Guide to the R & D Tax Concession - Part C
C8 Interaction with other government assistance
| This document has been archived.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 general advice, as referred to in Practice Statement PS LA 2001/4 , issued by the Commissioner of Taxation. 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 general advice 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 general advice and, in doing so, make an honest mistake, you will be protected from any penalty on underpaid tax. Furthermore, if something in the written general advice 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.
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Commonwealth of Australia 2008
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C8-1 Grant or recoupment to be included in assessable income
A grant or recoupment received by an eligible company in connection with it undertaking R & D activities will generally be assessable income. Specifically, any amount which an eligible company receives, or is entitled to receive, which is:
- in respect of the results of an any of the R & D activities the company has incurred expenditure on; or
- attributable to the company having incurred that expenditure;
is assessable income under subsection 73B(27A) of the ITAA 1936. If not assessable under subsection 73B(27A) of the ITAA1936, an amount received as a recoupment for a loss or outgoing deducted under sections 73B , 73BA or 73BH of the ITAA 1936, is an assessable recoupment under section 20-20 of the ITAA 1997.
Where a grant funding agreement stipulates that payment is conditional upon the funds being applied to specific activities, and the agreement requires the funds be repaid if they are not applied to those activities, then the payment will not be assessable income until the funds have actually been applied in accordance with the funding agreement.
For further information see: ATO Interpretative Decision ATO ID 2006/122 Assessable income: derivation of Commonwealth funding - Cooperative Research Centres (CRC) Programme Are instalments paid to a taxpayer (CRC Company) under the Commonwealth Agreements for the 2004 and 2006 Selection Rounds of the CRC Programme (the Agreements), derived at the time of receipt for the purposes of section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? |
The total amount of a grant or recoupment should be included in your tax return as assessable income. It is not correct to subtract an assessable grant or recoupment from gross deductible amounts and include only the net deductible amounts in your tax return. |
C8-2 Clawback and the R & D deduction
This section generally does not apply to deductions available under subsection 73B(14C) , section 73QA or section 73QB of the ITAA 1936. However, concepts such as when an amount is 'received', the 'initial clawback amount' and when an amount is 'in respect of' certain expenditure, may be relevant.
Section 73C of the ITAA 1936 operates to 'claw back', or offset the benefits of the R & D tax concession for companies that have received a government grant for the same project. Clawback is applied on a project basis, not to the entire claim.
Note: Subdivision 20-A of the ITAA 1997 applies to make any otherwise non-assessable grants or recoupments covered by the subdivision assessable recoupments and these assessable recoupments are subject to section 73C of the ITAA 1936.
Subsection 73C(2) of the ITAA 1936 states that section 73C of the ITAA 1936 applies where:
- there is an 'eligible company'
- expenditure (called 'relevant expenditure') is incurred by the company on or after 1 July 1985 on research and development activities
- the R & D activities form part or all of a particular project
- the project is carried on by or on behalf of the company; the company, or another person grouped with the company, has received or is entitled to receive (either before or after the commencement of section 73C of ITAA 1936), a recoupment or a grant for some or all of the relevant expenditure from:
- the Commonwealth
- a State or Territory
- an STB (State/Territory body); or
- an authority constituted by or under a law of the Commonwealth, a State or of a Territory.
Where a grant is paid on an instalment basis, the company must work out what amounts it has received, or become entitled to receive, for the purposes of section 73C of the ITAA 1936. Where amounts have been approved but not yet paid, the company must determine whether it had an absolute or unconditional entitlement to receive these amounts in the relevant income year, or whether its entitlement was contingent. If, for example, entitlement to receive a grant payment is contingent upon meeting certain milestones and conditions, a company will not be 'entitled to receive' such amounts, for the purposes of the claw back provisions, until the milestones and conditions have been met, or the amounts are actually received.
Clawback is project related, and therefore does not impact on a company's expenditure on separate non-subsidised projects. Where the projects for which a grant is paid include a project or projects for which the company is not registered with the Board under section 39J of the IR & D Act 1986, expenditure in respect of the unregistered projects can still constitute relevant expenditure under section 73C of the ITAA 1936. That is, the company may claw back against expenditure on unregistered projects where the requirements of section 73C of the ITAA 1936 are met.
Where a company has incurred expenditure in relation to an item of pre-29 January 2001 plant, the total amount of expenditure incurred in the year of income may constitute 'relevant expenditure' on 'research and development activities' that form part of a project for the purposes of applying section 73C of the ITAA 1936. If this is so, the initial clawback amount will be applied against the total expenditure on plant, rather than only against the amount of any deduction related to the use of that plant.
