Senate

Taxation Laws Amendment Bill (No. 4) 1994

Income Tax (Former Complying Superannuation Funds) Bill 1994

Income Tax (Former Complying Superannuation Funds) Act 1994

Income Tax (Former Non-Resident Superannuation Funds) Bill 1994

Income Tax (Former Non-resident Superannuation Funds) Act 1994

Income Tax Rates Amendment Bill 1994

Income Tax (Deficit Deferral) Bill 1994

Income Tax (Deficit Deferral) Act 1994

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Ralph Willis, MP)
THIS MEMORANDUM TAKES ACCOUNT OF AMENDMENTS MADE BY THE HOUSE OF REPRESENTATIVES TO THE BILL AS INTRODUCED

Research and Development Activitites

Overview

8.1 The Bill proposes amendments to the Income Tax Assessment Act 1936 (ITAA) and the Industry, Research and Development Act 1986 (IR & D Act) to achieve three outcomes to give effect to the changes announced in the Working Nation White Paper of 4 May 1994. These are to:

(a)
amend the ITAA to allow the highest available rate of deduction for research and development (R & D) expenditure once the $20,000 threshold (where it applies) is exceeded, in place of the present shading-in of the top rate as the 'aggregate research and development amount' for the year approaches $50,000;
(b)
allow certain expenditure incurred on R & D activities undertaken outside Australia to be eligible for the concession by:
(i)
amending the ITAA to allow a deduction for expenditure incurred on R & D activities conducted outside Australia that have been given prior approval by the Industry Research and Development Board (the Board); and
(ii)
amending the IR & D Act to give the Board the power to approve proposed overseas R & D activities of companies that meet certain eligibility criteria; and
(c)
reduce the expenditure threshold in the IR & D Act from $1,000,000 to $500,000 for companies registering jointly.

Summary of the amendments

Purpose of the amendments

(a) Elimination of shading-in rules

8.2 The purpose of the amendments is to allow companies whose qualifying R & D expenditure exceeds $20,000 to obtain the full benefit of the 150 per cent concession. The present rules for calculating the 'aggregate research and development amount' will continue to apply. [Items 14 and 15 of Schedule 4; amended subsections 73B(14) and 15(a)]

8.3 The broader purpose is that qualifying companies should all get deductions at the same rate for the same kind of expenditure in the same circumstances provided their aggregate expenditure for the year is enough to qualify under the law. This will remove the disadvantage to those companies with lower, but qualifying, levels of R & D expenditure.

(b) Expenditure on overseas R & D activities

At present, R & D expenditure is only deductible under the R & D concession if it is incurred in respect of R & D activities carried on in Australia or an external Territory. The purpose of the amendments is to allow some R & D expenditure incurred in respect of R & D activities carried on overseas to be deductible under the R & D concession.

R & D expenditure will be deductible when it is incurred in respect of overseas R & D activities that have been certified by the Industry Research and Development Board. The Board is required to establish guidelines for certifying overseas R & D activities, which will expand on the statutory minimum requirements.

The broader purpose of the amendments is that companies should not be precluded from pursuing R & D projects which require some overseas R & D activities, provided that R & D activities will be carried out in Australia as far as possible, and overseas R & D activities represent no more than a limited part of an overall project of R & D. [Item 16 of Schedule 4; new subsection 73B(17A)]

Reduced expenditure threshold for syndicates

8.7 Joint registration, so that individual expenditure on a joint project of R & D activities will qualify for the R & D concession, is the way for companies to pool their resources for a common project. Among other tests, joint registration requires expenditure on the joint project of at least $1 million. The purpose of these amendments is to reduce the threshold to $500,000.

8.8 The broader purpose is to encourage companies to consider the possibility of joint registration of R & D activities on a smaller scale than the existing rules would allow. This would particularly cater for joint registration of R & D activities of interest to a small number of participants or to participants with a narrower range of commercial interests. The reduced threshold for joint registration is meant to facilitate the use of syndicate structures by small-to-medium-sized companies, by allowing joint registration for the smaller R & D projects in which they are interested. This is not likely to advantage the larger syndicates, which are commonly based on large projects of wide commercial interest. [Item 6 of Schedule 4; amended paragraph 39P(3)(c)]

Date of effect

8.9 (a) The elimination of shading-in rules will apply to deductions claimed for the 1994-95 or later years of income in respect of expenditure related to R & D activities. [Item 22 of Schedule 4]

8.10 (b) The deduction for expenditure incurred on approved overseas R & D activities will be available for expenditure incurred after the Bill receives Royal Assent. [Item 22 of Schedule 4]

8.11 (c) The reduced expenditure threshold for syndicates will apply to syndicate registrations on or after 1 July 1994 in respect of any proposed project starting on or after that date and including R & D activities. [Item 8 of Schedule 4]

Background to the legislation

(a) Elimination of shading-in rules

The R & D concession is available to an eligible company for expenditure incurred, on or after 1 July 1985, on qualifying R & D in Australia. The concession allows a deduction for expenditure on qualifying R & D activities at rates varying from 100 per cent to 150 per cent.

