House of Representatives

Tax Laws Amendment (2007 Measures No. 2) Bill 2007

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello MP)

Chapter 3 - Certain expenditure on research and development activities

Outline of chapter

3.1 Schedule 3 to this Bill amends the provisions of the Income Tax Assessment Act 1936 (ITAA 1936) relating to expenditure on research and development (R & D). These amendments clarify and make 10 technical amendments to the provisions for the premium incremental concession and the refundable R & D tax offset.

Context of amendments

3.2 The R & D provisions of the ITAA 1936 allow a tax concession for certain expenditure on R & D.

3.3 Two elements of the R & D tax concession, that have applied from the income year starting after 30 June 2001, are the refundable R & D tax offset and the premium incremental concession.

3.4 On 9 May 2006, as part of the 2006-07 Budget, the Government announced it would improve the operation of the R & D provisions by amending taxation legislation to clarify the law, remove unintended consequences and ensure that the law reflects the original policy intent in relation to the R & D tax offset and the premium incremental concession.

Summary of new law

3.5 The new law makes 10 technical amendments to the R & D provisions of the ITAA 1936 to:

·
extend the appeal and review rights to encompass companies claiming the R & D tax offset;
·
extend the time for claiming the R & D tax offset;
·
ensure that the exception to the $20,000 minimum R & D spend rule applies to the R & D tax offset;
·
ensure that all R & D companies are covered by the R & D offset provisions by referring to 'persons' rather than 'taxpayers';
·
correct a section reference;
·
provide a more appropriate allocation of the premium incremental concession between companies in a group;
·
match the group's history with its R & D expenditure;
·
replace a reference to the start grant with a reference to the Commercial Ready program;
·
provide a more appropriate outcome in calculating the amounts relevant to the premium incremental concession; and
·
include a reference to the premium incremental concession as a deduction in section 12-5 of the Income Tax Assessment Act 1997 (ITAA 1997).

Comparison of key features of new law and current law

New law Current law
Companies will be able to object to written notices from the Commissioner of Taxation (Commissioner) if they are dissatisfied with the amount allowed under the R & D tax offset. The current law states that a company can object to an assessment when there is an amount of taxation payable. Companies in a loss situation, however, may not have a year end tax assessment. As an income tax assessment is the trigger for the availability of taxpayer objection and appeal rights those companies who are dissatisfied with decisions by the Commissioner relating to the R & D tax offset are unable to object.
Companies will be able to choose the R & D tax offset in writing to the Commissioner within the normal time for amendment of income tax assessments. Companies must choose the R & D tax offset in the year in which they are entitled to the R & D tax offset. There is no provision for a company to choose the R & D tax offset by amending their original return.
Companies will now be able to claim the R & D tax offset if they have incurred contracted expenditure to a Registered Research Agency, regardless of whether their aggregate expenditure is less than $20,000. The R & D tax concession has a general exception to the $20,000 minimum spend rule for contracted expenditure to a Registered Research Agency on behalf of a company. This exception does not apply if the R & D tax offset is claimed.
The reference to 'taxpayers' will be replaced with 'persons'. The R & D expenditure threshold for offset eligibility applies to all R & D expenditure undertaken by all 'taxpayers' in a group. This may not cover all companies in a group.
Section 73H will now correctly refer to section 73L. Section 73H of the ITAA 1936 incorrectly refers to section 72L.
The premium incremental concession will be distributed amongst all companies that have increased their R & D expenditure over the average of their past three year's expenditure. A group may have increased its R & D expenditure over its three year average and be eligible for the premium incremental concession yet it cannot get the premium incremental concession because distribution rules do not allocate a premium amount to any of the companies in the group.
The R & D provisions will refer to the company's group membership period for eligibility for the premium incremental concession. A group of companies is eligible for the premium incremental concession if one company in the group is eligible. A group may become eligible for the premium incremental concession based on the expenditure of a new company entering the group. As the new company does not take its expenditure history to the new group it should also not automatically make the new group eligible for the premium incremental concession which is based on expenditure not incurred as part of the group. This should only occur in circumstances where a viable business transfer has occurred that assigns the expenditure history of the new company to the new group.
Reference to a 'start grant' is replaced with reference to the Commercial Ready program. Eligibility to the premium incremental concession can be established based on a company receiving a 'start grant'. The R & D Start program to which this refers has been replaced with the Commercial Ready program.
Where the calculation of an incremental amount is negative it will be taken to be zero. Amounts relevant to the 175 per cent premium incremental concession may be calculated to have a negative result for that income year. As this is a tax concession there should not be a negative consequence resulting from its calculation.
Section 12-5 of the ITAA 1997 will now refer to the premium incremental concession. Section 12-5 of the ITAA 1997 is a reference section for all deductions in the income tax law. It currently does not refer to the premium incremental concession.

Detailed explanation of new law

3.6 The 10 technical amendments in this Schedule seek to ensure that the R & D tax offset and the premium incremental concession reflect the original policy intent. They clarify the law in situations where the intended outcome did not occur.

