• Legal database
Legal database

Guide to the R & D Tax Concession - Part C

C6 Extra deduction for increase in expenditure on Australian owned R & D (175% Australian Premium)

This document has been archived. It is current only to 30 June 2011.

Disclaimer

ATO position

The Tax Office is responsible for providing you with this Guide to the R & D tax concession. The Guide offers a commentary on all expenditure issues, taxation rulings, the tax offset, the incremental concession, on own behalf issues, Tax Office record keeping requirements, self assessment and clawback issues. The paragraph below outlines the current status of this Guide.

The information contained in this Guide, as it relates to the matters listed above, consists of written guidance, as referred to in Law Administration Practice Statement PS LA 2008/3 Provision of advice and guidance by the Tax Office . That is, the Guide contains information of a general nature about the operation of the law. As such, it is not binding on the Commissioner of Taxation. If you want to be certain about how this guidance applies to your individual circumstances, you should ask for a private ruling or, if applicable, obtain administratively binding advice from the Commissioner. However, if you follow information contained in this written guidance and, in doing so, make an honest mistake, you will be protected from any penalty on underpaid tax. Furthermore, if something in the written guidance is misleading or incorrect and you make an honest mistake as a result, you will be protected from any penalty and any interest on underpaid tax. You will, however, remain liable for the primary tax payable.

Copyright

Commonwealth of Australia 2009

This work is copyright. Apart from any use as permitted under the Copyright Act 1968, no part may be reproduced by any process without prior written permission from the Commonwealth. Requests and inquiries concerning reproduction and rights should be addressed to the Commonwealth Copyright Administration, Attorney-General's Department, 3-5 National Circuit, Barton ACT 2600 or posted at http://www.ag.gov.au/cca .

C6-1 Background

For the year of income commencing after 30   June   2007 and later years of income, the Government has extended the incremental tax concession (175% Premium) to companies who incur expenditure on behalf of a grouped foreign company above a rolling three-year average of expenditure. As a result, the 175% Premium has been divided into two separate deductions, the extra deduction for increase in expenditure on Australian owned research and development (the 175% Australian Premium) and the extra deduction for increase in expenditure on foreign owned research and development (the 175% International Premium).

Consequently, there are new methods to calculate a company's incremental tax concession. The new methods require a company to calculate the increases (and decreases) in expenditure on both foreign-owned R & D and Australian-owned R & D for each eligible company in the group, and then pool the results such that increases to one type of expenditure will be reduced by any decrease to the other type of expenditure.

For information on the new 175% International Premium, refer to Part C7.

Generally, the 175% Australian Premium will be available to eligible companies that increase their level of expenditure on Australian owned R & D above a three-year average, in years of income that commence after 30   June   2007.

This initiative is about encouraging sustained business investment in R & D on a long term basis.

Key features of the 175% Australian Premium:

  • Targeting of predominantly labour related components of R & D expenditure, where the greatest benefits for the whole economy occur. Plant related expenditure items are excluded.
  • Applies to additional R & D expenditure above the three year rolling average of the company group, subject to moderation where there has been significant volatility in prior years R & D.
  • Where a government grant is received in respect of eligible expenditure, this will impact on the calculation of the 175% Australian Premium.
  • Mandatory grouping rules and other anti-avoidance measures to avoid any potential abuse.

C6-2 Timing

Companies can claim the 175% Australian Premium for expenditure incurred in their first year of income that commences after 30   June   2007, and in later years of income.

C6-3 Eligibility

C6.3.1 Prerequisites for deduction

current year

An eligible company claiming the 175% Australian Premium for a year of income must register its R & D activities for the year of income with Innovation Australia (the   Board) and be eligible to deduct an amount for that year under subsection 73B(13) or (14) of the ITAA   1936 for incremental expenditure incurred in its group membership period .

three immediately prior years

In addition, the eligible company must have been eligible to deduct an amount under subsection 73B(13) or (14) of the ITAA   1936 for expenditure incurred in its group membership period in each of the three immediately prior years (three year claim history).

An exception to the requirement for an eligible company to have a three year claim history arises where the company is in a group and one of the eligible company's group members could deduct an amount under subsection 73B(13) or (14) for expenditure incurred in its group membership period for the relevant year or years (see section C6-4 of this guide for how to determine group members and group membership periods) . Provided that, between the eligible company and its group members, an amount could be deducted under subsection 73B(13) or (14) of the ITAA 1936, for expenditure incurred in a company's group membership period, in each of the three immediately prior years, the eligible company will have a three year claim history.

An eligible company can also have a claim history for a particular year of income if it has not registered with the Board for that year, but the company or one of its group members has been in receipt of a start grant* or commercial ready grant* in respect of that year of income. When calculating the amount of the 175% Australian Premium, the eligible company, or group member, will need to determine the amount of incremental expenditure incurred in its group membership period that could be taken into account in working out the amount of a deduction under subsection 73B(13) or (14) of the ITAA   1936 (apart from paragraph 73B(14)(b)) for that year of income.

In summary, where in respect of each of the three prior years, in any combination, the eligible company, or any of its group members, could deduct an amount under subsection 73B(13) or (14) of the ITAA   1936 for expenditure incurred in its group membership period, or the eligible company, or any of its group members, received a start grant or a commercial ready grant, the eligible company will have a three year claim history.

  • A start grant is a payment to a company under the government R & D start program.
  • A commercial ready grant is a payment to a company under the Commercial Ready program that includes a component for research and development.

ITAA 1936 sections 73P , 73QA , 73RA

When working out eligibility for the 175% Australian Premium, the company must determine which year(s) the start grant or commercial ready grant was received 'in respect of'. The years to which a start grant or commercial ready grant relate, for the purposes of section 73QA of the ITAA 1936, may differ from those in which the grant payments were actually received. For example, the grant approved may have been calculated on the basis of research and development activities undertaken prior to the date of application for the grant. The grant in this case is regarded as being 'in respect of' that earlier year of income.

the eligible company's share of the Australian owned part of the adjusted increase in expenditure on R & D by the group

To be eligible to claim the 175% Australian Premium, an 'eligible company's share of the Australian owned part of the adjusted increase in expenditure on R & D by the group' as determined under subsection 73QA(3) of the ITAA 1936 must also be greater than zero.

An eligible company's share of the Australian owned part of the adjusted increase in expenditure on R & D by the group is determined by the following formula.

For more information regarding this requirement refer to the Calculation Overview in C6-5.

Terms used

For the purposes of applying the 175% Premium rules, years of income are designated as follows:

Y 0 is the year of income for which an eligible company is working out its assessable income and deductions
Y -1 means the year of income before the Y 0 year of income
Y -2 means the year of income 2 years before the Y 0 year of income
Y -3 means the year of income 3 years before the Y 0 year of income

ITAA 1936 subsection 73P(6)

Example 6.1

Company A, which is not grouped with any other company, is seeking to claim the 175% Australian Premium for Y 0 , for which year it was entitled to deduct $100,000, under subsection 73B(13) or (14) of the ITAA   1936, for incremental expenditure incurred during its group membership period.

In each of the three years immediately prior to Y 0 (Y -1 , Y -2 andY -3 ), Company A was registered with the Board and entitled to deduct $90,000 (Y -1 ), $70,000 (Y -2 ) and $60,000 (Y -3 ), under subsection 73B(13) or (14) for incremental expenditure incurred in its group membership period.

Company A may be eligible for the 175% Australian Premium in Y0 as it has the required three year claim history.

Company

Y 0

($000)		Y -1

($000)		Y -2

($000)		Y -3

($000)

Company A

100

90

70

60

C6.3.2 Transitional accounting periods of greater or less than 12   months

This section applies where a company, or consolidated group, has adopted, or reverted from, a substituted accounting period in lieu of an income year ending on 30   June and so has a transitional period of greater or less than 12 months.

