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  • 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.

    Example

    Company A has a late-balancing September SAP. Company A's 2011 tax return will be lodged for the period 1 October 2010 to 30 September 2011. As its 2011 income year begins on 1 October 2010, which is before 1 July 2011, it will not be able to claim the R&D tax incentive until its 2012 income year, beginning on 1 October 2011.

    End of example

    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.

    Example

    Company B has an early-balancing December SAP. Company B's 2012 tax return will be lodged for the period 1 January 2011 to 31 December 2011. As its 2012 income year begins on 1 January 2011, which is before 1 July 2011, it will not be able to claim the R&D tax incentive until its 2013 income year, beginning on 1 January 2012.

    End of example

    See also:

    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:

    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:

    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:

    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:

    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.

      Last modified: 28 Feb 2017QC 24824