1] Although ex ante preparation of an R&D Plan is not a statutory
requirement for registration under the R&D tax incentive, documented
planning will still form an appropriate part of evidencing a systematic
progression of work.
[2] The treatment of software that is developed as part of an R&D project
is illustrated in Example 2.18.
[3] Although Oulixeus incurs a $300,000 company tax liability in relation
to the grant, it also receives a $400,000 tax offset (in lieu of a
$1 million tax deduction) in relation to the grant-funded spending, of
which $300,000 (30 per cent of $1 million) was the non-incentive
component.
[4] Strictly speaking, each ingot would be a separate feedstock output
and related feedstock expenditure attributed to each ingot under standard
accounting principles; but, where collectively the same feedstock
expenditures would be attributed to the full set of ingots, the total
feedstock adjustment would be the same as if the set of ingots were
treated as a single feedstock output.
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