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Edited version of private advice
Authorisation Number: 1052093149290
Date of advice: 14 March 2023
Ruling
Subject: Research and development tax offset - paid to associates
Question 1
In respect of a notional deduction for research and development (R&D) expenditure, did Company A pay in the income year ended 30 June 20XX, as required under paragraph 355-380(b) of the Income Tax Assessment Act 1997 (ITAA 1997), Trust A the amount invoiced in the year ended 30 June 20XX?
Answer
Yes
Question 2
In respect of a notional deduction for R&D expenditure, did Company A pay in the income year ended 30 June 20XX, as required under paragraph 355-205(1)(b) of the ITAA 1997, Trust A the amount invoiced in the year ended 30 June 20XX?
Answer
Yes
This ruling applies for the following period:
Year ended 30 June 20XX
The scheme commenced on:
1 July 20XX
Relevant facts and circumstances
1. Company A is an R&D entity as defined under section 355-35 of the ITAA 1997.
2. Trust A is an associate of Company A as defined under section 318 of the Income Tax Assessment Act 1936 (ITAA 1936).
3. During the year ended 30 June 20XX, Trust A invoiced Company A for the services provided under a service agreement between the two entities.
4. That invoice was not paid by before the end of year ended 30 June 20XX.
5. During the year ended 30 June 20XX, Trust A Invoiced Company A for the services provided under the service agreement between the two entities.
6. During the year ended 30 June 20XX, Trust A issued a call on the balances owing to it from Company A.
7. Company A entered into a loan agreement with Company B with the conditions of the loan requiring Company A to pay the amounts invoiced by Trust A under the services agreement.
8. Company B had enough funds in its bank account to be able to provide the loan to Company A and on a date before 30 June 20XX Company B transferred the agreed amounts, as listed in the loan agreement, to Company A.
9. Upon receipt of the agreed amounts Company A transferred amounts exceeding the agreed sum to Trust A.
Relevant legislative provisions
Income Tax Assessment Act 1936 section 318
Income Tax Assessment Act 1997 section 355-35
Income Tax Assessment Act 1997 subsection 355-205(1)
Income Tax Assessment Act 1997 paragraph 355-205(1)(b)
Income Tax Assessment Act 1997 section 355-380
Income Tax Assessment Act 1997 paragraph 355-380(b)
Reasons for decision
All legislative references are to the ITAA 1997 unless otherwise indicated.
Question 1
In respect of a notional deduction for R&D expenditure, did Company A pay in the income year ended 30 June 20XX, as required under paragraph 355-380(b), Trust A the amount invoiced in the year ended 30 June 20XX?
Summary
Yes.
The loan was provided specifically to Company A to pay Trust A services provided under the services agreement between Company A and Trust A.
After receiving the loan amount from Company B, Company A transferred a total of $X to Trust A before 30 June 20XX.
As the payment to Trust A will extinguish the liability between Company A and Trust A, which included the amount invoiced Company A has paid the amount invoiced to its associate in the year ended 30 June 20XX.
Detailed reasoning
10. Subsection 355-205(1) states:
An *R & D entity can deduct for an income year (the present year ) expenditure it incurs during that year to the extent that the expenditure:
(a) is incurred on one or more *R & D activities:
(i) for which the R & D entity is registered under section 27A of the Industry Research and Development Act 1986 for an income year; and
(ii) that are activities to which section 355-210 (conditions for R & D activities) applies; and
(b) if the expenditure is incurred to the R & D entity's *associate - is paid to that associate during the present year.
11. Note 3 to this subsection states:
The entity may also be able to deduct expenditure incurred to an associate in an earlier income year (see section 355-480).
12. The term 'paid' is not defined under Australian tax law for general application[1] and therefore the ordinary meaning applies.
