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Ruling

Subject:

Eligibility for deduction under section 73QA of the ITAA 1936

Issue 1

Is Company A eligible for a deduction under section 73QA of the Income Tax assessment Act 1936 (ITAA 1936) for the income year ending 31 December 2008?

Question 1

After applying section 73R of the ITAA 1936 for the year ending 31 December 2008, is Company A's group membership period for the purposes of sections 73P to 73Z, 1 January 2005 to 31 December 2008?

Advice/Answers

No.

Company A's group membership period extends from 26 October 2006 to 31 December 2008.

Question 2

For the purposes of sections 73P to 73Z of the ITAA 1936, does section 73BAC of the ITAA 1936 apply such that Company A satisfies the eligibility requirements of subsection 73QA(1) and is therefore eligible to claim an additional deduction under section 73QA?

Advice/Answers

No.

Company A does not satisfy the eligibility requirements of subsection 73QA(1) of the ITAA 1936 and is therefore ineligible to claim an additional deduction.

Question 3

For the purpose of determining Company A's deduction for the year ended 31 December 2008 under subsection 73QA(2) of the ITAA 1936, is the incremental expenditure incurred by the Company C consolidated group of companies prior to its acquisition taken into consideration?

Advice/Answers

No.

As Company C is not eligible to claim an additional deduction under subsection 73QA(1) of the ITAA 1936, there is no amount to determine under subsection 73QA(2).

Relevant facts and circumstances

Company A's consolidated group

Company A is an Australian proprietary company limited by shares, incorporated on 27 October 2006, owned and controlled by a foreign parent.

On 18 December 2006, Company B was incorporated. It was 100% owned by Company A.

Company A elected to form a consolidated group for tax purposes effective 1 January 2007, with Company A as the head company of the consolidated group for the purposes of Part 3-90 of the Income Tax Assessment Act 1997 (ITAA 1997). As at the effective date of its election to consolidate, Company B was the sole subsidiary.

Company A's consolidated group is an early December balancer, (that is, the group's 2009 income year runs from 1 January 2008 to 31 December 2008).

Neither Company A or Company B received any grants or recoupments as defined in section 73C of the ITAA 1936 during the period 1 January 2005 to 31 December 2008.

Company C's consolidated group

Company C was incorporated prior to 1 January 2005. Company C's group of companies elected to form a consolidated group for tax purposes in 2003, with Company C as the head company of the consolidated group for the purposes of Part 3-90 of the ITAA 1997.

Company D was a subsidiary of Company C's consolidated group.

Company C had a substituted accounting period such that the year ended 31 March 2007 was in lieu of the year ended 30 June 2007.

Between the date of their incorporations to the 31 December 2008, neither Company A or Company B were grouped with any eligible company not already identified, according of section 73L of the ITAA 1936.

Company C's consolidated group was not grouped with any other eligible company not already identified in this application between 1 January 2005 and 31 December 2008, according to section 73L of the ITAA 1936.

The Company A consolidated group's takeover of the Company C consolidated group

Company A acquired on-market shares in Company C in late 2006, however did not own, or unconditionally have the right to acquire, greater than 50% of interests in Company C until 7 June 2007.

On 7 June 2007, Company A and Company C became part of the same group for the purposes of sections 73L and 73R of the ITAA 1936. At no time prior to this date were the two entities grouped according to section 73L.

On 28 August 2007, Company A acquired 100% interest in Company C. On the same date, Company C ceased to be the head entity of Company C's tax consolidated group, and Company C's group of companies joined Company A 's consolidated tax group.

R&D activities

Neither Company A nor Company B was registered with Innovation Australia in accordance with section 39J of the Industry Research & Development Act (IR&D Act), for the years ending 31 December 2005, 31 December 2006 or 31 December 2007.

For the year ending 31 December 2008, Company A was registered in accordance with section 39J of the IR&D Act, and deducted an amount under subsection 73B(13) or (14) of the ITAA 1936 for incremental expenditure.

Company D was registered with Innovation Australia in accordance with section 39J of the IR&D Act in the years ending 31 March 2008, 31 March 2007, 31 March 2006 and 31 March 2005.

