Disclaimer
This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of your written advice

Authorisation Number: 1012692716617

Ruling

Subject: Application of Subdivision 355-G of the Income Tax Assessment Act 1997 (ITAA 1997) to payments received under a Commonwealth Government Scheme

Question 1

Are the payments received (or to be received) by Company A as a participant under the Commonwealth Government Scheme, that relate to expenditures incurred on research and development activities that are or will be notionally deductible under Division 355 of the Income Tax Assessment Act 1997 (ITAA 1997), recoupments of expenditure incurred on or in relation to certain activities under subparagraph 355-445(b)(i) of the ITAA 1997, rather than recoupments that require expenditure to have been incurred, or to be incurred, on certain activities under subparagraph 355-445(b)(ii) of the ITAA 1997?

Answer

Yes.

Question 2

If the answer to Question 1 is 'yes', is the expenditure amount on which extra income tax is payable as determined under section 355-450 of the ITAA 1997 limited to the payment amounts received (or to be received) by Company A under the Commonwealth Government Scheme referred to in Question 1 to the extent that those amounts relate to expenditures which are deducted under Division 355 of the ITAA 1997?

Answer

Yes.

Question 3

Is the methodology detailed below in the 'Relevant facts and circumstances' under the heading 'Method for calculating extra income tax payable' an appropriate method of calculating the extra income tax payable for the relevant income year arising under Subdivision 355-G of the ITAA 1997 for the portion of Commonwealth Government Scheme payments Company A have received as a participant in relation to defined research and development under that scheme?

Answer

Yes.

Question 4

If the answer to Question 1 is 'no', and it is considered that the Commonwealth Government Scheme payments are subject to a requirement for expenditure to have been incurred, or to be incurred, on certain activities and therefore fall under subparagraph 355-445(b)(ii) of the ITAA 1997, how is the amount of that expenditure to be determined (for the purposes of paragraph 355-450(1)(a) of the ITAA 1997)?

Answer

Not applicable.

This ruling applies for the following periods:

Years ending 30 June 2013 to 30 June 2017

Relevant facts and circumstances

Company A has elected to be the provisional head company of a multiple entry consolidated group under Part 3-90 of the ITAA 1997.

Since 1 July 2011 Company A has been a participant under the Commonwealth Government Scheme in relation to defined research and development of itself and its wholly-owned subsidiary Company B.

Company A has registered the eligible R&D activities of itself and Company B under section 27A of the Industry Research and Development Act 1986 (IRDA 1986) for the year ended 30 June 2013.

Commonwealth Government Scheme payments

Company A, as a participant under the Commonwealth Government Scheme, is entitled to receive payments if it meets the three conditions outlined in the regulations.

Company A incurred expenditure on defined research and development as a participant in the year ended 30 June 2013 and otherwise satisfied all other conditions in the regulations. As a result, Company A received Commonwealth Government Scheme payments in respect of that defined research and development in the year ended 30 June 2013 which were calculated according to a methodology which is contained in several provisions of the regulations. The methodology is summarised in the steps below:

Notional R&D deductions

Company A has claimed notional deductions under section 355-205 of the ITAA 1997 in the year ended 30 June 2013 in relation to the eligible R&D activities of itself and Company B which are registered under section 27A of the IRDA 1986.

Method for calculating extra income tax payable

Company A have proposed that the following methodology be used to calculate any extra income tax which is payable in a relevant income year as a result of Subdivision 355-G of the ITAA 1997 because a Commonwealth Government Scheme payment received in that year represented a recoupment of expenditure claimed as a notional deduction under Division 355 of the ITAA 1997:

This methodology is based on:

Relevant legislative provisions

ITAA 1997 Division 355,

ITAA 1997 Section 355-205,

ITAA 1997 Subdivision 355-G,

ITAA 1997 Subparagraph 355-445(b)(i),

ITAA 1997 Subparagraph 355-445(b)(ii), and

ITAA 1997 Subsection 355-450(1).

Reasons for decision

Question 1

Recoupments received from an Australian government agency in relation to expenditure on R&D activities may be taxable through the operation of Subdivision 355-G of the ITAA 1997. Any extra income tax payable in relation to Subdivision 355-G of the ITAA 1997 is referred to as a 'clawback adjustment' and is payable in the year that the recoupment is received, or the entitlement to receive the recoupment arises (known as 'the trigger year').

There are two types of recoupments that are taxable under Subdivision 355-G of the ITAA 1997:

Recoupment of expenditure incurred: subparagraph 355-445(b)(i) of the ITAA 1997

The first type of recoupment is recoupment under subparagraph 355-445(b)(i) of the ITAA 1997, which states:

Paragraph 3.118 of the Explanatory Memorandum to the Tax Laws Amendment (Research and Development) Bill 2010 (EM) provides some insight into what type of recoupment would be covered by subparagraph 355-445(b)(i):

Additionally, in paragraph 3.121 of the EM the recoupment is described as a 'reimbursement recoupment'.

