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    Ineligible expenditure under the R&D tax incentive

    You cannot notionally deduct the following types of expenditure under the R&D tax incentive:

    • interest expenditure (within the meaning of interest in the withholding tax rules)
    • expenditure that is not at risk
    • core technology expenditure
    • expenditure included in the cost of a depreciating asset (decline in value notional deductions may apply however)
    • expenditure incurred to acquire or construct a building (or part of a building or an extension, alteration or improvement to a building).

    These types of expenditure do not warrant the enhanced tax benefits available under the R&D tax offsets. However, they should be considered under the normal deduction provisions of the income tax law as you may still be able to deduct these amounts from your assessable income.

    Interest expenditure

    Interest incurred during the year of income is not eligible for a notional R&D deduction.

    Interest has the same broad meaning as it has in the withholding tax rules in Division 11A of Part III of the ITAA 1936. This includes an amount in the nature of interest (for example, a discount on a security) and a dividend on a non-equity share.

    Expenditure that is not at risk

    Expenditure that is not at risk (for example, if there is guaranteed return under a financing arrangement or an indemnity) is not eligible for a notional R&D deduction.

    Expenditure is not at risk to the extent that when the expenditure is incurred, you (or your associate) could reasonably be expected to receive an amount of consideration:

    • as a result of the expenditure being incurred or because of anything that happened before then
    • irrespective of the results of the activities on which the entity incurs the expenditure.

    Your expenditure can be at risk (and therefore eligible for an R&D tax offset) where the expectation of receiving consideration under a contract for the development and sale of a product is based on both:

    • the terms and conditions of that contract
    • the entity's experience and technical capability concerning the degree of confidence about successfully performing that contract.

    Where this product development involves R&D activities and the conditions above exist the expectation of receiving consideration under this contract cannot be said to exist irrespective of the results of these activities.

    The rule about expenditure not at risk does not apply to R&D activities conducted by you for one or more foreign corporations related to you. Nor does it apply to the corresponding permanent establishment case, where activities are conducted by a foreign corporation though a permanent establishment in Australia for other parts of the corporation.

    Core technology expenditure

    Expenditure incurred in acquiring technology that is 'core technology' is ineligible for the R&D tax incentive.

    See also:

    Undeducted core technology

    There are transitional rules in place to ensure that core technology expenditure (within the meaning of former section 73B of the Income Tax Assessment Act 1936) remaining after the last income year commencing before 1 July 2011 is eligible for deduction.

    In most cases, the undeducted expenditure is deductible in equal proportions over five income years, starting in the first income year commencing on or after 1 July 2010. However, if the core technology is a depreciating asset, the depreciating asset provisions in Division 40 of the ITAA 1997 will apply on the basis that the opening adjustable amount is the amount of undeducted expenditure in relation to the asset.

    Undeducted core technology expenditure is not included as a notional R&D deduction. It should be claimed at label X Other deductible expenses in item 7 of the Company Tax Return.

    See also:

    Expenditure included in the cost of a depreciating asset

    Expenditure included in the cost of a tangible depreciating asset is ineligible for a notional deduction under the R&D expenditure provisions. Notional deductions for the decline in value of R&D depreciating assets must be considered under the R&D decline in value provisions.

    Expenditure incurred to acquire or construct a building

    Expenditure incurred to acquire or construct a building, part of a building, or an extension, alteration or improvement to a building, is ineligible for a notional R&D deduction. However, deductions may be available under the capital works provisions in Division 43 of the ITAA 1997.

    There is an exception for expenditure on a building that is plant, or a depreciating asset. That expenditure is specifically excluded from Division 43 of the ITAA 1997 and therefore such a building is subject to the depreciating asset rules in Division 40 of the ITAA 1997. Consequently, an R&D entity may be able to claim a notional deduction for the decline in value of a building that is a depreciating asset.

      Last modified: 28 Feb 2017QC 25805