ATO Interpretative Decision
ATO ID 2004/568
Income Tax
Research and Development: clawback - when has a company received, or become entitled to receive, a grant or recoupmentFOI 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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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
Has an eligible company received, or become entitled to receive, the total agreed amount of an approved Government grant, for the purposes of applying section 73C of the Income Tax Assessment Act 1936 (ITAA 1936), where the grant has been approved but the total agreed amount has not yet been paid?
Decision
No. However, an eligible company has received, or become entitled to receive, Government grant instalment payments when they have been paid.
Facts
The taxpayer is an 'eligible company' as defined in subsection 73B(1) of the ITAA 1936. It commenced a project of 'research and development activities' (as defined in subsection 73B(1) of the ITAA 1936) in the 2000 year of income. It incurred expenditure on these activities.
The company continued the project in the 2001 year of income and registered the 'research and development activities', with the Industry, Research and Development Board. Expenditure was also incurred on these activities.
In the 2001 year of income, the company also applied for and received approval for a Government grant in relation to the project.
The grant was paid to the company over the 2001 and 2002 years of income in instalments when certain conditions were met.
In certain circumstances, the Commonwealth is not obliged to make an instalment payment. For example, if:
- •
- specified milestones are not completed before a payment date
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- the total of all grant payments made and scheduled to be made to date, exceed eligible expenditure incurred to date or budgeted expenditure for the next three months
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- the Grantee is in default under the agreement.
Reasons for Decision
Subsection 73C(2) 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% rate 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 company wholly on or after 21 November 1987. To apply paragraphs 73C(7)(b) and 73C(7)(c) of the ITAA 1936, however, the company needs to determine which is the first year in which it has received, or become entitled to receive, the amount of the grant taken into account in calculating the initial clawback amount.
The grant in question was approved in the 2001 year of income but only partly received in that year, with the remainder received in the 2002 year of income after specified milestones and conditions had been met and satisfied.
The ordinary meaning of 'becoming entitled to receive an amount' is that there is an absolute or unconditional entitlement to receive the amount. Part of the entry for 'entitle' in the The Macquarie Dictionary, 2001 rev. 3rd edn, The Macquarie Library Pty Ltd, NSW is:
... furnish with grounds for laying claim.
Similarly, part of the entry for 'entitle' in Black's Law Dictionary, Black, HC, 1991, Abridged 6th edn, West Pub. Co, St Paul:
...To qualify for, to furnish with proper grounds for seeking or claiming
The company in this case did not have proper grounds for claiming the entire amount of the grant in the 2001 year of income, but only that part that was paid as the milestones and conditions were completed or satisfied.
Accordingly, for the purposes of subsection 73C(2) of the ITAA 1936, the eligible company did not receive, and was not entitled to receive, the unpaid agreed amount of Government grant instalment payments during the 2001 year of income. However, the eligible company did receive the Government grant instalments paid during that year.
Note: An eligible company which had not achieved any required milestones or conditions and had not received any instalment payments but had a total agreed amount of a Government grant approved during a year of income, would not be deemed to have received or be entitled to receive any of that total agreed amount during that year of income.
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
section 73C(1)
section 73C(2)
paragraph 73C(3)(b)
subsection 73C(7)
paragraph 73C(7)(b)
paragraph 73C(7)(c)
ATO ID 2004/567
ATO ID 2004/569
Other References:
The Macquarie Dictionary, 2001 rev. 3rd edn, The Macquarie Library Pty Ltd, NSW.
Black's Law Dictionary, Black, HC, 1991, Abridged 6th edn, West Pub. Co, St Paul.
Keywords
Research & development expenditure recoupment
ISSN: 1445-2782