For further information see: ATO Interpretative Decision ATO ID 2004/567 Research and development: Application of clawback against expenditure incurred on acquisition or construction of pre-29 January 2001 plant Is the total amount of expenditure incurred by a company on acquiring or constructing an item of pre-29 January 2001 plant, in relation to 'research and development activities' in a year of income, 'relevant expenditure' on 'research and development activities' that formed or form part of a particular project for the purposes of section 73C of the Income Tax Assessment Act 1936 (ITAA 1936)? |
For further information see: ATO Interpretative Decision ATO ID 2004/568 Research and development: Clawback - when has a company received, or become entitled to receive, a grant or recoupment? Has an eligible company received, or become entitled to receive, the total agreed amount of an approved Government grant, for the purposes of applying section 73C of the Income Tax Assessment Act 1936 (ITAA 1936), where the grant has been approved but the total agreed amount has not yet been paid? |
For further information see: ATO Interpretative Decision ATO ID 2004/569 Research and development: Application of clawback against other and core technology expenditure incurred on unregistered research and development activities. Can expenditure incurred by an eligible company on 'research and development activities', for which registration has not been obtained with the Industry, Research and Development Board, be 'relevant expenditure' for the purposes of section 73C of the Income Tax Assessment Act 1936 (ITAA 1936)? |
Co-operative Research Centres (CRCs) and clawback
The clawback provisions in section 73C of the ITAA 1936 do not generally apply to recoupments or grants from the Commonwealth under the Cooperative Research Centres Program (CRC Program) (see subsection 73C(2A) of the ITAA 1936). However, this is not the case where there is a 'partnership' for the purposes of subsection 73B(3A) of the ITAA 1936 which is not designated as a Cooperative Research Centre under the CRC Program (see paragraph 73B(3A)(da) of the ITAA 1936). This is so irrespective of whether it is the partnership which receives, or becomes entitled to receive the recoupment or grant, or just one eligible company in that partnership. In such cases section 73C of the ITAA 1936 may apply.
C8.2.1 How is the clawback amount calculated?
The initial clawback amount is taken to be twice the amount, or twice the total amounts, that the company or another person grouped with the company, has received, or became entitled to receive, as a recoupment or a grant in respect of R & D expenditure.
ITAA 1936 subsection 73C(3)
Example 8.1
Where the company incurs research and development expenditure of $100,000 in the year of income and receives a $20,000 grant, the following calculation applies:
Therefore, the company may claim $60,000 at 125% under the tax concession and $40,000 at 100%.
C8.2.2 What happens if a further grant/recoupment is received later in the same year?
If a further recoupment/grant is received, or entitled to be received in the same year in relation to the same project expenditure, the initial clawback amount is recalculated so as to include the additional grant.
Example 8.2
Where the company receives a further recoupment of $10,000 later that year (in addition to the $20,000 grant already received), the clawback amount is recalculated to be twice the total amount, i.e. 2 x (20,000 + 10,000) = $60,000.
How is the clawback amount offset against the relevant research and development expenditure?
The clawback amount is offset against the relevant expenditure:
- if the initial clawback amount is equal to or greater than the relevant expenditure, clawback applies to the whole of that expenditure;
- if the initial clawback is less than the relevant expenditure, then the clawback amount is fully applied to the relevant expenditure, and is exhausted in the following manner;
- first, it is applied against expenditure in the years (in chronological order) in which the grant or recoupment is received or entitlement to it arises (i.e. 'the year of grant');
- the remainder of the initial clawback amount is applied progressively against expenditure in the years prior to the year of grant in reverse chronological order;
- the balance to be applied in chronological order to each year of income not already covered (i.e. this means that any balance of the initial clawback amount after the above applications is applied progressively against expenditure in the years after the year of grant, in chronological order).
ITAA 1936 subsection 73C(7)
Example 8.3
A company begins an R & D project in the 1999-2000 income year, which is completed in the 2003-04 income year. The company receives a grant of $100,000 in the 2000-01 income year.
The company incurs the following relevant expenditure during the life of the project:
The initial clawback amount is 2 x $100,000 = $200,000
The initial clawback amount is fully exhausted in the 2002-03 income year. However, $10,000 of relevant expenditure in that year is not subject to clawback, and is hence eligible for the concessional deduction at the 125% rate. As none of the 2003-04 income year expenditure is subject to the clawback, the full amount is eligible for the concessional deduction at the 125% rate.