 

Y 0 year of income

To determine its eligibility for the 175% Australian Premium under section 73QA of the ITAA 1936, an eligible company must first determine whether the requirements of section 73QA of the ITAA 1936 are met in relation to the Y0 year of income and each of the three prior years of income (the Y -1 , Y -2 and Y -3 years of income).

The Y 0 year of income for the purposes of sections 73P to 73V of the ITAA 1936 will be the 12-month period ending on the last day of the period for the which the eligible company (the company seeking to claim the 175% Australian Premium) will lodge its return of income for the current year. This is so even where the company's return of income for the year is for a period of greater or less than 12 months. For example, if the return of income of the company for the 2008-09 year of income is for the period from 1   July 2008 to 31 December 2008, the Y 0   year of income is the 12-month period 1   January 2008 to 31 December 2008.

This 12-month period will be used when determining whether the eligible company can deduct an amount for the Y 0 year of income under subsection 73B(13) or (14) of the ITAA   1936 for incremental expenditure incurred during its group membership period, and when calculating the amount of the eligible company's extra deduction for increase in expenditure on Australian owned R & D.

Three immediately prior years

The three prior years of income are the 3 immediately preceding 12-month periods, i.e.,

  • 1 January 2007 to 31 December 2007,
  • 1 January 2006 to 31 December 2006, and
  • 1 January 2005 to 31 December 2005,

representing the Y -1 , Y -2 and Y -3 years of income, respectively.

If the company seeking to claim the 175% Australian Premium has a transitional period in one of the years of income representing the Y -1 , Y -2 or Y -3 year of income, that year will be the 12-months ending on the last day of the period for which the return of income was, or will be, lodged. This 12-month period will be used when determining whether the eligible company has a three year claim history for the purposes of section 73QA of the ITAA   1936 and when calculating the amount of the eligible company's extra deduction for increase in expenditure on Australian owned R & D.

Example 6.2

Where a company is working out its additional deduction for the 2008-09

income year, and:

  • 1 January 2008 to 31 December 2008 represents the 2008-09 income year;
  • 1 January 2007 to 31 December 2007 represents the 2007-08 income year;
  • 1 July 2006 to 31 December 2006 represents the 2006-07 income year; and
  • 1 July 2005 to 30 June 2006 represents the 2005-06 income year,

then the Y 0 year of income and three immediately prior years for the purposes of the 175% Australian Premium will be:

  • 1 January 2008 to 31 December 2008 representing the Y 0 year of income;
  • 1 January 2007 to 31 December 2007 representing the Y -1 year of income;
  • 1 January 2006 to 31 December 2006 representing the Y -2 year of income;
  • 1 January 2005 to 31 December 2005 representing the Y -3 year of income.

Transitional accounting periods of group members

These 12-month periods are always worked out using the year of income or substituted accounting period of the eligible company working out its deduction, and not the year of any group member. All information, for example, group membership and the amounts worked out under section 73RA of the ITAA   1936, must be calculated using the 12-month periods representing the Y 0 to Y -3 years of income of the company working out its deduction. This process must be undertaken in respect of each group member working out its respective deduction as the periods may be different depending upon that company's own year of income.

C6-4 Grouping rules for the 175% Australian Premium

To determine its eligibility for, and to calculate, the 175% Australian Premium an eligible company is required to work out its group members. A company that is the head company of a consolidated group must work out whether it has any group members who are not members of the consolidated group of which it is head company.

Primary and secondary group members, and their individual group membership periods, are identified utilising the method statement in subsection 73R(2) of the ITAA   1936.

Section   73R relies on the grouping rules that apply for the R & D tax offset set out in section 73L of the ITAA   1936. (For more information on the grouping rules contained in section 73L of the ITAA   1936, see Part C4-4 of this guide).

For further information on the grouping rules for the R & D tax offset, refer to part C4-4 .

ITAA 1936 section 73L , 73R

C6.4.1 Section 73R group members

Many of the R & D provisions refer to the claimant company's group members under section   73R of the ITAA 1936 and the group membership periods of those companies. To determine a claimant company's entitlement to the R & D tax concession, it is therefore necessary to establish who is a member of its section 73R group and the group membership periods of each member. This is worked out by following the method statement in subsection   73R(2) of the ITAA   1936.

Subsection 73R(1) of the ITAA 1936 provides that when applying section 73R , section 73L of the ITAA 1936 must be used to determine whether companies are grouped. For more information on section 73L group members, see C4-4 . Once the eligible company has determined its section 73L group, it can proceed to Step   1 of the method statement contained in subsection 73R(2) of the ITAA   1936.

Determining who is a Primary Group Member (PGM)

Step   1 of the method statement contained in subsection 73R(2) of the ITAA   1936 provides that the eligible company must work out who are the primary group members in its group. Any companies grouped under section 73L of the ITAA 1936 with the eligible company on the last day of the Y 0 year of income, and the eligible company itself, are primary group members.

Example 6.3

Company Ais an eligible company (the claimant) seeking to work out its entitlement to the 175%   Australian Premium. Company A was a listed public company, with no shareholder having a greater than 9% interest, up until the first day of Y -1 when the company was acquired by Company   C.
Company Bis also an eligible company and undertook Australian owned R & D activities in the Y 0   year of income in relation to which it incurred an amount of research and development expenditure. Company   B was a wholly owned subsidiary of Company   A for the period from the first day of Y -3 year up to and including the last day of the Y 0 year.
Company Cis an Australian public company listed on the stock exchange. Company   C is the parent company of Company   A and has been since the first day of the Y -1   year. Company   C is an investment vehicle and does not undertake any R & D activities or incur any expenditure on R & D.
Company Dincurred expenditure on Australian owned R & D activities for which it could deduct an amount under subsection 73B(13) of the ITAA   1936 in each of the Y 0 to Y -3 years of income. Company   D was controlled by Company   C until the last day of the Y -2 year of income, after which time it was controlled by another company.
Company Eincurred expenditure on Australian owned R & D activities in each of the Y 0 to Y -3 years of income for which it could deduct an amount under subsection 73B(14) of the ITAA   1936. Company   E was acquired by Company   C on the first day of the Y -2 year of income, prior to which time it was controlled by another company.

Therefore, the primary group members of Company   A, are:

  • Company   A, the claimant
  • Company   B, a wholly owned subsidiary of Company   A on the last day of the Y 0 year
  • Company   C, the company who controlled Company   A on the last day of the Y 0 year, and
  • Company E, the company acquired by Company   C on the first day of the Y -2 year.

Company D is not a primary group member of Company   A, as it was not grouped with Company   A under section 73L of the ITAA   1936 on the last day of the Y 0 year of income, having been sold by Company   C on the last day of the Y -2 year.

However, completing Step   1 of the method statement contained in subsection 73R(2) of the ITAA   1936 does not identify all section 73R group members; it only identifies the primary group members . The eligible company's secondary group members are worked out at Step   3 of the method statement after the group membership periods of the primary group members have been determined. Once the eligible company's secondary group members have been identified, the group membership periods of the secondary group members must also be worked out.

C6.4.2 Group membership periods

There are rules to determine the group membership period of each section 73R group member, including the group membership period of companies entering or exiting an R & D group during the claim year and/or the three-year history period. (There are special rules for companies who join or leave a consolidated group, please see section 6.4.4 of this guide.)

These rules work by identifying all of the companies who are required to be grouped with the claimant at the end of the claim year ( primary group members ), and then by establishing the dates upon which the control of any of these companies last changed within the history period such that they became grouped with the claimant.

The period between these dates is the group membership period of each primary group member. Any other companies with whom these members were required to be grouped in their group membership period (but which have subsequently left the group) are also identified ( secondary group members ).

Therefore at any point in time, the members who are to be grouped together are identified, and their incremental expenditure during their period of group membership can be calculated. Where the claimant is not grouped with any other eligible company, it will be the only primary group member. A solitary company must still work out its group membership period in accordance with section 73R of the ITAA   1936.

