Special transitional rules

Special transitional rules apply for situations that extend over income years where the R&D tax concession provisions and the R&D tax incentive provisions apply.

The R&D tax incentive provisions are primarily contained in Division 355 of the ITAA 1997 and apply to work out eligibility for a R&D tax offset for an income year commencing on or after 1 July 2011.

You may be eligible for a tax offset under the new provisions for:

• expenditure incurred in an income year commencing on or after 1 July 2011
• the use of depreciating assets in an income year commencing on or after 1 July 2011.

The general result of the transitional provisions accompanying the R&D tax incentive is that:

• the R&D tax concession provisions apply to expenditure incurred, and to the use of depreciating assets, in an income year commencing before 1 July 2011
• the R&D tax incentive provisions apply to expenditure incurred, and to the use of depreciating assets, in an income year commencing on or after 1 July 2011.

However, there are special rules for situations that extend over income years where the R&D tax concession provisions applied and the R&D tax incentive provisions now apply (transitional rules).

Substituted accounting periods

Under the Income Tax Assessment Act 1936 (ITAA 1936), an accounting period is generally a period of 12 months ending on 30 June. However, the Act allows for a substituted accounting period (SAP) to balance on some other date.

The start date for the R&D tax incentive is determined by when your income year begins, not when it ends. If your 2011 income year begins before 1 July 2011, you cannot claim the R&D tax incentive. You may be able to claim the R&D tax incentive from your first year of income beginning on or after 1 July 2011.

If your 2012 income year begins before 1 July 2011, you will not be able to claim the R&D tax incentive in your 2012 tax return. You may be able to claim the R&D tax incentive from your first income year beginning on or after 1 July 2011.

See also:

• expenditure reduced to reflect intra-group mark-ups
• undeducted core technology expenses
• clawback as a result of recoupments received
• decline in value of depreciating assets

Expenditure reduced to reflect group mark-ups

A transitional rule ensures that for the purposes of the rule about intra-group mark-ups in section 355-415 of the ITAA 1997), if you have already taken a particular intra-group mark-up amount into account under the R&D tax concession, you disregard this amount when calculating your notional deduction under the R&D tax incentive.

See also:

• section 355-415 of the IT(TP) Act 1997

Undeducted core technology expenditure

There are transitional provisions in place to ensure that if you have core technology expenditure (within the meaning of former section 73B of the ITAA 1936) that cannot be deducted prior to 1 July 2011, it may be eligible for a deduction in an income year beginning after 1 July 2011.

If your core technology is a depreciating asset (for example, a patent), the R&D depreciating asset provisions will apply on the basis that the opening adjustable amount is the amount of undeducted expenditure in relation to your asset.

See also:

• section 355-605 of the IT(TP) Act 1997

If your core technology is not a depreciating asset, your undeducted expenditure is deductible in equal proportions over five income years, starting in your first income year commencing on or after 1 July 2011.

Undeducted core technology expenditure will not form part of your notional R&D deductions for income years commencing on or after 1 July 2011, but will be deductible against your assessable income when calculating your taxable income or loss.

See also:

• section 355-610 of the IT(TP) Act 1997

Recoupment received after 1 July 2011 which relates to expenditure incurred under the R&D tax concession

If you have received a grant or recoupment in an income year starting on or after 1 July 2011, in respect of expenditure incurred on registered R&D activities prior to 1 July 2011, you need to recalculate and apply your initial clawback amount in accordance with section 73C of the ITAA 1936.

This does not apply if you have received a recoupment of expenditure for which you have claimed a tax offset under Division 355 of the ITAA 1997. For further information in relation to recoupments of expenditure for which you have claimed a tax offset refer to Research and development tax incentive - clawback adjustment

Decline in value of depreciating assets

Under the R&D tax concession, a R&D deduction was allowed for decline in value of a tangible depreciating asset used for R&D activities. If that asset is also used for R&D activities in an income year starting on or after 1 July 2011, the R&D tax incentive provisions about notional deductions for the decline in value of R&D depreciating assets will apply. Accordingly, tangible depreciating assets are covered by the R&D tax incentive provisions, regardless of when they were acquired. A number of special provisions are necessary to ensure that:

• the normal rules that limit the ability of a R&D entity to change the method of calculating decline in value apply
• a determination or calculation of effective life that was made in relation to the R&D tax concession continues to apply
• a R&D entity cannot allocate a depreciating asset to a low value pool or one of the small business pools after the previous R&D tax concession decline in value provisions have applied to the asset.

See also:

If you have used a depreciating asset for R&D activities under the R&D tax concession and will continue to use this asset under the R&D tax incentive, refer to the following provisions for more information:

• section 40-67 of the IT(TP) Act 1997
• section 40-105 of the IT(TP) Act 1997
• section 40-430 of the IT(TP) Act 1997

Transitional balancing adjustment provisions

There are also transitional balancing adjustment provisions to cover cases where:

• a R&D entity or a R&D partnership used a depreciating asset for R&D activities when the R&D tax concession provisions are applied and continues to use the depreciating asset under the R&D tax incentive
• a balancing adjustment event happens in an income year starting on or after 1 July 2011.

These rules provide differing treatment dependant on whether the assets were used:

• solely for R&D activities
• partly for R&D activities.

Next steps:

If you have used a depreciating asset for R&D activities under the R&D tax concession, continued to use that asset under the R&D tax incentive, and a balancing adjustment event has occurred, refer to the following provisions for more information.

• Assets used solely for R&D activities        
  • section 355-320 of the IT(TP) Act 1997
  • section 355-325 of the IT(TP) Act 1997.
• Assets used partly for R&D activities        
  • section 40-285 of the ITAA 1997
  • section 40-292 of the IT(TP) Act 1997
  • section 40-293 of the IT(TP) Act 1997.

About the R&D tax concession that applied prior to 1 July 2011.