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Guide to the R & D Tax Concession - Part C

C7 Extra deduction for increase in expenditure on foreign owned R & D (175% International Premium)

This document has been archived. It is current only to 30 June 2011.

Disclaimer

ATO position

The Tax Office is responsible for providing you with this Guide to the R & D tax concession. The Guide offers a commentary on all expenditure issues, taxation rulings, the tax offset, the incremental concession, on own behalf issues, Tax Office record keeping requirements, self assessment and clawback issues. The paragraph below outlines the current status of this Guide.

The information contained in this Guide, as it relates to the matters listed above, consists of written guidance, as referred to in Law Administration Practice Statement PS LA 2008/3 Provision of advice and guidance by the Tax Office. That is, the Guide contains information of a general nature about the operation of the law. As such, it is not binding on the Commissioner of Taxation. If you want to be certain about how this guidance applies to your individual circumstances, you should ask for a private ruling or, if applicable, obtain administratively binding advice from the Commissioner. However, if you follow information contained in this written guidance and, in doing so, make an honest mistake, you will be protected from any penalty on underpaid tax. Furthermore, if something in the written guidance is misleading or incorrect and you make an honest mistake as a result, you will be protected from any penalty and any interest on underpaid tax. You will, however, remain liable for the primary tax payable.

Copyright

Commonwealth of Australia 2009

This work is copyright. Apart from any use as permitted under the Copyright Act 1968, no part may be reproduced by any process without prior written permission from the Commonwealth. Requests and inquiries concerning reproduction and rights should be addressed to the Commonwealth Copyright Administration, Attorney-General's Department, 3-5 National Circuit, Barton ACT 2600 or posted at http://www.ag.gov.au/cca

C7-1 Background

For the year of income commencing after 30 June 2007 and later years of income, the Government has extended the Incremental tax concession (175% Premium) to companies who incur expenditure on behalf of a grouped foreign company above a rolling three-year average of expenditure. As a result, the 175% Premium has been divided into two separate deductions, the extra deduction for increase in expenditure on foreign owned research and development (the 175% International Premium) and the extra deduction for increase in expenditure on Australian owned research and development (the 175% Australian Premium).

Consequently, there are new methods to calculate a company's incremental tax concession. The new methods require a company to calculate the increases (and decreases) in expenditure on both foreign-owned R & D and Australian-owned R & D for each eligible company in the group, and then pool the results such that increases to one type of expenditure will be reduced by any decrease to the other type of expenditure. (For information on the new 175% Australian Premium, refer to section C6.)

The extension of the 175% Premium to multinational subsidiaries that choose to hold resulting intellectual property offshore is intended to encourage additional R & D expenditure in Australia by multinational enterprise subsidiaries. An immediate 100% deduction for expenditure on eligible R & D activities and an additional 75% immediate tax deduction on expenditure above the average of the previous three years expenditure on R & D will be provided. (For information on the 100% deduction please see Part C3 Deduction for expenditure on foreign owned R & D.)

Key features of the 175% International Premium are:

The 'additional' component of the 175% International Premium provides a 75% deduction for increases in some Australian R & D activities carried on by a company incorporated in Australia, wholly or primarily on behalf of certain foreign companies.
Qualifying companies in groups where no group member has had a presence in Australia in the prior 10 years may be eligible to claim a 175% deduction under the new concession for all of their relevant R & D expenditure in their first year of operation in Australia.
Other eligible companies which undertake relevant R & D activities in Australia on behalf of a relevant foreign company in the first year of operation of this measure, and who meet the qualification tests, may have immediate access to the 175% International Premium. This transitional provision will not apply in subsequent years.
Calculations of an eligible company's entitlement to the additional 75% deduction are performed on a group basis, and will take account of any decreases in relevant expenditure on 'Australian owned' R & D activities.
A new treatment for grants, which will be applied to expenditure in relation to both foreign owned and Australian owned R & D. An amount equal to twice the amount of any R & D grant attributable to the relevant expenditures will be deducted when determining the expenditure figures used to calculate the additional deduction amounts.
Annual registration with Innovation Australia (the Board) of both Australian-owned and foreign-owned R & D activities is a prerequisite.
Mandatory grouping rules and other anti-avoidance measures to avoid any potential abuse.

C7-2 Timing

Companies can claim the 175% International Premium for expenditure incurred in their first year of income that commences after 30 June 2007, and in later years of income.

C7-3 Eligibility

C7.3.1 Prerequisites for deduction

Current year

An eligible company claiming the 175% International Premium for a year of income must be eligible to deduct an amount for that year under subsection 73B(14C) of the ITAA 1936 for expenditure incurred in its group membership period .

ITAA 1936 paragraph 73QB(1)(a)

Generally, a company will be eligible to deduct an amount under subsection 73B(14C) of the ITAA 1936, which gives an immediate 100% deduction for eligible expenditure on certain foreign owned R & D activities, if it satisfies all of the following conditions:

The eligible company incurs expenditure in the year of income at a time when it is grouped under section 73L of the ITAA 1936 with a foreign company.
The expenditure is incurred for the purpose of the carrying on of 'Australian-centred research and development activities'.
The activities are carried on wholly or primarily on behalf of the foreign company that is a group member of the eligible company.
The activities are carried on, directly or indirectly, under a written agreement between the eligible company and the foreign company and no other parties, for the activities to be performed:
- by the eligible company, or
- by another person directly or indirectly under another agreement to which the eligible company is, or will become, a party.
The expenditure is not incurred in connection with an agreement that:
- is between the eligible company and another eligible company that is grouped under section 73L with the eligible company when the expenditure is incurred, and
- is an agreement for the activities to be performed either by the eligible company or by a person who is not party to the agreement and is to perform the activities directly or indirectly under another agreement to which the eligible company is or will become a party.
The expenditure on foreign-owned R & D by the eligible company for the year of income exceeds $20,000.
The eligible company, and each eligible company in its group at any time in the year of income, are registered with the Board for the year of income in relation to all Australian-centred R & D activities on which the eligible company (or group member) incurred expenditure in the income year, regardless of whether the activities were covered by an R & D plan.

For further information on each of these conditions of eligibility for the deduction available under subsection 73B(14C) of the ITAA 1936, please refer to Part C3 Deduction for expenditure on foreign owned R & D.

Three immediately prior years

In addition, further eligibility conditions apply in relation to each of the three immediately prior years. There are three conditions, which are referred to collectively in this Guide as the 'three year claim history'. Only one of these three conditions needs to be met in any one of the three years in question, ie., whilst a condition needs to be met for each of these three years, it need not be the same one each time.

The first condition is that the eligible company could deduct an amount under subsection 73B(14C) of the ITAA 1936, for expenditure in its group membership period.

ITAA 1936 subparagraph 73QB(1)(b)(i)

The second condition is that one of the eligible company's other group members could deduct an amount under subsection 73B(14C) of the ITAA 1936, for the year of income, for expenditure in its group membership period. (See section C7-4 below for how to determine group members and group membership periods).

ITAA 1936 subparagraph 73QB(1)(b)(ii)

The third eligibility condition is that the year of income be a nil expenditure year. (See the definition of nil expenditure year on the following page).

ITAA 1936 subparagraph 73QB(1)(b)(iii)

Provided that between the eligible company and its group members, an amount could be deducted under subsection 73B(14C) or there is a nil expenditure year in each of the three immediately prior years, the eligible company will have a three year claim history.

Terms used

For the purposes of applying the 175% Premium rules, years of income are designated as follows:

Y ₀ is the year of income for which an eligible company is working out its assessable income and deductions

Y _-1 means the year of income before the Y ₀ year of income

Y _-2 means the year of income 2 years before the Y ₀ year of income

Y _-3 means the year of income 3 years before the Y ₀ year of income

ITAA 1936 subsection 73P(6)

Example 7.1

Company A, which is grouped with a foreign company, Company B, undertook foreign owned R & D activities on behalf of its parent company in the year of income ending 30 June 2011. Company A was entitled to deduct $100,000 under subsection 73B(14C) of the ITAA 1936 in relation to that year for the expenditure incurred in its group membership period.

In the Y _-1 year (the 2009-2010 income year) Company A did not register its R & D activities with the Board but received a Government grant of $40,000, in respect of its R & D, in relation to that year of income. In both of the Y _-2 and Y _-3 years of income (the 2008-09 and 2007-08 income years), Company A was able to deduct an amount under subsection 73B(14C) of the ITAA 1936 in relation to expenditure incurred in its group membership period.

Company A is not grouped with any other companies under section 73R of the ITAA 1936 and has not been so grouped at any time during the period commencing on the first day of the Y _-3 year, and ending on the last day of the Y ₀ year.

Company A is not entitled to claim a deduction under section 73QB of the ITAA 1936 as it does not have a three year claim history. There is no alternative eligibility condition in section 73QB (as there was in former section 73Q) , which can be satisfied by the receipt of a grant.

Nil expenditure year

For a year of income to be a nil expenditure year, the following conditions must be satisfied in relation to that year of income:

neither the eligible company nor any other group member (determined under section 73R of the ITAA 1936) existed at any time in the year or the 10 immediately preceding years of income,
at no time in the year, or the 10 immediately preceding years of income, did any of the following carry on business in Australia:
- a foreign company grouped with the eligible company under section 73L of the ITAA 1936 at any time in the Y ₀ , Y _-1 , Y _-2 or Y _-3 year of income (for an explanation of these terms, please refer to 'terms used' below)
- a foreign company grouped with a section 73R group member of the eligible company under section 73L (see section C6-4 of this guide for how to determine group members and group membership periods) at any time during the section 73R group member's group membership period
- a person grouped under section 73L with a foreign company which is grouped under section 73L with the eligible company or with a section 73R group member of the eligible company at any time in the year of income or the 10 immediately preceding years of income.

ITAA 1936 subsection 73QB

Example 7.2

Company A is an Australian proprietary company incorporated on 1 July 2007. Since incorporation, Company A has been wholly owned by Company D, a United States company. Company D does not own, and never has owned, any interests in any other companies incorporated in Australia. Company D also does not, in any other way, control any other companies incorporated in Australia, nor has it done so at any time previously. At no time has Company D, or any person with whom Company D is grouped under section 73L of the ITAA 1936, carried on business in Australia and Company D has not previously had a permanent establishment in Australia. Company A is not, and never has been, grouped with any other companies incorporated in Australia.