The head company of Company C's consolidated group, Company C, deducted an amount under subsection 73B(13) or (14) of the ITAA 1936 for incremental expenditure in the years ending 31 March 2008, 31 March 2007, 31 March 2006 and 31 March 2005. The claim for the 2008 year incorporated the period before Company C joined Company A's consolidated group.

Relevant legislative provisions

Income Tax Assessment Act 1936, section 73QA

Income Tax Assessment Act 1936, section 73R

Income Tax Assessment Act 1936, section 73L

Income Tax Assessment Act 1936, section 73B(13) or (14)

Income Tax Assessment Act 1936, section 73P

Income Tax Assessment Act 1997, section 701-1

Income Tax Assessment Act 1997, section 701-5

Income Tax Assessment Act 1936, section 73BAC

Income Tax Assessment Act 1936, subsection 705-185(1)

Reasons for decision

Issue 1

Is Company A eligible for a deduction under section 73QA of the ITAA 1936 for the income year ending 31 December 2008?

Question 1

After applying section 73R of the ITAA 1936 for the year ending 31 December 2008, is Company A 's group membership period for the purposes of sections 73P to 73Z, 1 January 2005 to 31 December 2008?

Answer

Section 73QA of the ITAA 1936 provides the eligibility criteria required to be satisfied before a company can claim an additional deduction for its increase in expenditure on Australian owned research and development. For years of income commencing after 30 June 2007, subsection 73QA(1) provides that an eligible company may deduct an amount for the Y₀ year of income if:

(a) the company can deduct an amount for that year under subsection 73B(13) or (14) for incremental expenditure incurred in the company's group membership period; and

(b) for each of the Y_-1, Y_-2 and Y_-3 years of income, any of the following conditions is met:

(i) the eligible company could deduct for the year of income an amount under subsection 73B(13) or (14) for expenditure incurred in its group membership period;


(ii) one of the eligible company's other group members could deduct for the year of income an amount under subsection 73B(13) or (14) for expenditure incurred in its group membership period;


(iii) the eligible company received a start grant or commercial ready grant in respect of the year of income;


(iv) one of the eligible company's other group members received a start grant or commercial ready grant in respect of the year of income;

(whether or not the same condition is met for 2 or more of those years, and whether or not a condition is met by the same company for 2 or more of those years); and


(c) the amount (the eligible company's share of the Australian owned part of the adjusted increase in expenditure on R&D by the group) worked out under subsection (3) is more than zero.

The eligible company's group membership period, its group members and their group membership periods, are determined under section 73R of the ITAA 1936.

Under subsection 73P(6) of the ITAA 1936, Y₀ is defined as the year of income for which an eligible company is working out its assessable income and deductions, with Y_-1 being the year of income one year before Y₀, Y_-2 being the year two years before Y₀, and Y_-3 being the income year three years before Y₀.

In this instance, the last day of Y₀ is 31 December 2008, and the first day of Y_-3 is 1 January 2005.

Section 73R of the ITAA 1936

The context for the operation of section 73R is set out in subsection 73R(1) of the ITAA 1936. This subsection provides that the section sets out the rules for determining which eligible companies that have deducted or can deduct an amount under subsection 73B(13), (14) or (14C), or that received a start or commercial ready grant, are group members, these being the criteria referred to in applying subsection 73QA(1). Thus section 73R is aimed at identifying the relevant group members, (and their group membership periods), to be considered under subparagraph 73QA(1)(b)(ii) or (iv) of the ITAA 1936.

Section 73R of the ITAA 1936 sets out a method statement covering the rules for determining which eligible companies that have deducted or can deduct an amount under subsection 73B(13), (14) or (14C) of the ITAA 1936, or that received a start or commercial ready grant, are group members (these being the criteria referred to in section 73QA). Further, it provides that section 73L is used to determine whether companies are grouped.

Section 73L of the ITAA 1936 provides that:

A person is grouped with another person at a time in a year of income if, at that time:

(a) either person controls the other person in the way described in this section; or

(b) both persons are controlled in that way by the same third person; or

(c) the persons are affiliates of each other.