Because R & D is generally of a capital nature, expenditure on it is generally not deductible under the general deduction provision of the income tax law, section 51 of the ITAA.

Qualifying R & D must be carried out on behalf of the eligible company, and on behalf of no-one else, unless the syndicate rules apply.

An eligible company may be entitled to a deduction at a rate greater than 100 per cent where 'aggregate R & D expenditure' for the year is greater than $20,000 (subsection 73B(14)). Where the R & D expenditure is between $20,000 and $50,000, the rate at which the deduction may be allowable increases proportionately from 100 per cent to 150 per cent. R & D expenditure of $50,000 or more may qualify for deduction at 150 per cent. The factor by which qualifying expenditure on R & D activities is multiplied to determine the amount of the deduction allowable is the 'deduction acceleration factor' (subsection 73B(1)). Some kinds of expenditure are never allowable at a higher rate of deductibility than 100 per cent. The usual maximum rate of deductibility is further reduced if the company's expenditure is not at risk.

Expenditure on overseas R & D activities

It is only expenditure on R & D activities carried out in Australia or an external Territory that qualifies for the concession.

Reduced expenditure threshold for syndicates

Syndicates of two or more companies that are formed to finance expenditure on R & D activities of $1 million or more can qualify for deductions under section 73B. The $1 million threshold was designed to encourage a minimum level of R & D investment that was thought to be consistent with an innovative company or project, and also to save on the disproportionate administrative overheads in processing low-value applications.

Explanation of the amendments

Amendments to the Income Tax Assessment Act 1936

(a) Elimination of shading-in rules

8.18 As the 'aggregate research and development amount' for an eligible company for a year of income increases from $20,001 to $50,000, the highest possible rate of deduction available to the company for some kinds of expenditure rises from 100 per cent to 150 per cent. In other words, the top rate of deduction shades in as the aggregate rises from $20,001 to $50,000. There is no expenditure threshold for expenditure contracted to an eligible research agency, and all the contracted expenditure qualifies for deduction at the rate of 150 per cent (subsection 73B(13)). 'At risk' rules may reduce the actual rate of deduction from 150 per cent, and some kinds of expenditure are allowable only at 100 per cent, or are allowable at the highest possible rate regardless of the aggregate.

8.19 Core technology expenditure is only deductible at 100 per cent, as is the limited building expenditure deductible over three years under the concession; contracted expenditure - that is, payments to certain approved research bodies to have them carry out R & D on behalf of the company - is deductible at the highest possible rate, regardless of the aggregate. Other R & D expenditure, including R & D plant expenditure that is deductible over three years, is deductible at a rate which reflects the aggregate.

8.20 The 'aggregate research and development amount' is defined in the law (definition, subsection 73B(1)). In essence, it includes actual expenditures that relate to qualifying R & D activities, to the extent that they are taken into account or taken to be incurred in calculating deductions for the particular year. So the aggregate includes core technology expenditure, contracted expenditure, the one-third of total qualifying plant expenditure and building expenditure by reference to which a year's deductions are calculated, the amount of any deductions under Division 10D writing off the capital cost of a building or part of a building used for the purpose of carrying on R & D activities, and the whole of other qualifying R & D expenditure for the year.

8.21 Core technology is knowledge, or the product of applying knowledge, that is extended, continued, developed or completed as a result of R & D activities. It is core technology in relation to those R & D activities. (Subsection 73B(1AB); definitions, 'core technology', 'technology', subsection 73B(1))

8.22 Other provisions also affect the calculation of the 'aggregate research and development amount'. Pilot plant expenditure is reduced to a maximum of $10 million where construction of the plant began, or a contract for its acquisition or construction was entered into, before 19 August 1992 (subsection 73B(6)).

8.23 Advance R & D expenditure - in effect, certain prepayments covering a longer period than 13 months from the day the expenditure is incurred - will be taken to be incurred equally over the period to which it relates (subsection 73B(11), and definitions of 'advance R & D expenditure' and 'accelerated expenditure' in subsection 73B(1)).

