ATO Interpretative Decision

ATO ID 2004/701

Income tax

Issue

What amounts are included in the 'value of supplies' under paragraph 73K(1)(b) of the definition of 'R&D group turnover', in the Income Tax Assessment Act 1936 (ITAA 1936), for a year of income, for a company that has entered into an agreement for the provision of services over a number of years of income, where no precise portion of the consideration expressly relates to services provided in a specific year of income?

Decision

The amount to be included in the 'value of supplies' under paragraph 73K(1)(b) of the definition of 'R&D group turnover', in the ITAA 1936, depends on making a reasonable estimate of that portion of the consideration related to the supplies, made under the agreement for the relevant year of income.

Facts

The taxpayer is an 'eligible company' as defined in subsection 73B(1) of the ITAA 1936. It undertook 'research and development activities' (as defined in subsection 73B(1) of the ITAA 1936) in the relevant year of income. The eligible company incurred expenditure on these activities.

The eligible company was grouped with another company in the manner described in section 73L of the ITAA 1936 during the relevant year of income.

Under section 73K of the ITAA 1936, when determining its' 'R&D group turnover', the eligible company was required to include 'the value of supplies made in the year of income by other persons while they were grouped with the company'.

In the relevant year of income, the company grouped with the eligible company in the manner described in section 73L of the ITAA 1936, provided mortgage brokering services, including originating and managing mortgages, dealing with general client enquiries, monitoring client loans and discharging loans.

These services were provided over a number of years and the total consideration for the services in the agreement was specified as a single amount. The agreement did not specify individual amounts of consideration for the services supplied for each year of the agreement.

Further, the obligation to pay this single amount of consideration was to be discharged by the other party making regular payments. However, these payments were set on a purely arbitrary basis, and did not represent what the consideration would have been if the agreement had been only for the year of income in question.

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 for the year is less than $5,000,000.

'R&D group turnover' of an eligible company for a year of income is defined in section 73K of the ITAA 1936 and subsection 73K(1) of the ITAA 1936 provides that it is the sum of:

(a)

the value of the supplies the company made in the year of income; and

(b)

the value of the supplies made in the year of income by other persons while they were grouped with the company; ...

'Value of the supplies' is defined in subsection 73H(2) of the ITAA 1936 according to whether the supplies are 'taxable supplies' or 'other' 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 definition draws on the concepts of value of taxable supplies and prices, as defined by section 9-75 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). However, common to both of these concepts is that of consideration, as defined in subsection 9-15(1) of the GST Act.

The agreement entered into by the company grouped with the eligible company for R&D purposes did not tie any specific fee, or any portion of any such fee, to any specific service or function to be performed by the company under the agreement. The timing and payment of consideration provided for services under the agreement was not determinative of when a supply was made for the purposes of determining the 'value of supplies made' for the calculation of the eligible company's 'R&D group turnover'.

In Roadshow Distributors Pty Ltd v. Commissioner of State Revenue (Vic) 1 VR 523; 97 ATC 4271; 35 ATR 376 Tadgell JA considered apportionment of consideration due under particular distribution agreements was required, in order to properly apply certain stamp duty provisions. By way of obiter, his Honour indicated that making a reasonable estimate on sensible commercial grounds would be an appropriate basis of apportionment.

Accordingly, in this case a reasonable estimate on sensible commercial grounds, of the portion of the total consideration related only to those services provided in the year of income in question, is required. It is this amount that is used in calculating the 'R&D group turnover' under section 73K of the ITAA 1936 for the purposes of determining the eligible company's entitlement to the research and development tax offset under section 73J of the ITAA 1936.

Year of income:  Year ended 30 June 2003

Legislative References:
Income Tax Assessment Act 1936
   section 73B
   subsection 73B(1)
   section 73BA
   section 73BH
   section 73L
   section 73K
   subsection 73K(1)
   paragraph 73K(1)(b)
   section 73I
   section 73J
   section 73Y
   subsection 73H(2)

Case References:
Roadshow Distributors Pty Ltd v. Commissioner of State Revenue (Vic)
   [1998] 1 VR 523
   97 ATC 4271
   35 ATR 376

Related ATO Interpretative Decisions
ATO ID 2003/343
ATO ID 2004/702
ATO ID 2004/703

Keywords
Research and Development Expenses
R&D Tax Offset
R&D Group Turnover

Siebel/TDMS Reference Number:  3895859

Business Line:  Public Groups and International

Date of publication:  27 August 2004

ISSN: 1445-2782