The recoupment is referred to by the Australian Taxation Office (ATO) in the Research and development tax incentive - clawback adjustment guide as follows:

Recoupment that requires expenditure to be incurred or to have been incurred: subparagraph 355-445(b)(ii) ITAA 1997

The second type of recoupment is recoupment under subparagraph 355-445(b)(ii) of the ITAA 1997, which states:

Paragraph 3.119 of the EM provides some insight into what type of recoupment would be covered by subparagraph 355-445(b)(ii):

Additionally, in paragraph 3.121 of the EM the recoupment is referred to as a 'grant recoupment'.

Which type of recoupment is received under the Commonwealth Government Scheme?

Commonwealth Government Scheme payments under the Commonwealth Government Scheme must be characterised as either being a 'recoupment of expenditure incurred' under subparagraph 355-445(b)(i) of the ITAA 1997 or a 'recoupment that requires expenditure to have been incurred' under subparagraph 355-445(b)(ii) of the ITAA 1997.

Commonwealth Government Scheme payments under the Commonwealth Government Scheme are calculated with reference to expenditure that has already been incurred. Paragraph 3.121 of the EM provides insight into how a retrospective recoupment of expenditure may be characterised:

A participant will be entitled to a Commonwealth Government Scheme payment if it meets the conditions in the regulations:

Importantly, none of the conditions in the regulations require a specified amount of expenditure to be incurred.

Entitlement to a Commonwealth Government Scheme payment does not arise on the condition that a specified amount is spent on one or more specified activities. Instead, entitlement arises because a specified amount has been spent on a specified activity; that is, because a particular amount of expenditure has been incurred in relation to defined research and development (as defined by the regulations).

A Commonwealth Government Scheme payment provides a partial reimbursement for expenditure that has been incurred in relation to defined research and development. Accordingly, each Commonwealth Government Scheme payment received by Company A as a participant under the Commonwealth Government Scheme is a recoupment of expenditure incurred and is of the type referred to in subparagraph 355-445(b)(i) of the ITAA 1997.

Question 2

The amount on which extra income tax is payable under Subdivision 355-G of the ITAA 1997 is determined under subsection 355-450(1) of the ITAA 1997 which states:

As established in the answer to Question 1 above, a Commonwealth Government Scheme payment is a recoupment of the type referred to in subparagraph 355-445(b)(i) of the ITAA 1997.

A distinction can be made between the expenditure on which a recoupment has been based and the expenditure that actually ends up being recouped. In the case of a full reimbursement the two amounts will be equal. However, a Commonwealth Government Scheme payment is only a partial reimbursement of the total expenditure on which that Commonwealth Government Scheme payment is based. As noted in paragraph 3.118 of the EM, a recoupment in the form of a partial reimbursement of total expenditure is treated as a recoupment of expenditure equal to the amount of the recoupment for the purposes of subparagraph 355-445(b)(i) of the ITAA 1997. As such, the recoupment of expenditure referred to in subparagraph 355-445(b)(i) of the ITAA 1997 is limited in the current circumstances to the amount of the partial reimbursement received under the Commonwealth Government Scheme. In addition, the words 'so much of the expenditure' in paragraph 355-450(1)(a) of the ITAA 1997 mean that it is only that amount of a Commonwealth Government Scheme payment (partial reimbursement) which represents a recoupment of expenditure that has been deducted under Division 355 of the ITAA 1997 that is the amount on which extra income tax is payable as determined under subsection 355-450(1) of the ITAA 1997.

Question 3

As established in answer to Question 2 above, the amount on which extra income tax is payable as determined under subsection 355-450(1) of the ITAA 1997 is the amount of a Commonwealth Government Scheme payment which represents a recoupment of expenditure that has been deducted under Division 355 of the ITAA 1997. The recipient of a Commonwealth Government Scheme payment under the Commonwealth Government Scheme must therefore determine how much of the expenditure recouped has been deducted under Division 355 of the ITAA 1997 in order to calculate the extra income tax payable under Subdivision 355-G of the ITAA 1997.

Company A have proposed the methodology (detailed in the 'Relevant facts and circumstances' under the heading 'Method for calculating extra income tax payable') for calculating the extra income tax payable under Subdivision 355-G of the ITAA 1997. The underlying principle of that methodology is to apply a modified version of the methodology that was used to calculate the amount of Company A's Commonwealth Government Scheme payments (detailed in the 'Relevant facts and circumstances' under the heading 'Commonwealth Government Scheme payments').

The methodology Company A have proposed is appropriate for calculating the extra income tax payable for the relevant income year arising under Subdivision 355-G of the ITAA 1997.

Question 4

Not applicable.


Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).