Expenditure to an associate must be both incurred and paid before it can be claimed as a notional deduction for the R&D tax incentive.
If you incur expenditure to an associate and you pay that amount in the same year, you can claim a notional deduction for that amount in that year. This is provided you meet all other eligibility requirements for the R&D tax incentive, including that the R&D activities are conducted for you and not for (or for a significant extent) for the associate.
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.
For more information see Taxpayer Alert TA 2023/4 R&D activities delivered by associated entities.
If you don't pay the amount until a later year
If you don't pay the amount until a later income year, you can choose to either:
- claim a deduction under the normal income tax provisions (for example, the general deduction provision, section 8-1 of the Income Tax Assessment Act 1997) for the income year in which the amount was incurred
- 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 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. The choice can't be reversed – for example, you can't later request an amendment of the assessment to disallow the deduction you claimed.
Example: claiming notional deductions
Ingenious Plans Pty Ltd is a corporation incorporated in Australia that carries on a business in Australia. During the 2023 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 2024 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 can't claim a notional deduction for the expenditure to the associate under the R&D tax incentive in the 2023 income year because they did not pay the amount in that income year.
When preparing their income tax return for the 2023 income year, Ingenious Plans didn't 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 in the 2024 income year.
End of exampleAmounts incurred by a member of a consolidated group to another member of the same group are not required to be paid before being claimed under the R&D tax incentive, provided the amounts meet all other eligibility criteria. The amounts are taken to have been incurred by the head company of the group.
Expenditure incurred while not at arm's length
Where expenditure on an R&D activity is incurred while not at arms length or to an associate, only the market value of those R&D services can be notionally deducted. Amounts above market value are not available for notional deduction.
Who an associate is
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. This is set out in section 318 of the Income Tax Assessment Act 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.
What 'sufficiently influenced' means
Under the associate rules, a company is sufficiently influenced by an entity or entities if the company or its directors are accustomed or obligated 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. The directions, instructions or wishes of the influencing entity can be communicated directly or through interposed companies, partnerships or trusts.
What 'majority voting interest' means
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.