ATO Interpretative Decision
ATO ID 2004/569
Income Tax
Research and Development: application of clawback against other and core technology expenditure incurred on unregistered research and development activitiesFOI status: may be released
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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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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
Can expenditure incurred by an eligible company on 'research and development activities', for which registration has not been obtained with the Industry, Research and Development Board, be 'relevant expenditure' for the purposes of section 73C of the Income Tax Assessment Act 1936 (ITAA 1936)?
Decision
Yes. Expenditure incurred by an eligible company on 'research and development' activities that formed or form part of a particular project carried on by or on behalf of the eligible company, will be 'relevant expenditure' 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, including core technology and other expenditure.
The company did not obtain registration with the Industry, Research and Development Board for the 'research and development activities' undertaken in the 2000 year of income. The company made no claim for the research and development tax concession in this year.
The company continued with 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. Expenditure was also incurred on these activities in that year.
In the 2001 year of income, the company applied for and was awarded a grant in relation to the project. Grant instalment payments were received during the 2001 year of income.
Note that the rule in sub-subparagraph 73C(7)(c)(i)(A) of the ITAA 1936 means that the initial clawback amount, calculated as twice the amount of the grant, 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. After applying this rule, there is part of the initial clawback amount still remaining.
Sub-subparagraph 73C(7)(c)(i)(B) of the ITAA 1936 and subparagraph 73C(7)(c)(iii) of the ITAA 1936 then require that any remaining part of the company's initial clawback amount, be next applied to relevant expenditure the company has incurred in the year of income before the 'receipt or entitlement to receipt year'. In this case, that year of income is the 2000 year of income.
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, as in this case.
The company incurred expenditure during the 2000 year of income on core technology and other expenditure. This expenditure was incurred in relation to 'research and development activities' as defined in subsection 73B(1) of the ITAA 1936, which formed part of a project. In this regard, refer Taxation Determination TD 98/1.
Although the purpose of section 73C of the ITAA 1936 is to apply amounts of recoupment or grants in reducing an eligible company's expenditure on research and development activities able to be claimed at concessional rates (refer subsections 73C(8) and 73C(9) of the ITAA 1936), there is no requirement that 'relevant expenditure', in this case being core technology and other expenditure, has to give rise to deductible amounts or be deductible at a concessional rate.
Accordingly, notwithstanding that the company did not obtain registration with the Industry, Research and Development Board in respect of its activities in the 2000 year of income, as those activities form part of the same project as is being undertaken in the 2001 year of income, expenditure on those activities in the 2000 year of income also qualifies as 'relevant expenditure'. Therefore, any remaining clawback amount after application against relevant expenditure in the 2001 year of income shall be applied against the company's expenditure in the 2000 year of income even though, as no concessional deductions have been claimed in the 2000 year of income, the application of this remaining clawback amount, of itself, results in no reduction in deductions.
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)
subsection 73B(10)
section 73C
section 73C(2)
section 73C(3)
paragraph 73C(3)(b)
subsection 73C(7)
subparagraph 73C(7)(c)(iii)
sub-subparagraph 73C(7)(i)(A)
sub-subparagraph 73C(7)(i)(B)
subsection 73C(8)
subsection 73C(9)
Related Public Rulings (including Determinations)
Taxation Determination TD 98/1
ATO ID 2004/567
ATO ID 2004/568
Keywords
Research & development expenditure recoupment
ISSN: 1445-2782
| Date: | Version: | |
| You are here | 17 June 2004 | Original statement |
| 3 March 2017 | Archived |