Other eligible expenditure
You may incur administrative costs and overheads from conducting R&D activities and employing R&D staff.
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Administrative costs and overheads
You may incur administrative costs and overheads from conducting R&D activities and employing R&D staff. This may include costs on R&D activities for:
- rent or lease payments
- light and power
- property rates and taxes
- certain types of insurance.
You can claim the cost for these expenses under the R&D tax incentive if they are directly linked to your R&D activities. The type of expenditure that qualifies for a notional R&D deduction under Division 355 of the ITAA 1997 depends on the facts of each case.
Leased plant and buildings
Rent or lease payments for equipment or buildings used in your R&D activities can be eligible expenditure. The expenditure only qualifies for a notional deduction if you have sufficient evidence to prove it was used directly on R&D activities.
Leasing equipment or buildings for yourself and other persons may also qualify for a notional deduction. This is possible under Division 355 of the ITAA 1997 if the lease payments are incurred to conduct eligible R&D activities.
Accountant and consultant fees
Expenditure incurred for accountant or consultant fees may be notionally deductible. The service provided by either the accountant or consultant must relate to your R&D activities.
Expenditure for accountant or consultant fees can't be claimed for:
- preparing a registration application for the R&D tax incentive
- preparing a tax return to claim the R&D tax incentive.
If services provided by a consultant are considered an R&D activity, it must be registered with AusIndustry.
Tax related expenses incurred for the management of a company's tax affairs may be deductible under section 25-5 of the ITAA 1997. Eligibility of R&D activities is determined by AusIndustry and eligible expenditure is determined by us.
Expenditure on overseas activities
To claim a notional deduction for overseas R&D activities you must get a favourable advance overseas finding from AusIndustry. Section 28C and section 28D of the IR&D Act provide information on findings about activities to be conducted outside Australia, including conditions you must meet.
You can only claim expenditure on an R&D activity carried out overseas if it is registered and covered by a finding that meets the following 4 conditions:
- The overseas activity is covered by an advance overseas finding that the activities are eligible R&D activities.
- The overseas activity has a significant scientific link to Australian core activities.
- The overseas activity can't be conducted in Australia or the external territories for a reason listed in the legislation.
- The expenditure on the overseas activity and certain other overseas activities is less than the expenditure on the related core R&D activities and supporting R&D activities conducted in Australia.
An overseas finding starts from the beginning of the income year the application is made.
You can only claim expenditure on an R&D activity by relying on an overseas finding for R&D activities that are:
- conducted for you
- not conducted for a foreign corporation that is connected or affiliated with you.
See Business.gov.auExternal Link for more information about conducting R&D activities outside Australia.
Payment to your associate in your claim year
You can claim a notional deduction if you incur an amount of expenditure to an associate and pay it in the same year. To do this, you must meet all other requirements for the R&D tax offset.
Paying an amount to an associate can include making a constructive payment. A constructive payment is where you apply or deal with the amount on their behalf or as they direct.
In working out whether you have paid an amount to another entity, and when the payment is made, the amount is taken to be paid to the other entity when you apply or deal with the amount in any way on the other's behalf, or as the other directs.
In broad terms, associates are those entities which, by reason of family or business connections, might appropriately be regarded as being associates of a particular entity.
For the definition of 'associate', refer to section 318 of the ITAA 1936.
Some examples of an associate of a company, other than a company in the capacity of trustee, include:
- a partner of the company or a partnership in which the company is a partner
- a trustee of a trust estate under which the company or associate benefits
- another entity (including a natural person) that, acting alone or with another entity or entities, sufficiently influences the company
- an entity (including a natural person) that, either alone or together with associates, holds a majority voting interest in the company
- a second company that is sufficiently influenced by the company or the company's associate
- a second company in which a majority voting interest is held by the company or the company's associate.
If you do not pay the amount until a later income year, you can either claim:
- the expenditure under the normal income tax provisions (for example, the general deduction provision, section 8-1 of the ITAA 1997 for the income year in which the amount was incurred)
- a notional R&D deduction in the year you make the payment if you have not already claimed the expenditure under the normal income tax provisions.
You must not have otherwise claimed the expenditure by the time you lodge your tax return for the most recent income year before the income year in which you paid the amount. This choice can't be reversed, for example, by later requesting an amendment of the assessment to disallow the deduction claimed.
For an example of how the rules work in relation to amounts incurred to associates, see R&D expenditure incurred to an associate. This includes:
- an example of how the rules work in relation to amounts incurred to associates
- explanations of the terms 'sufficiently influence' and 'majority voting interest'.
Decline in value of assets
You can notionally deduct the decline in value of a tangible depreciating asset used for R&D activities (if certain other conditions are satisfied, as outlined below). Specific rules also apply to the treatment of balancing adjustment events, for example, when you sell or scrap depreciating assets used for R&D purposes.