Determining group membership periods

The detailed steps involved in determining group membership periods are:

Step   1:Identify the primary group members (PGM) - these are the claimant company, and other companies required to be grouped with the claimant company as at the end of the claim year (the Y 0 year).
Step   2:Determine the group membership period of each of the PGMs. A PGM's group membership period extends from the day that its control changed (or from the date the PGM experienced another change as specified in step 2 of the method statement in section 73R of the ITAA 1936) to cause it to come into the group to the last day of the current income year. However, the group membership period cannot generally commence before the first day of the income year three years before the current income year (the Y -3 year).
Step   3:Determine any other companies that are required to be grouped with each PGM at a time during the PGM's group membership period. Any company identified under this step is called a secondary group member (SGM). These will be companies which were required to be grouped with a PGM for a least some part of the four year period under review, but which have left the group prior to the end of the Y 0 year.
Step   4 & 5:Determine the group membership period for each SGM. This extends from the day that its control or affiliates changed to cause it to come into the group to the day its control or affiliates changed to cause it to leave the group. However, as in Step   2, the group membership period cannot generally commence before the first day of the income year three years before the current income year (the Y -3 year).

The effect of these rules is that for the purposes of calculation of the total incremental

expenditure of a group, the incremental expenditure of a company is only taken into account for the period of time that it is a member of the group.

Where a company now controlled by a person or persons under section 73L of the ITAA 1936 was previously not controlled by any person within the meaning of that section, there is a change in control for the purposes of section 73R of the ITAA 1936. The group membership period of the company which experienced that change in control will be the period between the day on which the company became controlled by the current controller and the last day of the Y 0 year of income.

For further information see:
ATO Interpretative Decision ATO ID 2005/152
Research and development: group membership period under section 73R of the ITAA 1936
Where a company, now controlled by a person under section 73L of the ITAA 1936, was previously not controlled by any person within the meaning of that section, has there been change in control of the company of the purposes of paragraph 73R(2) of the ITAA 1936?
ITAA 1936 section 73R

Example 6.4

Following on from Example 6.3 above, the method statement in subsection 73R(2) of the ITAA   1936 determines group members and group membership periods in the following manner:

Step   1 Determine primary group members

Company   A, Company   B, Company   C and Company   E are primary group members because each company was grouped under section 73L of the ITAA   1936 on the last day of the Y 0 year of income.

Step   2 Determine the group membership period of each primary group member

Company   A was acquired by Company   C on the first day of the Y -1 year. Therefore, the day before the last day of the Y 0 year when Company   A was controlled by a person other than Company   C is the last day of the Y -2 year. This means that the group membership period (GMP) of Company   A is the period from the first day of the Y -1 year to the last day of the Y 0 year.
Company B was controlled by Company A for the full period from the first day of the Y -3 year up to and including the last day of the Y 0 year. However, Company   B experienced a change in control for the purposes of section 73L of the ITAA   1936 when its parent, Company   A, was acquired by Company   C. Therefore, the GMP of Company   B is the period from the first day of Y -1 year to the last day of the Y 0 year.
Company C has not undergone any change in control, its GMP includes the whole period from the first day of the Y -3 year to the last day of the Y 0 year.
Company E was acquired by Company C on the first day of the Y -2 year and remained wholly owned by Company   C for the period up to and including the last day of the Y 0 year. Therefore, the GMP for Company E is the period from the first day of the Y -2 year up to and including the last day of the Y 0 year.

Step   3 Determine secondary group members

Company D will be a secondary group member as it is grouped with a primary group member at a time during that PGM's group membership period (in this example, Company C and Company   E).

Step   4 & 5 Determine the group membership period of each secondary group member

The group membership period of the secondary group member, Company D, will be the period when it was grouped with a primary group member. Company D was grouped with Company C (and also with Company E), on the first day of the Y -3 year of income but ceased to be grouped with Companies C and E on the last day of the Y -2 year of income. Therefore, the group membership period of Company D (the SGM) will be the period from the first day of the Y -3 year of income to the last day of the Y -2 year of income.

Companies A, B, D and E incurred the following amounts of incremental expenditure during the Y 0 to Y -3 years of income (Company C did not incur incremental expenditure):

Company

Y 0

($000)		Y -1

($000)		Y -2

($000)		Y -3

($000)

Company A

70

60

30

30

Company B

80

0

0

0

Company D

100

200

30

20

Company E

80

40

20

160

Total

330

300

80

210

Company A, B, D and E incurred the following amounts in their group membership periods :

Company

Y 0

($000)		Y -1

($000)		Y -2

($000)		Y -3

($000)

Company A

70

60

 

 

Company B

80

0

 

 

Company D

 

 

30

20

Company E

80

40

20

 

Total

230

100

50

20

However, a company's group membership period is modified where a company enters or leaves a section 73R group with a 'viable business'.

C6.4.3 Viable business exception

The group membership periods of both primary group members and secondary group members can change under certain circumstances:

  • where the secondary group member left the section 73R group with a viable business, its group membership period in relation to this prior group is deemed never to exist. This means that although the company may have incurred incremental expenditure, this expenditure will not be included in the calculation of the 175% Australian Premium for that company in relation to this prior group, as it was not incurred during the company's group membership period; and
  • where a primary group member (an eligible company who remains a section 73R group member on the last day of the Y 0 year of income) or a secondary group member (an eligible company who entered the section 73R group on or after the first day of the Y -3 year of income, but was not a group member on the last day of the Y 0   year of income) entered the section 73R group with a viable business, the company's group membership period is extended to include its group membership period from its previous group. As such, any incremental expenditure incurred from the 1 st day of the Y -3 year of income during a previous group membership period may be taken into account in the calculation of the 175% Australian Premium for that company or any new group members of that company.

A company will join or leave the group with a viable business if all assets (which must include R & D assets) necessary to comprise a continuing business are transferred with the company and the vendor and purchaser agree in writing that they are transferring a viable business. The vendor must provide written details of the expenditure incurred on R & D by the company while in its former group and grants and recoupments received or entitled to be received in relation to that expenditure. The written agreement and details of the incremental expenditure, or expenditure on foreign owned R & D for which an amount could be deducted under subsection 73B(14C) of the ITAA 1936, generally needs to be provided by the end of the year in which the change of control took place. However, the Commissioner may exercise a discretion to allow the written agreement to be provided at some later date.

ITAA 1936 subsections 73R(3) to (6)

Example 6.5

Following on from Example 6.3 and Example 6.4 , above:

  • Company A, Company B, Company C, Company D and Company E are section 73R group members
  • Company A, Company B, Company C and Company E are primary group members, with the following group membership periods:
    • Coy C: first day of the Y -3 year to the last day of the Y 0 year
    • Coy   A: first day of the Y -1 year to the last day of the Y 0 year
    • Coy   B: first day of the Y -1 year to the last day of the Y 0 year
    • Coy   E: first day of the Y -2 year to the last day of the Y 0 year
  • Company D is a secondary group member, its group membership period is:
    • Coy   D: first day of the Y -3 year to the last day of the Y -2 year

Assume however, that Company   D left the R & D group with a viable business. This means that, when working out Company   A's entitlement to the 175% Australian Premium, the rules for determining Company   D's group membership period are modified and the group membership period of Company   D is treated as never having existed.

Assume also that Company   E joined the group with a viable business. This means that, when working out Company   A's entitlement to the 175% Australian Premium, the rules for determining Company   E's group membership period are modified to extend Company   E's group membership period to include its R & D history incurred while grouped with its former R & D group.

For the purposes of calculating the increase in expenditure on Australian owned R & D for each company under section 73QA , the incremental expenditure for Company   A and Company   B will be as per the table above. However, due to the exit from the group of Company D at the end of the Y -1 year with a viable business, no incremental expenditure of Company   D is taken into account by Company   A. Due to Company   E entering the group on the first day of the Y -2 year, with a viable business, the incremental expenditure Company   E incurred while grouped with its former group is taken into account by Company   A.