In relation to companies, subsection 73L(3) of the ITAA 1936 provides that a person controls another person if the first person, its affiliates or the first person together with the first person's affiliates legally or beneficially own, or have the right to acquire the legal or beneficial ownership of, interests in the company that carry between them the right to:

§ receive more than 50% of any distributions of income or capital by that person; or

§ exercise, or control the exercise of, more than 50% of the voting power in the company.

In addition, subsection 73L(2) of the ITAA 1936 provides that section 73L applies to a person that directly controls a second person as if the first person also controlled any other person that is directly or indirectly, by any other application or applications of section 73L, controlled by the second person.

Subsection 73R(2) of the ITAA 1936 provides a method statement for determining group members and group membership periods of eligible companies.

Grouping under section 73L of the ITAA 1936 is not confined to Australian entities, and the method statement in section 73R of the ITAA 1936 is similarly not confined to eligible companies. Non-eligible companies (for example foreign companies) that are primary group members may be relevant to the identification of other eligible companies that are, for example, secondary group members of that non-eligible company that are eligible companies. It is only the group members that are eligible companies however, that are relevant to the application of subsection 73QA(1) of the ITAA 1936 (as subsection 73R(1) notes). It is not necessary, for the purposes of this ruling, to determine all relevant group members (eligible and non-eligible companies), as the conclusion as to the relevant eligible companies that are grouped with Company A under section 73L is included as a fact on which this ruling is based. That is, Company A has stated that during the relevant period it was not grouped according to section 73L with any eligible company other than Company C and Company B, although it was also grouped during this time with its overseas foreign parent.

Method Statement

Step 1

Step 1 of the method statement in subsection 73R(2) of the ITAA 1936 says that the eligible company and those companies grouped with the eligible company as at the last day of the Y₀ year of income are the 'primary group members'.

Whether or not there are any other primary group members under Step 1 of the method statement depends on whether or not there are any other companies grouped with Company A as the end of the relevant income year, 31 December 2008. Relevant to this issue is the single entity rule (SER) in section 701-1 of the ITAA 1997. Subsections 701-1(1) and (2) state:

701-1(1) If an entity is a subsidiary member of a consolidated group for any period, it and any other subsidiary member of the group are taken for the purposes covered by subsections (2) and (3) to be parts of the head company of the group, rather than separate entities, during that period.

701-1(2) The purposes covered by this subsection (the head company core purposes) are:

(a) working out the amount of the head company's liability (if any) for income tax calculated by reference to any income year in which any of the period occurs or any later income year; and

(b) working out the amount of the head company's loss (if any) of a particular sort of any income year.

The operation of the single entity rule means that no subsidiary member of the tax consolidated group, of which Company A is the head company, is recognised as a separate company grouped with Company A under section 73L of the ITAA 1936 on 31 December 2008. Therefore the Company C group of companies that entered Company A 's tax consolidated group on 28 August 2007, as well as the pre-existing subsidiary of the Company A consolidated group, are not recognised as having a separate existence to Company A. Consequently, these companies are not grouped with Company A or with each other, pursuant to section 73L.

It is a material fact of this ruling that, on the last day of Y₀, Company A was not grouped with any eligible companies (who were not members of the tax consolidated group of which it is head company). Accordingly, as Company A was not grouped according to section 73L of the ITAA 1936, for the purposes of section 73R(1) of the ITAA 1936, with any other 'eligible' companies, Company A is the only relevant primary group member to be considered under subsection 73R(2).

Step 2

Step 2 of the method statement in subsection 73R(2) of the ITAA 1936 provides that the group membership period of each primary group member is determined by working out the day before the last day of the Y₀ year of income or the first day of the Y_-3 year of income, whichever is later, when the eligible company:

a) was controlled, as mentioned in section 73L, by a person other than a person who controlled it as at the last day of the Y₀ year of income; or

b) acted, or could be expected to act, in accordance with the directions or wishes of a person, other than a person in accordance with whose directions or wishes it acted, or could be expected to act, as at the last day of the of the Y₀ year of income.

The question of what is meant by the phrase, 'was controlled, as mentioned in section 73L, by a person other than a person who controlled it as at the [relevant day]', requires an examination of the purpose and context of the provision. Its meaning was considered in ATO Interpretative Decision ATO ID 2005/152 R&D: group membership period under section 73R of the ITAA 1936. There, reference is made to paragraph 4.17 of the Explanatory Memorandum to the Taxation Laws Amendment (Research and Development) Bill 2001, which explains:

Step 2…determines the group membership period of the primary group members. The primary group members group membership period extends from the day their control changed which caused them to come into the group to the last day of the income year. The group membership period will not commence before the first day of the income year 3 years before the current income year.