In relation to the year of income ending 30 June 2008, Company A can deduct an amount under subsection 73B(14C) of the ITAA 1936 for expenditure on foreign owned R & D incurred in its group membership period.

Company A did not exist at any time prior to the current income year (Y ₀ ), and, for the purposes of subsection 73QB(2) of the ITAA 1936, has no group members.

Example 7.3

Company X, a company incorporated in Germany, has decided to move some of its R & D operations to Australia. On 1 July 2007, Company X incorporated Company E as an Australian proprietary company. Company X has owned all issued shares in Company E from the date of its incorporation.

During the income year, Company X learns that Company W, an Australian body corporate, has recently acquired a licence to further develop some research which is complementary to the R & D that Company E is undertaking in Australia on behalf of Company X. To gain access to this new research and control the direction taken to ensure synergy with its existing operations, Company X acquires Company W on 1 December 2007. Company W has been carrying on R & D in Australia for 15 years, and has two subsidiary companies which it established 5 years ago for asset protection.

Company E can deduct an amount under subsection 73B(14C) of the ITAA 1936 for expenditure incurred in its group membership period for the year ending 30 June 2008 (the Y ₀ year of income) and wishes to test its eligibility for the extra deduction available under section 73QB of the ITAA 1936.

Company E did not exist at any time prior to the current year. However, during the year it has become grouped under section 73L of the ITAA 1936 with another eligible company, Company W. Company W has incurred expenditure which it could deduct under subsection 73B(14) of the ITAA 1936 in previous years and is a group member of Company E (determined under section 73R) in the current year.

As Company W is a group member of Company E determined under section 73R of the ITAA 1936 and has been in existence for 15 years, neither the Y _-1 , Y _-2 or Y _-3 year can be a nil expenditure year for Company E. As well, although Company W can deduct amounts under subsection 73B(14) for each of the three previous years of income, it cannot deduct any amounts under subsection 73B(14C) , and hence, the second eligibility condition cannot be satisfied. Company E will need to consider whether it comes within the transitional rules (discussed below) for eligibility to claim the additional component of the 175% International Premium in the 2007-08 income year.

Example 7.4

Company G is a Japanese company which manufactures farm machinery and undertakes R & D to develop better machines more adept at operating efficiently in difficult terrain. The company has not at any time controlled an Australian body corporate within the meaning of section 73L of the ITAA 1936. However, for the last seven years Company G has had a permanent establishment in Australia because it has a production facility located in Australia where items for sale are assembled and packed for distribution.

Company G becomes aware that it may be entitled to claim the Australian R & D tax concession if it restructures its business so that operations are conducted through an entity incorporated under Australian law. Therefore, on 1 July 2007, Company G incorporates Company L, an Australian proprietary company. Company L has no group members for the purposes of subsection 73QB(2) of the ITAA 1936 and Company G does not own any interests in any other companies incorporated in Australia. Nor does Company G in any other way control any other companies incorporated in Australia.

For the years of income ending 30 June 2009 (Y ₀ ) and 30 June 2008 (Y _-1 ), Company L could deduct an amount under subsection 73B(14C) of the ITAA 1936 for expenditure incurred in its group membership period on activities undertaken in Australia on behalf of Company G.

Company L did not exist prior to the Y _-1 year and has no group members for the purposes of subsection 73QB(2) of the ITAA 1936. However, Company G, a foreign company grouped with Company L under section 73L of the ITAA 1936, did carry on business in Australia (through a permanent establishment) during the Y _-2 year and prior income years. Therefore Company L cannot have a nil expenditure year in the Y _-2 or Y _-3 years of income, as a foreign company grouped with it during the Y ₀ and Y _-1 years of income did carry on business in Australia in the Y _-2 and Y _-3 years of income (paragraph 73QB(2)(b) (i) of the ITAA 1936).

Example 7.5

Company T is a company incorporated in Finland which in the 1990s owned several Australian companies (Company S, Company Q and Company R), that carried on business and undertook R & D in Australia on Company T's behalf. On 30 June 1999, Company T sold all of its Australian interests to Company B, a Norwegian entity which was looking to expand its Asia-Pacific operations. Company T ceased all Australian operations at that time and focused on its New Zealand operations.

Company T decided to re-enter the Australian market when it heard about the new 175% International Premium, and on 1 July 2007 incorporated an Australian proprietary company, Company P. Since incorporation, Company P has not been grouped with any other person (other than with Company T) under section 73L of the ITAA 1936.

In relation to the years of income ending 30 June 2011 (the Y ₀ year of income) and the two immediately prior years (the Y _-1 and Y _-2 years of income being the 2009-10 and 2008-09 income years, respectively), Company P incurred an amount of expenditure in its group membership period for which it was entitled to a deduction under subsection 73B(14C) of the ITAA 1936.

Company P did not exist at any time prior to the Y _-2 year of income and had no group members as determined under section 73R of the ITAA 1936. However, Company T was previously grouped with Company S, Company Q and Company R who, at a time during the 10 years immediately preceding the Y _-3 year of income, carried on business in Australia. Therefore, Company P cannot have a nil expenditure year in the Y _-3 year of income and so will not have the required three year claim history.

C7.3.2 Transitional rule - deemed three year claim history

Generally, to qualify for the 175% International Premium, an eligible company must have a three year claim history. A company will have a three year claim history where, between the eligible company and its group members, an amount could be deducted under subsection 73B(14C) of the ITAA 1936 for expenditure incurred in a company's group membership period, or there is a nil expenditure year, in each of the Y _-1 , Y _-2 and Y _-3 years of income (see 7.3.1 Prerequisites for deduction).

However, for the year of income commencing after 30 June 2007 and before 1 July 2008, there is a transitional rule to allow companies who do not have a nil expenditure year in each of the Y _-1 , Y _-2 and Y _-3 years of income immediate access to the 175% International Premium.

The transitional rule operates by providing an eligible company, who has satisfied the prerequisites for deduction in respect of the Y ₀ year of income, with a deemed three year claim history. That is, for the purposes of paragraph 73QB(1)(b) of the ITAA 1936, the eligible company is taken to have been able to deduct an amount under subsection 73B(14C) for each of the relevant Y _-1, Y _-2 and Y _-3 years of income.

The transitional rule may apply, where:

the Y ₀ year of income is the year of income starting after 30 June 2007 and before 1 July 2008
in the Y ₀ year of income, in its group membership period, the eligible company has incurred an amount of expenditure on foreign owned R & D
the eligible company can deduct an amount under subsection 73B(14C) of the ITAA 1936 in relation to Y ₀ , and
any of the three preceding years, Y _-1 to Y _-3 , were not nil expenditure years.

For information on the deduction available under subsection 73B(14C) of the ITAA 1936, please refer to Part C3 of this guide. Please refer above for further information on the conditions for a nil expenditure year.

(For more information about the reduced notional expenditure on foreign owned R & D, see section 7.8.1 Increase in expenditure on foreign owned R & D).

C7.3.3 Transitional accounting periods of greater or less than 12 months

This section applies where a company, or consolidated group, has adopted, or reverted from, a substituted accounting period in lieu of an income year ending on 30 June and so has a transitional period of greater or less than 12 months.

Y ₀ year of income

To determine its eligibility for the 175% International Premium under section 73QB of the ITAA 1936, an eligible company must first determine whether the requirements of section 73QB are met in relation to the Y ₀ year of income and each of the three prior years of income (the Y _-1 , Y _-2 and Y _-3 years of income).

The Y ₀ year of income for the purposes of sections 73P to 73V of the ITAA 1936 will be the 12-month period ending on the last day of the period for which the eligible company (the company seeking to claim the 175% International Premium) will lodge its return of income for the current year. This is so even where the company's return of income for the year is for a period of greater or less than 12 months. For example, if the return of income of the company for the 2008-09 year of income is for the period from 1 July 2008 to 31 December 2008, the Y ₀ year of income is the 12-month period 1 January 2008 to 31 December 2008.

This 12-month period will be used when determining whether the eligible company can deduct an amount for the Y ₀ year of income under subsection 73B(14C) of the ITAA 1936 for expenditure on foreign owned R & D incurred during its group membership period, and when calculating the amount of the eligible company's extra deduction for increase in expenditure on foreign owned R & D under section 73QB of the ITAA 1936.

Three immediately prior years

The three prior years of income are the 3 immediately preceding 12-month periods, i.e.

1 January 2007 to 31 December 2007
1 January 2006 to 31 December 2006, and
1 January 2005 to 31 December 2005

representing the Y _-1 , Y _-2 and Y _-3 years of income, respectively.

If the company seeking to claim the 175% International Premium has a transitional period in one of the years of income representing the Y _-1 , Y _-2 or Y _-3 year of income, that year will be the 12-months ending on the last day of the period for which the return of income was, or will be, lodged. This 12-month period will be used when determining whether the eligible company has a three year claim history for the purposes of paragraph 73QB(1)(b) of the ITAA 1936 and when calculating the amount of the eligible company's extra deduction for increase in expenditure on foreign owned R & D.

Example 7.6

Where a company is working out its additional deduction for the 2008-09 income year, and:

1 December 2008 to 30 November 2009 represents the 2008-09 income year;
1 December 2007 to 30 November 2008 represents the 2007-08 income year;
1 July 2006 to 30 November 2007 represents the 2006-07 income year; and
1 July 2005 to 30 June 2006 represents the 2005-06 income year,

then the Y0 year of income and three immediately prior years for the purposes of the 175% International Premium will be:

1 December 2008 to 30 November 2009 representing the Y ₀ year of income;
1 December 2007 to 30 November 2008 representing the Y _-1 year of income;
1 December 2006 to 30 November 2007 representing the Y _-2 year of income;
1 December 2005 to 30 November 2006 representing the Y _-3 year of income;

Transitional accounting periods of group members

These 12-month periods are always worked out using the year of income or substituted accounting period of the eligible company working out its deduction, and not the year of any group member. All information, for example, group membership and the amounts worked out under section 73RB of the ITAA 1936, must be calculated using the 12-month periods representing the Y ₀ to Y _-3 years of income of the company working out its deduction. This process must be undertaken in respect of each group member working out its respective deduction as the periods may be different depending upon that company's own year of income.

