There’s been considerable activity in respect of the research and development (R&D) incentive with various announcements made by AusIndustry and the Australian Tax Office (ATO) as well as the new federal government.
AAT case: Mount Owen (formerly known as DBTL)
The decision of the Administrative Appeals Tribunal (AAT) in the case of Mount Owen Pty Limited v Innovation Australia  AATA 573 handed down on 20 November 2013 has provided insight as to the AAT’s focus on a stated hypothesis, the R&D purpose of the activities, and evidentiary requirements.
Perhaps more importantly, the decision is now being used by AusIndustry as a guide for assessing R&D claims. While the subject matter of Mount Owen was mining operations, the evidentiary aspects of the decision have applicability across all industry sectors.
Note that our November TaxTalk publication featured a detailed discussion of the case. You can view this here.
Increased review activity
The past twelve months has seen an increase in review activity by AusIndustry, with a particular focus on the application of the ‘internal administration’ software exclusion as well as the mining industry.
AusIndustry is also focussing on better educating claimants through pre-registration compliance activities using R&D workshops and educational visits).
Further to this, AusIndustry recently distributed their draft ‘R&D Guide’ for comment and feedback. This will complement the industry guidance material that has been released since the commencement of the new incentive for the following:
- Information and Communications Technology (ICT)
- Built Environment).
We look forward to the R&D Guide being finalised and released to the public in the coming months.
R&D Application – reminder of lodgement deadline 30 April 2014 (for June balancers)
The deadline for lodging the Application: Registration of R&D Activities (R&D Application) with AusIndustry is fast approaching for companies with a June year end. This deadline is 30 April 2014.
The only substantial change to the R&D Application form this year is a new section that asks claimants to explain how the outcome of the project’s core activities could not have been known or determined in advance, on the basis of current knowledge, information or experience.
ATO guidance on R&D
Draft Taxation Determination on Design Expenditure
Draft Taxation Determination: TD 2013/D9 was released on 4 December 2013. The draft TD considers situations where an R&D entity incurs expenditure on various stages of design (Design Expenditure) that is connected with it beginning to hold a tangible depreciating asset, where that expenditure also falls within the terms of section 355-205 of the Income Tax Assessment Act 1997 (Cth). The Commissioner’s preliminary view is that such Design Expenditure will not be notionally deductible for R&D purposes because it is expenditure included in the cost of a tangible depreciating asset for the purposes of Division 40 of that Act, thereby falling within the scope of the exclusion in paragraph (b) of subsection 355-225(1) of that Act.
However, the draft TD states that design costs that are not included in the cost of the asset for the purpose of Division 40, are not prevented from being notionally deductible for R&D. These design costs typically relate to preliminary activities and design elements that do not form part of the final design.
ATO Interpretive Decision on building expenditure
Most recently on 12 March 2014, the Commissioner of Taxation published ATO Interpretive Decision 2014/11 which relates to the ‘building expenditure provisions’ under the former R&D Tax Concession. The ATO ID states that 'building' for the purposes of subsection 73B(1) of the Income Tax Assessment Act 1936 (Cth) also includes 'a part of' a building. For this purpose, ‘a part of’ a building takes on its ordinary meaning and refers to structural components of a building that make up the whole building. It also includes items that have a separate identifiable nature that nevertheless become an integral part of a building, enabling the building to function as the setting for the taxpayer's incomeproducing activities.
New Government announcements
Above $20 Billion threshold
On 6 November 2013, the Commonwealth government confirmed it would proceed with introducing an annual Australian ‘aggregated assessable income’ threshold, so that very large businesses with assessable income of $20 billion or more would no longer be eligible for the R&D tax incentive. The change would apply to income years starting on or after 1 July 2013 and affect approximately 20 of Australia’s largest companies.
The legislation was referred to a Senate Committee for further consideration and the collection of feedback. PwC prepared a submission on the proposed changes, highlighting the importance of large companies to Australia’s R&D system. The submission can be viewed here.
On 17 March 2014, the Senate Committee tabled its findings to the Parliament recommending that the legislation should be passed once further consideration has been given to the definition of ‘aggregated assessable income’ as drafted.
Review of tax and ‘patent box’ rules
The Commonwealth government is scheduled to undertake a comprehensive review of the tax system this year which will include a review of the R&D tax incentive program. As part of this, the government has stated that it will consider the merits of a ‘patent box’ program which would provide reduced tax rates on income attributable to the commercialisation of patented intellectual property (IP) developed and/or held in Australia.
Patent box rules were recently introduced in the United Kingdom and have been in place in many other countries in Europe for some time. They are seen as an effective way of attracting (or retaining) highvalue manufacturing jobs.