This indicates that the day upon which the company came into the group of which it was a member on the last day of the Y₀ year of income was envisaged as defining the group membership period.

ATOID 2005/152 acknowledges that on an alternative, literal interpretation of paragraph 73R(2)(a) of the ITAA 1936, the words used would not recognise a change in control where, previously, no person(s) controlled the company within the meaning of section 73L of the ITAA 1936. However, this approach is problematic as it cannot be said that where a company was not previously controlled by any person(s), the person who controlled the company on the last day of the Y₀ year of income controlled the company for the whole of the relevant period. Such an interpretation would;

defeat the purpose of the provision, being to recognise the start of the group membership period as the time that a relevant change of control occurs, even if no persons or persons previously controlled the company under section 73L of the ITAA 1936.

The preferred construction of paragraph 73R(2)(a) of the ITAA 1936 is one that supports the purpose of the provision, and recognises the start of the group membership period as at the time that a relevant change of control occurs.

On this basis, paragraph 73R(2)(a) of the ITAA 1936 is interpreted to apply where a change in control is the result of a company not controlled by any person within the meaning of section 73L of the ITAA 1936, coming under a person(s) control.

Company A was incorporated on 26 October 2006. Prior to this date it did not exist, and therefore was not controlled by any person within the meaning of section 73L of the ITAA 1936. Under the preferred interpretation of paragraph 73R(2)(a) of the ITAA 1936, Company A experienced a change in control upon incorporation, as it resulted in the company coming under a person(s) control according to section 73L.

As Company A did not experience any other change of control according to section 73R of the ITAA 1936 between the last day of Y₀ and the date it was incorporated, Company A 's group membership period extends from the date of its incorporation, 26 October 2006, to the last day of Y₀, 31 December 2008.

Question 2

For the purposes of sections 73P to 73Z of the ITAA 1936, does section 73BAC of the ITAA 1936 apply such that Company A satisfies the eligibility requirements of subsection 73QA(1) and is therefore eligible to claim an additional deduction under section 73QA?

Answer

Subsection 73QA(1) of the ITAA 1936 provides the eligibility criteria required to be satisfied before a company can claim an additional deduction for its increase in expenditure on Australian owned research and development. If an eligible company cannot meet the eligibility criteria on its own, it may still be entitled to the additional deduction where a group member can meet those requirements.

As Company A's group membership period does not extend to the Y_-3 income year, prima facie it is unable to meet the eligibility requirements for a deduction under subsection 73QA(1) of the ITAA 1936 on its own. To determine whether it may still be eligible for the deduction because one of its group members meet the requirements, it is necessary to determine who are Company A's 'group members' and what are their respective 'group membership periods' under section 73R.

Steps 1 and 2 of the method statement in subsection 73R(2) of the ITAA 1936 (worked out in question 1), determined that:

§ Company A is a primary group member;

§ Company A is the sole primary group member, and

§ Company A's group membership period extends from 26 October 2006 to 31 December 2008.

Step 3

Step 3 of the method statement in section 73R of the ITAA 1936 identifies secondary group members. It considers whether during the group membership period of Company A, there were any eligible companies who were grouped with Company A but who were not so grouped with it as at the end of Y₀.

On the facts being ruled upon, Company C's consolidated group was grouped with Company A between the date it experienced a change in control (the date Company A acquired greater than 50% of its issued shares), and the date that the Company C group of companies joined Company A's consolidated group. As this occurred during Company A's group membership period (during Y_-1), Company C is a secondary group member according to section 73L and 73R of the ITAA 1936.

Company A was also grouped with Company B between the date it was incorporated and the date it joined Company A's consolidated group, according to section 73L of the ITAA 1936.

According to the facts, Company A is not grouped with any other person in Company A's group membership period, according to sections 73L and 73R of the ITAA 1936. Consequently, Company C and Company B are Company A's only secondary group members.