8.24 Contracted expenditure is included in the 'aggregate research and development amount', but it is not affected by it, because contracted expenditure is deductible regardless of the aggregate amount (subsection 73B(13)).

8.25 The effect of the proposed amendments relating to overseas R & D activities should be noted. R & D expenditure related to overseas R & D activities will count towards the aggregate only to the extent to which the expenditure is deductible in that year. This is consistent with the other aspects of the definition of the 'aggregate research and development amount', which includes R & D expenditure only as and to the extent to which it is deductible as such.

8.26 Any excess deduction over 100 per cent proportionately reduces as the expenditure to which the deduction relates is not at risk (section 73CA). Core technology expenditure is expenditure on getting core technology or the right to use core technology; for purposes of R & D activities. That expenditure is only deductible at 100 per cent (subsection 73B(12)).

8.27 Under the proposed amendments qualifying R & D expenditure over $20,000 for the 1994-95 and later years of income may be deductible at the highest possible rate of 150 per cent. The 'deduction acceleration factor' will be omitted from the definitions in subsection 73B(1) because it will not be used to determine the amount of the deduction allowable. [Item 11 of Schedule 4; definition of 'deduction acceleration factor' in subsection 73B(1)]

8.28 Instead, the Bill will amend subsection (14) and (15)(a) by omitting 'the deduction acceleration factor in relation to the company in relation to the year of income' and substituting '1.5'. The amendment will allow qualifying R & D expenditure, incurred in the 1994-95 and later years of income, to be multiplied by 1.5, where the 'aggregate research and development amount' is more than $20,000, to determine the amount of the allowable deduction.

8.29 This expenditure will continue to be subject to the risk provisions of section 73CA, and the risk rules precluding deductions for expenditure to government bodies if the expenditure is not at risk (section 73CB). [Item 14 and 15 of Schedule 4; amended subsections 73B(14) and (15)(a)]

Other amendments

8.30 Certain other provisions will be amended as a consequence of the elimination of the shading-in provisions and the removal of the definition of 'deduction acceleration factor' from the definitions in subsection 73B(1). Changes will be made to replace the reference to 'deduction acceleration factor' with '1.5', which will be the rate that certain expenditure will be multiplied by to determine the deductible amount.

8.31 Subsection 73C(9) specifies that where clawback applies to expenditure, a deduction acceleration factor does not apply and the rate of deduction is limited to 100 per cent of that expenditure. This will be amended to retain the same meaning as the existing provision. Because of the elimination of the shading-in provisions and the removal of the 'deduction acceleration factor' from the definitions in subsection 73B(1) the provision will state that if clawback applies to expenditure, subsection 73B(14) and paragraph 73B(15)(a) have effect as if 'multiplied by 1.5' were omitted from that subsection and paragraph. [Item 20 of Schedule 4; amended subsection 73C(9)]

8.32 Subsections 73B(23) and (24) contain provisions which take effect on the disposal, loss or destruction of plant or pilot plant that has been used exclusively for R & D activities and in respect of which a deduction under section 73B applied. Where the written down value exceeds the consideration received on the disposal, loss or destruction of plant or pilot plant a company may be allowed a deduction of the excess amount. The deduction allowable is the amount of the excess, increased by the deduction acceleration factor, where the 'aggregate research and development amount' for the year of income exceeds $20,000.

8.33 Subparagraph 73B(23)(e)(i) and paragraph 73B(24)(e) will be amended to remove 'the deduction acceleration factor in relation to the company in relation to the year of income' and substituting it with '1.5'. This amendment will not change the effect of these provisions. [Items 17 and 18 of Schedule 4; amended subparagraph 73B(23)(e)(i) and paragraph 73B(24)(e)]

(b) Expenditure on overseas R & D activities

8.34 Under the existing law, deductions are allowable for specified expenditure in relation to R & D activities. R & D activities must be carried on in Australia or in an external Territory (the definition of 'research and development activities', subsection 73B(1)). The proposed amendments will allow some expenditure in relation to certain R & D activities carried on outside Australia and an external Territory to qualify for the concession. [Item 13 of Schedule 4; substituted definition of 'research and development activities', subsection 73B(1) and Item 16 of Schedule 4; new subsection 73B(17A)]

8.35 The concession will only be available for expenditure on overseas activities that have been approved by the Board before the expenditure is incurred. A provisional certificate (see later notes), given to a company under the proposed section 39EE of the IR & D Act, will specify the overseas activities (and the amount of expected expenditure on those activities) that have been approved by the Board. [Item 12 of Schedule 4; definition of 'certified expenditure' in subsection 73B(1) and item 3 of Schedule 4; new sections 39ED and 39EE of the IR & D Act]

Deductible expenditure on overseas R & D activities

8.36 Expenditure on the overseas R & D activities that can qualify for deduction under section 73B will be:

·
core technology expenditure (subsection 73B(12));
·
plant expenditure (subsection 73B(15));
·
building expenditure (subsection 73B(17));
·
contracted expenditure on the approved overseas R & D activities (subsection 73B(13));
·
salary expenditure on those activities (subsection 73B(14)); and
·
other expenditure carried out by or on behalf of the company in relation to those activities (subsection (73B(14)).

