ATO Interpretative Decision
ATO ID 2004/567
Income Tax
Research and Development: application of clawback against expenditure incurred on acquisition or construction of pre-29 January 2001 plantFOI status: may be released
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Is the total amount of expenditure incurred by a company on acquiring or constructing an item of pre-29 January 2001 plant, in relation to 'research and development activities' in a year of income, 'relevant expenditure' on 'research and development activities' that formed or form part of a particular project for the purposes of section 73C of the Income Tax Assessment Act 1936 (ITAA 1936)?
Decision
Yes. The total expenditure, incurred in the year of income, is 'relevant expenditure' on 'research and development activities' that formed or form part of a project, for the purposes of section 73C of the ITAA 1936.
Facts
The taxpayer is an 'eligible company' as defined in subsection 73B(1) of the ITAA 1936. The company commenced a project of 'research and development activities' (as defined in subsection 73B(1) of the ITAA 1936) in the 2000 year of income, and incurred expenditure on these activities.
In the 2001 year of income, the company applied for and received approval for a Government grant in relation to the project.
The company continued the project in the 2001 year of income and registered the 'research and development activities' for this year with the Industry, Research and Development Board.
The company incurred expenditure in the 2001 year of income on acquiring or constructing plant prior to 29 January 2001, in relation to the project as an integral and pre ordained part of the project, and to be used exclusively in the project.
Reasons for Decision
Section 73C of the ITAA 1936 deals with situations where an eligible company has received, or become entitled to receive, a recoupment of, or a grant in respect of, expenditure it has incurred on research and development activities that formed or form part of a particular project carried on by or on behalf of the company. In subsection 73C(2) of the ITAA 1936 this expenditure is referred to as 'relevant expenditure'.
Under section 73C of the ITAA 1936, the company needs to take account of the amount of the recoupment or grant in calculating the amount of certain deductions it may be able to claim at concessional rates, under section 73B of the ITAA 1936.
Under paragraph 73C(3)(b) of the ITAA 1936, the amount of the recoupment or grant is doubled to produce what is called 'the initial clawback amount'. The precise application of the initial clawback amount in reducing the amount of the company's expenditure on research and development activities that is able to be claimed at a concessional rate (for example, at a 125% under subsection 73B(14) of the ITAA 1936), depends on whether this expenditure was incurred partly before and partly on or after 21 November 1987, or wholly on or after 21 November 1987.
Subsection 73C(7) of the ITAA 1936 applies to the situation, as in the present case, where the relevant expenditure has been incurred by the eligible company wholly on or after 21 November 1987. The rule in sub-subparagraph 73C(7)(c)(i)(A) of the ITAA 1936 means that the initial clawback amount is applied firstly to the company's relevant expenditure in the 2001 year of income, being the year ('the receipt or entitlement to receipt year') in which the company first either received, or became entitled to receive, the underlying grant amount.
The eligible company incurred expenditure during the 2001 year of income on acquiring or constructing pre-29 January 2001 plant. This expenditure was incurred exclusively in relation to 'research and development activities' as defined in subsection 73B(1) of the ITAA 1936, which formed part of a project.
The Explanatory Memorandum to the Taxation Laws Amendment Bill (No 4) 1989 (The Explanatory Memorandum), which inserted section 73C of the ITAA 1936, is relevant. The variation to example 3 in the Explanatory Memorandum makes reference to clawback being applicable to the entire amount of the qualifying plant expenditure incurred during the year on research and development activities, rather than the deductible component of the qualifying plant expenditure under section 73B of the ITAA 1936 for the year of income.
Accordingly, the total amount of pre-29 January plant expenditure incurred in the 2001 year of income, is considered to be 'relevant expenditure' when undertaking the clawback calculation in section 73C of the ITAA 1936. This results in a deduction for the eligible company in relation to this expenditure at a rate of 100 per cent over three years.
Date of decision: 17 June 2004Year of income: Year ended 30 June 2000 Year ended 30 June 2001
Legislative References:
Income Tax Assessment Act 1936
section 73B
subsection 73B(1)
subsection 73B(14)
section 73C
subsection 73C(2)
subsection 73C(3)
paragraph 73C(3)(b)
subsection 73C(7)
sub-subparagraph 73C(7)(c)(i)(A)
Related Public Rulings (including Determinations)
Taxation Determination TD 98/1
ATO ID 2004/568
ATO ID 2004/569
Other References:
Explanatory Memorandum to the Taxation Laws Amendment Bill (No 4) 1989
Keywords
Research & development expenditure recoupment
ISSN: 1445-2782