Research and development tax incentive – expenditure incurred to an associate
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The research and development (R&D) tax incentive provides a targeted tax offset to encourage certain companies (R&D entities) to conduct R&D activities that benefit Australia.
It provides generous benefits for companies performing eligible R&D activities and has the following two core components:
- a 43.5% refundable tax offset for eligible entities with an aggregated turnover of less than $20 million - unless they are controlled by tax exempt entities
- a 38.5% non-refundable tax offset for all other eligible entities.
The rate of the R&D tax offset is reduced to the company tax rate (currently 30%) for that portion of an entity’s notional R&D deductions that exceeds $100 million for an income year. This change applies to assessments for income years starting on or after 1 July 2014 and before 1 July 2024.
The tax incentive replaces the R&D tax concession and is jointly administered by Innovation Australia (assisted by AusIndustry) and us.
Under the R&D tax incentive, R&D entities can only obtain the incentive for expenditure they incur to an associated entity when they actually pay the amount.
Can you claim a notional deduction for expenditure you incur to an associate?
If you incur an amount of expenditure to an associate and you pay the amount in the same year, you can claim a notional deduction for that amount in that year (provided you meet all other eligibility requirements for the R&D tax incentive).
Paying an amount to an associate can include making a constructive payment, where you apply or deal with the amount on their behalf or as they direct.
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What if you do not pay the amount until a later year?
If you do not pay the amount until a later income year, you can choose to do either of the following:
- claim a deduction under the normal income tax provisions - for example, the general deduction provision, section 8-1External Link of the Income Tax Assessment Act 1997 - for the income year in which the amount was incurred. This choice, (which can be made in your return or as an amendment) must be made by the time you lodge your return for the income year before the one in which the payment is made
- claim a notional R&D deduction in the year you make the payment.
If you claim the deduction (or obtain a non-R&D tax offset) for this expenditure under the first choice, you will no longer be entitled to claim a notional R&D deduction in the year you make the payment. This cannot be reversed - for example, you cannot later request an amendment of the assessment to disallow the deduction you claimed.
Ingenious Plans Pty Ltd is a corporation incorporated in Australia that carries on a business in Australia. During the 2011-12 income year, Ingenious Plans incurs an expense of $20,000 to an associate to carry out R&D activities on their behalf. However, they do not pay the $20,000 until the 2012-13 income year.
Ingenious Plans is registered for the R&D activities for the income year in which they were conducted. The expenditure also satisfies the various eligibility requirements for the R&D tax incentive. However, Ingenious Plans cannot claim a notional deduction for the expenditure to the associate under the R&D tax incentive in the 2011-12 income year because they did not pay the amount in that income year.
When preparing their income tax return for the 2011-12 income year, Ingenious Plans did not take the expenditure incurred to their associate into account when they worked out the following:
- the amount they could claim as a deduction under any non-R&D provision
- their entitlement to a non-R&D tax offset.
Because of this, Ingenious Plans is entitled to a claim a notional R&D deduction for the expenditure of $20,000 for the 2012-13 income year.
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Who is my associate?
In broad terms, associates are those entities that, by reason of family or business connections, might appropriately be regarded as being associates of a particular entity.
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For a more detailed definition of 'associate', refer to section 318External Link of the Income Tax Assessment Act 1936.
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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.
What does 'sufficiently influence' mean?
Under the associate rules, a company is sufficiently influenced by an entity or entities if the company, or its directors, are accustomed or under an obligation to act (or might reasonably be expected to act) in accordance with the directions, instructions or wishes of that entity or entities.
The influence by another entity could be either formal or informal and the directions, instructions or wishes of the influencing entity can be communicated directly or through interposed companies, partnerships or trusts.
What does 'majority voting interest' mean?
Under the associate rules, majority voting interest means the ability to cast, or to control the casting of, more than 50% of the maximum number of votes that may be exercised at a general meeting of the company.
For more information about the eligibility of R&D activities, contact AusIndustry by:
For more information about expenditure issues:
How the research and development tax incentive applies to expenditure you incur to an associate.