8.37 This means that the same sort of expenditure that is deductible in relation to Australian R & D activities can be deductible in relation to overseas R & D activities. However, new subsection 73B(17A) will limit the deduction for expenditure on overseas R & D activities to expenditure that is 'certified expenditure'. [Item 16 of Schedule 4; new subsection 73B(17A)]

8.38 Generally such expenditure can be deducted only under section 73B; in any case where it may also be deducted under another provision, section 82 prevents double deductions.

Certified expenditure

8.39 In order to be eligible for a deduction, proposed expenditure on overseas R & D activities must qualify as 'certified expenditure' (subsection 73B(17A). 'Certified expenditure' will be a new definition in subsection 73B(1). 'Certified expenditure' is expenditure an eligible company incurs on overseas R & D activities where:

·
the company is the holder of a provisional certificate issued by the Board in relation to those overseas activities; and
·
the expenditure is incurred by the company after the provisional certificate is issued.

[Item 12 of Schedule 4; definition of 'certified expenditure' in subsection 73B(1)]

8.40 Provisional certificates issued by the Board may identify particular activities by reference to particular expenditures, or particular total expenditures. In such cases, the R & D activities are certified only to that extent; expenditures other than those identified, or exceeding the total given, would not be certified expenditure. Such other expenditures would not be incurred in respect of activities in respect of which the Board gave a provisional certificate before the expenditure was incurred.

8.41 A company's review rights in respect of the Board's refusal, or deemed refusal, to issue a provisional certificate for certain R & D activities are against the Board rather than the Commissioner. This reflects the need for the decision and review of the decision to be based on expert knowledge in relation to R & D activities.

R & D activities

8.42 The present definition of 'research and development activities' will be amended to exclude the requirement that the activities must be carried on in Australia or in an external Territory. The subsections that now allow a deduction for certain types of expenditure on 'research and development activities' will be given a wider application without any need to amend the subsections themselves because the present definition of 'research and development activities' will include both Australian and overseas R & D activities. [Item 13 of Schedule 4; amended definition of 'research and development activities' in section 73B(1)]

8.43 Subsections (12), (13), (14), (15) and (17) will therefore also allow a deduction for expenditure incurred on overseas R & D activities. Those deductions will be limited to deductions in respect of certified expenditure where the activities were overseas R & D activities. [Item 16 of Schedule 4; new subsection 73B(17A)]

8.44 A new definition will be provided for R & D activities carried on in Australia or in an external Territory. These activities will be defined as 'Australian R & D activities'. The term will have the same meaning as the existing definition of 'research and development activities' and will be used in various sections of the IR & D Act. Other than as a definition in subsection 73B(1) the term does not need to be been used in the ITAA. [Item 12 of Schedule 4; new definition of 'Australian R & D activities' in section 73B(1)]

8.45 A new definition will be provided for R & D activities carried on outside Australia or an external Territory in subsection 73B(1). These activities will be defined as 'overseas research and development activities'. This term will be used in the definition of 'certified expenditure' and in new subsection 73B(17A) to restrict a deduction for expenditure on overseas R & D activities to expenditure that is 'certified expenditure'. [Item 12 of Schedule 4; new definition of 'overseas research and development activities' in section 73B(1)]

Aggregate R & D amount

8.46 Aggregate R & D amount is defined in subsection 73B(1) of the ITAA. It specifies the expenditure items that are included in the calculation of 'aggregate research and development amount'. The amount of deduction allowable under subsection 73B(14) and (15) is dependent on the 'aggregate research and development amount'. Where the 'aggregate research and development amount' exceeds $20,000 the rate of deduction will be 150 per cent of the expenditure amount. (Refer to paragraphs 8.18 to 8.25 for a more detailed explanation on the 'aggregate research and development amount').

