Explanatory Memorandum(Circulated by the authority of the Treasurer, the Hon John Dawkins, M.P.)
Research and Development Rollover Relief
Purpose of amendment: These amendments will provide for a deferral (or "rollover") of assessable adjustments that could otherwise arise from disposals of property to which the research and development provisions have applied.
Date of Effect: This rollover relief will apply where capital gains tax rollover relief is obtained on the disposal of property between eligible companies, applicable to disposals occurring after [date of introduction] .
Concessional deductions are available for expenditure incurred by eligible companies on research and development (R & D) activities - sections 73B, 73C, 73CA, proposed 73CB and 73D of the Income Tax Assessment Act ("The Act").
The concession presently consists of:
- outright deductions for "core technology" expenditure - broadly, expenditure incurred in acquiring knowledge for use in R & D activities;
- immediate deductions for 150% of expenditure incurred in respect of R & D work performed by approved research agencies on behalf of an eligible company;
- immediate deductions for up to 150% of expenditure incurred by eligible companies in respect of their R & D activities;
- a three year write-off of up to 150% of the cost of plant used exclusively in R & D activities; and
- a three year write-off of the cost of buildings used exclusively in R & D activities where either acquired, or commenced to be constructed, before 21 November 1987.
A disposal of property to which the R & D provisions have applied can result in assessable adjustments.
On the disposal of plant, any consideration for the disposal is compared with the written down value of the plant (broadly, cost less the portion of cost for which deductions have been claimable). The excess of the disposal consideration over written down value is assessable up to the value of the difference between cost and written down value (that is, the portion of the plant's cost which has been allowed as deductions).
In the case of buildings, a disposal of a building within 5 years of it first becoming eligible for deductions can result in a disallowance of all previously allowed deductions. Disposals occurring after 5 years can lead to assessable adjustments similar to those for plant.
Finally, any consideration received on a disposal of either the results of R & D activities or core technology is assessable.
In the case of plant and buildings, taxpayers cannot avoid the operation of the R & D disposal rules by transferring the property below market value. Where that occurs, anti-avoidance rules treat the disposal as occurring at market value, ensuring that the appropriate amounts are brought to account as income.
Similar outcomes can occur on the disposal of property for which deductions have been allowed under other capital allowance provisions which permit deductions for the capital cost of income producing property, eg. plant depreciation, the mining concessions, etc.
However, under those other capital allowance provisions, companies can obtain a deferral of the disposal rules where there is no change in the real ownership of the property, as occurs when the disposal is between companies within a wholly-owned company group. This deferral or "rollover relief" applies when capital gains tax (CGT) rollover relief is obtained for the disposal.
A form of rollover relief, similar to that available under the other capital allowance provisions, is to apply under the R & D provisions to disposals of plant, buildings, and certain industrial property where the disposals are between companies within a wholly-owned company group and CGT rollover relief is obtained under section 160ZZO of the Act. No separate election will be required - the rollover relief will apply automatically where CGT rollover relief is obtained.
The broad effect of this rollover relief is to treat disposals as if they had not occurred and treat the transferor company and transferee company as if a single taxpayer.
There will be no claw back of previously allowed deductions on the disposal of plant or buildings for which R & D deductions have been allowed and the transferee company will inherit the transferor company's deduction entitlements in respect of any undeducted cost of the property.
As a safeguarding measure, the transferee will be taxable on any subsequent recoupment of deductions allowed to the transferor.
Similarly, any consideration receivable on the disposal of either the results of R & D activities or core technology will not be assessable. However, the transferee will be assessable on any consideration receivable on a subsequent disposal of such property.
This R & D rollover relief will be available successively; that is, the "deferral and inheritance" mechanism described above will occur whenever the relevant CGT rollover relief is obtained.
A more detailed explanation of how R & D rollover relief works is contained in the appendices to this chapter.
R & D rollover relief will apply whenever a valid election is made for CGT rollover relief and a separate election will not be needed.
Transferors will need to provide transferees with such information as is necessary for transferees to work out how the rollover provisions will apply to them. For example, on the disposal of an item of plant, a transferor would need to provide the transferee with details of the item's original cost and its written down value.
That information needs to be given within six months of the end of the year of income in which the rollover disposal occurs. Transferees need to keep that information for 5 years after the date on which they dispose of the asset or it is lost or destroyed. [Amendment to existing subsection 262A(4AC), Clause 43]
The amendments are to apply from the same time as the existing capital allowance rollover provisions.
Those other capital allowance rollover relief provisions provided an optional form of rollover relief for disposals that occurred after 6 December 1990 (the date the concession was announced) and on or before 19 December 1991 (the date of introduction of the amending legislation).
Under that option, companies could elect for rollover relief to apply to intra group company disposals irrespective of whether CGT rollover relief was obtained under section 160ZZO.
Disposals occurring after 19 December 1991 (the date those measures were introduced) automatically obtain rollover relief where CGT rollover relief applies.
A similar optional form of rollover relief is to be available for disposals of the type to which these amendments relate that occurred after 6 December 1990 and on or before [date of introduction] .
That optional rollover relief can be obtained by the transferor and transferee companies making a written election within 6 months of the later of the end of the transferor's income year in which the disposal occurred or [date of introduction] .
Such elections do not need to be lodged but should be retained until the end of 5 years after the date on which the property is disposed of or lost or destroyed.
Assessments affected by an election will be amended on receipt of an application from the relevant taxpayer (that follows from existing law - subsection 170(6) of the Act). [Transitional clause 45]
For disposals occurring after [date of introduction], R & D rollover relief will automatically apply where section 160ZZO CGT rollover relief is obtained. [Application clause 44]