C7-4 Grouping rules for the 175% International Premium

To determine its eligibility for, and to calculate, the 175% International Premium an eligible company is required to work out its group members. A company that is the head company of a consolidated group must work out whether it has any group members who are not members of the consolidated group of which it is head company.

Primary and secondary group members, and their individual group membership periods, are identified utilising the method statement in subsection 73R(2) of the ITAA 1936.

Section 73R relies on the grouping rules that apply for the R & D tax offset set out in section 73L of the ITAA 1936. (For an explanation of when one company is grouped with another company under section 73L of the ITAA 1936, see Part C4-4 of this guide).

ITAA 1936 section 73L , 73R

C7.4.1 Section 73R group members

Many of the R & D provisions refer to the claimant company's group members under section 73R of the ITAA 1936 and the group membership periods of those companies. To determine a claimant company's entitlement to the R & D tax concession, it is therefore necessary to establish who is a member of its section 73R group and the group membership periods of each member. This is worked out by following the method statement in subsection 73R(2) of the ITAA 1936.

Subsection 73R(1) of the ITAA 1936 provides that when applying section 73R , section 73L of the ITAA 1936 must be used to determine whether companies are grouped. For more information on section 73L group members, see Part C4-4 . Once the eligible company has determined its section 73L group, it can proceed to Step 1 of the method statement contained in subsection 73R(2) of the ITAA 1936.

Determining who is a Primary Group Member (PGM)

Step 1 of the method statement contained in subsection 73R(2) of the ITAA 1936 provides that the eligible company must work out who are the primary group members in its group. Any companies grouped under section 73L of the ITAA 1936 with the eligible company on the last day of the Y ₀ year of income, and the eligible company itself, are primary group members.

Example 7.7

Assume Y ₀ is the income year ending 30 June 2011.

Company A	is an eligible company (the claimant) that is an Australian public company listed on the stock exchange, and is not controlled by any person for the purposes of section 73L of the ITAA 1936. Company A has incurred expenditure on foreign owned R & D in the Y ₀ to Y _-3 years of income. Company A has been entitled to a 100% deduction for its expenditure on foreign owned R & D under subsection 73B(14C) of the ITAA 1936 in each of those years and is working out its entitlement to the 175% International Premium.
Company B	is an Australian proprietary company wholly owned by Company A in the Y ₀ to Y _-3 years of income. Company B also incurred expenditure on foreign owned R & D in the Y ₀ to Y _-3 income years. However, it could not deduct any amount for this expenditure under subsection 73B(14C) of the ITAA 1936 for the Y _-1 to Y _-3 years because the activities were not carried out in accordance with an R & D plan as required by subsection 73B(2BA) of the ITAA 1936 in relation to those years.
Company C	is an Australian proprietary company, 60% owned by Company D since its incorporation on the first day of the Y _-2 year. Company C carried on Australian-centred R & D activities in the Y ₀ to Y _-2 income years and received an ACIS grant of $200,000 in each of the Y ₀ and Y _-1 years attributable to its incremental expenditure on Australian owned R & D incurred in those years.
Company D	is a company incorporated in Singapore. In the Y ₀ to Y _-3 years of income, Company D is wholly owned by Company A.
Company E	is an Australian proprietary company, 40% owned by Company C and 60% owned by Company X. It incurred expenditure on Australian owned R & D activities in the Y _-2 year of income, and was able to deduct an amount under subsection 73B(14) in respect of that expenditure.
Company F	is an Australian proprietary company that incurred expenditure on Australian owned R & D activities in each of the Y ₀ to Y _-3 years of income for which it could deduct an amount under subsection 73B(13) of the ITAA 1936. Company F was wholly owned by Company B until the last day of the Y _-1 year of income, after which time it was acquired by Company Z.

Therefore, the primary group members of Company A, are:

Company A, the claimant
Company B, a wholly owned subsidiary of Company A on the last day of the Y ₀ year
Company C, a company controlled by Company D (60% ownership), who is in turn a wholly owned subsidiary of Company A, on the last day of the Y ₀ year, and
Company D, the foreign company controlled by Company A on the last day of the Y ₀ year.

Company E is not a primary group member of Company A because it was not grouped with Company A under section 73L of the ITAA 1936 on the last day of the Y ₀ year of income. For the same reason, Company F also is not a primary group member of Company A as it was not grouped with Company A under section 73L of the ITAA 1936 on the last day of the Y ₀ year of income.

However, completing Step 1 of the method statement contained in subsection 73R(2) of the ITAA 1936 does not identify all section 73R group members; it only identifies the primary group members . The eligible company's secondary group members are worked out at Step 3 of the method statement after the group membership periods of the primary group members have been determined. Once the eligible company's secondary group members have been identified, the group membership periods of the secondary group members must also be worked out.

7.4.2 Group membership periods

There are rules to determine the group membership period of each section 73R group member, including the group membership period of companies entering or exiting an R & D group during the claim year and/or the three-year history period. (There are special rules for companies who join or leave a consolidated group, please see section 7.4.4 of this guide).

These rules work by identifying all of the companies who are required to be grouped with the claimant at the end of the claim year ( primary group members ), and then by establishing the dates upon which the control of any of these companies last changed within the history period such that they became grouped with the claimant.

The period between these dates is the group membership period of each primary group member. Any other companies with whom these members were required to be grouped in their group membership period (but which have subsequently left the group) are also identified ( secondary group members ).

Therefore at any point in time, the members who are to be grouped together are identified, and their incremental expenditure and expenditure on foreign owned R & D during their period of group membership can be calculated. Where the claimant is not grouped with any other eligible company, it will be the only primary group member. A solitary company must still work out its group membership period in accordance with section 73R of the ITAA 1936.

Determining group membership periods

The detailed steps involved in determining group membership periods are:

Step 1:	Identify the primary group members (PGM ) - these are the claimant company, and other companies required to be grouped with the claimant company as at the end of the claim year (theY ₀ year).
Step 2:	Determine the group membership period of each of the PGMs. A PGM's group membership period extends from the day that its control changed to cause it to come into the group to the last day of the current income year. However, the group membership period cannot generally commence before the first day of the income year three years before the current income year (the Y _-3 year).
Step 3:	Determine any other companies that are required to be grouped with each PGM at a time during the PGM's group membership period. Any company identified under this step is called a secondary group member (SGM). These will be companies which were required to be grouped with a PGM for a least some part of the four year period under review, but which have left the group prior to the end of the Y ₀ year.
Steps 4 & 5:	Determine the group membership period for each SGM. This extends from the day that its control changed to cause it to come into the group to the day its control changed to cause it to leave the group. However, as in Step 2, the group membership period cannot generally commence before the first day of the income year three years before the current income year (the Y _-3 year).

The effect of these rules is that for the purposes of calculation of the increase in incremental expenditure on Australian owned R & D, and the increase in expenditure on foreign owned R & D, the relevant expenditure of a company is only taken into account for the period of time that it is a member of the group.

Where a company now controlled by a person or persons under section 73L of the ITAA 1936 was previously not controlled by any person within the meaning of that section, there is a change in control for the purposes of section 73R of the ITAA 1936. The group membership period of the company which experienced that change in control will be the period between the day on which the company became controlled by the current controller and the last day of the Y ₀ year of income.

For further information see:

ATO Interpretative Decision ATO ID 2005/152

Research and development: group membership period under section 73R of the ITAA 1936

Where a company, now controlled by a person under section 73L of the ITAA 1936, was previously not controlled by any person within the meaning of that section, has there been change in control of the company of the purposes of subsection 73R(2) of the ITAA 1936?

ITAA 1936 section 73R

Example 7.8

Following on from Example 7.7 above, the method statement in subsection 73R(2) of the ITAA 1936 determines group members and group membership periods in the following manner:

Step 1 Determine primary group members

Company A, Company B, Company C and Company D are primary group members because each company was grouped under section 73L of the ITAA 1936 on the last day of the Y ₀ year of income.

Step 2 Determine the group membership period of each primary group member

Company A, Company B and Company D did not experience any change in control in the period from the first day of the Y _-3 year to the last day of the Y ₀ year. This means the group membership period (GMP) of each company is the whole period from the first day of the Y _-3 year to the last day of the Y ₀ year.

Company C was controlled by Company D for the full period of its existence from the first day of the Y _-2 year to the last day of the Y ₀ year. Before this time, the company was not controlled by any person for the purposes of section 73L of the ITAA 1936. Therefore, the GMP of Company C is the period from the first day of the Y _-2 year to the last day of the Y ₀ year.

Step 3 Determine secondary group members

Company F will be a secondary group member as it is grouped with a primary group member (in this example, Company A, Company B, Company C and Company D) at a time during the PGM's group membership period.

Company E is not a secondary group member as it is not grouped with a primary group member at any time during the PGM's group membership period.

Steps 4 & 5 Determine the group membership period of each secondary group member

The group membership period of the secondary group member, Company F, will be the period when it was grouped with a primary group member. Company F became grouped with Company A (and also with Company B and Company D) on the first day of the Y _-3 year of income. However, Company F left the control of Company A on the last day of the Y _-1 year of income when it was sold to Company Z. Therefore, the group membership period of Company F is the period from the first day of the Y _-3 year of income to the last day of the Y _-1 year of income.

Companies A, B, C and F incurred the following amounts of incremental expenditure and expenditure on foreign owned R & D during the Y ₀ to Y _-3 years of income during their respective group membership periods. (Company D is not an eligible company and therefore cannot incur either type of expenditure).

However, a company's group membership period is modified where a company enters or leaves a section 73R group with a 'viable business'.

C7.4.3 Viable business exception

The group membership periods of both primary group members and secondary group members can change under certain circumstances:

where the secondary group member left the section 73R group with a viable business, its group membership period in relation to this prior group is deemed never to exist. This means that although the company may have incurred expenditure on foreign owned R & D, this expenditure will not be included in the calculation of the 175% International Premium for that company or in relation to this prior group, as it was not incurred during the company's group membership period; and
where a primary group member (an eligible company who remains a section 73R group member on the last day of the Y ₀ year of income) or a secondary group member (an eligible company who entered the section 73R group on or after the first day of the Y _-3 year of income, but was not a group member on the last day of the Y0 year of income) entered the section 73R group with a viable business, the company's group membership period is extended to include its group membership period from its previous group. As such, any incremental expenditure incurred from the 1 ^st day of the Y _-3 year of income during a previous group membership period may be taken into account in the calculation of the 175% International Premium for that company or any new group members of that company.