Step 4

Step 4 of the method statement in section 73R of the ITAA 1936 says to work out the day before the last day of the Y₀ year of income when a secondary group member became grouped with the primary group member, or the first day of Y_-3, whichever is later.

Company C became grouped with Company A on the 7 June 2007, when Company A acquired greater than 50% of its issued shares for the first time.

Company B became grouped with Company A on the 18 December 2006, upon its incorporation.

Step 5

Step 5 says to work out the day before the last day of the Y₀ year of income when the secondary group member was not so grouped with the primary group member. The period between that day and the day worked out under step 4 is the secondary group member's group membership period.

On 28 August 2007, Company C joined Company A 's tax consolidated group and ceased to have a separate existence due to the single entity rule in section 701-1 of the ITAA 1997, and ceased to be grouped with Company A according to section 73L of the ITAA 1936.

Company C's group membership period therefore extends from 7 June 2007 to 27 August 2007.

On 1 January 2007, Company B joined Company A 's tax consolidated group and ceased to have a separate existence due to the single entity rule in section 701-1 of the ITAA 1997, and ceased to be grouped with Company A according to section 73L of the ITAA 1936.

Company B's group membership period therefore extends from 18 December 2006 to 31 December 2006.

Subsection 73R(3) of the ITAA 1936

Subsection 73R(3) of the ITAA 1936 is relevant to the determination of the group membership period of the group members determined under subsection 73R(2). This provision contains an 'exception' to the group membership period of a secondary group member as determined under subsection 73R(2), where a secondary group member leaves a group with a viable business. It provides:

The period that would be a secondary group member's group membership period is treated as never having existed if, at the end of that period when the secondary group member stops being grouped with a primary group member, the secondary group member has a viable business.

This means where a secondary group member leaves a group with a viable business, its group membership period is deemed not to exist. As such, its incremental expenditure that was otherwise within its group membership period is no longer available for use in the calculation of the additional 50% deduction for the group from which it departed.

Subsection 73R(4) of the ITAA 1936

Subsection 73R(4) of the ITAA 1936 is also relevant to the determination of the group membership period of a group member. It states:

The group membership period of a group member of a particular group (the current group) is extended to include its history period with its former group… if, when the company became a group member of the current group, it did so with a viable business.

This means that where a group member joins a group with a viable business, its group membership period is extended to include its group membership period from its former group. As such, its incremental expenditure that was incurred with this earlier group membership period is now available for use in qualification for and in the calculation of the additional 50% deduction for the group it has joined.

Viable business

Subsection 73R(5) of the ITAA 1936 states that a company stops or starts being a group member of a group with a 'viable business' if:

(a) sufficient assets (including assets that have been used in carrying on research and development activities) are transferred under the transactions involved in the change of control to allow the continued operation of a business; and

(b) the person or persons that disposed of control of the company agree in writing with the person or persons that gain control that this subsection should apply; and

(c) the person or persons that disposed of control of the company provide written details of the following needed to enable the making of calculations required by sections 73QA, 73QB, 73RA, 73RB, 73RC, 73RD, 73RE, 73T and 73V:


(i) expenditure incurred by the company during the period (its history period) it was a group member of its former group;


(ii) receipts of grants and recoupments relating to that expenditure;

(iii) entitlements to receive grants and recoupments relating to that expenditure.

As can be seen from this, the critical elements of a 'viable business' are the transfer of sufficient business assets for the operation of an on-going business at the time of a change in control, and the entering into of a relevant written agreement containing prescribed information by the disposer and acquirer of the company.

On 18 December 2006, Company B became grouped under section 73L of the ITAA 1936 with Company A upon its incorporation. Accordingly, subsection 73R(4) of the ITAA 1936 can have no application in relation to this company as it was not in existence prior to this date, and among other things, there is no person who disposed of the company who could have executed a viable business transfer.

As at 1 January 2007, Company B joined Company A's consolidated group, and due to the single entity rule, ceased to be grouped with it under section 73L of the ITAA 1936. Therefore, at this date, it stopped being grouped with a group member according to subsection 73R(3) of the ITAA 1936. It did so however, without a change in control as envisaged by paragraphs 73R(5)(a), (b) and (c). As Company B did not undergo a change in control, and therefore no viable business agreement was or could be entered into, subsection 73R(3) of the ITAA 1936 does not apply.