8.47 Expenditure on overseas R & D activities will be included in the 'aggregate research and development amount' only to the extent that it is certified expenditure. This means that only the amount of expenditure that qualifies as a deduction under section 73B will be included in the calculation of 'aggregate research and development amount'. This is consistent with the other aspects of the definition of the 'aggregate research and development amount', which includes R & D expenditure only to the extent to which it is deductible in the relevant year. [Item 10 of Schedule 4; amended definition of 'aggregate research and development amount' in subsection 73B(1)]

Board to decide whether actual overseas activities are those described in provisional certificate

8.48 A provisional certificate will only be issued by the Board for particular eligible 'overseas research and development activities' (as defined in section 73B). However there may be a dispute between the company and the Commissioner as to whether particular activities conducted by the company are the activities described in a particular provisional certificate. In such circumstances the Commissioner will be able to ask the Board, under new subsection 39LAA(1), to settle the matter under dispute. [Item 5 of Schedule 4; new subsection 39LAA(1) of the IR & D Act]

8.49 The Board's decision will be provided in a certificate given to the Commissioner, with a copy to the company, that states whether the overseas R & D activities that have been or are being carried on by or on behalf of an eligible company were or are the activities that are described in a particular provisional certificate. [Item 5 of Schedule 4; new subsection 39LAA(1) of the IR & D Act]

8.50 If the Board decides that the particular activities were not described in a provisional certificate given to the company, the Board must provide the company with a statement of the reasons for that decision. [Item 5 of Schedule 4; new subsection 39LAA(2) of the IR & D Act]

8.51 A company's review rights in respect of such a certificate are against the Board rather than the Commissioner. This reflects the Commissioner's administrative role; the Commissioner is not expert in deciding what activities are R & D activities and whether they are the particular activities approved by the Board, and so would rely on the Board in cases of dispute. [Subitem 7(b) of Schedule 4; insertion of reference to section 39LAA in section 39S of the IR & D Act]

Effect of a certificate issued to the Commissioner by the Board

8.52 The purpose of the certificate will be to inform the Commissioner whether the overseas R & D activities for which the company is seeking a deduction against assessable income were the activities approved in the provisional certificate.

8.53 The certificate issued by the Board is binding on the Commissioner for the purpose of making an assessment of the company's taxable income for any relevant year of income. That year of income need not be the year in which the R & D activities themselves were carried out; the related expenditure may have been incurred in a different year. That year of income need not be the year in which the related expenditure was incurred; it may have been plant expenditure, or expenditure for which deductions are allowable under Division 10D of the ITAA. [Item 19 of Schedule 4; new subsection 73B(34A)]

8.54 The information on the R & D activities provided to the Commissioner by the Board, together with expenditure details provided by the taxpayer, will enable the Commissioner to determine the deductible amount for expenditure incurred on overseas R & D activities on a particular project.

Amendment to definition of 'research and development activities' in subsection 124ZF(1)

8.55 Section 124ZF is an interpretative provision containing definitions of various expressions used in Division 10D of Part III of the ITAA. The Division provides a special system of tax deductions for capital expenditure incurred on the construction, extension, alteration or improvement of buildings in Australia - in effect the original cost of building work - which are used for the purpose of producing assessable income; or which are used for the purposes of carrying on R & D activities where the activities are carried on Australia or elsewhere in connection with a business conducted for the purpose of producing assessable income.

8.56 The present definition of 'research and development activities' in subsection 124ZF(1) obtains its meaning in part from the definition in section 73B. However, the definition in subsection 124ZF(1) extends the section 73B definition of 'research and development activities' to include activities that are carried on overseas.

8.57 The proposed amendment to the definition of 'research and development activities' in section 73B will exclude the requirement that the activities must be carried on in Australia or in an external Territory. The definition of 'research and development activities' 124ZF(1) will therefore be amended to take into account the new meaning that 'research and development activities' will have under section 73B. The new definition of 'research and development activities' in subsection 124ZF(1) will have the same meaning as the existing definition in that subsection. Division 10D will continue to apply even though the building (or part of a building) is used for R & D on behalf of a taxpayer other than an eligible company. [Item 21 of Schedule 4; substituted paragraph 124ZF(1)(a)(ii)]

Amendments to the Industry Research and Development Act 1986

(b) Expenditure on overseas R & D activities

8.58 Several features of the proposed changes require amendments to the Industry Research and Development Act 1986. The changes in relation to overseas R & D activities will give the Board the power to give provisional certificates in relation to overseas R & D activities, and the responsibility for making the rules by which requests for those certificates will be decided. The Board will also be made responsible for giving the ATO binding certificates in relation to a company's overseas R & D activities, on request from the ATO.