A company will join or leave the group with a viable business if all assets (which must include R & D assets) necessary to comprise a continuing business are transferred with the company, and the vendor and purchaser agree in writing that they are transferring a viable business. The vendor must provide written details of the expenditure incurred on R & D by the company while in its former group and grants and recoupments received or entitled to be received in relation to that expenditure. The written agreement and details of the incremental expenditure, or expenditure on foreign owned R & D for which an amount could be deducted under subsection 73B(14C) of the ITAA 1936, generally needs to be provided by the end of the year in which the change of control took place. However, the Commissioner may exercise a discretion to allow the written agreement to be provided at some later date.

ITAA 1936 subsections 73R(3) to (6)

Example 7.9

Following on from Example 7.7 and Example 7.8 above:

Company A, Company B, Company C, Company D and Company F are section 73R group members
Company A, Company B, Company C and Company D are primary group members, with the following group membership periods:
- Coy A: first day of the Y _-3 year to the last day of the Y ₀ year
- Coy B: first day of the Y _-3 year to the last day of the Y ₀ year
- Coy C: first day of the Y _-2 year to the last day of the Y ₀ year
- Coy D: first day of the Y _-3 year to the last day of the Y ₀ year
Company F is a secondary group member, its group membership period is:
- Coy D: first day of the Y _-3 year to the last day of the Y _-1 year

Assume however, that Company F left the R & D group with a viable business. This means that, when working out Company A's entitlement to the 175% International Premium, the rules for determining Company F's group membership period are modified and the group membership period of Company F is treated as never having existed.

For the purposes of calculating the increase in expenditure on foreign owned R & D under section 73QB of the ITAA 1936 for Company A, the expenditure on foreign owned R & D for Company A and Company B and the incremental expenditure on Australian owned R & D for Company C will be as per the table above. However, due to the exit from the group of Company F at the end of the Y _-1 year with a viable business, no incremental expenditure of Company F is taken into account by Company A when working out its increase in expenditure on foreign owned R & D.

The expenditure incurred by members of the section 73R group during their group membership periods is therefore:

C7.4.4 Consolidated groups

Where a company becomes a member of a consolidated group or MEC group, then for the purpose of determining entitlement to the 175% International Premium and calculating the extra deduction:

expenditure amounts incurred by the joining company before it became a member are treated as if they were incurred by the head company of the group,
any amounts the joining company has deducted or can deduct for that expenditure are treated as if they had been deducted by the head company of the group, and
any recoupments of, or grants in respect of, that expenditure, received or receivable by the joining company or its former group are treated as being received by the head company of the group.

This is by virtue of section 73BAC of the ITAA 1936. This section applies after any application of subsections 73R(3) and (4) so that any viable business transfer exceptions to the group membership period rules for joining entities are applied before attributing the relevant amounts to the head company of the consolidated group.

The operation of section 73BAC of the ITAA 1936 is generally taken to be conditional upon one or more joining companies becoming members of the relevant consolidated group. After the time at which this occurs, and in subsequent income years, the deeming effects set out above will operate in respect of the head company of the group.

ITAA 1936 section 73BAC

Where a company ceases to be a member of a consolidated group:

expenditure amounts actually incurred by the leaving company while it was a member of the group, are treated as if they were incurred by it and not by the head company; and
any amounts the head company has deducted or can deduct for that expenditure are treated as if they had been deducted by the leaving company.

This is by virtue of section 73BAD of the ITAA 1936. This section applies before the application of subsections 73R(3) and (4) so that any viable business transfer exceptions to the group membership period rules for exiting entities are applied after attributing the relevant amounts to the leaving company.

ITAA 1936, section 73BAD

These special rules effectively override the operation of the consolidation entry and exit history rules, which might otherwise allow both the joining (or leaving) company and the head company to count the company's history prior to the joining (or after the exit).

For a company that has left a consolidated group, these rules are intended to put that company in the same position it would have been in if it had never been in the consolidated group.

If a company leaves a consolidated group during an income year, it will be required to calculate its income tax payable, taxable income or losses for the period it is no longer part of the consolidated group (non-membership period). Expenditure incurred by the company in its non-membership period will generally be deductible by the company if the eligibility requirements are met.

For more information on how the consolidation provisions interact with the R & D tax concession, refer to paragraph 2.1.6 Consolidation in Part C-2 of this guide.

C7-5 Calculation overview

An eligible company seeking to claim the 175% International Premium must work out the eligible company's share of the foreign owned part of the adjusted increase in expenditure on R & D by the group using the following formula:

ITAA 1936 subsection 73QB(4)

In applying this formula:

the increase in expenditure on foreign owned R & D by the eligible company is worked out under subsection 73RB(1) of the ITAA 1936,
the total increase in expenditure on foreign owned R & D by the eligible companies in the group means the amount worked out under subsection 73RB(2) of the ITAA 1936,
the net increase in expenditure on foreign owned R & D by the group (the net increase is the result of taking into account any decreases in expenditure on foreign owned R & D by the eligible company or its group members), means the amount worked out under section 73RD of the ITAA 1936,
the net increase in expenditure on Australian owned R & D by the group (the net increase is the result of taking into account any decreases in expenditure on Australian owned R & D by the eligible company or its group members - if there is no expenditure on Australian owned R & D by the eligible company or its group members, this will be nil), is worked out under section 73RC of the ITAA 1936, and
the adjusted increase in expenditure on R & D by the group means the amount worked out under section 73RE of the ITAA 1936 (this calculation includes the adjustment balance worked out under section 73V of the ITAA 1936; there may be an adjustment balance where expenditure has decreased more than 20% from one year to the next).

Hence the formula for working out the eligible company's share of the foreign owned part of the adjusted increase in expenditure on R & D by the group, can be represented in terms of the relevant provisions as:

Once the company has worked out the increases and decreases in expenditure on both Australian-owned R & D and foreign-owned R & D for each eligible company in the group, the calculation effectively pools the results such that increases to one type of expenditure will be reduced by any decrease to the other type of expenditure.

The eligible company will be entitled to claim the 175% International Premium where the eligible company's share of the foreign owned part of the adjusted increase in expenditure on R & D by the group is greater than zero.

The amount allowable as a deduction to the eligible company for the Y ₀ year of income will be 75% of the eligible company's share of the foreign owned part of the adjusted increase in expenditure on R & D by the group .

ITAA 1936 subsection 73QB(3)

The grouping rules for the International Premium are outlined at C7-4 .

C7-6 Expenditure on foreign owned R & D

In order to work out the increase in expenditure on foreign owned R & D by the eligible company under subsection 73RB(1) of the ITAA 1936 and the total increase in expenditure on foreign owned R & D by the eligible companies in the group under subsection 73RB(2) of the ITAA 1936, you must first work out:

for the Y ₀ year of income - the amount of the expenditure on foreign owned R & D by the eligible company (see subsections 73B(14C) and (14D) of the ITAA 1936) that was incurred by the company in its group membership period, for the year of income, and
for each of the Y _-1 , Y _-2 and Y _-3 years of income - the amount of expenditure incurred by the company in its group membership period for the year of income, that would have been expenditure on foreign owned R & D if the requirement for activities to be carried on in accordance with an R & D plan (the requirement in subsection 73B(2BA) of the ITAA 1936) had not been enacted.

That is, for the Y _-1 , Y _-2 and Y _-3 years of income, you must include expenditure incurred by the eligible company in relation to activities that would have been Australian-centred research and development activities (see section C3.2.2 of this guide) apart from the R & D plan requirement, even though no deduction is allowable under subsection 73B(14C) of the ITAA 1936 in respect of this expenditure. Such amounts are known as the company's notional expenditure on foreign owned R & D. (See below, paragraph C7-8 , which sets out the steps you must follow to calculate the 175% International Premium).

For an explanation of how to work out an eligible company's expenditure on foreign owned R & D, please see chapter C3 of this guide.

Example 7.10

In the Y ₀ to Y _-3 income years, Green Wood Pty Ltd (Green Wood) and El Naturale Pty Ltd (El Naturale) undertook various R & D activities on behalf of Rainforest Inc (Rainforest), their foreign parent, to invent a manufactured type of material able to replicate woodchips in weight, texture and combustibility. All activities (including those that were not carried out in accordance with a plan) were registered with Innovation Australia.

However, in its first year (the Y _-3 year), El Naturale did not have an R & D plan that complied with guidelines formulated by the Board under section 39KA of the Industry Research and Development Act 1986. Although this omission was rectified for the Y _-2 to Y ₀ years, as a consequence, El Naturale was entitled to claim a deduction for expenditure on foreign owned R & D for the Y ₀ to Y _-2 years only. Green Wood was entitled to claim a deduction under subsection 73B(14C) for each of the Y ₀ to Y _-3 income years.

The companies were entitled to deduct the following amounts under subsection 73B(14C) for expenditure incurred on foreign owned R & D:

In order to work out the increase in expenditure on foreign owned R & D for El Naturale and Green Wood, it is necessary to determine each company's expenditure on foreign owned R & D for the Y ₀ year and the notional expenditure on foreign owned R & D for the Y _-1 to Y _-3 years, which can be different from the amount the company was entitled to deduct for that year under subsection 73B(14C) of the ITAA 1936.

The expenditure on foreign owned R & D for the Y ₀ year and the notional expenditure on foreign owned R & D for the Y _-1 to Y _-3 years for the companies is:

For the purposes of the deduction available under section 73QB , El Naturale must work out the amount that would have been its expenditure on foreign owned R & D for the Y _-3 year apart from the R & D plan requirement (using subsections 73B(14C) and (14D) of the ITAA 1936). Although no deduction is available under subsection 73B(14C) of the ITAA 1936 for this expenditure, it must be included in the calculation for the 175% International Premium and 175% Australian Premium (refer section C6 of this Guide).

C7-7 Prepayments in the calculation of the 175% International Premium

The amount utilised in calculating any entitlement to the 175% International Premium is based on amounts allowable as a deduction under subsection 73B(14C) of the ITAA 1936.