3.7 Companies currently are unable to object to decisions relating to the R & D tax offset due to subsection 175A(2) of the ITAA 1936 stating that a taxpayer with no taxable income cannot object against an assessment unless to increase their tax liability. This Schedule creates a new right of objection for claimants of the R & D tax offset against a written notice from the Commissioner specifying the amount of a R & D tax offset allowable to the company. This objection right will be consistent with other objection rights, such as in the circumstances of the R & D tax concession, according to Part IVC of the Taxation Administration Act 1953 . Companies will be allowed between two and four years to lodge an objection with the Commissioner depending on the complexity of their taxation affairs. The timeframe allowed is aligned with the same timeframe that the Commissioner has to amend the assessment of the taxpayer. [Schedule 3, items 3 and 22]

3.8 Companies are currently required to choose the R & D tax offset in the income year that expenditure is incurred. Companies who have failed to choose the R & D tax offset will be now be able to claim the R & D tax offset by writing to the Commissioner within the normal timeframe that the Commissioner could amend that company's assessment for the relevant income year. [Schedule 3, item 2]

3.9 Under the R & D tax concession there is a general exception to the minimum expenditure threshold of $20,000 if a company incurs contracted expenditure to a Registered Research Agency. This exception will be extended where the company wishes to claim the R & D tax offset for the amount of contracted expenditure. [Schedule 3, item 5]

3.10 The R & D tax offset provisions refer to 'taxpayers' which is too narrow to cover certain companies that the original policy intent was to encompass. References to 'taxpayers' will be replaced with 'persons' that will cover all companies in a group. [Schedule 3, items 7 and 8]

3.11 There is an incorrect section reference (section 73H of the ITAA 1936) in the R & D provisions which will be corrected. [Schedule 3, item 1]

3.12 Under the current law it is possible that a group of companies will be eligible for an amount of the premium incremental concession without any firm in the group being eligible for the distribution of that amount. This situation arises as a group of companies may have a collective expenditure greater than the rolling three year average of the group and hence the group is entitled to an amount of the premium incremental concession. However, it is possible that no company in the group will have increased their expenditure over the previous year's expenditure. In these circumstances, there will be no distribution of the premium amount that the group would otherwise be eligible for. This will be remedied by calculating the distribution of a premium amount to companies in a group based on the companies' expenditure over the average of the previous three year's expenditure. [Schedule 3, item 19]

3.13 A group of companies is eligible for the premium incremental concession when any group member can establish eligibility for the premium incremental concession. Currently, a new company entering a group can make the group automatically eligible for the premium incremental concession if it could establish eligibility by reference to R & D expenditure incurred prior to joining the group. As the new company entering the group does not take its expenditure history to the new group it should also not automatically make the new group eligible for the premium incremental concession based on expenditure not incurred as a member of the group. The new law will ensure that if a company is unable to take its expenditure history to a new group, which is allowed by viable business transfers, it will not be able to establish eligibility for the group to the premium incremental concession based on expenditure incurred when the company was not a member of the group. [Schedule 3, items 12 and 13]

3.14 The R & D Start program which can be used to establish eligibility for the premium incremental concession no longer exists. This program was abolished and replaced with the Commercial Ready program that commenced on 6 May 2004. Companies will now be able to establish eligibility for the premium incremental concession based on a payment under the Commercial Ready program. [Schedule 3, items 10 and 15]

3.15 The R & D provisions specify a method for calculating the incremental amount a group of companies or a single company may deduct. This calculation may lead to a negative incremental amount where the aggregate R & D expenditure of the company or group of companies is less than the average of the previous three years of R & D expenditure. As the premium incremental concession is intended to provide a benefit to eligible companies, in these circumstances negative amounts will now be taken to be zero. [Schedule 3, item 17]

3.16 Section 12-5 of the ITAA 1997 provides a reference list of deductions in the tax law. This list will now include the premium incremental concession. [Schedule 3, item 21]

Application and transitional provisions

3.17 The amendment to create a new objection right for taxpayers dissatisfied with the amount allowable under the R & D tax offset applies to years of income commencing on or after 1 July 2001, which is the date of commencement for the R & D tax offset. The amendment creating a timeframe of two to four years applies from Royal Assent. [Schedule 3, item 4]

3.18 The amendment to allow companies to choose the R & D tax offset by writing to the Commissioner within the normal time for amendment applies from the date of Royal Assent.

3.19 The extension of the general exception for contracted expenditure of the minimum expenditure threshold applies from income years commencing on or after the day on which this amendment receives Royal Assent. [Schedule 3, item 6]

3.20 The reference to persons rather than taxpayers in the R & D tax offset provisions will apply from the first year of income commencing after 9 May 2006 and later years. [Schedule 3, item 9]

3.21 The correction of the section reference will apply from the date of Royal Assent.

3.22 The amendment relating to the distribution of the incremental amount applies from the year of income following the year of income in which these amendments receive Royal Assent and later years. [Schedule 3, item 20]

3.23 The amendment that refers the eligibility for the premium incremental concession to a company's group membership applies from the year of income following the year of income in which this amendment receives Royal Assent and later years. [Schedule 3, item 14]

3.24 The reference to the Commercial Ready program in place of the start grant in the premium incremental concession provision will apply from 6 May 2004 which is the date of the Commercial Ready program's announcement. [Schedule 3, items 11 and 16]

3.25 The amendment of the calculation for the incremental amount to be taken as zero applies to years of income commencing on or after 1 July 2001. [Schedule 3, item 18]

3.26 The reference to the premium incremental concession in the reference list of deductions in the income tax law applies from Royal Assent.


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