ATO Interpretative Decision

ATO ID 2003/343

Income Tax

R&D tax offset: 'R&D group turnover' - licence fees payable over more than one year of income
FOI status: may be released
  • With effect from 1 July 2015, the term 'Australia' is replaced in nearly all instances within the GST, Luxury Car Tax and Wine Equalisation Tax legislation with the term 'indirect tax zone' by the Treasury Legislation Amendment (Repeal Day) Act 2015. The scope of the new term, however, remains the same as the repealed definition of 'Australia' used in those Acts. For readability and other reasons, where the term 'Australia' is used in this document, it is referring to the 'indirect tax zone' as defined in subsection 195-1 of the GST Act.

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If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

What amount is included by the company in calculating the amount of 'R&D group turnover' for the purposes of determining the company's entitlement to the research and development (R&D) tax offset under section 73J of the Income Tax Assessment Act 1936 (ITAA 1936), where a licence fee under an agreement is payable over four years of income?

Decision

The amount included in the calculation of the company's 'R&D group turnover' for the current year of income, for the purposes of determining its entitlement to the R&D tax offset under section 73J of the ITAA 1936, is only so much of the relevant licence fee as represents the value of the supplies made under the agreement for the current year of income.

Facts

A company carries on a business involving high levels of research and development and holds a number of patents relating to its work. Over the years the company has entered into a number of licence agreements as part of its business.

The company entered into a non-exclusive, non-transferable licence agreement with a company resident overseas for the use of patented technology for the life of certain patents, due to expire five years after entering the agreement.

The total licence fee under the agreement is set as a lump sum, payable by instalments over four years of income, but with no specific portion attributable to each of the four years.

The company's aggregate research and development amount for the current year of income exceeds $20,000.

The aggregate research and development amount for the company and other taxpayers with which it is grouped does not exceed $1,000,000 for the current income year.

The value or price of the rights granted for the current year of income is not quantified in the licence agreement.

Reasons for Decision

Section 73I of the ITAA 1936 provides that an eligible company can choose a tax offset rather than a deduction for research and development expenditure.

Section 73J of the ITAA 1936 provides that an eligible company can only choose the tax offset if:

it would have been entitled to a deduction under sections 73B, 73BA, 73BH or 73Y of the ITAA 1936;
the company's aggregate research and development amount exceeds $20,000 for the income year;
the aggregate research and development amount for the company and other taxpayers with which it is grouped is not more than $1,000,000; and
the R&D group turnover of the company for the year is less than $5,000,000.

'R&D group turnover' is defined in section 73K of the ITAA 1936 to include the value of supplies the company made in the year of income.

'Value of supplies' is defined in section 73H of the ITAA 1936. For 'taxable supplies' it is the value of those supplies and for 'other supplies' it is the price of those supplies, made during the year in the course of carrying on a business or in the course of carrying on research and development activities. The value of taxable supplies and prices of other supplies are as defined by section 9-75 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Section 9-5 of the GST Act provides that a taxable supply excludes supplies that are 'GST-free'. Paragraph 9-30(1)(a) of the GST Act provides that supplies are GST-free if they are GST-free under Division 38 of the GST Act. Item 4 of the table in subsection 38-190(1) of the GST Act states that a supply of rights is GST-free if 'the rights are for use outside Australia'. However, the supply will only be GST-free if it is not connected with Australia (subsection 38-190(2) of the GST Act).

The granting of the rights relating to the patents are supplies which are GST-free as they are for use outside of, and are not connected with, Australia. The rights are therefore 'other supplies', and consequently the 'price' of those supplies must be used in the calculation of the company's 'R&D group turnover'.

'Price' is defined in subsection 9-75(1) of the GST Act to be the amount of money or, if not expressed as an amount of money, the GST inclusive market value.

As the supply is made over a number of years, the relevant test concerns the value or price of the supplies made, rather than the part of the total consideration received or receivable, in the current income year. Taxation Ruling TR 2002/11 (in the context of the Simplified Tax System (STS)), states at paragraph 32:

32. An entity needs to include the value of a supply in its *STS group turnover for an income year if the supply is made during that income year..... The entity must do so even if it or the grouped entity does not receive consideration for the supply in the same income year in which the supply is made. This means that an entity's *STS group turnover for an income year may include the value of supplies that have been made, but for which the entity or grouped entity has not yet been paid.

STS group turnover is a defined term in subsection 995-1(1) of the Income Tax Assessment Act 1997, but is very similar to the definition of R&D group turnover in section 73K of the ITAA 1936.

To determine what part of the total consideration given for the rights granted over the entire period of the agreement relates to the current income year, an apportionment of this consideration based on market price was adopted (see the example in paragraph 40 of Taxation Ruling TR 93/12).

Adopting this method, it is inferred that the value of the rights supplied for the current year of income does not exceed that part of the total consideration actually due and payable in this year. Accordingly, it is that amount that is used in calculating the 'R&D group turnover' under section 73K of the ITAA 1936 for the purposes of determining the company's entitlement to the R&D tax offset under section 73J of the ITAA 1936.

Date of decision:  21 February 2003

Year of income:  Year ended 30 June 2002

Legislative References:
Income Tax Assessment Act 1936
   section 73B
   section 73BA
   section 73BH
   section 73H
   section 73I
   section 73J
   section 73K
   section 73Y

Income Tax Assessment Act 1997
   subsection 995-1(1)

A New Tax System (Goods and Services Tax) Act 1999
   section 9-5
   section 9-75
   subsection 9-75(1)
   paragraph 9-30(1)(a)
   Division 38
   subsection 38-190(1)
   subsection 38-190(2)

Related Public Rulings (including Determinations)
Taxation Ruling TR 2002/11
Taxation Ruling TR 93/12

Keywords
Research & development expenses
Research & development segment

Siebel/TDMS Reference Number:  3164859

Business Line:  Public Groups and International

Date of publication:  15 May 2003

ISSN: 1445-2782