The incremental expenditure incurred by members of the section 73R group during their group membership periods is:

Company

Y 0

($000)		Y -1

($000)		Y -2

($000)		Y -3

($000)

Company A

70

60

 

 

Company B

80

0

 

 

Company D

 

 

 

 

Company E

80

40

20

160

Total

230

100

20

160

C6.4.4 Consolidated groups

Where a company becomes a member of a consolidated group or MEC group, then for the purpose of determining entitlement to the 175% Australian Premium and calculating the extra deduction:

  • expenditure amounts incurred by the joining company before it became a member are treated as if they were incurred by the head company of the group,
  • any amounts the joining company has deducted or can deduct for that expenditure are treated as if they had been deducted by the head company of the group, and
  • any recoupments of, or grants in respect of, that expenditure, received or receivable by the joining company or its former group are treated as being received by the head company of the group.

This is by virtue of section 73BAC of the ITAA 1936. This section applies after any application of subsections 73R(3) and (4) so that any viable business transfer exceptions to the group membership period rules for joining entities are applied before attributing the relevant amounts to the head company of the consolidated group.

The operation of section 73BAC of the ITAA 1936 is generally taken to be conditional upon one or more joining companies becoming members of the relevant consolidated group. After the time at which this occurs, and in subsequent income years, the deeming effects set out above will operate in respect of the head company of the group.

If a company joins a consolidated group during an income year, it will be required to calculate its income tax payable, taxable income or losses for the period it is not part of the consolidated group (non-membership period). Expenditure incurred by the company in its non-membership period will generally be deductible by the company if the eligibility requirements are met.

ITAA 1936 section 73BAC

Where a company ceases to be a member of a consolidated or MEC group:

  • expenditure amounts actually incurred by the leaving company while it was a member of the group, are treated as if they were incurred by it and not by the head company; and
  • any amounts the head company has deducted or can deduct for that expenditure are treated as if they had been deducted by the leaving company.

This is by virtue of section 73BAD of the ITAA 1936. This section applies before any application of subsections 73R(3) and (4) so that any viable business transfer exceptions to the group membership period rules for exiting entities are applied after attributing the relevant amounts to the leaving company.

ITAA 1936, section 73BAD

These special rules effectively override the operation of the consolidation entry and exit history rules, which might otherwise allow both the joining (or leaving) company and the head company to count the company's history prior to the joining (or after the exit).

For a company that has left a consolidated group, these rules are intended to put that company in the same position it would have been in if it had never been in the consolidated group.

If a company leaves a consolidated group during an income year, it will be required to calculate its income tax payable, taxable income or losses for the period it is no longer part of the consolidated group (non-membership period). Expenditure incurred by the company in its non-membership period will generally be deductible by the company if the eligibility requirements are met.

For more information on how the consolidation provisions interact with the R & D tax concession, refer to part 2.1.6 Consolidation and the R & D tax concession in Part C-2 of this guide.

C6-5 Calculation overview

The method for calculating the 175% Australian Premium is different from the method for calculating the additional deduction under former section 73Y of the ITAA   1936 (incremental tax concession) available in relation to years of income commencing before 30   June   2007.

An eligible company seeking to claim the 175% Australian Premium must work out the eligible company's share of the Australian owned part of the adjusted increase in expenditure on R & D by the group using the following formula:

ITAA   1936 subsection 73QA(3)

In applying this formula:

  • the increase in expenditure on Australian owned R & D by the eligible company is worked out under subsection 73RA(1) of the ITAA   1936,
  • the total increase in expenditure on Australian owned R & D by eligible companies in the group means the amount worked out under subsection 73RA(2) of the ITAA   1936,
  • the net increase in expenditure on Australian owned R & D by the group (the net increase is the result of taking into account any decreases in expenditure on Australian owned R & D by the eligible company or its group members), is worked out under section   73RC of the ITAA   1936,
  • the net increase in expenditure on foreign owned R & D by the group (the net increase is the result of taking into account any decreases in expenditure on foreign owned R & D by the eligible company or its group members - if there is no expenditure on foreign owned R & D by the eligible company or its group members, this will be nil), means the amount worked out under section 73RD of the ITAA   1936, and
  • the adjusted increase in expenditure on R & D by the group means the amount worked out under section 73RE of the ITAA   1936 (this calculation includes the adjustment balance worked out under section 73V of the ITAA   1936; there may be an adjustment balance where expenditure has decreased more than 20% from one year to the next in any of the history years).

Hence the formula for working out the eligible company's share of the Australian owned part of the adjusted increase in expenditure on R & D by the group, can be represented in terms of the relevant provisions as:

Once the company has worked out the increases and decreases in expenditure on both Australian-owned R & D and foreign-owned R & D for each eligible company in the group, the calculation effectively pools the results such that increases to one type of expenditure will be reduced by any decrease to the other type of expenditure.

The eligible company will be entitled to claim the 175% Australian Premium where the eligible company's share of the Australian owned part of the adjusted increase in expenditure on R & D by the group is greater than zero.

The amount allowable as a deduction to the eligible company for the Y 0 year of income will be 50% of the eligible company's share of the Australian owned part of the adjusted increase in expenditure on R & D by the group . The grouping rules are outlined at paragraph C6-4 .

ITAA 1936 sections 73P to 73V

C6-6 Incremental expenditure

In order to work out the increase in expenditure on Australian owned R & D by the eligible company under subsection 73RA(1) of the ITAA   1936 and the total increase in expenditure on Australian owned R & D by eligible companies in the group under subsection 73RA(2) of the ITAA   1936, you must work out the 'incremental expenditure' incurred by each eligible company in its group membership period (as determined under section C6-4 of this guide), for each of the Y 0 to Y -3 years of income.

'Incremental expenditure' as defined in subsection 73P(2) of the ITAA   1936 means expenditure that is research and development expenditure as defined in subsection 73B(1) of the ITAA 1936.

Subsection 73P(2) therefore includes:

  • contract expenditure incurred to a Registered Research Agency (RRA)
  • salary expenditure
  • other expenditure incurred directly in respect of R & D activities, which includes:
    • contract expenditure to others for R & D activities, and
    • eligible feedstock expenditure (not residual feedstock expenditure).

Expenditure which is not 'research and development expenditure' as defined in subsection   73B(1) of the ITAA   1936 is not 'incremental expenditure'. Items in this excluded category include: decline in value in relation to depreciating assets, core technology expenditure, interest expenditure and residual feedstock expenditure.

A company's incremental expenditure includes amounts that satisfy the definition of 'research and development expenditure' (except those amounts excluded by section 73P of the ITAA   1936), that the company could deduct under subsection 73B(13) or (14) regardless of whether the company actually claimed a deduction for these amounts under the R & D tax concession, at either the rate of 125%, or at the rate of 100% (for example, because of the operation of the clawback provisions in section 73C of the ITAA 1936 on receipt of a grant, or the 'not at risk rules' in section 73CA of the ITAA   1936).

Note: A company's 'incremental expenditure' also includes expenditure which it could deduct under subsection 73B(14) of the ITAA 1936 (salary expenditure and other expenditure incurred directly in respect of R & D activities) if the requirement in paragraph 73B(14)(b) that a company's aggregate research and development amount is greater than $20,000 were ignored. While paragraph (14)(b) is not ignored when an eligible company is working out whether it satisfies the prerequisites for claiming the extra deduction for increase in expenditure on Australian owned R & D , amounts which come within paragraph (14)(a), in relation to a year of income, must be included when the eligible company is working out the increases and decreases in expenditure on Australian owned R & D for each eligible company in the group.

What is excluded from incremental expenditure

Subsection 73P(2) expressly excludes:

  • expenditure to lease or hire plant,
  • expenditure under a contract that is in substance for the acquisition of plant and not for the receipt of services.

Where the expenditure under a contract is both for the acquisition of plant and for the provision of services, the expenditure is to be apportioned between the two on a reasonable basis. Where reasonable apportionment is not possible, none of the expenditure under that contract can be 'incremental expenditure'.