Company B's group membership period therefore remains as 18 December 2006 to 31 December 2006.

On 7 June 2007, a change in control of Company C occurred and it became grouped under section 73L of the ITAA 1936 with Company A. However, Company A stated that no written agreement was executed between Company A and the person who disposed of Company C when Company A acquired it on 7 June 2007. Accordingly, subsection 73R(4) of the ITAA 1936 does not apply.

As at August 2007, Company C joined Company A's consolidated group, and due to the single entity rule, ceased to be grouped with it under section 73L of the ITAA 1936. Therefore at this date, it stopped being grouped with a group member according to subsection 73R(3) of the ITAA 1936. It did so however, without a change in control as envisaged by paragraphs 73R(5)(a), (b) and (c). As Company C did not undergo a change in control, and therefore no viable business agreement was or could be entered into, subsection 73R(3) of the ITAA 1936 does not apply.

Company C's group membership period therefore remains as 7 June 2007 to 27 August 2007.

Therefore, according to section 73R of the ITAA 1936:

§ Company A's group membership period extends from 26 October 2006 to 31 December 2008, across the Y₀ to Y_-2 years of income;

§ Company C's group membership period extends from 7 June 2007 to 27 August 2007, within the Y_-1 year of income, and

§ Company B's group membership period extends from 18 December 2006 to 31 December 2006, within the Y_-2 year of income.

On this basis, no group member was able to deduct a relevant amount under section 73B(13) or (14) of the ITAA 1936 within the relevant group membership period in Y_-3 to satisfy the requirements of paragraph 73QA(1)(b) of the ITAA 1936.

Section 701-5 of the ITAA 1997 and section 73BAC of the ITAA 1936

Company A has argued that section 73BAC of the ITAA 1936 effectively overrides section 701-5 of the ITAA 1997 and ensures that the expenditure history necessary to access the extra deduction is not affected by the consolidation rules. This is not in dispute.

Section 701-5 of the ITAA 1997 states that:

For the head company core purposes in relation to the period after the entity becomes a ^*subsidiary member of the group, everything that happened in relation to it before it became a subsidiary member is taken to have happened in relation to the ^*head company.

However, note 2 to the section says that it is overridden by section 73BAC of the ITAA 1936 for the purposes of the research and development incremental expenditure provisions.

Subsection 73BAC(1) of the ITAA 1936 states:

For the purposes of sections 73P to 73Z (inclusive), where a company (the joining company) becomes a member of a consolidated group or MEC group, those provisions have effect after the joining company became a member as if:

(a) any expenditure incurred by the joining company before it became a member had been incurred by the head company of the group; and

(b) any amounts the joining company has deducted or can deduct for that expenditure had been deducted by the head company; and

(c) the head company of the group had received any recoupments of, or grants in respect of, that expenditure that the joining company of a person grouped with it under section 73L received, or became entitled to receive, before the joining company became a member of the group.

Subsection 73BAC(2) of the ITAA 1936 states:

Subsection(1) has effect after any application of subsection 73R(3) or (4) (exceptions to group membership periods).

It is considered that section 73BAC does effectively override the consolidation entry history rule in section 701-5 of the ITAA 1997 for the purposes of sections 73P to 73Z of the ITAA 1936, which would otherwise allow both the joining company and the head entity to count the joining company's history prior to joining.

We consider that the wording of this provision, specifically the words, 'has effect after the joining company became a member' means, amongst other things, that the operation of paragraphs (a) to (c) is conditional upon one or more joining companies becoming members of the relevant tax consolidated group. In the income year that this occurs and subsequent income years (where the consolidated group remains for the whole of the year, a member of the consolidated group), the deemed effects set out in paragraphs (a) and (b) above apply to the head company in question.

For a year of income in which a joining company has become a member of a consolidated group, and incurs incremental expenditure over the course of the whole of that year, there will therefore be both incremental expenditure it has incurred before becoming a member (to which section 73BAC of the ITAA 1997 can apply), and that which it has incurred while a member of this group (to which section 701-1 of the ITAA 1997 can apply).

