SENATE

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

AMENDMENT OF THE INCOME TAX ASSESSMENT ACT 1936 AND THE INDUSTRY RESEARCH AND DEVELOPMENT ACT 1986

Research and development activities

Amends the research and development provisions of the income tax law to:

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reduce from 150 per cent to 125per cent the deduction for expenditure on plant, contracted R & D and other R & D expenditures;

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prevent companies in partnership from claiming expenditure on R & D activities;

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limit to four years the period in which tax assessments can be amended to reflect expenditures on R & D activities;

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modify the R & D deductibility rules relating to interest, core technology, pilot plant and feedstock;

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clarify the definition of 'research and development activities'.

Amends the research and development provisions of the Industry, Research and Development Act 1986 to:

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remove the Industry Research and Development Board's (the Board) power to register syndicates under section 39P for the tax concession;

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allow the Minister to provide formal advice to the Board and its committees;

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ensure that the general administrative arrangements for research and development programs contained in the Industry, Research and Development Act 1986 will also apply to programs administered through delegated legislation authorised by sections 19 and 20.

Date of effect: The reduced deduction rate of 125 per cent will apply from 7.30 p.m., by standard time in the Australian Capital Territory on 20August 1996. All other measures in the Income Tax Assessment Act 1936 and the removal of syndication under section 39P of the Industry, Research and Development Act 1986 apply from 5pm, by standard time in the Australian Capital Territory on 23 July 1996. Other measures in the Industry, Research and Development Act 1986 apply from Royal Assent.

Proposal announced: Measures other than the reduction in the concessional deduction rate were announced on 23 July 1996. The reduction to 125% was announced on 20 August 1996.

Compliance cost impact: The reduction of the rate of concessional deduction from 150% to 125% may involve some marginal additional record keeping costs for companies incurring expenditure available for the concession before and after the date of effect of the new rate. The additional record keeping costs should be minor and limited to the transitional year of income (1996/97).

The limitation of the period in which tax assessments may be amended will have no compliance cost implications.

The modified deduction rules for interest expenditure will not cause additional record keeping.

The modification of the deduction rules for core technology, pilot plant and feedstock will require eligible companies to do more computation and record keeping, albeit within a limited compass of expenditure types. In the case of feedstock, there will be some additional valuation and accounting obligations.

Clarification of the definition of 'R & D activities' should not increase the costs of compliance by eligible companies. The amendment should help to reduce compliance costs by clarifying the meaning of 'R & D activities'.

Removal of the right of companies in partnership to claim expenditure on R & D activities has no implications for compliance costs.

There will be some initial costs incurred by companies in understanding the new legislative rules relating to research and development.