If a grant or recoupment is not received, or entitled to be received, until after the last year in which any relevant expenditure was incurred, the initial clawback amount is first offset against expenditure in the latest year in which a deduction was allowed/allowable under section 73B of the ITAA 1936, and then, progressively in reverse chronological order to each of the earlier years of income.
C8.2.3 What happens if a further grant/recoupment is received in a subsequent year?
If a further recoupment/grant is received, or entitled to be received, in a subsequent year that relates to the same project expenditure the initial clawback amount is recalculated so as to include the additional grant.
ITAA 1936 paragraph 73C(3)(b)
Example 8.4
Where the company receives a further recoupment of $10,000 in a subsequent year (in addition to the $20,000 grant already received), the clawback amount is recalculated to be twice the total amount, i.e.
2*($20,000 + $10,000) = $60,000
The process of offsetting the clawback amount against the relevant expenditure is slightly different to that shown in the example under the heading How is the clawback amount offset against the relevant research and development expenditure ? The clawback amount is offset in the following order:
- year of the first grant
- year of the second grant
- years previous to year of first grant
- years subsequent to year of first grant (excluding year of second grant).
Companies receiving government grants or other assistance subject to clawback should ask the Tax Office for advice on this matter.
C8.2.4 Consolidation and clawback
There can be cases where the head company of a consolidated group will claim the 125% or 175% deduction for expenditure made by a subsidiary, but the subsidiary will subsequently receive a grant for, or recoup that expenditure, after it has left the consolidated group. In these circumstances, clawback will operate in respect of the head company to the same extent that it would have in respect of the subsidiary, if the subsidiary had never been in the consolidated group.
The head company may not know the amount of the recoupment or grant that its former subsidiary has received or that the recoupment or grant was received. Consequently, the subsidiary is required to notify the head company of the amount that it will have to use for its clawback calculation. It must do so within 60 days of the end of the financial year in which the entitlement to the grant or recoupment arises. By that time the subsidiary will be in a position to calculate the information it must supply to the head company
ITAA 1936 subsection 73BAE(2)
A subsidiary may receive a grant in relation to certain of its R & D activities in a year of income for which it is not a member of a consolidated group. Clawback will apply to its R & D deductions for that year. In the next year of income it may continue to incur expenditure on those activities, but become part of a consolidated group. The consolidation rules will mean that clawback may also apply, for this later year of income, to the head company's R & D deductions in relation to those activities, where there is some clawback amount that still remains to be applied.
Similarly, where a grant in respect of expenditure on R & D activities is received by a subsidiary whilst in a consolidated group, but the subsidiary incurs expenditure on those activities after leaving the group, the consolidation 'exit history rule' (ITAA 1997 section 701-40 ) operates so that clawback applies to the subsidiary's expenditure on those activities after its departure.
A subsidiary which has incurred expenditure on R & D activities prior to joining a group, may receive a grant in respect of expenditure on those activities after it has joined a consolidated group. In this circumstance, the subsidiary will still be required to apply clawback to the expenditure incurred prior to consolidation. The 'single entity rule' in the consolidation provisions is only relevant for various purposes in any period in which the subsidiary is a member of the consolidated group . These rules therefore do not prevent clawback from applying to the subsidiary in the period prior to joining the group.
ITAA 1997 subsection 701-1(3)
C8.2.5 Clawback and guaranteed returns to investors
Section 73CA of the ITAA 1936 operates to reduce the benefits of the R & D tax concession in relation to expenditure if, at the time an eligible company incurred expenditure, the company was not at risk in respect of the whole or part of that expenditure.
For further information see: ATO Interpretative Decision ATO ID 2006/68 Research and Development: application of section 73CA of the ITAA 1936 to a reimbursement arrangement - expenditure 'not at risk' Does section 73CA of the Income Tax Assessment Act 1936 (ITAA 1936) apply where an eligible company is entitled to reimbursement for expenditure on research and development activities in the form of a fee paid by a related entity? |
For further information see: ATO Interpretative Decision ATO ID 2009/107 R & D tax concession: is a company 'not at risk' if it can expect to recover its R & D expenditure because of the good technical prospects of its activities (rather than merely because of the terms of the relevant arrangement)? Under section 73CA of the Income Tax Assessment Act 1936 (ITAA 1936), is a company 'not at risk' in respect of an amount of expenditure if:
|
If an eligible company also receives a grant or recoupment from the government in respect of that expenditure then, in accordance with paragraph 73CA(2)(a) of the ITAA 1936, the company would first need to apply the clawback provisions. Any amount of expenditure not subject to clawback would then be subject to the application of section 73CA of the ITAA 1936.
