Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)
Chapter 1 - Research and development activities
1.1 This chapter explains the changes made to aid interpretation of the R & D tax concession. The amendments include the:
- addition of an objects clause;
- amendment to the definition of R & D activities; and
- requirement for an R & D plan to exist for all R & D activities.
1.2 The definition of R & D activities is a most fundamental aspect of the R & D tax concession. The changes aid in the interpretation of the definition and provide more certainty in the determination of what is an eligible R & D activity.
1.3 The objects clause is designed to aid courts and users in the interpretation of what are eligible R & D activities. The objects clause is intended to provide a statement which reflects the 1986 objectives of the R & D tax concession, incorporating the changes made to the definition of R & D activities in 1996 and the changes in this Bill. [Schedule 1, Part 1, item 1, subsection 73B(1AAA) of the ITAA 1936; Schedule 1, Part 1, item 2, section 39AA of the IR & DA 1986]
1.4 The change to the definition of R & D activities is to clarify and strengthen the current definition to ensure that activities that are not R & D cannot be supported by the tax concession. To be eligible for the R & D tax concession, the program of activities will require at least one activity to meet both the innovation and high levels of technical risk criteria. This activity is referred to as a core activity. Other activities within the program will be eligible as long as they are carried on for a purpose directly related to the carrying on of a core R & D activity. [Schedule 1, Part 2, item 3]
1.5 Further, there will now be a requirement that activities will not qualify as R & D activities unless there is an R & D plan in existence that covers the activities carried out. The requirements for the plan will be prescribed in guidelines issued by the IR & D Board. [Schedule 1, Part 3, item 5, subsection 73B(2BA) of the ITAA 1936; Schedule 1, Part 3, item 7, section 39KA of the IR & DA 1986]
1.6 A change has also been made to the section which excludes certain activities from being R & D activities. This change is to ensure that activities that relate to the post-R & D production and commercial activities are not eligible R & D activities. [Schedule 1, Part 4, item 8, subsection 73B(2C) of the ITAA 1936]
1.7 In interpreting the definition of R & D activities, the AAT and Federal Court have, on occasion, made reference to the objective of the IR & DA 1986 as set out in section 3 of that Act.
The object of this Act is to promote the development, and improve the efficiency and international competitiveness, of Australian industry by encouraging research and development activities.
1.8 This statement is one of general encouragement and has resulted in the courts using this objective as a justification to interpret the definition of R & D activities widely.
1.9 The inclusion of a more precise statement of objectives directed at the particular requirements of the tax concession is considered to provide the AAT and the Federal Court with better guidance. It is also consistent with current legislative practice.
1.10 Companies will also benefit by being in a more informed position to self-assess the eligibility of their activities for the R & D tax concession.
1.11 The objects clause has as its basis the objectives of the R & D tax concession as first publicly stated in the second reading speech for the Income Tax Assessment Act Amendment (Research and Development) Bill 1986. It seeks to incorporate the changes made to the definition in 1996 and those in this Bill. It also seeks to limit the parameters of the concession to expenditures in respect of the defined activities.
1.12 The objects clause is inserted into the IR & DA 1986 as the IR & D Board will have a role in determining whether companies satisfy the requirements for the concession. [Schedule 1, Part 1, item 2, section 39AA of the IR & DA 1986]
1.13 A new provision is inserted into the IR & DA 1986 to give the IR & D Board the power to issue guidelines in relation to the making of an R & D plan. [Schedule 1, Part 3, item 7, section 39KA of the IR & DA 1986]
1.14 The definition of R & D activities has been changed to ensure such activities now involve both innovation and high levels of technical risk. This change has been made to maintain the integrity of the concession by focussing on R & D which involves innovation and high levels of technical risk.
1.15 Past court interpretations of the R & D legislation have established low thresholds for both the innovation and technical risk criteria, such that support under the concession could be extended beyond its policy intent.
1.16 Innovation continues to mean an appreciable element of novelty, where novelty means something new or different. High levels of technical risk continues to mean that activities will not involve high levels of technical risk unless there is uncertainty as to whether the technical or scientific outcome can be achieved, and this uncertainty can only be resolved through a program of systematic, investigative and experimental activities. The change to innovation and technical risk is supported by the Frascati definition of R & D activities, which requires the existence of both innovation and technical risk. Such a change will ensure that the focus of R & D activities is where there is uncertainty of outcome and some original thinking is required to resolve the uncertainty.
1.17 The amendment to subsection 73B(2C) will have the effect that those supporting activities which are listed as excluded activities no longer qualify as eligible R & D activities. [Schedule 1, Part 4, item 8, subsection 73B(2C) of the ITAA 1936]
1.18 The activities in the exclusion list, such as, quality control, tooling-up, patent and licensing costs, may be carried on for a purpose directly related to the carrying on of the core activity but relate to the post-R & D production and commercial activities of companies or are activities not otherwise included in the concession.
1.19 Through the introduction of an R & D plan, it is sought to reinforce the importance of planning in R & D. It will also encourage Australian companies to think strategically about their R & D activities as a critical and ongoing part of their business.
1.20 An R & D plan is a plan detailing the R & D activities that the company is planning. The contents, form and timing of the plan will be prescribed in guidelines issued by the IR & D Board. The requirement to prepare a plan applies to all claimants, irrespective of the level of expenditure on eligible R & D activities.
1.21 The amendments to the definition will apply from and including 12.00 pm, by legal time in the Australian Capital Territory, on 29 January 2001. [Schedule 1, Part 2, item 4; Part 3, item 6 and Part 4, item 9]
1.22 All other amendments will commence from the date of Royal Assent.