In considering the application of this provision, it is noted that whilst Company C was formerly itself the head company of a tax consolidated group, and therefore itself subject to the operation of the SER under section 701-1 of the ITAA 1997, that particular operation of the SER is not effective in relation to the calculation of the tax liability or loss of Company A (this not being a head company core purpose of Company C). Therefore each of the companies in Company C's consolidated group is considered singularly by Company A pursuant to section 73BAC of the ITAA 1936. In this regard we note that subsection 705-185(1) of the ITAA 1997 states:

Subdivision 705-A has effect in relation to the acquiring group for the head company core purposes set out in subsection 701-1(2) as if:

a) the only member of the acquired group that is a joining entity of the acquiring group were the entity that, just before acquisition time, was the head company of the acquired group; and…

This provision is not relevant in the circumstances under consideration as it is designed to modify the application of Subdivision 705-A of the ITAA 1997 for an acquiring group. Subdivision 705-A of the ITAA 1997 is about when an entity becomes a subsidiary member of an existing consolidated group, the tax cost setting amount for its assets reflects the cost to the group acquiring the entity. This subdivision has no role to play in the consideration of any deduction available under section 73QA of the ITAA 1936.

For the purpose of calculating the eligibility of Company A to the extra deduction under section 73QA of the ITAA 1936, subsection 73BAC(1) of the ITAA 1936 treats any incremental expenditure incurred before 28 August 2007 by each of the members of Company C's consolidated group of companies that joined Company A's tax consolidated group of which Company A is head company, as if it had been incurred by Company A. Similarly, any amount the above mentioned companies can/had deducted is treated as if it had been deducted by Company A.

Subsection 73BAC(2) of the ITAA 1936 does not alter this. This provision, by virtue of the words 'has effect after' merely specifies the order of application of subsection 73BAC(1) in relation to subsections 73R(3) or (4), should there be any application of these provisions, which, it has already been established, there is not in these circumstances. Therefore, section 73BAC of the ITAA 1936 is effective despite there being no application of subsections 73R(3) or (4).

Despite its effectiveness in deeming the expenditure of Company C's subsidiaries to Company A, section 73BAC of the ITAA 1936 does not alter group membership periods determined under section 73R of the ITAA 1936.

Returning to the requirements that need to be met for Company A to be eligible for the additional deduction under section 73QA of the ITAA 1936, it has already been established that it has met the criterion set out in paragraph 73QA(1)(a). In relation to paragraph 73QA(1)(b), the requirement is that for each of the Y_-1, Y_-2 or Y_-3 years of income, any of the following conditions is met:

(i) the eligible company could deduct for the year of income an amount under subsection 73B(13) or (14) for expenditure incurred in its group membership period;


(ii) one of the eligible company's other group members could deduct for the year of income an amount under subsection 73B(13) or (14) for expenditure incurred in its group membership period;


(iii) the eligible company received a start grant or commercial ready grant in respect of the year of income;


(iv) one of the eligible company's other group members received a start grant or commercial ready grant in respect of the year of income;

(whether or not the same condition is met for 2 or more of those years, and whether or not a condition is met by the same company for 2 or more of those years); and

Under close analysis, Company A does not meet the requirement in paragraph 73QA(1)(b) of the ITAA 1936 as:

§ Company A cannot deduct an amount for the Y_-3 year of income under subsection 73B(13) or (14) for expenditure incurred 'in its group membership period';

§ none 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; and

§ and (iv) it has been established on the facts that the neither Company A nor its group member received a start or commercial ready grant in respect of any year of income.

In conclusion, Company A cannot meet any of the eligibility criteria in paragraph 73QA(1)(b) of the ITAA 1936, and therefore fails to meet the prerequisites for deduction under section 73QA for the year ending 31 December 2008.

Question 3)

For the purpose of determining Company A's deduction for the year ended 31 December 2008 under subsection 73QA(2) of the ITAA 1936, is the incremental expenditure incurred by the Company C consolidated group prior to its acquisition taken into consideration.

Answer

Subsection 73QA(2) of the ITAA 1936 sets out how to determine the amount of the eligible company's deduction for the Y₀ year of income. As it has already been established in question (2) that Company A is ineligible for an extra deduction under section 73QA, there can be no amount of deduction to calculate under section 73QA(2).