The prepayment rules apply when working out the amount allowable as a deduction under subsection 73B(14C) of the ITAA 1936, in relation to a year of income. Most prepaid expenditure on R & D activities will be deductible in the year(s) of income to which the prepayment relates, and not solely in the year in which it is incurred. Prepayments for contract expenditure to a Registered Research Agency attract special treatment and are not subject to the general prepayment rules. For further information on the treatment of the prepayment of expenditure on R & D activities, refer to section 2.3.10 .

ITAA 1936 section 82KZMA to 82KZMF

C7-8 Calculating the 175% International Premium

The steps to calculating the components to be used in the calculation of the 175% International Premium amount are set out in sections 73RB , 73RC , 73RD and 73RE of the ITAA 1936.

The formula for working out the eligible company's share of the foreign owned part of the adjusted increase in expenditure on R & D by the group can be represented in terms of the relevant provisions in the following manner:

The steps for each component can be summarised as follows:

Subsection 73RB(1)	Subsection 73RB(2)	Section 73RD	Section 73RC	Section 73RE
Calculates each eligible company's increase in expenditure on foreign owned R & D	Calculates total increase in expenditure on foreign owned R & D of the group	Calculates net increase in expenditure on foreign owned R & D by the group	Calculates net increase in expenditure on Australian owned R & D by the group	Calculates the adjusted increase in expenditure on R & D by the group

C7.8.1 Increase in expenditure on foreign owned R & D

The first step in determining the increase in expenditure on foreign owned R & D by the eligible company, and eligible companies in its group, is to work out the expenditure on foreign owned R & D incurred by the eligible company, and its eligible company group members, in their group membership periods.

The increase in expenditure on foreign owned R & D is based on the excess of the current year expenditure on foreign owned R & D over the average expenditure on foreign owned R & D for the previous three years, for each company. When working out the amounts of expenditure to be included in the calculation in respect of the Y _-1 , Y _-2 and Y _-3 years of income, expenditure incurred on activities that were not carried out in accordance with an R & D plan must be included, even though such amounts are not deductible under subsection 73B(14C) of the ITAA 1936.

However, the amount of expenditure in relation to foreign owned R & D included in this calculation for each of the Y ₀ to Y _-3 years of income may be reduced where the company has received a recoupment or grant that is attributable to that expenditure.

C7.8.1.1 Operation of the 'clawback' provisions and 175% International Premium

Generally, where a company or a company group member receives a grant or a recoupment from the government for an R & D project, the clawback provisions in section 73C of the ITAA 1936 apply to reduce the amount the company can deduct at the rate of 125%. Expenditure to which section 73C clawback applies can only be deducted at the rate of 100%.

Where the grant or recoupment received by the eligible company relating to expenditure incurred by the company on R & D is attributable to expenditure on foreign owned R & D incurred in the company's group membership period, then the amounts the company can include in its calculation for the 175% International Premium are reduced.

To be 'attributable' to the expenditure on foreign owned R & D incurred by the company, the purpose of the grant or recoupment being received must generally be viewed as being paid in relation to, or regarded as an effect of, incurring the expenditure. A causal or contributory connection between the grant or recoupment and the expenditure will generally be required, and it will be sufficient if the cause was only one of a number of causes. That is, the grant or recoupment amount need not be paid as a sole, dominant or direct cause or effect of having incurred the expenditure. In addition, the term 'attributable' implies that apportionment of the grant or recoupment amount between the foreign owned R & D expenditure incurred by the company and other types of expenditure is possible.

The expenditure on foreign owned R & D to be included in the calculation of the 175% International Premium is reduced by the 'initial clawback amount' relating to expenditure that is attributable to expenditure on foreign owned R & D incurred in the company's group membership period, in each of the years Y ₀ to Y _-3 . The 'initial clawback amount' is equal to two times the amount of the grant or recoupment attributable to the expenditure on foreign owned R & D. The clawback-adjusted expenditure amounts, known as reduced expenditure on foreign owned R & D in relation to the Y ₀ year and as reduced notional expenditure on foreign owned R & D for the Y _-1 , Y _-2 and Y _-3 years, are then used to determine the increase in expenditure on foreign owned R & D by the eligible company, and its eligible company group members.

C7.8.1.2 Transitional rule - deemed three year claim history

For the year of income commencing after 30 June 2007 and before 1 July 2008, there is a transitional rule under which an eligible company may be taken to have been able to deduct an amount under subsection 73B(14C) of the ITAA 1936 for each of the relevant Y _-1, Y _-2 and Y _-3 years of income for the purposes of paragraph 73QB(1)(b) of the ITAA 1936. (see 7.3.2 Transitional rule - deemed three year claim history).

This transitional rule also provides an eligible company with a reduced notional expenditure on foreign owned R & D for the Y _-1 , Y _-2 and Y _-3 years of income, calculated as a percentage of the amount of expenditure on foreign owned R & D incurred by the eligible company in its group membership period in year Y ₀ (this is known as the 'paragraph (1)(a) amount').

Under the transitional rule, the reduced notional expenditure on foreign owned R & D for the Y _-1 , Y _-2 and Y _-3 years of income is:

Year	Deemed history
Y _-1	90% of the paragraph(1)(a) amount
Y _-2	80% of the paragraph(1)(a) amount
Y _-3	70% of the paragraph(1)(a) amount

Note This only applies where the Y ₀ year of income is the year of income starting after 30 June 2007 and before 1 July 2008, i.e., the 2007-08 income year, which is generally the 12-month period from 1 July 2007 to 30 June 2008. For later years of income, the deemed history is not available and an eligible company must meet the conditions of eligibility described above at 7.3.1 .

Example 7.11

Company Great Hair Pty Ltd (Great Hair) is an Australian proprietary company that manufactures hair care products. Since its incorporation on 1 January 2007, it has been wholly owned by beauty company, Company Beta (Beta) a body corporate incorporated in and resident of France.

Beta wants to create and market a new product designed to increase facial hair growth on men who have difficulty growing beards. Beta enters into a written agreement with Great Hair in relation to performing the R & D activities (Project Full Beard), to which no other person is a party. The agreement specifies that Beta will directly own the intellectual property and commercialisation rights of the R & D project under contract.

Great Hair commences Project Full Beard on 1 July 2007, and incurs $100,000 of expenditure on foreign owned R & D prior to 30 June 2008. Great Hair is eligible for a deduction, under subsection 73B(14C) of the ITAA 1936, of $100,000 in relation to expenditure incurred in its group membership period in the Y ₀ year of income.

Great Hair could immediately qualify for the 175% International Premium if the Y _-1 , Y _-2 and Y _-3 years of income were all nil expenditure years. However, as Great Hair came into existence on 1 January 2007, during the Y _-1 year of income, the Y _-1 year will not satisfy the conditions for a nil expenditure year contained in subsection 73QB(2) of the ITAA 1936. Nonetheless, Great Hair may have immediate access to the International Premium under the transitional rules because:

the Y ₀ year of income is the year of income starting after 30 June 2007 and before 1 July 2008,
the Y _-1 to Y _-3 income years are not all nil expenditure years,
Great Hair has incurred an amount of expenditure on foreign owned R & D in its group membership period in the Y ₀ year of income, and
Great Hair can deduct an amount under subsection 73B(14C) of the ITAA 1936 in relation to the Y ₀ year of income.

Great Hair's 'paragraph (1)(a) amount' is $100,000, which in this example is the same as its reduced expenditure on foreign owned R & D . Therefore, the company's reduced expenditure on foreign owned R & D for the Y ₀ year and its deemed reduced notional expenditure on foreign owned R & D (its reduced notional expenditure on foreign owned R & D ) for the Y _-1 , Y _-2 and Y _-3 years of income is:

Company	Y0 ($000)	Y _-1 ($000)	Y _-2 ($000)	Y _-3 ($000)
Great Hair	100	90	80	70

Example 7.12

Following on from example 7.6 above, assume Great Hair received a Commercial Ready grant of $20,000 in relation to the expenditure incurred by the eligible company in its group membership period for the Y ₀ year of income. Under the transitional rules, the company's deemed reduced notional expenditure on foreign owned R & D (its reduced notional expenditure on foreign owned R & D ) is worked out on the basis of the company's paragraph (1)(a) amount, i.e., its Y ₀ year expenditure on foreign owned R & D before clawback is applied. Therefore the deemed reduced notional expenditure on foreign owned R & D for Great Hair would still be:

Company	Y _-1 ($000)	Y _-2 ($000)	Y _-3 ($000)
Great Hair	90	80	70

However, as the company has received a grant attributable to the expenditure on foreign owned R & D incurred by it during the Y ₀ year, the company's reduced expenditure on foreign owned R & D for the Y ₀ year is not the same as its paragraph (1)(a) amount. The company's reduced expenditure on foreign owned R & D for the Y ₀ year and its deemed reduced notional expenditure on foreign owned R & D (its reduced notional expenditure on foreign owned R & D ) for the Y _-1 , Y _-2 and Y _-3 years is:

Company	Y0 ($000)	Y _-1 ($000)	Y _-2 ($000)	Y _-3 ($000)
Great Hair	60	90	80	70

(steps 1 to 6, subsection 73RB(1) of the ITAA 1936)

Therefore Great Hair is not eligible for a deduction under section 73QB as there is no increase in Y ₀ over the three year average.

For more information on clawback and reduced expenditure on foreign owned R & D , see section 7.8.1.1 of this guide.

C7.8.1.3 Increase in expenditure on foreign owned R & D by the eligible company - 73RB(1)

The increase in expenditure on foreign owned R & D by the eligible company is calculated by following the steps of the method statement set out in subsection 73RB(1) of the ITAA 1936. Where the eligible company does not have an increase in expenditure on foreign owned R & D in the Y ₀ year of income, it will not be entitled to the extra 75% deduction available under section 73QB of the ITAA 1936.

