ATO Interpretative Decision
ATO ID 2006/135
Income Tax
Research and development: consolidated group - deductibility for head company - expenditure incurred by subsidiary as a corporate trusteeFOI status: may be released
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If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Does subsection 73B(3) of the Income Tax Assessment Act 1936 (ITAA 1936) prevent the head company of a consolidated group from claiming a deduction under section 73B of the ITAA 1936 for research and development expenditure incurred by a subsidiary member of the consolidated group in its capacity as a corporate trustee?
Decision
No. Subsection 73B(3) of the ITAA 1936 does not prevent the head company of a consolidated group from claiming a deduction under section 73B of the ITAA 1936 for research and development expenditure incurred by a subsidiary member of the consolidated group in its capacity as a corporate trustee.
Facts
In the relevant income year, a company is the head company of a consolidated group for the purposes of Part 3-90 of the Income Tax Assessment Act 1997 (ITAA 1997). The head company is not a corporate trustee or nominee company.
The subsidiary members of the consolidated group include a trust and the corporate trustee of the trust. The trust is not a public trading trust for the purposes of Division 6C of the ITAA 1936.
The corporate trustee is an eligible company as defined in subsection 73B(1) of the ITAA 1936.
In its capacity as trustee of the trust, the corporate trustee carries out eligible research and development activities as defined in subsection 73B(1) of the ITAA 1936 and is registered with the Industry Research and Development Board under section 39J of the Industry Research and Development Act 1986 in relation to those activities in the relevant income year.
In its capacity as trustee of the trust, the corporate trustee also incurs research and development expenditure that otherwise meets the relevant requirements for related amounts to be allowable as deductions under section 73B of the ITAA 1936 (apart from subsection 73B(3) of the ITAA 1936) in the relevant income year.
Reasons for Decision
One requirement that must be satisfied for a deduction to be allowable under section 73B of the ITAA 1936, is that the claimant must be an 'eligible company', as defined under subsection 73B(1) of the ITAA 1936. Under this provision, an eligible company means a body corporate incorporated under a law of the Commonwealth or of a State or Territory.
Subsection 73B(3) of the ITAA 1936 indicates that the reference to the incurring of expenditure by an eligible company in section 73B of the ITAA 1936 does not include reference to expenditure incurred by the company in the capacity of a trustee or nominee. The exception to this rule is where the expenditure is incurred on or after 1 July 1988 in the capacity of a trustee of a public trading trust for the purposes of Division 6C of the ITAA 1936 in relation to the year of income in which the expenditure is incurred.
To determine whether subsection 73B(3) of the ITAA 1936 prevents a deduction for the expenditure incurred, it is necessary to consider how the single entity rule impacts on the operation of subsection 73B(3) of the ITAA 1936.
Section 701-1 of the ITAA 1997 (the single entity rule) provides that if an entity is a subsidiary member of a consolidated group for any period, it and any other subsidiary member of the group are taken for 'head company core purposes' and 'entity core purposes' to be part of the head company, rather than separate entities during that period.
The intended operation of the single entity rule is to apply the income tax laws to a consolidated group as if it were a single entity (being the head company) (see Taxation Ruling TR 2004/11). Therefore, it is the head company that will lodge an income tax return and claim allowable deductions. To determine whether it can claim a deduction for the expenditure in question under section 73B of the ITAA 1936, the head company must consider whether subsection 73B(3) of the ITAA 1936 prevents entitlement to that deduction.
For the purposes of subsection 73B(3) of the ITAA 1936, it must be determined whether the expenditure is incurred by a company in the capacity of a trustee or nominee (the public trading trust exception is not relevant in this case). In the relevant income year, the subsidiary members of the consolidated group include the trust and corporate trustee. The single entity rule in section 701-1 of the ITAA 1997 treats the abovementioned subsidiary members as parts of the head company rather than separate entities for the purposes of working out liability for income tax or losses. The head company is deemed to undertake the eligible research and development activities and incur the research and development expenditure, rather than the corporate trustee (in its capacity as trustee), as it does not exist as a separate entity for the relevant income tax purposes in the income year in question. The head company is not a corporate trustee or nominee company.
Hence, subsection 73B(3) of the ITAA 1936 does not apply to the head company and therefore, does not prevent it from claiming a deduction under section 73B of the ITAA 1936.
Date of decision: 10 April 2006Year of income: Year ending 30 June 2002
Legislative References:
Income Tax Assessment Act 1936
section 73B
subsection 73B(3)
section 701-1
Related Public Rulings (including Determinations)
Taxation Ruling TR 2004/11
ATO ID 2006/136
ATO ID 2006/137
ATO ID 2006/138
Keywords
Australian Taxation Office
Consolidation
Consolidation - tax liabilities
Deductions & expenses
Eligible research and development expenditure
Innovation segment
LB & I segments
Research & development expenses
Single entity rule
ISSN: 1445-2782
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