Criteria for overseas R & D activities

8.59 The proposed amendments will give the Board the power to set criteria to be met by a company seeking a provisional certificate in relation to proposed overseas R & D activities. [Item 3 of Schedule 4; new subsection 39EB(1)]

8.60 By allowing the Board to formulate criteria, the Board will be able to respond quickly to changing market circumstances instead of the delay and additional cost to Government that would be involved if the criteria required legislative amendments. This will give the Board greater flexibility to grant provisional certificates than if all the criteria were contained in the legislation. The proposed operational structure is also considered necessary in order to cater for the possible complex and diverse circumstances that may lead a company to undertake R & D activities outside Australia.

8.61 The criteria set by the Board will be limited in two ways. First, they must include some key requirements set out in legislation. Second, they will be made in the form of written guidelines which will be subject to disallowance by either chamber of Parliament; this ensures Parliamentary supervision of all requirements not directly included in legislation. [Item 3 of Schedule 4; new subsections 39EB(3) and (4)]

8.62 The criteria set by the Board will be public and readily available. They will be published in the Gazette; they must be made available free to any Australian company that asks for them; and the first version of those criteria must be made as soon as possible after these legislative changes commence, and no later than ninety days from that date. [Item 3 of Schedule 4; new subsections 39EB(1) and (2)]

Legislative criteria

8.63 The three mandatory elements of any criteria set out by the Board are as follows.

8.64 First, the company must show the Board that the proposed overseas R & D activities cannot be carried out in Australia (or its external territories). This is not meant to preclude overseas R & D activities altogether, and so does not require that activities be done here regardless of available resources or cost. However, the fact that facilities for a particular activity are presently unavailable here will not be sufficient to show that the activity cannot be carried out here - it may be reasonable for appropriate facilities or expertise to be created here. Considerations of relative cost, timing, and available resources may be relevant to this criterion. [Item 3 of Schedule 4; new paragraph 39EB(3)(a)]

8.65 Second, the company must show the Board that the results of the overseas R & D activities will be exploited for the benefit of the Australian economy and by the company concerned. This requires exploitation to be on terms at least as favourable to the company concerned as an arm's length arrangement entered into purely for commercial reasons, and without related purposes. [Item 3 of Schedule 4; new paragraph 39EB(3)(b)]

8.66 Third, the company must show the Board that the proposed expenditure on overseas R & D activities for which the company proposes to claim a deduction under section 73B of the ITAA, will not exceed 10 per cent of the total expenditure that the company proposes to incur on the project of R & D activities.

8.67 A project might be well advanced before there is any need to carry on overseas R & D activities. Where a project is in progress, this criterion will allow a company to apply for approval for proposed overseas R & D activities calculated on the basis that the proposed activities will not exceed 10 per cent of the total expenditure already incurred or proposed for the project. [Item 3 of Schedule 4; new paragraph 39EB(3)(c)]

Possible additional criteria

8.68 Additional criteria may be contained in the guidelines that a company will need to satisfy to be given a provisional certificate. Some further criteria that will be considered by the Board include the following:

·
The company must be able to demonstrate that the proposed R & D activities cannot be undertaken in Australia by showing that:
(i)
the scientific and technological resources required to undertake the work do not exist in Australia; and

(ii)
the cost of establishing the required facilities, trained personnel and research data bases in Australia is prohibitive both in terms of time and money;
(iii)
The results of the R & D undertaken overseas will form part of a larger R & D project which will include R & D to be undertaken in Australia;

·
The R & D that is to be undertaken overseas shall take the form of an arm's length arrangement with a party or parties that are neither related to nor associated with the Australian company;
·
The results of overseas R & D activities must be exploited by the company for the benefit of the Australian economy and the company must be able to demonstrate that:

(i)
manufacture and production use of the R & D results will occur in Australia. This will not preclude subsequent manufacturing operations from being established overseas;
(ii)
commercialisation of the R & D results will in general be undertaken from Australia. However the Board may consider arrangements that involve the use of international marketing agreements with appropriate payments at arm's length rates to the Australian company to strategically position new products on world markets; and
(iii)
there will be no restrictions placed on the new technology that may limit its exploitation or use by the Australian company in relation to international markets.