As a partner in an R&D partnership, you are entitled to a notional deduction for your proportion of the amount that the partnership would have been able to deduct under the depreciating asset provisions, provided the conditions listed below have been met.
Conditions to be met for decline in value
To be eligible for an R&D notional deduction for a decline in value of a depreciating asset, you must be:
- registered for the income year in which you hold the asset for conducting R&D activities
- conducting your R&D activities in Australia (unless you have a positive overseas finding from AusIndustry) using the asset during the income year for conducting R&D activities
- entitled to deduct an amount under the depreciating asset provisions (Division 40) if those provisions applied with certain changes.
Once an asset is pooled, its tax identity and its adjustable value are lost, and the asset can no longer be distinguished from other assets in the pool. As a result you can't notionally deduct an amount if either:
- the asset has been pooled with other assets for working out deductions for depreciating assets
- you have allocated a depreciating asset to a low value pool or one of the small business pools after the R&D depreciating asset provisions have applied to the asset.
R&D decline in value rules and R&D expenditure rules
The R&D decline in value rules apply to the exclusion of the R&D expenditure rules. Where you incur an amount of expenditure that is included in the cost of a depreciating asset, your notional deduction is worked out for its decline in value under the R&D rules in Subdivision 355-E. Your notional deduction in relation to this expenditure, and therefore the R&D tax offsets, is spread over the effective life of the asset.
Notional application of Division 40
Under the R&D tax incentive, decline in value deductions for depreciating assets (as defined in Division 40 of the ITAA 1997, but excluding intangible assets) used in carrying on R&D activities is worked out under section 355-305 and section 355-310 of the ITAA 1997. These sections require that the amount allowable on the decline in value of those assets for the period of R&D use be calculated notionally, for the period of R&D use, under the rules set out in Division 40 of the ITAA 1997, as applied with certain modifications.
Working out whether you would be entitled to deduct an amount under the depreciating asset provisions if those provisions were applied with certain changes, is called the 'Notional application of Division 40'. This notional application of Division 40 is for the purpose of working out the notional R&D deduction for the decline in the value of a depreciating asset. It is also relevant to working out balancing adjustments on these assets and the amounts excluded from being claimed as expenditure.
The modifications made in notionally applying the Division 40 decline in value rules to R&D assets require that the:
- asset be used for the purpose of carrying on R&D activities, rather than for a taxable purpose
- same method of calculating depreciation and effective life be used as applied before the R&D use, if relevant.
Purpose of conducting R&D activities
The main change made to Division 40 in working out the notional Division 40 deduction is that references to a taxable purpose are replaced with references to the purpose of conducting one or more R&D activities. For balancing adjustment calculations, references to a taxable purpose are replaced with a reference to the purpose of conducting one or more of the R&D activities to which the R&D deductions relate. The object is to work out the notional Division 40 deduction based on its use for R&D activities.
Buildings and capital works other than buildings
The second change made to Division 40 in working out the notional Division 40 deduction is to assume that Division 40 does not apply to a building (or an extension, alteration or improvement to a building) for which you can deduct an amount under the capital works provisions in Division 43, or could have deducted an amount under Division 43, if you had started work before a particular date or used the building for R&D activities.
The object is to replace the rule in Division 40 that excludes capital works for which you can deduct amounts under Division 43. The result is that you can get a notional R&D deduction (and therefore, an R&D tax offset) for the decline in value of capital works that are not buildings used in R&D activities.
'Uses' to ignore
In working out the notional deduction for decline in value of a depreciating asset, it is necessary to ignore 'uses' of the asset that would not satisfy the various conditions. It is necessary to ignore uses for R&D activities that:
- aren't registered for the income year in which they were conducted
- don't meet conditions about where activities must be conducted
- don't satisfy the 'on own behalf' test.
The capital allowance rules in Division 40 of the ITAA 1997 allow you either to:
- use the Commissioner's estimates of effective life for your depreciating assets
- work it out yourself under the rules in Division 40.
In working out the effective life of a depreciating asset, you must estimate the period that the asset can be used by an entity for one or more of these:
- a taxable purpose
- the purpose of producing exempt income or non-assessable non-exempt income
- the purpose of conducting R&D activities, assuming that this is reasonably likely.
This applies both for self-assessing effective life and for the Commissioner making a written determination of effective life.
Where it is reasonably likely that an asset will be used for the purpose of conducting R&D activities, it is also necessary to have regard to the period within which the asset is likely to be scrapped or abandoned, ensuring you disregard reasons attributable to technical risk in conducting R&D activities.
