ATO Interpretative Decision

ATO ID 2006/19 (Withdrawn)

Income tax

• This ATO ID is withdrawn from the database as sections 82AAC and 82AAR of the Income Tax Assessment Act 1936 (ITAA 1936) and subsection 82AAA(1) of the ITAA 1936 have been repealed. Despite its withdrawal from the database, this ATO ID continues to be a precedential view in respect of decisions for the income years up to, and including, the 2006-07 income year. For the 2007-08 and later income years, subsection 73B(20A) of the ITAA 1936 provides that research and development expenditure in the form of superannuation contributions is to be deducted under section 73B of the ITAA 1936.
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Issue

Can an eligible company claim a deduction under subsection 73B(14) of the Income Tax Assessment Act 1936 (ITAA 1936) for superannuation contributions paid in respect of an employee that is engaged in research and development activities?

Decision

Yes. An eligible company can claim a deduction at a concessional rate, for superannuation contributions for an employee, under subsection 73B(14) of the ITAA 1936, to the extent that he/she is engaged in research and development activities of the company.

Facts

The company is an 'eligible company', as defined in subsection 73B(1) of the ITAA 1936. It carries out 'research and development activities' (as defined in subsection 73B(1)) in Australia, on its own behalf, in the income year ended 30 June Y1.

The company is registered under section 39J of the Industry Research and Development Act 1986 for that income year with the Industry Research and Development Board in respect of those activities.

The company's aggregate research and development amount is greater than $20,000 in the income year.

The company makes contributions to a superannuation fund to make a provision for superannuation benefits payable for an 'eligible employee', as defined in subsection 82AAA(1) of the ITAA 1936. This employee is directly engaged in research and development activities for the whole of the income year.

The total contributions made for the employee in question (who satisfies the age requirements contained in section 26-80 of the Income Tax Assessment Act 1997) are below the age based deduction limit applicable to the employee.

The contributions are made to a 'complying superannuation fund' within the meaning of Part IX of the ITAA 1936.

Reasons for Decision

A deduction is available under subsection 73B(14) of the ITAA 1936, if an eligible, registered company incurs relevant research and development expenditure (other than contracted expenditure) and has an aggregate research and development amount greater than $20,000 in the income year.

The deduction is available at a rate of 125% of the expenditure incurred. Subsection 73B(20) of the ITAA 1936 provides, subject to certain exceptions, that deductions allowed under section 73B are not deductible under any other provision of the ITAA 1936.

The term 'research and development expenditure' is defined in subsection 73B(1) of the ITAA 1936 to include 'salary expenditure' incurred on or after 1 July 1985. 'Salary expenditure' (also defined under subsection 73B(1)) includes the portion of 'contributions to superannuation funds' that relate to an employee carrying out research and development activities on behalf of the company. 'Contributions to superannuation funds' in relation to an eligible company, means under subsection 73B(1), expenditure that would, apart from subsection 73B(20) of the ITAA 1936, be allowable as a deduction to the company under section 82AAC of the ITAA 1936.

Section 82AAR of the ITAA 1936, which was inserted prior to section 73B of the ITAA 1936, broadly provides that a deduction is not allowable for contributions to superannuation funds, other than under the subdivision which includes section 82AAC of the ITAA 1936. This subdivision does not include section 73B. The deduction available is the amount of the contributions, limited to the age based limit applicable to the employee in question, not 125% of these contributions, as provided for by section 73B. There is therefore an apparent conflict between the operation of 73B and the restriction described in section 82AAR.

In circumstances where provisions dealing with the same subject matter conflict, it is necessary to reconcile the provisions in accordance with the rules of legislative interpretation (South Eastern Board (SA) v. Savings Bank of South Australia (1939) 62 CLR 603). A number of methods of statutory interpretation might be used to resolve such a conflict (see for example, Fabry v. FC of T [2003] FCA 1043; (2003) 132 FCR 239).

Whatever method is used, it is clear that superannuation contributions which come within the subsection 73B(1) of the ITAA 1936 definition of 'salary expenditure' were intended as a matter of policy, to receive concessional treatment if eligible, under section 73B.

An approach that applied sections 82AAC and 82AAR of the ITAA 1936 to the exclusion of subsection 73B(14) of the ITAA 1936 in this regard, would defeat that policy, and therefore is not to be preferred (section 15AA, Acts Interpretation Act 1901 (Cth)). Instead, where such expenditure meets the requirements of subsection 73B(14), the Commissioner considers that the provisions should be interpreted to allow a deduction under that provision, rather than section 82AAC. In these circumstances, such a deduction will not be prevented by section 82AAR.

The company meets the requirements set out in section 82AAC of the ITAA 1936 (apart from the operation of subsection 73B(20) of the ITAA 1936), as the contributions are made for provision of superannuation benefits for an 'eligible employee' to a 'complying superannuation fund' and are below the applicable age based limit. As a result, the eligible company has made 'contributions to superannuation funds' which form part of 'salary expenditure'. In view of the fact that that the employee is engaged in research and development activities for the whole income year, the total of the superannuation contributions is also 'research and development expenditure' as defined in subsection 73B(1) of the ITAA 1936.

As the company meets all the other requirements of subsection 73B(14) of the ITAA 1936, the deduction for these superannuation contributions is available at a rate of 125%. This deduction is not prevented by the operation of section 82AAR of the ITAA 1936.

Year of income:  Year ending 30 June 2005

Legislative References:
Income Tax Assessment Act 1936
   subsection 73B(1)
   subsection 73B(14)
   subsection 73B(20)
   subsection 82AAA(1)
   section 82AAC
   section 82AAR

Case References:
South Eastern Board (SA) v. Savings Bank of South Australia
   (1939) 62 CLR 603

Related Public Rulings (including Determinations)
Taxation Ruling IT 2552

Keywords
Australian Taxation Office
Contributions for employees - allowable deductions
Deductions & expenses
Innovation segment
LB & I segments
Research & development expenses
Research & development salary expenditure
Superannuation
Superannuation contributions - deductions & rebates
Superannuation contributions for employees

Business Line:  Public Groups and International

Date of publication:  20 January 2006

ISSN: 1445-2782