·
The results of the R & D that is undertaken overseas must be transferred to Australia and must remain the property of the Australian company. Where the overseas organisation is a research institution such as the equivalent of CSIRO or a university, then some discretion will be applied in relation to the issue of publication rights;
·
A company must notify the Board of any changes to the planned R & D activities forming part of the project for which a certificate has been sought, or to the budgeted costs of the project. This requirement would continue while an application for a certificate is pending, and once a certificate is granted. (Companies refused a certificate have no continuing obligation; companies seeking a change to a certificate will in any case have to provide such information.) Before an application is dealt with, this information will be required because otherwise the application could be considered on the basis of information which has become misleading. After an application has been granted, there may be developments or changes of plan which do not require amendment of the provisional certificate, but which affect the basis on which the certificate was granted. The Board should be able to require that companies inform it of such changes. This will enable it to check whether its other requirements are sufficient to ensure appropriate decision making, for example.

Application for a provisional certificate

8.69 An eligible company will be allowed a deduction for certified expenditure under section 73B of the ITAA. Certified expenditure is expenditure incurred on overseas R & D activities after a provisional certificate relating to those activities has been given to the company. A company may apply to the Board for a provisional certificate in relation to proposed overseas R & D activities. The application will need to:

·
be in writing;
·
describe the project to which the proposed overseas activities relate;
·
describe the proposed overseas activities;
·
state the respective amounts of expenditure proposed to be incurred by the company on the project that relate to:

(i)
Australian R & D activities; and
(ii)
overseas R & D activities; and
(ii)
if the company proposes to claim a deduction under section 73B of the ITAA, for part only of the expenditure incurred on overseas R & D activities, the amount of that part of the expenditure.

·
be accompanied by any other information that the Board reasonably requires. The other information that the Board may require could include information relevant to the criteria set by the Board, such as the rationale for the activities being carried on overseas, the mechanisms to be implemented for commercialisation of the R & D results and intellectual property arrangements. The other information could also include other material, for instance information on the applicant and its other activities, that would help the Board to discharge its responsibilities. [Item 3 of Schedule 4; new section 39EC]

8.70 A company that started a project before 1 July 1994 will be eligible to apply for a provisional certificate for any proposed overseas R & D activities. However, the provisional certificate will be restricted to expenditure incurred after the certificate is issued and on the activities specified on the certificate. (The activities themselves may have already commenced, like the project.)

Calculation of the 10 per cent limit

8.71 Companies must advise the Board, in their application for a provisional certificate, the amount of expenditure that they propose to claim as a deduction under section 73B on the ITAA. The deduction allowable for overseas R & D activities will be limited to 10 per cent of the total project expenditure that a company has incurred and proposes to incur from the day the project commenced until the day the project is completed. The proposed deduction for expenditure on overseas R & D activities will be the lesser of:

·
the proposed expenditure on overseas R & D activities; or
·
10 per cent of the total expenditure that the company has incurred or proposes to incur on the project of R & D activities.

Provisional certificate

8.72 The Board will have 90 days to decide whether to issue a provisional certificate in relation to an application received from a company. A 90 day period has been set to ensure that companies seeking to perform R & D outside Australia do not suffer as a result of administrative delays. If at the end of 90 days the Board has not made a decision then it is taken to have made a decision to refuse the application. This deemed refusal triggers rights of review of the Board's decision. The Board may, during the original 90 day period, ask the company for additional information in relation to its application. A new 90 day period will start after the Board has received the additional information from the company. [Item 3 of Schedule 4; new section 39ED]

8.73 A provisional certificate will be issued by the Board showing the overseas R & D activities that will qualify for the concession. It is only expenditure on the overseas R & D activities covered by a provisional certificate and incurred to the extent of the limit shown on the certificate that will qualify for the concession. Expenditure incurred on the overseas R & D activities before the Board issues the provisional certificate will not qualify for the concession.

8.74 When the Board issues a provisional certificate under new section 39ED that certificate will:

·
describe the overseas R & D activities covered by the certificate;
·
describe the overall project of R & D activities to which the overseas R & D activities relate;
·
state the amount of proposed expenditure on overseas R & D activities in respect of which the company proposes to claim a deduction under section 73B of the ITAA; and
·
contain any other matters that the Board considers relevant. These other matters may relate to the provisional certificate criteria that will be set out by the Board in the guidelines. [Item 3 of Schedule 4; new subsection 39EE(1)]

8.75 One possible feature of provisional certificates might be the identification of the overseas R & D activities by reference to identifiable expenditures or levels of expenditure. For example, an activity could be described as the activity for which the company is to incur expenditure to a particular institution under a particular agreement in relation to the project; it could be described as the activity in a particular project plan to the extent of a particular level of expenditure overall. Such a feature might be appropriate to a range of circumstances in which a particular part of a project of R & D is to be carried out overseas.