ITAA 1936 paragraph 73CA(2)(b)
C8-3 Clawback and the deduction for expenditure on foreign owned R & D
Companies can claim a deduction for expenditure on foreign owned R & D under subsection 73B(14C) of the ITAA 1936 for their first year of income commencing after 30 June 2007, and later income years.
Clawback generally operates to reduce the rate of deduction for relevant expenditure from 125% to 100%. Therefore, because amounts of expenditure on foreign owned R & D are deductible under subsection 73B(14C) at the rate of 100%, the clawback provisions will not impact upon the deduction available under this subsection where a company has received a grant or recoupment in respect of its expenditure on foreign owned R & D.
However, where a company has received a grant or recoupment in respect of its expenditure on foreign owned R & D, this may impact upon its entitlement to the 175% Australian Premium and 175% International Premium. (See C8-6 Clawback and the 175% Australian Premium and C8-7 Clawback and the 175% International Premium).
C8-4 Clawback and the R & D tax offset
Where a company receives a grant or recoupment from the government in relation to their R & D expenditure, prior to or during the claim year, the clawback provisions should be taken into account in calculating the deductions. As the amount of any deduction available may be reduced by the application of the clawback provisions the amount which is eligible to be cashed out under the offset may also be reduced.
Where clawback applies deductions are claimed at the rate of 100% instead of 125%. Consequently, the application of the clawback provisions does not prevent a company from being eligible for the R & D tax offset so long as the eligibility criteria contained in section 73J of the ITAA 1936 have been met. (See Part C4-7 - Clawback of grant funding or recouped expenditure).
C8-5 Clawback and the incremental tax concession (175% Premium)
Companies can claim the incremental tax concession for expenditure incurred in their first income year that commences after 30 June 2001, until the end of the 2006-07 year of income. This section does not apply in relation to expenditure incurred in years of income starting after 30 June 2007.
Companies claiming the incremental concession must have been registered under the 125% Concession and be eligible to deduct incremental expenditure in each of the three immediately prior years. An exception to the requirement for a company to have a three year claim history arises where the company or its group member received a start grant or a commercial ready grant in respect of that year of income. (see section C5-3 Eligibility).
Where a company has received a grant or recoupment from the government in relation to its 'incremental expenditure', this is taken into account in working out the additional deduction available under section 73Y of the ITAA 1936. The additional 50% deduction is the lesser of:
- 50% of the premium amount distributed to the eligible company, or
- 50% of the eligible company's Y 0 year of income incremental expenditure eligible for a deduction under section 73B of the ITAA 1936 at the rate of 125% (the '125% cap').
While clawback does not affect the amount of incremental expenditure included in the calculations for the current or history years, it will affect the level of the claim. The impact of clawback is taken into account in calculating the entitlement to the incremental tax concession through the operation of the '125% cap' in subsection 73Y(2) of the ITAA 1936, which limits the amount of the incremental deduction to the lesser of 50% of the premium amount distributed to the eligible company, or 50% of the amount of incremental expenditure incurred by the company in the Y 0 year of income that is eligible for a deduction at the rate of 125%. (See part C5-11 Operation of the clawback provisions and the incremental concession).
C8-6 Clawback and the 175% Australian Premium
Companies can claim the 175% Australian Premium (concerning 'Australian owned R & D') for expenditure incurred in their first year of income that commences after 30 June 2007 and later years of income.
To claim the 175% Australian Premium, an eligible company must have been able to deduct an amount under subsection 73B(13) or (14) of the ITAA 1936 for incremental expenditure incurred in its group membership period in each of the three years immediately preceding the deduction year. An exception to this requirement arises where the company or its group member received a start grant or a commercial ready grant in respect of that year of income. (See section C6-3 Eligibility).
Where a company has received a grant or recoupment from the government in relation to its 'incremental expenditure', this is taken into account in working out the extra deduction available under section 73QA of the ITAA 1936. If the grant or recoupment is attributable to incremental expenditure incurred by the eligible company in its group membership period, the company must reduce its incremental expenditure by the 'initial clawback amount' (twice the amount received). A company's entitlement to the 175% Australian Premium is calculated on the basis of the reduced amounts for the current year and the three immediately preceding years. (See 6.8.1.1 Operation of the clawback provisions and the 175% Australian Premium).