For the Y ₀ year of income ( reduced expenditure on foreign owned R & D) :

Step 1	The first step is to work out the eligible company's expenditure on foreign owned R & D (worked out under subsections 73B(14C) and (14D) of the ITAA 1936) incurred during its group membership period for the Y ₀ year of income.
Step 2	In the event that the company has received a grant or recoupment relating to expenditure incurred by the company in the Y ₀ year of income, work out how much of the initial clawback amount (twice the amount received) is attributable to the expenditure on foreign owned R & D incurred by the company in its group membership period for the Y ₀ year of income.
Step 3	The result of Step 2 is subtracted from the amount of expenditure on foreign owned R & D worked out under Step 1.
	The result is the reduced expenditure on foreign owned R & D.
	Note: The result of Step 3 cannot be less than zero.
	*For each of the Y _-1 , Y _-2 and Y _-3 years of income ( reduced notional expenditure on foreign owned R & D* ):**
Step 4	Work out the amount of expenditure incurred by the eligible company in its group membership period for each of the Y _-1 , Y _-2 and Y _-3 years, that would have been expenditure on foreign owned R & D apart from the requirement to have an R & D plan (see subsection 73B(2BA) of the ITAA 1936).
	The result is the eligible company's notional expenditure on foreign owned R & D .
	Note: If all relevant activities were carried out in accordance with an R & D plan and the company's group membership period covers the whole year of income, the company's notional expenditure on foreign owned R & D is the same as its expenditure on foreign owned R & D for the year of income.
Step 5	In the event that the company has received a grant or recoupment relating to expenditure incurred by the company in any of the Y _-1 , Y _-2 or Y _-3 years, work out how much of the initial clawback amount (twice the amount received) is attributable to the notional expenditure on foreign owned R & D incurred by the company in its group membership period for the year of income.
Step 6	For each of the Y _-1 , Y _-2 or Y _-3 years of income, subtract the result of Step 5 from the notional expenditure on foreign owned R & D worked out for each year at Step 4.
	The result is the reduced notional expenditure on foreign owned R & D.
	Note: The result of Step 6 cannot be less than zero.

Example 7.13

To adopt the factual scenario used above in Example 7.7 and Example 7.8 , the following table shows the reduced expenditure on foreign owned R & D and the reduced notional expenditure on foreign owned R & D of Company A and its eligible company group members:

Company B must include its expenditure incurred in the Y _-1 to Y _-3 years on activities that would have been Australian-centred R & D apart from the R & D plan requirement in its notional expenditure on foreign owned R & D, even though it was not entitled to a deduction under subsection 73B(14C) in respect of this expenditure in relation to those years. Neither Company A nor Company B received any grants or recoupments in relation to expenditure incurred attributable to its expenditure, or notional expenditure, on foreign owned R & D. Therefore, reduced expenditure on foreign owned R & D is the same as expenditure on foreign owned R & D and reduced notional expenditure on foreign owned R & D is the same as notional expenditure on foreign owned R & D.

Step 7	Add up the reduced notional expenditure on foreign owned R & D by the eligible company in its group membership period for the Y _-1 , Y _-2 and Y _-3 years of income.
Step 8	Divide the result of Step 7 by 3.

Example 7.13 cont.

Step 9	Subtract the result of Step 8 from the reduced expenditure on foreign owned R & D for the Y ₀ year of income worked out at Step 3, above.
	The result is the change in expenditure on foreign owned R & D by the eligible company.
	Note : This amount may be a negative number, a positive number or zero.
Step 10	The increase in expenditure on foreign owned R & D by the eligible company is either: the change in expenditure on foreign owned R & D by the eligible company worked out at Step 9, or zero, if the result of Step 9 is a negative number.
	Note: if the result of Step 10 is zero, the eligible company is not entitled to the 175% International Premium.

Example 7.13 cont.

Company A and Company B both have an increase in their expenditure for the Y ₀ year over their average expenditure for the Y _-1 to Y _-3 years. Therefore, their change in expenditure on foreign owned R & D by the eligible company (worked out at Step 9) is the same as their increase in expenditure on foreign owned R & D by the eligible company (worked out at Step 10). If either company had experienced a decrease in the current year in relation to their average expenditure for the Y _-1 to Y _-3 years resulting in a negative number at Step 9, then the result of Step 10 would be zero.

C7.8.1.4 Total increase in expenditure on foreign owned R & D by the eligible companies in the group - 73RB(2)

The method statement in subsection 73RB(2) sets out the steps for calculating the total increase in expenditure on foreign owned R & D by the eligible companies in the group . This is the sum of the increase in expenditure on foreign owned R & D by each of the eligible companies in the group.

Steps 1 to 10 above, are performed for each eligible company in the group. The results are then added together to give the total increase in expenditure on foreign owned R & D by the eligible companies in the group.

If an eligible company seeking to claim the 175% International Premium is a solitary company, the total increase in expenditure on foreign owned R & D by the eligible companies in the group will be the same as the increase in expenditure on foreign owned R & D by the eligible company.

ITAA 1936 subsection 73RB(2)

Example 7.13 cont.

The table above shows the increase in expenditure on foreign owned R & D by the eligible company for Company A and Company B. The total increase in expenditure on foreign owned R & D by the eligible company for the claimant, Company A, is the total of each of the amounts worked out at Step 10 in respect of each eligible company group member.

The total increase in expenditure on foreign owned R & D by the eligible company for Company A is $600,000.

C7.8.2 Net increase in expenditure on foreign owned R & D by the group - 73RD

The method statement in section 73RD sets out the steps for calculating the net increase in expenditure on foreign owned R & D by the group.

This is worked out by adding together the change in expenditure on foreign owned R & D by the eligible company of each eligible company in the group. This is the sum of the amount calculated under Steps 1 to 9 of the method statement in subsection 73RB(1) of the ITAA 1936 for each company. Remember that the change in expenditure on foreign owned R & D by the eligible company worked out using Steps 1 to 9 of the method statement in subsection 73RB(1) of the ITAA 1936 can be a negative number.

If an eligible company seeking to claim the 175% International Premium is a solitary company, the net increase in expenditure on foreign owned R & D by the group will be the same as the total increase in expenditure on foreign owned R & D by the eligible companies in the group and the increase in expenditure on foreign owned R & D by the eligible company.

Note: If the sum of the change in expenditure on foreign owned R & D by the eligible company for each company in the group is a negative number, then the net increase in expenditure on foreign owned R & D by the group will be zero.

If the amount worked out under the method statement in section 73RD of the ITAA 1936 is zero, the eligible company is not entitled to the 175% International Premium.

ITAA 1936 section 73RD

Example 7.13 cont.

Company A and Company B both have an increase in their expenditure for the Y ₀ year over their average expenditure for the Y _-1 to Y _-3 years. Therefore, their change in expenditure on foreign owned R & D by the eligible company (worked out at Step 9) is the same as their increase in expenditure on foreign owned R & D by the eligible company (worked out at Step 10). Consequently, the net increase in expenditure on foreign owned R & D by the group is the same as the total increase in expenditure on foreign owned R & D by the eligible companies in the group , i.e., $600,000.

C7.8.3 Net increase in expenditure on Australian owned R & D - 73RC

The method statement contained in section 73RC sets out how to calculate the net increase in expenditure on Australian owned R & D by the group .

This is calculated as the sum of steps 1 to 6 of the method statement in subsection 73RA(1) of the ITAA 1936 which works out the change in expenditure on Australian owned R & D by the eligible company for each company in the group. The result of Step 6 of the method statement in subsection 73RA(1) of the ITAA 1936 is equivalent to the change in expenditure on foreign owned R & D worked out using steps 1 to 9 of the method statement in subsection 73RB(1) of the ITAA 1936.

If no amount of expenditure on Australian owned R & D was incurred by the eligible company, or group member, in its group membership period, for the Y ₀ , Y _-1 , Y _-2 or Y _-3 years of income, then the net increase in expenditure on Australian owned R & D by the group will be nil.

If the sum of the change in expenditure on Australian owned R & D by the eligible company for each company in the group is a negative number, then the net increase in expenditure on Australian owned R & D by the group will be zero.

Note: A detailed explanation of how to calculate the net increase in expenditure on Australian owned R & D by the group is given in part C6.8.2 Extra deduction for increase in expenditure on Australian owned R & D (175% Australian Premium).

ITAA 1936 section 73RC

Example 7.13 cont.

Adopting the factual scenario used above in Example 7.9 and Example 7.10 , Company A has two group members worked out under section 73R of the ITAA 1936 who have incurred incremental expenditure on Australian owned R & D in their group membership periods at a time during the Y ₀ to Y _-3 income years, Company C and Company F. Company F did not leave the group with a viable business transfer and so its expenditure must be included in Company A's calculation of the 175% International Premium.

Therefore the reduced expenditure on Australian owned R & D for eligible group members of Company A is:

Company C has decreased its expenditure incurred in the Y ₀ year compared to its average expenditure for the Y _-1 to Y _-3 years. As Company F left the group at the end of the Y _-1 year, it also has not increased its expenditure over its average for the Y _-1 to Y _-3 years.

The sum of steps 1 to 6 of the method statement in subsection 73RA(1) of the ITAA 1936 for each company in the group is a negative number (-$240,000). Therefore, the net increase in expenditure on Australian owned R & D by the group for Company A is zero.

However, the amounts of incremental expenditure on Australian owned R & D incurred by Company C and Company F are also taken into account when working out the a djusted increase in expenditure on R & D by the group and so cannot be disregarded. The a djusted increase in expenditure on R & D by the group is explained below at 7.8.4 .

C7.8.4 Adjusted increase in expenditure on R & D by the group - 73RE

The adjusted increase in expenditure on R & D by the group is calculated under section 73RE of the ITAA 1936. This amount is calculated as the sum of the change in expenditure on Australian owned R & D and the change in expenditure on foreign owned R & D for all group members (will be positive or zero if negative). An adjustment balance is then subtracted from this result (will be positive or zero if negative).

The adjustment balance is calculated under section 73V of the ITAA 1936 and will be relevant where there is any annual downswing in the combined total of incremental expenditure (incurred in relation to Australian owned R & D) and expenditure on foreign owned R & D during the three year history period that exceeds 20%. In other words, that amount may be moderated where expenditure in any of the two previous years i.e. Y _-1 or Y _-2 , has fallen below 80% of the expenditure in years Y _-2 or Y _-3 respectively. This adjustment exercise is determined by examining the incremental expenditure and expenditure on foreign owned R & D of the company's group.

ITAA 1936 section 73RE

Step 1	For each group member that is an eligible company work out, under steps 1 to 6 inclusive of the method statement in subsection 73RA(1) , the change in expenditure on Australian owned R & D by the eligible company .
Step 2	For each group member that is an eligible company work out, under steps 1 to 9 inclusive of the method statement in subsection 73RB(1) the change in expenditure on foreign owned R & D by the eligible company .
Step 3	Add up all the results of steps 1 and 2. If the result is a negative number, the adjusted increase on R & D by the group will be zero.
Step 4	Subtract the adjustment balance worked out under section 73V from step 3. If the result is a negative number, the adjusted increase in expenditure on R & D by the group will be zero.