Amendments to the provisional certificate

8.76 A company which holds a provisional certificate may seek to have the Board vary it. There could be a change to add other overseas R & D activities, or to alter the description of particular activities to agree more precisely with what is proposed. There could be a change to the maximum amount in respect of which the company proposes to claim. (There could be related changes, removing references to particular overseas R & D activities which are no longer proposed to be carried out, or altering the description of the project of R & D if the project changes direction.) These changes are significant, because expenditure in relation to overseas R & D activities cannot be deducted unless the Board had given a certificate in relation to those activities before the expenditure was incurred. Changes to total expenditure, or to projected expenditure on particular activities, might require changes to the overseas activities specified by the Board's certificate. [Item 3 of Schedule 4; new subsection 39EE(2)]

8.77 The Board considers the request for an amendment in the light of the same criteria which apply to first time applications. The amendment will be considered in respect of the revised project as if it were a new application.

8.78 The original certificate must be returned to the Board, and the Board will amend the certificate and return the amended certificate to the company. This avoids the problem of a company having two inconsistent certificates at the same time. [Item 3 of Schedule 4; new subsection 39EE(3)]

Certificate issued to the Commissioner

8.79 The Commissioner of Taxation will be able to request from the Board a binding certificate concerning the overseas R & D activities of a company. The certificate given to the Commissioner by the Board will state whether any particular activities that have been or are being carried on by or on behalf of an eligible company were or are described in a provisional certificate given to a company.

8.80 The Commissioner will only need to request such certificates for particular activities where there is dispute over whether the activities are covered by a provisional certificate given to the company. Ordinarily the Commissioner's requests would be confined to the matter in dispute. Where the Commissioner requests a certificate from the Board, the Board must comply with that request. The Board will also have the power to issue a certificate without receiving a request from the Commissioner. [Item 5 of Schedule 4; new subsection 39LAA(1)]

8.81 Where the Board gives a certificate to the Commissioner it must also provide a copy of that certificate to the company. Where the Board has decided that certain activities were not covered by the certificate it must give the reasons for those decisions to the company concerned. [Item 5 of Schedule 4; new subsection 39LAA(2)]

Review of Board decisions

8.82 Section 39S will be amended to allow a company to request an internal review where the Board has:

·
refused to grant a provisional certificate [subitem 7(a) of Schedule 4; insertion of reference to subsection 39ED in subsection 39S(1)];
·
refused to vary a provisional certificate that has been issued to a company [subitem 7(a) of Schedule 4; insertion of reference to section 39EE(3) in subsection 39S(1)];
·
issued a certificate to the Commissioner under new subsection 39LAA(1) that states that the companies overseas R & D activities are not the activities described in a particular provisional certificate [subitem 7(b) of Schedule 4; insertion of reference to section 39LAA in subsection 39S(1)].

8.83 Following such a review, if the company is still dissatisfied with the Board's decision it will be entitled to lodge a request for review with the Administrative Appeals Tribunal in accordance with section 39T of the IR & D Act.

Other amendments

8.84 The proposed amendments to subsection 39E(1) and section 39F are required to maintain the existing interpretation of the subsection and section. The proposed amendments are necessary because the definition of 'research and development activities' in the ITAA will change from Australian R & D activities to Australian and overseas R & D activities.

8.85 Section 39E requires the Board to formulate guidelines which are used by companies to determine what are 'research and development activities' that have adequate Australian content. These requirements relate to 'research and development activities' that are carried on in Australia or an external Territory. The proposed amendments to subsection 39E(1) to insert 'Australian' before 'research and development activities' will not change the application of the existing provisions. [Item 2 of Schedule 4; amended subsection 39E(1)]

8.86 Section 39F provides for the registration of research agencies, in relation only to specified R & D activities. At present these are only activities carried out in Australia or an external Territory. The proposed amendments confine references to R & D in section 39F to Australian R & D. Registered research agencies will continue to be registered only for 'Australian research and development activities'. [Item 2 of Schedule 4; amended section 39F]

(c) Reduced expenditure threshold for syndicates

8.87 Section 39P enables the Board to register two or more companies jointly in relation to a proposed project involving R & D activities. The process of joint registration provides a basis for prior 'in principle' approval of a proposed venture so as to give some assurance to portfolio investors that they may be entitled to deductions under section 73B of the ITAA in respect of their contributions to the syndicate's expenditure on R & D activities.

8.88 The minimum investment required for registration as a syndicate will be reduced from $1,000,000 to $500,000. [Item 6 of Schedule 4; amended paragraph 39P(3)(c)]

8.89 The reduction is designed to facilitate access to the R & D tax concession for small-to-medium sized firms who will be able to use the syndicate structure to finance smaller R & D projects.


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