Supplementary Explanatory Memorandum
(Circulated by the authority of the Treasurer, the Hon J. Dawkins M.P.)Research and Development Expenditure
Explanation of proposed amendments
Changes to the Income Tax Assessment Act
Deductions for expenditure incurred to government bodies
Proposed section 73CB will deny deductions for expenditure incurred by a company to a government body or an associate in connection with R & D activities if the company is guaranteed a return on or of any part of the expenditure.
The effect of the proposed supplementary amendment is that section 73CB will not apply if the government body or associate to which the expenditure is incurred is entered on the 'Register of Commercial Government Bodies'. Government bodies entered on the register cannot be exempt from Commonwealth income tax and must be operating on a fully commercial basis. The register is to be administered by the Board [Amendments 1 & 2] .
The register will be established, together with guidelines for entry to the register, removal from the register, and other appropriate administration procedures, under the changes to the Industry Research and Development Act 1986 as discussed below.
Changes to Industry Research and Development Act 1986
Commercial Government Bodies Guidelines
The Board will be required to develop Guidelines setting out criteria which will indicate whether a government body is a commercial government body which may be entered on the Register of Commercial Government Bodies. Expenditure to government bodies or their associates which are not included on the Register can only be deductible under section 73B if there is no guaranteed return on or of any part of the expenditure [Amendment 4, new section 39HB].
The Board is to prepare and publish guidelines within 90 days of the commencement of the section setting out the criteria by which it will determine whether or not a Government body is a commercial Government body. Only those government bodies that, in the opinion of the Board, satisfy the criteria contained in the guidelines will be able to be entered onto the 'Register of Commercial Government Bodies'. The guidelines will be published in the Gazette and will be made available free of charge [Amendment 4, new subsections 39HB(1) and (2)] .
The guidelines will be contained in a disallowable instrument under the Acts Interpretation Act 1901. So, they will be subject to the scrutiny of Parliament, [Amendment 4, new subsection 39HB(5)].
In developing the guidelines the Board will have regard to a number of factors. These will include, but shall not be limited to:
- (a)
- the commercial environment in which the government body operates. This will include such factors as the degree of funding and other forms of backing that may be provided by the Commonwealth, State or Territory governments and the body's exposure to commercial risk and to competition;
- (b)
- whether and how the operations and performance of the body are subject to scrutiny;
- (c)
- to what extent the government body is bound by Commonwealth, State or Territory regulations, taxes and charges;
- (d)
- how much private investment there is in the body. The Board may take into account indirect investment, for instance through investment in companies, partnerships or trusts with interests in the body. So, for example, a body won't have to be treated as free of private investment, where interests are held by another government body in which there is private investment; and
- (e)
- if the eligible government body is established by or under a law of the Commonwealth, a State or Territory, the policies of the relevant government on treating the body as fully commercial [Amendment 4, new subsection 39HB(3)].
Any Government body or associate that is exempt from income tax will be excluded from inclusion on the Register of commercial Government bodies [Amendment 4, new subsection 39HB(4)] .
Examples of Government bodies that may qualify as commercial government bodies under the proposed guidelines include:
- •
- the Australian Overseas and Telecommunications Corporation;
- •
- Aerospace Technologies of Australia Ltd;
- •
- the Snowy Mountains Engineering Corporation; and
- •
- the Commonwealth Serum Laboratory.
Eligibility for inclusion on the Register will be determined on an individual case by case basis.
Register of Commercial Government Bodies
The Board will be required to maintain a Register of Commercial Government Bodies [Amendment 4, new section 39HA].
Only those government bodies that are listed on the Register will be excluded from the provisions of proposed section 73CB of the ITAA which would otherwise operate to disallow a deduction under section 73B. Only those government bodies or their associates which satisfy the Commercial Government Bodies Guidelines will be included on the Register.
The Register of Commercial Government Bodies will be administered by the Board and will be made available for inspection on request. Those looking to incur expenditure to government bodies or their associates will have an interest in examining the register to indicate that deductions under section 73B of the ITAA may be available [Amendment 4, new subsection 39HA(2)].
Applications for inclusion on the Register of Commercial Government Bodies
In order to be included on the Register of Commercial Government Bodies, a government body must apply to the Board in writing, providing all necessary information as required by the Board in order to make a decision as to the body's eligibility for inclusion on the Register [Amendment 4, new section 39HC].
After it considers a body's application for inclusion on the Register the Board must either grant or refuse the application [Amendment 4, new subsection 39HC(1)].
The Board must advise the applicant of its decision in writing and, if it refuses, set out the reasons for its decision [Amendment 4, new subsections 39HC(3) and (4)].
Only those applications under proposed section 39HD(1) which satisfy the Commercial Government Bodies Guidelines will be included on the Register.
If required, the Board may seek additional information from the applicant in order to make a determination as to the eligibility of the applicant for inclusion on the Register.
Deemed refusal of application after 90 days
The Board has to make a decision within 90 days from the date of receipt of the original application or, if the Board seeks additional information from the applicant, within 90 days from the date of receipt of that additional information. If not, the Board shall be taken to have made a decision to refuse the application for inclusion on the Register. This deemed refusal does not require notice to the body, or a statement of reasons [Amendment 4, new subsection 39HC(2)].
Date of effect of entry on the Register
Inclusion on the Register of Commercial Government Bodies will take effect from no later than the date of the Board's decision. If asked by the applicant, the Board may specify an earlier effective date [Amendment 4, new subsection 39HC(5)].
The Board may determine an effective date for inclusion in the Register that is earlier than the commencement day for the section under which the effective date is determined. Should the Board do so the provisions of the proposed legislation will operate as though the Register had been in existence at that specified date [Amendment 4, new subsections 39HC (6)and (7)] .
So companies incurring expenditure to unregistered government bodies in connection with R & D activities may still obtain deductions under section 73B, despite some guaranteed return, if the body obtains a back-dated entry on the Register because of particular circumstances making that appropriate.
Removal from the Register of Commercial Government Bodies
If the Board is satisfied that a government body does not satisfy the criteria established under the commercial government bodies guidelines, the Board must remove the body from the Register [Amendment 4, new subsection 39HF(1)].
Before doing so, the Board must advise the Government body and provide a written statement of reasons. The Board must also invite the body to make a written submission about the removal from the Register to the Board within 60 days from the date of notification.
Should the Government body make such a submission within the time given, the Board must consider the matters raised in the submission in determining whether the body should be removed from the Register on the basis of a failure to comply or a failure to continue to comply with the guidelines [Amendment 4, new subsection 39HF(2)].
Date of effect of removal from the Register
If the Board removes a government body from the Register, the removal will take effect from the date the body was told the Board was considering its removal from the register and given reasons.
The date of effect will not be earlier, as this could disadvantage companies seeking to claim deductions under section 73B for expenditure to the body incurred when the body was listed on the register and had no reason to believe that registration might be withdrawn.
The Board must provide the government body with written advice of its decision [Amendment 4, new subsection 39HF(3) and (4)].
Administrative Appeals Tribunal
Where a government body is not satisfied with the decision of the Board to deny registration or revoke registration of the body then the matter can be referred to the Administrative Appeals Tribunal for review [Amendment 4, amendment to section 39T] .
Appropriate notices must be given about such review rights [Amendment 4, amendment to section 39U].