• Definitions

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    Adjustment amount year zero (AA0)

    AA0 is the abbreviation used to denote a group's adjustment amount for the Y0 year of income (subsection 73P(2) of the ITAA 1936).

    Adjustment amount year minus one (AA-1)

    AA-1 is the abbreviation used to denote a group's adjustment amount for the Y-1 year of income (subsection 73P(2) of the ITAA 1936).

    Aggregate research and development amount

    Subsection 73B(1) defines the expenditures and deductions that comprise aggregate research and development amount.

    • To claim the additional 25% concession, and some expenditures, this amount (or an annualised amount where a subsidiary company has joined or left a consolidated group and has a non-membership period of less than 365 days) needs to be more than $20,000. However, payments to an RRA are not subject to this threshold.
    • To be eligible to claim the R&D tax offset the group aggregate research and development amount must be $2 million or less for years of income starting on or after 1 July 2009.

    Australian-centred research and development activities

    The definition of 'Australian research and development activities' in subsection 73B(1) of the ITAA 1936 forms the basis of the definition of 'Australian-centred research and development activities'. It has the effect that expenditure deductible as 'expenditure on foreign owned R&D' is only expenditure for the purpose of carrying on research and development activities in Australia or in an external Territory. The base 100% specific deduction is only allowed for directly related activities if they have a sole or dominant purpose directly related to the carrying on of a core research and development activity conducted in Australia or in an external Territory.

    Australian research and development activities

    Subsection 73B(1) of the ITAA 1936 defines Australian research and development activities to mean research and development activities that are carried on in Australia or in an external Territory.

    Balancing adjustment event

    A balancing adjustment event occurs when an asset is disposed of, lost or destroyed after being used for carrying on research and development activities (section 40-295 of the ITAA 1997).

    Current year (Y0)

    The current year is the year of income for which the company tax return is being completed. For most companies the current year is 2009-10. Y0 is the abbreviation used to denote the current year.

    Expenditure on foreign owned R&D

    Expenditure on foreign owned R&D refers to expenditure on R&D which:

    • an eligible company incurred in respect of Australian-centred research and development activities carried on wholly or primarily on behalf of certain grouped foreign companies, and
    • meets the tests set out in subsections 73B(14C) and 73B(14D) of the ITAA 1936 (concerning activities carried out pursuant to certain written agreements).
    • Eligibility for claiming this type of expenditure is set out in subsection 73B(14C) of the ITAA 1936, and includes conditions such as:
      • the expenditure for the year of income being greater than $20,000
      • the eligible company and all of its other eligible company group members being registered under section 39J of the IR&D Act for all of their relevant research and development activities (whether or not carried out in accordance with an R&D plan) in relation to the year of income.
       

    Foreign company

    Foreign company means a body corporate that:

    a is incorporated under a law of a foreign country, and

    b is a resident of a foreign country for the purposes of a double tax agreement that relates to that foreign country (subsection 73B(1) of the ITAA 1936).

    Incremental expenditure

    Incremental expenditure means expenditure that:

    • is research and development expenditure, except
      • expenditure to lease or hire plant, and
      • expenditure under a contract to the extent that it is, in substance, for the acquisition of plant and not for the receipt of services (subsection 73P(2) of the ITAA 1936), and
       
    • can be taken into account in working out the amount of a deduction under subsection 73B(13) or 73B(14) or could be taken into account in working out the amount of a deduction under subsection 73B(14) apart from paragraph 73B(14)(b) of the ITAA 1936.

    Nil expenditure year

    Foreign companies that establish a new presence in Australia after the commencement of the foreign owned R&D incremental tax concession have immediate access to this concession for additional expenditure on foreign owned R&D expenditure with a nil expenditure year for each of the three prior years. The conditions for a nil expenditure year are set out in subsection 73QB(2). These are that neither the eligible company nor any grouped eligible companies existed in Australia in that year or in the 10 preceding years; and that none of the following carried on business in Australia in the nil expenditure year or the 10 preceding years:

    • a foreign company grouped under section 73L with the eligible company any time during Y0, Y-1, Y-2 or Y-3 years of income
    • a foreign company grouped under section 73L with any section 73R group member of the eligible company, or
    • a person who was grouped under section 73L with the relevant foreign company.

    For further information, see Guide to the R&D tax concession.

    Overseas research and development activities

    Overseas research and development activities means research and development activities that are carried on outside Australia and the external Territories (subsection 73B(1) of the ITAA 1936).

    R&D spend

    R&D spend of an eligible company and its group members for a year of income means the sum of:

    • the amounts worked out for the year of income as the reduced expenditure on Australian owned R&D by each eligible company in its group membership period for the year of income, and
    • the amounts worked out for the year of income as the reduced notional expenditure on foreign owned R&D by each eligible company in its group membership period for the year of income (subsection 73P(2) of the ITAA 1936).

    Registered Australian research agency (RRA)

    An Australian research agency registered with Innovation Australia under section 39F of the IR&D Act.

    Research and development activities

    Research and development activities means:

    • systematic, investigative and experimental activities that involve innovation or high levels of technical risk and are carried on for the purpose of
      • acquiring new knowledge (whether or not that knowledge will have a specific practical application), or
      • creating new or improved materials, products, devices, processes or services, or
       
    • other activities that are carried on for a purpose directly related to the carrying on of activities of the kind referred to in the paragraph above.

    Running average (RA-1)

    RA-1 means 'half the sum of the R&D spend of the eligible company and its group members for the Y-2 and Y-3 years of income' (subsections 73P(2) and 73U(2) of the ITAA 1936).

    Section 73BA depreciating asset

    A section 73BA depreciating asset of an eligible company is an asset for which the eligible company could (ignoring section 73BA) deduct an amount under section 40-25 of the ITAA 1997 if the following assumptions were made:

    • contrary to paragraph 40-30(1)(c) and subsection 40-30(2) of the ITAA 1997, all intangible assets were excluded from the definition of depreciating asset in section 40-30 of the ITAA 1997
    • subsection 40-45(2) of the ITAA 1997 did not, except in the case of buildings, prevent Division 40 of the ITAA 1997 from applying to capital works to which Division 43 of the ITAA 1997 applies, or to which Division 40 would apply but for expenditure being incurred, or capital works being started, before a particular day
    • the eligible company satisfied any relevant requirement for deductibility under Division 40.

    Total group markup

    The total group markup is the sum of the amounts derived by persons during the year of income for goods and services in respect of all or part of the things the R&D amount was for while those persons were grouped with the eligible company mentioned in section 73L, less the actual cost to those persons of providing those goods or services (subsection 73B(14AC) of the ITAA 1936).

    Y-1

    Y-1 is the year immediately before the current year of income. For the 2009-10 income year Y-1 is the 2008-09 income year.

    Y-2

    Y-2 is the year immediately before year Y-1. For the 2009-10 income year, year Y-2 is the 2007-08 income year.

    Y-3

    Y-3 is the year immediately before year Y-2. For the 2009-10 income year, year Y-3 is the 2006-07 income year.

    Last modified: 02 Jun 2010QC 22870