Tax Laws Amendment (2007 Measures No. 5) Act 2007 (164 of 2007)

Schedule 11   Research and development

Part 1   Amendment of the Income Tax Assessment Act 1936

8   After subsection 73B(14B)

Insert:

Deduction for expenditure on foreign owned R&D

(14C) An eligible company may deduct for a year of income the amount (the expenditure on foreign owned R&D by the eligible company for the year of income) worked out under subsection (14D) if:

(a) the eligible company incurs expenditure in the year of income at a time when the eligible company is grouped under section 73L with a foreign company; and

(b) the expenditure is for the purpose of the carrying on of Australian-centred research and development activities; and

(c) the activities are, are to be or were carried on wholly or primarily on behalf of the foreign company; and

(d) the activities are, are to be or were carried on directly or indirectly under a written agreement between the eligible company and the foreign company and no other parties for the activities to be performed:

(i) by the eligible company; or

(ii) by another person directly or indirectly under another agreement to which the eligible company is, or will become, a party; and

(e) the expenditure is not incurred in connection with an agreement that:

(i) is between the eligible company and another eligible company that is grouped under section 73L with the eligible company when the expenditure is incurred; and

(ii) is an agreement for the activities to be performed either by the eligible company or by a person who is not a party to the agreement and is to perform the activities directly or indirectly under another agreement to which the eligible company is, or will become, a party; and

(f) the expenditure on foreign owned R&D by the eligible company for the year of income is greater than $20,000; and

(g) the eligible company, and each other eligible company (if any) that is grouped under section 73L with that company at any time in the year of income, is registered under section 39J of the Industry Research and Development Act 1986 in relation to the year of income and all activities that meet both the following conditions:

(i) the activities are ones that, if subsection (2BA) had not been enacted, would be Australian-centred research and development activities carried on wholly or primarily on behalf of a foreign company (whether or not the activities would be such Australian-centred research and development activities taking account of that subsection);

(ii) the activities are ones in relation to which the eligible company or the other eligible company (as appropriate) incurred expenditure during the year of income.

Note 1: An example of the carrying on or performance of activities indirectly under an agreement that is a contract is the carrying on or performance of the activities under a subcontract, or one of a chain of subcontracts, under the agreement.

Note 2: One effect of paragraph (14C)(e) is that, even if the eligible company has an agreement with the foreign company for the carrying on of Australian-centred research and development activities wholly or primarily on behalf of the foreign company, the eligible company cannot deduct its expenditure:

(a) for performing the activities as a subcontractor under a subcontract with another eligible company grouped under section 73L with the eligible company; or

(b) if the eligible company is a subcontractor to another eligible company grouped under section 73L with the eligible company, for further subcontracting the performance of the activities.

Note 3: The eligible company may get an extra deduction under section 73QB if its expenditure on foreign owned R&D for the year of income is greater than the average of the amounts that would be the expenditure on foreign owned R&D by the eligible company for the 3 previous years of income if subsection (2BA) of this section had not been enacted.

(14D) The expenditure on foreign owned R&D by the eligible company for the year of income is the amount that would be the eligible company's incremental expenditure under section 73P for the year of income if:

(a) the Australian-centred research and development activities covered by subsection (14C) (ignoring paragraphs (14C)(f) and (g)) of this section were carried on on behalf of the eligible company (and not on behalf of the foreign company mentioned in paragraph (14C)(c)); and

(b) the only expenditure incurred by the eligible company in the year of income in relation to research and development activities had been the expenditure covered by subsection (14C) (ignoring paragraphs (14C)(f) and (g)) of this section; and

(c) the total group markup (if any) of the eligible company for the year of income were the amount (if any) that would be worked out under subsection (14AC) of this section if the company were working out the amount of a deduction under subsection (13) or (14) of this section on the basis described in paragraphs (a) and (b) of this subsection.

Note 1: Paragraphs (14D)(a) and (b) affect what would be the eligible company's incremental expenditure by affecting expenditure described in definitions of terms (e.g. contracted expenditure and salary expenditure ) used in the definition of research and development expenditure , on which incremental expenditure is based.

Note 2: Subsection 73P(5) excludes a company's total group markup (worked out under subsection (14AC) of this section) from the company's incremental expenditure. The markup is worked out to affect a deduction by the company under subsection (13) or (14) of this section for an amount of research and development expenditure to which subsection (14AB) of this section applies.

Note 1: The following heading to subsection 73B(15) is inserted "Deduction for qualifying plant expenditure".

Note 2: The following heading to subsection 73B(15AA) is inserted "Deduction for qualifying expenditure on post-23 July 1996 pilot plant".

Note 3: The following heading to subsection 73B(15A) is inserted "Reduction of deduction under subsection (15)".

Note 4: The following heading to subsection 73B(17A) is inserted "Limit on deduction for expenditure on overseas research and development activities".

Note 5: The following heading to subsection 73B(18) is inserted "Choice that this section not apply to plant".

Note 6: The following heading to subsection 73B(20) is inserted "Limit on double deductions".

Note 7: The following heading to subsection 73B(23) is inserted "Balancing adjustments".

Note 8: The following heading to subsection 73B(27) is inserted "Amounts included in assessable income".