ITAA 1936 subsections 73P(3) and (4)

Subsection 73P(2) also excludes expenditure that cannot be taken into account in working out the amount of the deduction under subsection 73B(13) or (14) of the ITAA   1936 (apart from paragraph (14)(b)). This excludes, for example:

  • expenditure a company is required by subsection 73B(9) of the ITAA   1936 to disregard,
  • expenditure for which a deduction is denied by subsection 73B(17A) of the ITAA   1936 (expenditure on overseas research and development which is not certified expenditure), and
  • expenditure incurred in relation to activities that were not registered with the Board in relation to the year of income.

Total group markup

Subsection 73P(5) excludes from the definition of 'incremental expenditure' the total group markup of the company for that expenditure.

The total group markup of the company is excluded from incremental expenditure. The group markup of a company is the amount paid by it to a group member (see section 73L of the ITAA   1936) for goods or services in excess of the actual cost to that group member of providing those goods or services. A company's total group markup is the sum of all such amounts.

In calculating incremental expenditure, amounts that are incurred by an eligible company to a member of the same group need to be reduced by the total group markup. That is, any amounts incurred by an eligible company on R & D activities which represent an intra-group markup are eliminated from that expenditure when calculating the 175% Australian Premium.

For further information on amounts including a group markup refer to para 2.3.11 .

ITAA 1936 subsections 73B(14AA) to (14AD) , 73P(5)

C6-7 Prepayments in the calculation of the 175% Australian Premium

The incremental expenditure amount utilised in calculating any entitlement to the 175%   Australian Premium is based on amounts allowable as a deduction under s 73B(13) or (14) of the ITAA   1936 (ignoring paragraph (14)(b)).

The prepayment rules apply when working out the amount allowable as a deduction under subsections 7B(13) or (14) of the ITAA   1936, in relation to a year of income. Most prepaid expenditure on R & D activities is taken into account on a spread basis in the year to which the payment relates, not the year in which it is incurred. Prepayments for contract expenditure to a Registered Research Agency attract special treatment and are not subject to the general prepayment rules. For further information on the treatment of the prepayment of expenditure on R & D activities, refer to paragraph 2.3.10 .

ITAA 1936 section 82KZMA to 82KZMF

C6-8 Calculating the 175% Australian Premium

The steps to calculating the components to be used in the calculation of the 175% Australian Premium amount are set out in sections 73RA , 73RC , 73RD and section 73RE of the ITAA 1936.

The formula for working out the eligible company's share of the Australian owned part of the adjusted increase in expenditure on R & D by the group can be represented in terms of the relevant provisions in the following manner:

The steps for each component can be summarised as follows:

Subsection 73RA(1)Subsection 73RA(2)Subsection 73RCSubsection 73RDSubsection 73RE

Calculates each eligible company's increase in expenditure on Australian owned R & D

Calculates total increase in expenditure on Australian owned R & D for the eligible company's group

Calculates net increase in expenditure on Australian owned R & D by the eligible company's group

Calculates net increase in expenditure on foreign owned R & D by the eligible company's group

Calculates the adjustment to the increase in expenditure on R & D by the eligible company's group

C6.8.1 Increase in expenditure on Australian owned R & D

Working out the incremental expenditure incurred by the eligible company and its eligible company group members in their group membership periods, is the first step in determining the increase in expenditure on Australian owned R & D by the eligible company, and eligible companies in its group.

The increase in expenditure on Australian owned R & D is based on the excess of the current year incremental expenditure over the average incremental expenditure for the previous three years, for each company.

However, the amount of incremental expenditure included in this calculation may be reduced where the company has received a recoupment or grant that is attributable to that expenditure.

 

C6.8.1.1 Operation of the 'clawback' provisions and 175% Australian Premium

Where a company or a company group member receives a grant or a recoupment from the government for an R & D project, the clawback provisions in section 73C of the ITAA   1936 apply to reduce the amount the company can deduct at the rate of 125%. Expenditure to which the grant or recoupment relates can only be deducted at the rate of 100%.

Where the grant or recoupment received by the eligible company relating to expenditure incurred by the company on R & D is attributable to incremental expenditure incurred in the company's group membership period, then the amounts the company can include in its calculation for the 175% Australian Premium are reduced.

To be 'attributable' to incremental expenditure incurred by the company, the purpose of the grant being received must generally be viewed as being paid in relation to, or regarded as an effect of, incurring the expenditure. A causal or contributory connection between the grant and the expenditure will generally be required, and it will be sufficient if the cause was only one of a number of causes. That is, the grant amount need not be paid as a sole, dominant or direct cause or effect of having incurred the expenditure. In addition, the term 'attributable' implies that apportionment of the grant amount between the incremental expenditure incurred by the company and other type of expenditure is possible.

The incremental expenditure to be included in the calculation of the 175% Australian Premium is reduced by the 'initial clawback amount' relating to expenditure that is attributable to incremental expenditure incurred in the company's group membership period, in each of the years Y 0 - Y -3 . The 'initial clawback amount' is equal to two times the amount of the grant attributable to the incremental expenditure. The clawback-adjusted incremental expenditure amounts are then used to determine the increase in expenditure on Australian owned R & D by the eligible company, and its eligible company group members.

C6.8.1.2 Increase in expenditure on Australian owned R & D by the eligible company - 73RA(1)

The increase in expenditure on Australian owned R & D by the eligible company is calculated by following the steps of the method statement set out in subsection 73RA(1) of the ITAA   1936. Where the eligible company does not have an increase in expenditure on Australian owned R & D in the Y 0 year of income, it will not be entitled to the extra 50% deduction available under section 73QA of the ITAA   1936.

Step   1:The first step is to work out the eligible company's incremental expenditure incurred during its group membership period for each of the Y 0 , Y -1 , Y -2 and Y -3 years of income.
Step   2:In the event that the company has received a grant, work out how much of the initial clawback amount (twice the amount received) relating to expenditure incurred by the company is attributable to the incremental expenditure incurred by the eligible company in its group membership period.
Step   3:The result of Step   2 is subtracted from the company's incremental expenditure worked out under Step   1.
The result is the reduced expenditure on Australian owned R & D. This is to be calculated for each of the Y 0 , Y -1 , Y -2 and Y -3 years of income.
Note: The result of Step   3 cannot be less than zero.

Example 6.6

Company   J incurred an amount of incremental expenditure on Australian owned R & D activities in its group membership period for each of the Y 0 , Y -1 , Y -2 and Y -3 years of income:

Company J

Y 0

($000)		Y -1

($000)		Y -2

($000)		Y -3

($000)

100

90

60

60

Company J received a commercial ready grant of $10,000 in Y 0 in relation to expenditure incurred in Y 0 on an Australian owned R & D project. The 'initial clawback amount' is $20,000. There were no other grants or recoupments received by Company J in the Y 0 to Y -3 years of income. The $10,000 grant received by Company J in Y 0 is wholly attributable to the incremental expenditure incurred by the company in Y 0 on the Australian owned R & D project. Therefore, the $20,000 initial clawback amount is subtracted from Company J's incremental expenditure incurred in its group membership period for Y 0 to give the reduced expenditure on Australian owned R & D by the eligible company in its group membership period for that year of income.

The reduced expenditure on Australian owned R & D by Company J is:

Company J

Y 0

($000)		Y -1

($000)		Y -2

($000)		Y -3

($000)

Step 1

incremental expenditure

100

90

60

60

Step 3

initial clawback amount

(20)

0

0

0

Step 3

reduced expenditure on Australian owned R & D

80

90

60

60

Step   4:Add up the reduced expenditure on Australian owned R & D by the eligible company in its group membership period for the Y -1 , Y -2 and Y -3 years of income.
Step   5:Divide the result of Step   4 by 3.

Example 6.6 cont.

