Supplementary Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 1 - Amendments to the Taxation Laws Amendment (Research and Development) Bill 2001
Overview
1.1 The Taxation Laws Amendment (Research and Development) Bill 2001 (R & D Bill) contains changes and additions to the research and development (R & D) tax concession. The R & D Bill amends the Income Tax Assessment Act 1936 (ITAA 1936), the Income Tax Assessment Act 1997 (ITAA 1997), the Taxation (Interest on Overpayments and Early Payments) Act 1983 and the Industry Research and Development Act 1986 .
1.2 The amendments to the R & D Bill make minor changes of a technical or clarifying nature.
Summary of the amendments
1.3 The amendments to the R & D Bill will ensure the R & D tax concession operates as originally intended by the R & D Bill. The majority of the amendments relate to the balancing charge and rollover relief provisions for depreciating assets used in R & D activities. There are also amendments which will ensure that R & D depreciating assets continue to be excluded from the capital gains tax (CGT) provisions.
Explanation of the amendments
1.4 These amendments will ensure that the balancing charge provision in the R & D Bill operates as it was intended. Under the R & D Bill, as currently drafted, if an eligible company holds an R & D asset which is subsequently subject to a balancing adjustment event, only the notional Division 40 deductions are taken into account in determining the balancing charge which would be added to or subtracted from the companys income.
1.5 However, some R & D depreciating assets, purchased between 29 January 2001 and 30 June 2001, will also be subject to notional Division 42 deductions. It is appropriate that these deductions are also taken into account in determining the balancing charge as both the notional Division 40 deductions and the notional Division 42 deductions represent the assets decline in value.
1.6 Proposed section 73EA of the ITAA 1936 provides rollover relief for an eligible company which disposes of a depreciating asset, that has been used solely for R & D purposes, to another company within a wholly-owned group. The rollover relief will only be available where a deduction has been allowed for the asset under section 73BA of the ITAA 1936 and no deduction has been allowed for the asset under Division 40 of the ITAA 1997. These amendments extend that rollover relief so that it is available where a deduction has been allowed for the asset under section 73BH of the ITAA 1936 and no deduction has been allowed for the asset under Division 42 of the ITAA 1997.
1.7 These amendments will ensure that the balancing charge provision, which applies when there is both R & D use and non-R & D use of a depreciating asset, operates as intended. Under the R & D Bill, as currently drafted, if an eligible company holds an asset which is subject to a balancing adjustment event, only those amounts which are notional Division 40 deductions are taken into account in determining the amount which would be added to or subtracted from the companys income.
1.8 Some depreciating assets, purchased between 29 January 2001 and 30 June 2001, will have notional Division 42 deductions attached to them at the time they are used in R & D activities. It is appropriate that these deductions are also taken into account in determining the balancing charge as both the notional Division 40 deductions and the notional Division 42 deductions represent the assets decline in value.
1.9 Section 104-235 of the ITAA 1997 provides for a new CGT event - K7, which only occurs where a balancing adjustment event has happened to a depreciating asset that has been used wholly or partly for non-taxable purposes.
1.10 However, in some circumstances, a non-taxable purpose could include the carrying on of R & D activities by or on behalf of an eligible company. This would mean that not only would a balancing adjustment calculation need to be made, but a CGT calculation would also be necessary. This would be inconsistent with the fact that a depreciating assets decline in value for R & D purposes is based solely on its use in R & D activities - without regard for whether the activity is for a taxable purpose.
1.11 To ensure this consistency, amendment 23 inserts 2 new subsections into section 104-235 to widen the concept of a depreciating asset to include a section 73BA depreciating asset. The effect of the new subsections is that, for the purposes of a CGT K7 event, a CGT calculation is not required where the asset has been used for either a taxable purpose or for the purpose of carrying on R & D activities.
1.12 Section 104-240 of the ITAA 1997 provides a formula with which to determine a capital gain or loss on a CGT K7 event. As a depreciating asset which is used in R & D activities is not subject to CGT, amendment 24 ensures that section 73BA depreciating assets are excluded.
1.13 Section 118-24 of the ITAA 1997 excludes depreciating assets, which had a balancing adjustment event happen to them and whose decline in value was worked out under Division 40, from the ambit of the CGT provisions. This result, which was enacted in the New Business Tax System (Capital Allowances - Transitional and Consequential) Act 2001, was intended to apply not only to depreciating assets used for a taxable purpose but also to depreciating assets used in R & D activities. Amendment 25 corrects section 118-24 by including a reference to section 73BA depreciating assets.
1.14 This amendment corrects a technical error in a note to proposed section 73Y of the ITAA 1936. There are currently 2 references to section 73C. The second reference should have been to section 73CB.