If the amount worked out under the method statement in section 73RE of the ITAA 1936 is zero, the eligible company is not entitled to the 175% International Premium.

C7.8.4.1 Adjustment amounts

To work out the adjustment amount, a company must first determine its R & D spend for the Y _-1 , Y _-2 and Y _-3 years of income.

R & D spend of an eligible company and its group members for a year of income means the sum of:

the amounts worked out for the year of income under steps 1, 2 and 3 of the method statement in subsection 73RA(1) as the reduced expenditure on Australian owned R & D by each eligible company in the group in its group membership period for the year of income; and
the amounts worked out for the year of income under steps 4, 5 and 6 of the method statement in subsection 73RB(1) as the reduced notional expenditure on foreign owned R & D by each eligible company in the group in its group membership period for the year of income.

ITAA 1936 subsection 73P(2)

There may be an adjustment amount (AA ₀ ) where a company's R & D spend in the Y _-1 year of income is less than 80% of its R & D spend for the Y _-2 year of income. Similarly, there may be an adjustment amount (AA _-1 ), where a company's R & D spend in the Y _-2 year of income is less than 80% of its R & D spend for the Y _-3 year of income.

The adjustment amount of an eligible company and its group members for the Y ₀ year of income (AA ₀ ) is:

[R & D spend for Y _-2 year x 80%] - R & D spend for Y _-1 year

The adjustment amount of an eligible company and its group members for the Y _-1 year of income (AA _-1 ) is:

[R & D spend for Y _-3 year x 80%] - R & D spend for Y _-2 year

ITAA 1936 subsections 73T(1) and (2)

Exceptions

However, there are exceptions to these rules.

AA ₀ will be zero if:

the eligible company or any of its group members could deduct an amount under section 73QA or 73QB for the Y _-1 year of income, and
there has been no change in control of the eligible company or any of its group members for the Y ₀ year of income resulting in a company entering or leaving the group with a viable business and a change to the R & D spend of the eligible company for the Y _-1 , Y _-2 or Y _-3 year of income.

ITAA 1936 subsection 73T(3)

Also, AA _-1 will be zero if:

the eligible company or any of its group members could deduct an amount under section 73QA or 73QB for the Y _-2 year of income, and
there has been no change in control of the eligible company or any of its group members for the Y ₀ or Y _-1 year of income resulting in a company entering or leaving the group with a viable business and a change to the R & D spend of the eligible company for the Y _-1 , Y _-2 or Y _-3 year of income.

ITAA 1936 subsection 73T(4)

The adjustment amount will also be deemed to be nil where the result of the calculation is negative.

ITAA 1936 section 73S

C7.8.4.2 Adjustment balance

If the R & D spend of the eligible company for the Y _-1 year of income is less than or equal to RA _-1 , then

adjustment balance = AA ₀ + AA _-1

Otherwise,

adjustment balance = (RA _-1 + AA ₀ + AA _-1) - the R & D spend for Y _-1

ITAA 1936 section 73V

RA-1 (short for Running Average for the Y _-1 year of income) means half the sum of the R & D spend of the eligible company and its group members for the Y _-2 and Y _-3 years of income.

ITAA 1936 section 73P(2)

The adjustment balance is zero if the eligible company or any of its group members met the conditions in either paragraphs 73QA(1)(a) and (b) or in paragraphs 73QB(1)(a) and (b) for the Y _-1 year of income, and there has been no change in control of the eligible company or any of its group members for the Y ₀ year of income resulting in a company entering or leaving the group with a viable business and a change to the R & D spend of the eligible company for the Y _-1 , Y _-2 or Y _-3 year of income.

ITAA 1936 subsection 73V(3)

The adjustment balance will also be deemed to be nil where the result of the calculation is negative.

ITAA 1936 section 73S

C7.8.4.3 Effect of the transitional rules

Transitional rule - deductions under former section 73Y of the Income Tax Assessment Act 1936

Transitional provisions operate to modify the application of paragraphs 73T(3)(a) and 73T(4)(a) and paragraph 73V(3)(a) for Y ₀ that is the first year of income starting after 30 June 2007.

In effect, an eligible company may come within the exceptions to the adjustment amounts and adjustment balance where that company was eligible, or was deemed to be eligible, to claim an incremental tax concession under section 73QA of the ITAA 1936 in the Y _-1 or Y _-2 year of income, as relevant.

Example 7.14

This example is a continuation of Example 7.13 . To calculate the adjusted increase in expenditure on R & D by the group under section 73RE there is a method statement to follow.

Step 1	For each eligible company that was a group member, work out under steps 1 to 6 (inclusive) of the method statement in subsection 73RA(1) , the change in expenditure on Australian owned R & D by the eligible company.
Step 2	This step requires each eligible company that is a group member to work out the change in expenditure on foreign owned R & D by the eligible company. This is calculated by following steps 1-9 of the method statement in subsection 73RB(1) .

The following amounts have been worked out above for Company A and its eligible company group members:

the total of the amounts worked out for Company C and Company F under Steps 1 to 6 of the method statement in subsection 73RA(1) is -$240,000
the total of the amounts worked out for Company A and Company B under Steps 1 to 9 of the method statement in subsection 73RB(1) is $600,000

These amounts are the results of Step 1 and Step 2 of the method statement in section 73RE .

Step 3

Add together all the results of Step 1 and Step 2.

The total of these two amounts is $360,000, which is the result of Step 3 of the method statement in section 73RE .

Step 4	An adjustment balance calculated under section 73V of the ITAA 1936 is required to be subtracted from the result obtained at Step 3. If the result is a negative number, the adjusted increase in expenditure on R & D by the group will be deemed to be zero.

	To work out the adjustment balance, the first step is to determine the R & D spend of Company A for the Y _-1 , Y _-2 and Y _-3 years of income. Once the R & D spend has been calculated, the adjustment amounts AA ₀ and AA _-1 can be worked out. (See section 7.8.4.1 Adjustment amounts and 7.8.4.2 Adjustment balance)

	The R & D spend of the eligible company for a year of income is the sum of the reduced expenditure on Australian owned R & D for each group member (worked out under steps 1, 2 and 3 of the method statement in 73RA(1) ) and the reduced notional expenditure on foreign owned R & D for each group member (worked out under steps 4, 5 and 6 of the method statement in 73RB(1)) . (See also section 7.8.4.1 Adjustment amounts)

	Therefore the R & D spend for Company A is worked out as follows:

	AA ₀ is
		[R & D spend for the Y _-2 year x 80%] - R & D spend for Y _-1 year
		$800,000 - $770,000
		= $30,000
	AA _-1 is
		[R & D spend for the Y _-3 year x 80%] - R & D spend for Y _-2 year
		$840,000 - $1,000,000
		= zero
	The running average for the Y _-1 year of income (RA _-1 ) for Company A is:
		Half the R & D spend for the Y _-2 and Y _-3 years
		i.e. (R & D spend for Y _-2 + R & D spend for Y _-3 ) / 2
		= ($1,000,000 + $1,050,000) / 2
		= $1,025,000
	From this it can be seen that that the R & D spend for Y _-1 is less than RA _-1 so the adjustment balance is:
		AA ₀ + AA _-1
		(0 + $30,000)
		= $30,000
	For the purposes of this example, no exceptions apply to reduce the adjustment amounts or the adjustment balance to zero (none of the eligible companies were entitled to deduct an amount under former section 73Y , or section 73QA) .
	Step 4 of the method statement in section 73RE requires the adjustment balance to be subtracted from the result of Step 3.
		$360,000 - $30,000
		= $330,000

Company A's adjusted increase in expenditure on R & D by the group is $330,000. Company A will input this amount into its calculation for working out the eligible company's share of the foreign owned part of the adjusted increase in expenditure on R & D by the group .

Company A will be entitled to a deduction for the Y ₀ year of income of 75% of the eligible company's share of the foreign owned part of the adjusted increase in expenditure on R & D by the group.

That is, 75% of:

Through the examples above, the following have been worked out:

the increase in expenditure on foreign owned R & D by the eligible company for Company A is $500,000
the total increase in expenditure foreign owned R & D by the eligible companies in the group for Company A is $600,000
the net increase in expenditure on foreign owned R & D by the group for Company A is $600,000
the net increase in expenditure on Australian owned R & D by the group for Company A is zero
the adjusted increase in expenditure on R & D by the group for Company A is $330,000.

Company A is entitled to a deduction under section 73QB of the ITAA 1936 of 75% of $275,000:

$275,000 x 75%

= $206,250.

C7-9 Other anti-avoidance measures

There is an anti-avoidance measure which applies where a company requests an amendment to an assessment for a year of income to reduce the amounts of its research and development expenditure for that year, and the Commissioner is of the opinion that the purpose of the amendment request is to increase the company's entitlement to the 175% Australian Premium or the 175% International Premium.

Where the Commissioner is of the opinion that the purpose of a debit amendment is to increase a company's entitlement to the extra 50% deduction and/or the extra 75% deduction, the Commissioner may disregard that debit amendment for the purposes of working out a company's incremental expenditure and/or its notional expenditure on foreign owned R & D in its group membership period for the relevant year or years of income. The amended R & D figures will be ignored in working out the company's entitlement to the 175% Australian Premium and /or 175% International Premium.

ITAA 1936 section 73Z

C7-10 Interaction between the 175% International Premium and the R & D tax offset

The refundable R & D tax offset is not available in respect of amounts deductible under subsection 73B(14C) or section 73QB of the ITAA 1936. This means that an eligible company cannot choose an offset instead of a deduction in respect of expenditure on foreign owned R & D or in respect of the extra deduction for increase in expenditure on foreign owned R & D. For further information of the R & D tax offset, see section C4 .