Company J

($000)

reduced expenditure on Australian owned R & D for Y -1

90

reduced expenditure on Australian owned R & D for Y -2

60

reduced expenditure on Australian owned R & D for Y -3

60

Step 4

210

Step 5

70

Step   6:Subtract the result of Step   5 from the reduced expenditure on Australian owned R & D by the eligible company in its group membership period for the Y 0 year of income (this was worked out at Step   3).
The result is the change in expenditure on Australian owned R & D by the eligible company.
Note : This amount may be a negative number, a positive number or zero.

Example 6.6 cont.

Company J

($000)

reduced expenditure on Australian owned R & D for Y 0

80

result of Step 5

(70)

change in expenditure on Australian owned R & D by the eligible company

10

Step   7:
The increase in expenditure on Australian owned R & D by the eligible company is either:
  • the change in expenditure on Australian owned R & D by the eligible company , or
  • zero, if the result of Step   6 is a negative number.
Note: if the result of Step   7 is zero, the eligible company is not entitled to the 175%   Australian Premium.

Example 6.6 cont.

The increase in expenditure on Australian owned R & D by the eligible company, for Company J, is $10,000. Company J will input this amount into its calculation for working out the eligible company's share of the Australian owned part of the adjusted increase in expenditure on R & D by the group .

ITAA 1936 subsection 73RA(1)

C6.8.1.3 Total increase in expenditure on Australian owned R & D by the eligible companies in the group - 73RA(2)

The method statement in subsection 73RA(2) sets out the steps for calculating the total increase in expenditure on Australian owned R & D by the eligible companies in the group . This is the sum of the increase in expenditure on Australian owned R & D by each of the eligible companies in the group.

Steps 1 to 7 above, are performed for each eligible company in the group. The results are then added together to give the total increase in expenditure on Australian owned R & D by the eligible companies in the group.

If an eligible company seeking to claim the 175% Australian Premium is a solitary company, the total increase in expenditure on Australian owned R & D by the eligible companies in the group will be the same as the increase in expenditure on Australian owned R & D by the eligible company.

ITAA 1936 subsection 73RA(2)

Example 6.7

Company J has three section 73R group members. Company K, Company L and Company M are primary group members of Company J. The group members incurred an amount of incremental expenditure on Australian owned R & D activities in the group membership period for each of the Y 0 , Y -1 , Y -2 and Y -3 years of income as follows:

Step   1 The increase in expenditure on Australian owned R & D for Company J was worked out above. This amount is $10,000. The increase in expenditure on Australian owned R & D for the group members of Company J who are eligible companies is:

Step   2 Total the results of Step   1.
The total increase in expenditure on Australian owned R & D by the eligible companies in the group is:
$10,000 + $40,000 + $60,000
= $110,000

Company J will input this amount into its calculation for working out the eligible company's share of the Australian owned part of the adjusted increase in expenditure on R & D by the group .

C6.8.2 Net increase in expenditure on Australian owned R & D by the group - 73RC

The method statement contained in section 73RC sets out how to calculate the net increase in expenditure on Australian owned R & D by the group .

This is worked out by adding together the change in expenditure on Australian owned R & D by the eligible company of each eligible company in the group. This is the sum of the amount calculated under steps 1 to 6 of the method statement in subsection 73RA(1) for each company.

If an eligible company seeking to claim the 175% Australian Premium is a solitary company, the net increase in expenditure on Australian owned R & D by the group will be the same as the total increase in expenditure on Australian owned R & D by the eligible companies in the group and the increase in expenditure on Australian owned R & D by the eligible company.

Note: Remember that the change in expenditure on Australian owned R & D by the eligible company worked out using Steps 1 to 6 of the method statement in subsection 73RA(1) of the ITAA   1936 can be a negative number.

If the amount worked out under the method statement in section 73RC of the ITAA   1936 is zero, the eligible company is not entitled to the 175% Australian Premium.

ITAA 1936 section 73RC

Example 6.8

Step   1For each group member that is an eligible company work out, under steps 1 to 6 inclusive of the method statement in subsection 73RA(1) , the change in expenditure on Australian owned R & D by the eligible company . This was worked out for Company   J above. The change in expenditure on Australian owned R & D by the eligible company for each group member is:

Step   2Total the results of Step   1. If the result is a negative, the net increase in expenditure on Australian owned R & D by the group is zero instead.
$10,000 + $40,000 + ($10,000) + $60,000
= $100,000

Company J will input this amount into its calculation for working out the eligible company's share of the Australian owned part of the adjusted increase in expenditure on R & D by the group .

C6.8.3 Net increase in expenditure on foreign owned R & D - 73RD

The method statement in section 73RD sets out the steps for calculating the net increase in expenditure on foreign owned R & D by the group.

This is calculated as the sum of steps 1 to 9 of the method statement in subsection 73RB(1) which works out the increase in expenditure on foreign owned R & D by the eligible company , for each of the eligible companies in the group. The result of Step   9 of the method statement in subsection 73RB(1) is equivalent to the change in expenditure worked out in relation to Australian owned R & D using steps 1 to 6 of the method statement in subsection 73RA(1) of the ITAA   1936.

If no amount of expenditure on foreign owned R & D was incurred by the eligible company, or group member, in its group membership period, for the Y 0 , Y -1 , Y -2 or Y -3   years of income, then the net increase in expenditure on foreign owned R & D by the group will be nil.

For more information on expenditure on foreign owned R & D, please see Part C3 Deduction for expenditure on foreign owned R & D.

Note: A detailed explanation of how to calculate the net increase in expenditure on foreign owned R & D by the group is given in section 7.8.2 of this guide in part C7 Extra deduction for increase in expenditure on foreign owned R & D (175% International Premium). Note that if this amount is a negative number, the net increase in expenditure on foreign owned R & D by the group is zero.

ITAA   1936 section 73RD

C6.8.4 Adjusted increase in expenditure on R & D by the group - 73RE

The adjusted increase in expenditure on R & D by the group is calculated under section 73RE of the ITAA   1936. This amount is calculated as the sum of the change in expenditure on Australian owned R & D and the change in expenditure on foreign owned R & D for all group members (will be positive or zero if negative). An adjustment balance is then subtracted from this result (will be positive or zero if negative).

The adjustment balance is calculated under section 73V of the ITAA   1936 and will be relevant where there is any annual downswing in the combined total of incremental expenditure and expenditure on foreign owned R & D during the three year history period that exceeds 20%. In other words, that amount may be moderated where expenditure in any of the two previous years i.e. Y -1 or Y -2 , has fallen below 80% of the expenditure in years Y -2 or Y -3 respectively. This adjustment exercise is determined by examining the incremental expenditure and expenditure on foreign owned R & D of the company's group.

ITAA 1936 section 73RE

Step   1Step   1 For each group member that is an eligible company work out, under steps 1 to 6 inclusive of the method statement in subsection 73RA(1) , the change in expenditure on Australian owned R & D by the eligible company .
Step   2For each group member that is an eligible company to work out, under steps 1 to 9 inclusive of the method statement in subsection 73RB(1) the change in expenditure on foreign owned R & D by the eligible company .
Step   3Add up all the results of steps 1 and 2. If the result is a negative number, the adjusted increase in expenditure on R & D by the group will be zero.
Step   4Subtract the adjustment balance worked out under section 73V from Step   3. If the result is a negative number, the adjusted increase in expenditure on R & D by the group will be zero.

If the amount worked out under the method statement in section 73RE of the ITAA   1936 is zero, the eligible company is not entitled to the 175% Australian Premium.

C6.8.4.1 Adjustment amounts

To work out the adjustment amount, a company must first determine its R & D spend for the Y -1 , Y -2 and Y -3 years of income.

R & D spend of an eligible company and its group members for a year of income means the sum of:
  1. the amounts worked out for the year of income under steps 1, 2 and 3 of the method statement in subsection 73RA(1) as the reduced expenditure on Australian owned R & D by each eligible company in the group in its group membership period for the year of income; and
  2. the amounts worked out for the year of income under steps 4, 5 and 6 of the method statement in subsection 73RB(1) as the reduced notional expenditure on foreign owned R & D by each eligible company in the group in its group membership period for the year of income.