Where a company has received a grant or recoupment from the government in relation to its expenditure on foreign owned R & D, this is also taken into account when working out the 175% Australian Premium. The company's expenditure on foreign owned R & D is reduced by the initial clawback amount to the extent that the grant or recoupment is attributable to the expenditure on foreign owned R & D incurred by the eligible company in its group membership period. The reduced amount of expenditure on foreign owned R & D is used when working out a company's entitlement to the 175% Australian Premium (see 7.8.1.1 Operation of the clawback provisions and the 175% International Premium).
C8-7 Clawback and the 175% International Premium
Companies can claim the 175% International Premium (concerning 'foreign owned R & D') for expenditure incurred in their first year of income that commences after 30 June 2007 and later years of income.
To claim the 175% International Premium, an eligible company generally must have been able to deduct an amount under subsection 73B(14C) of the ITAA 1936 for expenditure incurred on foreign owned R & D in its group membership period in each of the three years immediately preceding the deduction year. There is no exception to this eligibility requirement of the 175% International Premium where the company or its group member received a start grant or a commercial ready grant in respect of that year of income. (See section C7-3 Eligibility).
Where a company has received a grant or recoupment from the government in relation to its expenditure on foreign owned R & D, this is taken into account in working out the extra deduction available under section 73QB of the ITAA 1936. If the grant or recoupment is attributable to expenditure on foreign owned R & D incurred by the eligible company in its group membership period, the company must reduce its expenditure on foreign owned R & D by the 'initial clawback amount' (twice the amount received). A company's entitlement to the 175% International Premium is calculated on the basis of the reduced amounts for the current year and the three immediately preceding years. However, if one or more of the immediately preceding three years is a nil expenditure year, the requirement concerning deductibility does not apply to that year. (See 7.8.1.1 Operation of the clawback provisions and the 175% International Premium).
Where a company has received a grant or recoupment from the government in relation to its expenditure on Australian owned R & D, this is also taken into account when working out the 175% International Premium. The company's expenditure on Australian owned R & D is reduced by the initial clawback amount to the extent that the grant or recoupment is attributable to the expenditure on incremental expenditure incurred by the eligible company in its group membership period. The reduced amount of expenditure on Australian owned R & D is used when working out a company's entitlement to the 175% International Premium. See 6.8.1.1 Operation of the clawback provisions and the 175% Australian Premium).
C8-8 AusIndustry and other programs subject to clawback
AusIndustry and other Commonwealth, Territory and State government programs are subject to 'clawback' where the programs provide a company with a 'recoupment or a grant in respect of, the whole or any part of the relevant expenditure on research and development activities'.
A variety of Commonwealth, State and Territory government assistance programs exist which provide support for companies undertaking R & D activities. Many of these programs will also support activities other than R & D activities as defined in subsection 73B(1) of the ITAA 1936 (for example, commercialisation of a product).
The application of the 'clawback' provision is limited to assistance received for R & D activities covered under subsection 73B(1) of the ITAA 1936 and applies on a project by project basis. Clawback will not be applicable to funding received for those activities undertaken by the company on a project which does not qualify as R & D activities within the definition in subsection 73B(1) of the ITAA 1936.
An assistance program may not necessarily specify that an objective of the funding is to support R & D activities. However, if the funding is provided in respect of R & D activities as defined in subsection 73B(1) of the ITAA 1936, clawback would apply to the assistance received for those activities.
AusIndustry has a range of products designed to support innovation within Australian industry. Where these programs support R & D activities through grants for R & D expenditure, or other forms of support that give rise to recoupment of expenditure, then clawback will apply when the company claims a deduction under the R & D tax concession.
Details of these products are available from the AusIndustry website .
For further information see: ATO Interpretative Decision ATO ID 2001/753 Section 73C Income Tax Assessment Act 1936 (ITAA 1936) and the Automotive Competitiveness and Investment Scheme. If a taxpayer receives credits under the Commonwealth Government's Automotive Competitiveness and Investment Scheme (ACIS) (which are calculated with reference to investment in approved research and development (R & D) plant and equipment or investment in approved (R & D)), do the clawback provisions in respect of expenditure on (R & D) activities (relevant expenditure) contained in section 73C of the ITAA 1936 apply? If so, does section 73C of the ITAA 1936 apply to all relevant expenditure, within the meaning of that term in paragraph 73C(2)(a) of the ITAA 1936, used in the calculation of a particular credit? |
ATO Interpretative Decision ATO ID 2004/871 Research and development: Clawback (section 73C) for grants and recouped expenditure and the Pharmaceutical Industry Investment Program. Must a company apply the 'clawback' provisions of section 73C of the Income Tax Assessment Act 1936 (ITAA 1936) to all or part of the payments received under the Pharmaceutical Industry Investment Program (PIIP)? |