C7-11 Example of the calculation of the 175% International Premium

Company S wishes to claim a deduction under section 73QB of the ITAA 1936. Company S, Company T and Company U are eligible companies who are group members worked out under section 73R of the ITAA 1936. Company S, Company T and Company U each incurred expenditure on foreign owned R & D in their group membership periods for the Y ₀ toY _-3 income years, for which they were entitled to claim a deduction under subsection 73B(14C) of the ITAA 1936 as follows:

TABLE 1: expenditure on foreign owned R & D incurred in the eligible company's group membership period

Company T also incurred expenditure in the Y _-2 and Y _-3 income years which would have been expenditure on foreign owned R & D apart from the requirement for activities to be conducted in accordance with a complying R & D plan (refer subsection 73B(2BA) of the ITAA 1936). Company T received a grant of $50,000 in respect of the expenditure incurred in the Y _-2 year.

TABLE 2: expenditure incurred in the eligible company's group membership period that would have been expenditure on foreign owned R & D apart from the R & D plan requirement

Company S and Company T also incurred incremental expenditure on Australian owned R & D in their group membership periods for each of the Y ₀ , Y _-1 , Y _-2 and Y _-3 income years, for which they were each entitled to claim a deduction under subsection 73B(14) of the ITAA 1936 in each of those years. Company S received a P3 grant of $300,000 in the Y ₀ year in relation to expenditure incurred in that year, 80% of which was attributable to incremental expenditure incurred in its group membership period for the Y ₀ year and 20% of which was attributable to expenditure on foreign owned R & D incurred in its group membership period for that year.

TABLE 3: incremental expenditure on Australian owned R & D incurred in the eligible company's group membership period

Increase in expenditure on foreign owned R & D by the eligible company - 73RB(1) (see 7.8.1.2 )

Step 1	Calculate the expenditure on foreign owned R & D incurred by each eligible company in its group membership period for the Y ₀ year of income.
Step 2	Work out how much of the initial clawback amount, if any, is attributable to the expenditure on foreign owned R & D incurred in the company's group membership period for the Y ₀ year of income.
Step 3	Subtract this amount from the company's expenditure on foreign owned R & D incurred in its group membership period in the Y ₀ year to give the reduced expenditure on foreign owned R & D . The result cannot be less than zero.

Step 4	For each for the Y _-1 , Y _-2 and Y _-3 years of income work out the eligible company's notional expenditure on foreign owned R & D . This is the amount of expenditure incurred in the eligible company's group membership period that would have been expenditure on foreign owned R & D apart from the requirement for activities to be conducted in accordance with a complying R & D plan (refer subsection 73B(2BA) of the ITAA 1936).

Step 5	For each for the Y _-1 , Y _-2 and Y _-3 years of income work, out what would have been the company's initial clawback amount, if any, attributable to the notional expenditure on foreign owned R & D incurred in the company's group membership period for the year.
Step 6	Subtract this amount from the company's notional expenditure on foreign owned R & D incurred in its group membership period in the year to give the reduced notional expenditure on foreign owned R & D for each of the Y _-1 , Y _-2 and Y _-3 years of income. The result cannot be less than zero.

Step 7	Add up the reduced notional expenditure on foreign owned R & D incurred by each eligible company in its group membership period for the Y _-1 , Y _-2 and Y _-3 years of income.
Step 8	Divide the result of Step 7 by 3.

Step 9	For each company, subtract the result of step 8 from the reduced expenditure on foreign owned R & D incurred by the company in its group membership period for the Y ₀ year. The result is the change in expenditure on foreign owned R & D by the eligible company. This can be a positive number, a negative number, or zero.

Step 10	The increase in expenditure on foreign owned R & D is the amount worked out at Step 9 or, if the result of Step 9 is a negative amount, zero.

Total increase in expenditure on foreign owned R & D by eligible companies in the group - 73RB(2) (see 7.8.1.3 )

Step 1	For each group member that is an eligible company, work out the increase in expenditure on foreign owned R & D by the eligible company using Steps 1 to 10 of the method statement in subsection 73RB(1) (calculated above).
Step 2	Total the results of Step 1

Net increase in expenditure on Australian owned R & D by the group - 73RC (see 7.8.3 )

Step 1	For each group member that is an eligible company, work out the change in expenditure on Australian owned R & D by the eligible company using steps 1 to 6 (inclusive) of the method statement in subsection 73RA(1) .
	Increase in expenditure on Australian owned R & D by the eligible company - 73RA(1)
	Step 1	Calculate the eligible incremental expenditure incurred by each eligible company in its group membership period for the Y ₀ , Y _-1 , Y _-2 and Y _-3 years of income.

	Step 2	Work out how much of the initial clawback amount, if any, is attributable to incremental expenditure incurred in the company's group membership period.
	Step 3	Subtract this amount from the company's incremental expenditure to give the reduced expenditure on Australian owned R & D.

	Step 4	Add up the reduced expenditure on Australian owned R & D by the eligible company for the Y _-1 , Y _-2 and Y _-3 years of income.
	Step 5	Step 5 Divide the result of Step 4 by 3.

	Step 6	For each company subtract the result of Step 5 from the expenditure incurred by the company in the Y ₀ year. This gives the change in expenditure on Australian owned R & D by the eligible company.

Step 2	Total the results of Step 1. The result cannot be less than zero.

Net increase in expenditure on foreign owned R & D by the group - 73RD (see 7.8.2 )

Step 1

For each group member that is an eligible company, work out the change in expenditure on foreign owned R & D by the eligible company using steps 1 to 9 (inclusive) of the method statement in subsection 73RB(1) .

Step 2

Total the results of Step 1. The result cannot be less than zero.

Adjusted increase in expenditure on R & D by the group - 73RE (see 7.8.4 )

Step 1	For each group member that is an eligible company, work out the change in expenditure on Australian owned R & D by the eligible company using steps 1 to 6 (inclusive) of the method statement in subsection 73RA(1) .
Step 2	For each group member that is an eligible company, work out the change in expenditure on foreign owned R & D by the eligible company using steps 1 to 9 (inclusive) of the method statement in subsection 73RB(1) .
Step 3	Add up all of the results of Step 1 and step 2

Step 4	Work out the adjustment balance and subtract this amount from the result of Step 3. This is the adjusted increase in expenditure on R & D by the group. This amount cannot be less than zero (if the result is a negative number it is taken to be zero instead).
	R & D spend

	AA ₀ is:
		[R & D spend for the Y _-2 year x 80%] - R & D spend for Y _-1 year
		$2,416,000 - $2,275,000
		= $141,000
	AA _-1 is
		[R & D spend for the Y _-3 year x 80%] - R & D spend for Y _-2 year
		$3,360,000 - $3,020,000
		= $340,000
	For the purposes of this example, no exceptions apply to reduce AA _-1 to zero (none of the eligible companies were entitled to deduct an amount under section 73QA or 73QB) .
	RA _-1 is:
		(R & D spend for Y _-2 + R & D spend for Y _-3 ) / 2
		= ($3,020,000 + $4,200,000) / 2
		= $3,610,000
	R & D spend for Y _-1 is less than RA _-1 . The adjustment balance is therefore:
	AA ₀ + AA _-1
		($141,000 + $340,000)
		= $481,000
	For the purposes of this example, no exceptions apply to reduce the adjustment balance to zero.
	The adjusted increase in expenditure on R & D by the group is
		$635,000- $481,000
		= $154,000

The eligible company's share of the foreign owned part of the adjusted increase in expenditure on R & D by the group for Company S is:

The extra deduction available to Company S is 75% of the eligible company's share of the Australian owned part of the adjusted increase in expenditure on R & D by the group

$52,088

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Guide to the R & D Tax Concession - Part C

C7 Extra deduction for increase in expenditure on foreign owned R & D (175% International Premium)

Disclaimer

ATO position

Copyright

C7-1 Background

C7-2 Timing

C7-3 Eligibility

C7.3.1 Prerequisites for deduction

Current year

Three immediately prior years

Terms used

Example 7.1

Nil expenditure year

Example 7.2

Example 7.3

Example 7.4

Example 7.5

C7.3.2 Transitional rule - deemed three year claim history

C7.3.3 Transitional accounting periods of greater or less than 12 months

Y 0 year of income

Three immediately prior years

Example 7.6

Transitional accounting periods of group members

C7-4 Grouping rules for the 175% International Premium

C7.4.1 Section 73R group members

Determining who is a Primary Group Member (PGM)

Example 7.7

7.4.2 Group membership periods

Determining group membership periods

Example 7.8

C7.4.3 Viable business exception

Example 7.9

C7.4.4 Consolidated groups

C7-5 Calculation overview

C7-6 Expenditure on foreign owned R & D

Example 7.10

C7-7 Prepayments in the calculation of the 175% International Premium

C7-8 Calculating the 175% International Premium

C7.8.1 Increase in expenditure on foreign owned R & D

C7.8.1.1 Operation of the 'clawback' provisions and 175% International Premium

C7.8.1.2 Transitional rule - deemed three year claim history

Example 7.11

Example 7.12

C7.8.1.3 Increase in expenditure on foreign owned R & D by the eligible company - 73RB(1)

Example 7.13

Example 7.13 cont.

Example 7.13 cont.

C7.8.1.4 Total increase in expenditure on foreign owned R & D by the eligible companies in the group - 73RB(2)

Example 7.13 cont.

C7.8.2 Net increase in expenditure on foreign owned R & D by the group - 73RD

Example 7.13 cont.

C7.8.3 Net increase in expenditure on Australian owned R & D - 73RC

Example 7.13 cont.

C7.8.4 Adjusted increase in expenditure on R & D by the group - 73RE

C7.8.4.1 Adjustment amounts

Exceptions

C7.8.4.2 Adjustment balance

C7.8.4.3 Effect of the transitional rules

Transitional rule - deductions under former section 73Y of the Income Tax Assessment Act 1936

Example 7.14

C7-9 Other anti-avoidance measures

C7-10 Interaction between the 175% International Premium and the R & D tax offset

C7-11 Example of the calculation of the 175% International Premium

Increase in expenditure on foreign owned R & D by the eligible company - 73RB(1) (see 7.8.1.2 )

Total increase in expenditure on foreign owned R & D by eligible companies in the group - 73RB(2) (see 7.8.1.3 )

Net increase in expenditure on Australian owned R & D by the group - 73RC (see 7.8.3 )

Net increase in expenditure on foreign owned R & D by the group - 73RD (see 7.8.2 )

Adjusted increase in expenditure on R & D by the group - 73RE (see 7.8.4 )

The eligible company's share of the foreign owned part of the adjusted increase in expenditure on R & D by the group for Company S is:

Y ₀ year of income