ITAA 1936 subsection 73P(2)

There may be an adjustment amount (AA 0 ) where a company's R & D spend in the Y -1 year of income is less than 80% of its R & D spend for the Y -2 year of income. Similarly, there may be an adjustment amount (AA -1 ), where a company's R & D spend in the Y -2 year of income is less than 80% of its R & D spend for the Y -3 year of income.

The adjustment amount of an eligible company and its group members for the Y 0 year of income (AA 0 ) is:

[R & D spend for Y -2 year x 80%] - R & D spend for Y -1 year

The adjustment amount of an eligible company and its group members for the Y -1 year of income (AA -1 ) is:

[R & D spend for Y -3 year x 80%] - R & D spend for Y -2 year

ITAA 1936 subsections 73T(1) and (2)

Exceptions

However, there are exceptions to these rules.

AA 0 will be zero if:

  • the eligible company or any of its group members could deduct an amount under section 73QA or 73QB for the Y -1 year of income, and
  • there has been no change in control of the eligible company or any of its group members for the Y 0 year of income resulting in a company entering or leaving the group with a viable business and a change to the R & D spend of the eligible company for the Y -1 , Y -2 or Y -3 year of income.

ITAA 1936 subsection 73T(3)

Also, AA -1 will be zero if:

  • the eligible company or any of its group members could deduct an amount under section 73QA or 73QB for the Y -2 year of income, and
  • there has been no change in control of the eligible company or any of its group members for the Y 0 or Y -1 year of income resulting in a company entering or leaving the group with a viable business and a change to the R & D spend of the eligible company for the Y -1 , Y -2 or Y -3 year of income.

ITAA 1936 subsection 73T(4)

The adjustment amount will also be deemed to be nil where the result of the calculation is negative.

ITAA section 73S

C6.8.4.2 Adjustment balance

If the R & D spend of the eligible company for the Y -1 year of income is less than or equal to RA -1 , then

adjustment balance = AA 0 + AA -1

Otherwise,

adjustment balance = (RA -1 + AA 0 + AA -1) - the R & D spend for Y -1

ITAA 1936 section 73V

RA-1 (short for Running Average for the Y-1 year of income) means half the sum of the R & D spend of the eligible company and its group members for the Y-2 and Y-3 years of income.

ITAA 1936 subsection 73P(2)

The adjustment balance is zero if the eligible company or any of its group members met the conditions in either paragraphs 73QA(1)(a) and (b) or in paragraphs 73QB(1)(a) and (b) of the Y -1 year of income, and there has been no change in control of the eligible company or any of its group members for the Y 0 or Y -1 year of income resulting in a company entering or leaving the group with a viable business and a change to the R & D spend of the eligible company for the Y -1 , Y -2 or Y -3 year of income.

ITAA 1936 subsection 73V(3)

The adjustment balance will also be deemed to be nil where the result of the calculation is negative.

ITAA section 73S

C6.8.4.3 Transitional rules

Transitional provisions operate to modify the application of paragraphs 73T(3)(a) and 73T(4)(a) and paragraph 73V(3)(a) for Y 0 that is the first year of income starting after 30   June   2007.

In effect, an eligible company may come within the exceptions to the adjustment amounts and adjustment balance where that company was eligible, or was deemed to be eligible, to claim an incremental tax concession (under section 73Y , 73QA or 73QB of the ITAA   1936) in the Y -1 or Y -2 year of income, as relevant.

Example 6.9

Continuing with Example 6.8 above , eligible company, Company J, and its group members, have the following:

  • total increase in expenditure on Australian owned R & D by the eligible companies in the group (as calculated under subsection 73RA(2)) of $110,000
  • net increase in expenditure on Australian owned R & D by the group (as calculated under section 73RC ) of $100,000

Company J, Company K, Company L and Company M did not undertake any foreign owned R & D in Y 0 or any of the three previous years (Y -1 to Y -3 ). Therefore the net increase in expenditure on foreign owned R & D by the group as calculated by the method statement in section 73RD will be zero.

To calculate the adjusted increase in expenditure on R & D by the group under section 73RE there is a method statement to follow.

Step   1For each eligible company that was a group member, work out under steps 1 to 6 (inclusive) of the method statement in subsection 73RA(1) , the change in expenditure on Australian owned R & D by the eligible company.
 This amount has been calculated above and gave the following result:
 

Step   2This step requires each eligible company that is a group member to worked out the change in expenditure on foreign owned R & D by the eligible company. This is calculated by following steps 1-9 of the method statement in subsection 73RB(1) .
 

In this example, none of the group members have undertaken foreign owned R & D activities so the change in expenditure on foreign owned R & D by each of the eligible companies will be zero.

Step   3

Add up all of the results of Step   1 and Step   2. This amount is $100,000.

Step   3Add together all the results of Step   1 and Step   2.
 This is $100,000.
  
Step   4An adjustment balance calculated under section 73V of the ITAA   1936 is required to be subtracted from the result obtained at Step   3. If the result is a negative number, the adjusted increase in expenditure on R & D by the group will be deemed to be zero.
  
 To work out the adjustment balance, the first step is to determine the R & D spend of Company J for the Y -1 , Y -2 and Y -3 years of income. Once the R & D spend has been calculated, the adjustment amounts AA 0 and AA -1 can be worked out. (See section 6.8.4.1 Adjustment Amounts and 6.8.4.2 Adjustment balance)
  
 The R & D spend of the eligible company for a year of income is the sum of the reduced expenditure on Australian owned R & D for each group member (worked out under steps 1, 2 and 3 of the method statement in 73RA(1)) and the reduced notional expenditure on foreign owned R & D for each group member (worked out under steps 4, 5 and 6 of the method statement in 73RB(1) ). (See section 6.8.4.1 for definition of 'R & D spend')
  
 In our example, the reduced notional expenditure on foreign owned R & D for each group member (worked out under steps 4, 5 and 6 of the method statement in 73RB(1) is zero. Therefore the R & D spend for Company J is worked out as follows:
 

  
 AA 0 is 
  [R & D spend for the Y -2 year x 80%] - R & D spend for Y -1 year
  $136,000 - $210,000
  = zero
  
 

AA -1 is

 
  [R & D spend for the Y -3 year x 80%] - R & D spend for Y -2 year
  $200,000 - $170,000
  = $30,000
  
 

The running average for the Y -1 year of income (RA -1 ) for Company J is:

   
  Half the R & D spend for the Y -2 and Y -3 years
  i.e. (R & D spend for Y -2 + R & D spend for Y -3 ) / 2
  = ($170,000 + $250,000) / 2
  = $210,000
   
 

From this it can be seen that that the R & D spend for Y -1 is equal to RA -1 so the adjustment balance is:

  AA 0 + AA -1
  (0 + $30,000)
  = $30,000
   
 

For the purposes of this example, no exceptions apply to reduce the adjustment amounts or the adjustment balance to zero (none of the eligible companies were entitled to deduct an amount under former section 73Y , or section 73QA or 73QB ).

  
 

Step   4 of the method statement in section 73E requires the adjustment balance to be subtracted from the result of Step   3.

  
 $100,000 - $30,000
 = $70,000

Company J's adjusted increase in expenditure on R & D by the group is $70,000. Company J will input this amount into its calculation for working out the eligible company's share of the Australian owned part of the adjusted increase in expenditure on R & D by the group .

Company J will be entitled to a deduction for the Y 0 year of income of 50% of the eligible company's share of the Australian owned part of the adjusted increase in expenditure on R & D by the group.

That is, 50% of:

Through the examples above, the following have been worked out:

  • the increase in expenditure on Australian owned R & D by the eligible company for Company J is $10,000
  • the total increase in expenditure Australian owned R & D by the eligible companies in the group for Company J is $110,000
  • the net increase in expenditure on Australian owned R & D by the group for Company J is $100,000
  • the net increase in expenditure on foreign owned R & D by the group for Company J is zero
  • the adjusted increase in expenditure on R & D by the group for Company J is $70,000.