If the technical risk in the R&D activities does in fact lead to the early scrapping of the plant, the balancing adjustment provisions ensure that the appropriate write-off is given.
No change in decline in value method
You generally have a choice of 2 methods in working out the decline in value of a depreciating asset:
- the prime cost method
- the diminishing value method
You can't change methods. If an R&D entity has previously worked out actual deductions for an asset using a particular method, it must use the same method in working out notional deductions, and vice versa.
R&D depreciating assets rules
Division 328 provides certain concessions for small business entities (SBEs). If you meet certain eligibility requirements, you can take advantage of the simpler depreciation rules under Subdivision 328-D of the ITAA 1997. One of these rules is an immediate deduction for low cost assets (costing less than $1,000).
SBEs can generally calculate the decline in value deductions under the simplified depreciation rules instead of the general depreciation rules. However, you can't calculate the decline in value amounts for a depreciating asset for any period under the simplified depreciation rules if you can notionally deduct the decline in value for that asset for the same or an earlier period under the R&D tax offset rules.
Subsection 355-310(4) of the ITAA 1997 says that to notionally apply Division 40 (to calculate the decline in value amount notionally deductible under the R&D tax incentive) you should assume that Subdivision 328-D has not been enacted. This means that low cost assets that could be immediately deducted under section 328-180 are not eligible for a notional deduction under the R&D tax incentive on that basis. You notionally deduct your decline in value amount calculated under Division 40 for the R&D tax incentive.
R&D activities and non-R&D activities
The notional deduction is reduced to the extent that the asset is used for a purpose other than R&D activities. The R&D entity may be entitled to an actual Division 40 deduction for that other use (for example, the other use is in carrying on a business for the purpose of producing assessable income).
This also applies to any immediate asset write off you may be entitled to. That is, you need to consider the extent to which the asset is used for R&D purposes and for a purpose other than R&D during the income year.
Your R&D expenditure can include amounts called feedstock input expenditure. These are amounts you can claim as R&D expenditure for:
- the purchase or production of goods or materials (feedstock inputs) that are transformed or processed during R&D activities in producing one or more tangible products (feedstock outputs)
- energy input directly into that transformation or processing.
These amounts are identified separately because a clawback amount included in assessable income can arise when the feedstock output is supplied to another entity or applied to own use in the current year or in a later year. This clawback amount also applies to the decline in value of assets used in acquiring or producing feedstock inputs.
The feedstock provisions apply to both core R&D activities and supporting R&D activities that transform or process feedstock inputs. The provisions are not confined to mass production or industrial activities. For example, it can apply to agricultural and other primary production activities.
To find out more see Feedstock adjustments or Taxation Ruling TR 2013/3 Income tax: research and development tax offsets: feedstock adjustments.
Contributions under the CRC program
Generally, you must incur at least $20,000 worth of expenditure on R&D activities to be eligible to claim a notional deduction under subsection 355-100(1) of the ITAA 1997. However, monetary amounts contributed under the CRC program, where all other eligibility criteria have been met is an exception to this rule.
You are entitled to a notional deduction for expenditure incurred as a monetary contribution under the CRC program, if you are registered for the R&D activities on which the contribution is spent. The notional deduction does not arise until you are registered, which in some cases could be for an income year after you incur the contribution. However, the notional deduction for the monetary contribution still applies to the income year in which the contribution was incurred.
You are not entitled to a notional R&D deduction for any expenditure the CRC incurs out of Commonwealth funding.
To prevent double benefits in respect of the same amounts, you can't claim a notional R&D deduction for:
- a monetary contribution made to a CRC other than as a notional deduction under section 355-580 as that contribution
- expenditure incurred under the program out of a contribution that can be notionally deducted
- the decline in value of an R&D depreciating asset whose cost has been incurred under the CRC program.
Where you incur a non-monetary contribution but the contribution is in money's worth (for example, an employee's time or plant used in the R&D activities), that contribution should be valued and this value will also constitute expenditure incurred by you. The normal R&D tax incentive provisions apply in these circumstances and any notional deduction is subject to the R&D rules in Subdivision 355-D of the ITAA 1997, including the requirement that at least $20,000 of expenditure be incurred.
Company A incurs $100,000 of expenditure as a monetary contribution under the CRC program in the income year ending 30 June 2021. The CRC does not spend Company A's contribution on an R&D activity until the year ending 30 June 2022.
To be eligible for a notional deduction for this amount, Company A must register the R&D activity for the year in which the R&D activity is conducted (the income year ending 30 June 2022). Company A can notionally deduct $100,000 in the income year ending 30 June 2021 even though the R&D activity is registered for the R&D activity that is conducted by the CRC in the income year ending 30 June 2022 (provided all other criteria are also met).
End of example