Earlier this week the ATO released draft TD 2020/D1 Income tax: notional deductions for R&D activities subsidised by JobKeeper payments to clarify its view on how section 355-405 of the Income Tax Assessment Act 1997 (Cth) (ITAA97) applies to JobKeeper payments for employees and eligible business participants.
Section 355-405 is the ‘at-risk rule’ which states that an R&D entity cannot notionally deduct expenditure under sections 355-205 or 355-480 of the ITAA97 if:
a) when it incurs expenditure, the R&D entity (or an associate) has received, or could reasonably be expected to receive, consideration:
i. as a direct or indirect result of the expenditure being incurred, and
ii. regardless of the results of the activities on which the expenditure is incurred, and
b) the consideration is equal to or greater than the expenditure.
The ATO takes the view that if an R&D entity pays wages to an employee undertaking eligible R&D activities, the JobKeeper payment is consideration received as a direct or indirect result of the R&D expenditure incurred. As the JobKeeper payments are received regardless of the results of the R&D activities on which the wage is incurred, to the extent an R&D entity receives the JobKeeper payment for its employees, the entity is not at risk for the wage expenditure and is not entitled to a notional deduction.
This means that if an entity receives a JobKeeper payment for an eligible employee who is wholly engaged in R&D activities during a fortnight, the entity cannot notionally deduct the $1,500 JobKeeper payment. To the extent the R&D entity pays the employee more than the JobKeeper payment, it would continue to be entitled to a notional deduction for the R&D wage expenditure still at risk.
If an entity receives a JobKeeper payment for an eligible employee who is partially engaged in R&D activities, the notional deduction is partially reduced. For example, if the employee is paid $4,000 per fortnight and spends 50% of their time on R&D activities, the R&D entity would be entitled to a notional deduction under section 355-205 of $1,250 ($4,000 x $50% (R&D portion of the wage) - $1,500 x 50% (JobKeeper payment attributed to R&D) = $2,000 - $750) for the employee’s fortnightly wage.
In contrast to the situation for employees, the ATO has taken the view that JobKeeper payments for business participants (e.g. a director or a shareholder) do not trigger the at risk rule because, having regard to the eligibility criteria for this category of JobKeeper, the payments are not received as a direct or indirect result of incurring any R&D expenditure. Therefore no portion of the JobKeeper payment based on business participation will reduce an entity’s notional deduction for expenditure incurred on R&D activities.
The ATO has asked for any comments on TD 2020/D1 to be provided by 24 August 2020.