Company J is entitled to a deduction under section 73QA of the ITAA   1936 of 50% of $6,364:

$6,364 x 50%
= $3,182.

C6-9 Other anti-avoidance measures

There is an anti-avoidance measure which applies where a company requests an amendment to an assessment for a year of income to reduce the amounts of its research and development expenditure for that year, and the Commissioner is of the opinion that the purpose of the amendment request is to increase the company's entitlement to the 175% Australian premium or the 175% International Premium.

Where the Commissioner is of the opinion that the purpose of a debit amendment is to increase a company's entitlement to the extra 50% deduction and/or the extra 75% deduction, the Commissioner may disregard that debit amendment for the purposes of working out a company's incremental expenditure and/or its notional expenditure on foreign owned R & D in its group membership period for the relevant year or years of income. The amended R & D figures will be ignored in working out the company's entitlement to the 175% Australian premium and /or 175% foreign premium.

ITAA 1936 section 73Z

C6-10 Interaction between the 175% Australian Premium and the R & D tax offset

A company can choose a tax offset instead of a deduction under section 73QA for its entitlement to the Australian owned R & D incremental concession if it meets the eligibility requirements to make that choice contained in section 73J of the ITAA 1936. (For further information on the R & D tax offset, see section C4 ).

Example 6.10

Following on from Examples 6.6 to 6.9 above, Company J is eligible to claim the $100,000 of research and development expenditure (incremental expenditure) incurred in the Y 0   year of income in relation to its R & D project under subsection 73B(14) of the ITAA   1936. As Company J received a Commercial ready grant of $10,000 in respect of this expenditure, the amount which the company can claim as a deduction at the rate of 125% is reduced by $20,000 (the initial clawback amount). The amount subject to clawback is eligible for deduction at the 100% rate.

From the information above, the section 73QA deduction for an increase in expenditure on Australian owned R & D for Company J will be $6,364 x 50% = $3,182.

Company J's entitlement to deductions under the R & D tax concession will therefore be:

If the R & D group turnover for Company J is less than $5,000,000 and the other eligibility criteria in section 73J are met, Company J will be able to choose the R & D tax offset for the current year of income.

Company J will be entitled to a cash amount for the R & D tax offset of

$36,954.60   ;     ($123,182 x 30%).

Note : Where, prior to choosing the R & D tax offset, Company J's income tax return for the current year shows a loss, Company J's carried forward loss will be reduced by the amount of deductions under the R & D tax concession i.e. by $123,182.

For further information on the eligibility requirements for the R & D tax offset see Part   C4 .

C6-11 Example of the calculation of the 175% Australian Premium

Company B wishes to claim a deduction under section 73QA of the ITAA   1936. Company A, Company B and Company C are Australian companies and are grouped for the purposes of section 73L of the ITAA   1936. Company A, Company B and Company C have undertaken Australian owned R & D activities and have not undertaken any foreign owned R & D activities. Each company incurred incremental expenditure on Australian owned R & D in its group membership period in the current year and the three previous years as outlined in the table below. The companies are group members for the purposes of section 73R of the ITAA   1936.

Company B received a grant of $10,000 in the Y 0 year of income attributable to the incremental expenditure incurred in its group membership period in the Y 0 year. There were no other grants or recoupments received by Company B in the Y 0 to Y -3 years. Neither Company A nor Company C received any grants or recoupments attributable to the incremental expenditure below.

Increase in expenditure on Australian owned R & D by the eligible company - 73RA(1)

Step   1Calculate the eligible incremental expenditure incurred by each eligible company in its group membership period for the Y 0 , Y -1 , Y -2 and Y -3 years of income.
 

Step   2Work out how much of the initial clawback amount, if any, is attributable to incremental expenditure incurred in the company's group membership period.
Step   3Subtract this amount from the company's incremental expenditure to give the reduced expenditure on Australian owned R & D.
 

 * In the Y 0 Year, Company B received a grant of $10,000 attributable to incremental expenditure incurred in its group membership period. Therefore, Company B must reduce its incremental expenditure by the initial clawback amount, which is twice the amount received: $200,000 - ($10,000 x 2) = $180,000.
Step   4Add up the reduced expenditure on Australian owned R & D by the eligible company for the Y -1 , Y -2 and Y -3 years of income.
Step   5Divide the result of Step   4 by 3.
 

Step   6For each company subtract the result of step   5 from the expenditure incurred by the company in the Y 0 year. This gives the change in expenditure on Australian owned R & D by the eligible company.
 

Step   7The increase in expenditure on Australian owned R & D is the amount worked out at Step   6 or, if the result of Step   6 is a negative amount, zero.
 

Total increase in expenditure on Australian owned R & D by eligible companies in the group - 73RA(2)

Step   1For each group member that is an eligible company, work out the increase in expenditure on Australian owned R & D by the eligible company using Steps 1 to 7 of the method statement in subsection 73RA(1) (calculated above).
Step   2Total the results of Step   1
 

Net increase in expenditure on Australian owned R & D by the group - 73RC

Step   1For each group member that is an eligible company, work out the change in expenditure on Australian owned R & D by the eligible company using steps 1 to 6 (inclusive) of the method statement in subsection 73RA(1) .
Step   2Total the results of Step   1. The result cannot be less than zero.
 

Net increase in expenditure on foreign owned R & D by the group - 73RD

Step   1For each group member that is an eligible company, work out the change in expenditure on foreign owned R & D by the eligible company using steps 1 to 9 (inclusive) of the method statement in subsection 73RB(1) .
Step   2Total the results of Step   1. The result cannot be less than zero.
 Company A, Company B and Company C did not incur any expenditure on foreign owned R & D in the Y 0, Y -2, or Y -3 year of income. The net increase in expenditure on foreign owned R & D by the group is zero.

Adjusted increase in expenditure on R & D by the group - 73RE

Step   1For each group member that is an eligible company, work out the change in expenditure on foreign owned R & D by the eligible company using steps 1 to 9 (inclusive) of the method statement in subsection 73RB(1) .
Step   2For each group member that is an eligible company, work out the change in expenditure on foreign owned R & D by the eligible company using steps 1 to 9 (inclusive) of the method statement in subsection 73RB(1) .
Step   3Add up all of the results of Step   1 and step   2
 

Step   4Work out the adjustment balance and subtract this amount from the result of Step   3. This is the adjusted increase in expenditure on R & D by the group. This amount cannot be less than zero (if the result is a negative number it is taken to be zero instead).
 R & D spend
 

 AA 0 is: 
  [R & D spend for the Y -2 year x 80%] - R & D spend for Y -1 year
  $136,000 - $260,000
  = zero
   
 

AA -1 is

 
  [R & D spend for the Y -3 year x 80%] - R & D spend for Y -2 year
  $232,000 - $170,000
  = $62,000
   
 

For the purposes of this example, no exceptions apply to reduce AA -1 to zero (none of the eligible companies were entitled to deduct an amount under former section 73Y , or section 73QA or 73QB) .

   
 

RA -1 is:

 
  (R & D spend for Y -2 + R & D spend for Y -3 ) / 2
  = ($170,000 + $290,000) / 2
  = $230,000
   
 

R & D spend for Y -1 is greater than RA -1 . The adjustment balance is therefore:

  (RA -1 + AA 0 + AA -1 ) - R & D spend for Y -1
  ($230,000 + 0 + $62,000) - $260,000
  = $32,000
 

For the purposes of this example, no exceptions apply to reduce the adjustment balance to zero.

 

The adjusted increase in expenditure on R & D by the group is

  $70,000 - $32,000
  = $38,000

The eligible company's share of the Australian owned part of the adjusted increase in expenditure on R & D by the group

The extra deduction available to Company B is 50% of the eligible company's share of the Australian owned part of the adjusted increase in expenditure on R & D by the group

$15,200.

View full documentView full documentBack to top