Payment to associates
Under the R&D tax incentive, R&D entities can only obtain an R&D tax offset for expenditure they incur to an associate when the amount is paid.
If you incur expenditure to an associate, the answers to these frequently asked questions will help you to work out when the amount has been paid and; therefore, when you can claim an R&D tax offset for that expenditure.
I have read that amounts incurred to my company's associates must be paid before I can claim a notional deduction for this expenditure. Can I follow other ATO guidance to assist me to determine if I have paid an amount?
'Paid' in relation to the R&D tax incentive has its general legal meaning, which includes constructive payment. This means that you can use our existing guidance products and rulings to assist you to determine your eligible notional deductions for amounts paid to associates.
We have a number of interpretive products that look at related terms such as cashed, payment, loans, contributions, advancement of money and consideration. Although not an exhaustive list, the following interpretive products may assist you to work out whether you have paid an amount to your associate:
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- ATO ID 2003/347 Loan Fringe Benefits - advance of money by cheque
- TR 2010/1 Income tax: superannuation contributions (as at 8 December 2010)
- GSTR 2003/12 Goods and services tax: when consideration is provided and received for various payment instruments and other methods of payment (as at 11 July 2007)
- TR 2002/9 Income tax: withholding from payments where recipient does not quote ABN (as at 1 August 2007)
- ATO ID 2002/141 Superannuation retirement & employment termination: Eligible termination payment (ETP): ETP death benefit must be cashed
- ATO ID 2006/132 Superannuation retirement & employment termination: Eligible termination payments (ETP) - Journal entries insufficient to constitute payment of a death benefit ETP made under ETP provisions
- GSTD 2004/4 Goods and services tax: can consideration for a supply be provided or received without transferring money (such as where the parties only make book entries recording their agreement that the supply is paid for)? (as at 1 December 2004).
I have issued a cheque to my associate, but it was not presented by 30 June 2012. Can I claim a notional R&D deduction for this amount?
A personal cheque is taken to be paid when it is received by the recipient, provided it is promptly presented and not refused. It will be taken to have been presented promptly if the presentation is within a few business days.
If it is clear to us that payment has not been promptly sought on a personal cheque, the payment will, in the absence of extenuating circumstances, be taken to be made if, and when, the cheque is presented and cleared.
Can a journal entry be considered payment?
Using a journal entry to transfer an obligation by way of a loan account will not, on its own, constitute payment.
A journal entry will only constitute payment if there are mutual liabilities between the two parties and there is a binding agreement between those parties to set off the liabilities.
Company A conducted all R&D activities on behalf of Company B. Company A issued an invoice to Company B for the full amount of its services. Company B did not have any funds to pay Company A, so Company A and Company B entered into a loan agreement for this amount. Company B wants to claim the R&D tax incentive for this amount.
As no mutual liabilities existed between the two companies, Company B is unable to claim the R&D tax incentive for this amount until it has paid Company A.
Company C conducted all R&D activities on behalf of Company D. Company C issued an invoice to Company D for the full amount of its services. Company D did not have any funds to pay Company C. However, Company C owed Company D an amount in excess of the invoiced amount. Company C and Company D agree in writing for the amount of this invoice to offset the amount Company C owes to Company D. Company D wants to claim the R&D tax incentive for this amount.
As mutual liabilities existed between the two companies, and the binding agreement between Company C and Company D agreed that the liability would be offset, the invoice is considered to be paid. As a result, Company D can claim the R&D tax incentive for this amount.
My company is a subsidiary in a consolidated group for a full income year, and I contract another member of that group to undertake R&D activities for me. Does the amount under this contract need to be paid before claiming a notional deduction amount?
No. The claimant company in this scenario would be the head entity of your group. If the amounts were incurred, and meet all other eligibility criteria for the R&D tax incentive, all amounts incurred by a subsidiary while a member of a consolidated group are taken to have been incurred by the head company. Therefore, amounts incurred to other subsidiaries within a consolidated group are not required to be paid before being claimed under the R&D tax incentive.