13. Paragraph 90 of TR 2017/3[2] states:
The ordinary meaning of the word 'paid' includes 'to discharge a debt or obligation as by giving or doing something', 'to give money to discharge a debt' and 'to satisfy the claims of a person by giving money'.39
39 Case 10/2000 2000 ATC 189; Case [2000] AATA 625 (2000) 45 ATR 1019 at 1036.
14. For the year ended 30 June 20XX Company A was invoiced for the services provided by Trust A, but Company A's liability to pay Trust A still existed at the end of the day on 30 June 20XX.
15. As the liability still existed, Company A had not paid the liability and paragraph 355-205(1)(b) was not satisfied.
16. As the expenditure had not been paid note 3 to subsection 355-205(1) is applicable and in respect of that note section 355-480 states:
An *R & D entity can deduct for an income year (the present year ) expenditure it incurred to its *associate during an earlier income year to the extent that:
(a) the expenditure was incurred on one or more *R & D activities:
(i) for which the R & D entity is registered under section 27A of the Industry Research and Development Act 1986 for an income year; and
(ii) that are activities to which section 355-210 (conditions for R & D activities) applies; and
(b) the expenditure is paid to that associate during the present year; and
(c) subsection (2) applies to the expenditure.
17. Company B agreed to advance an amount to Company A to pay Trust A the amounts invoiced by Trust A under the services agreement.
18. The amounts invoiced in the year ended 30 June 20XX were for services provided under the Services Agreement referenced in the loan agreement between Company B and Company A.
19. Before 30 June 20XX, Company A transferred the agreed loan amount to Company A's bank account.
20. Before 30 June 20XX, Company B transferred money exceeding the agreed loan amount to Trust A.
21. Although Company A may have used funds borrowed from another associate and has a liability to repay an amount to that other associate on 30 June 20XX, section 355-480 applies if the associate that the R&D entity incurred the expense to is paid.
22. As Trust A was paid the amount invoiced in the year ended 30 June 20XX before 30 June 20XX and paragraph 355-480(b) has been satisfied.
Question 2
In respect of the notional deduction for R&D expenditure, has Company A paid in the income year ended 30 June 20XX, as required under paragraph 355-205(1)(b) of the ITAA 1997, Trust A the amount listed in the issued in the year ended 30 June 20XX?
Summary
Yes.
The loan was provided specifically to Company A to pay Trust A the amount invoiced in the year ended 30 June 20XX.
There is a clear record in the bank accounts of an amount equal to the amount invoiced being transferred from Company B to Company A, and then to Trust A.
As the payment to Trust A will extinguish the liability in respect of the amount of invoiced in the year ended 30 June 20XX, Company A had paid its associate the invoiced amount in the year ended 30 June 20XX.
Detailed reasoning
23. Subsection 355-205(1) states:
An *R & D entity can deduct for an income year (the present year) expenditure it incurs during that year to the extent that the expenditure:
(a) is incurred on one or more *R & D activities:
(i) for which the R & D entity is registered under section 27A of the Industry Research and Development Act 1986 for an income year; and
(ii) that are activities to which section 355-210 (conditions for R & D activities) applies; and
(b) if the expenditure is incurred to the R & D entity's *associate - is paid to that associate during the present year.
24. In the year ended 30 June 20XX, Trust A issued an invoice to Company A for services provided under the service agreement between Trust A and Company A.
25. One of the amounts Company B agreed to advance Company A was the amount listed in the invoice, provided it was used to pay this invoiced amount.
26. Before 30 June 20XX, Company B transferred the agreed amount to Company A and Company A then forwarded the amount to Trust A.
27. Although Company A may have borrowed the same amount from another associate and has a liability to repay the same amount to that other associate on 30 June 20XX, paragraph 355-205(1)(b) applies if the associate that the R&D entity incurred the expense to is paid.
28. As Trust A received the invoiced amount from Company A before 30 June 2022, paragraph 355-205(1)(b) is satisfied.
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[1] It is defined in relation to dividends or non-share dividends, per subsection 6(1) of the ITAA 1997.
[2] Taxation Ruling TR 2017/3 Income tax: distributions from foreign companies - meaning of 'at the time the distribution is made' when applying the participation test