Draft Taxation Determination TD 2013/D9 is concerned with when design expenditure incurred by an R&D entity will be included in the cost of a tangible depreciating asset under s 355-225(1) (b) (expenses that cannot be notionally deducted) of the Income Tax Assessment Act 1997 and therefore will not able to be deducted under s 355-205 (notional deductions for R&D expenditure).

This design expenditure will typically be incurred in cases where the R&D entity is constructing the asset itself, or having another entity construct it on its behalf, as distinct from purchasing a ready-made asset. The asset begins to be 'held' by the R&D entity at the time that construction is completed. At this time the R&D entity is the legal owner and holder of the asset.

Design expenditure will only be included in the cost of an asset where it has been incurred “in relation to holding” the asset. Design expenditure is included in the asset’s cost where it has been incurred in relation to starting to hold the asset, on the proviso that the expenditure is “directly connected with holding the asset”.

Identification of the final shape, features and performance of the asset, will allow an R&D entity to determine the time at which it begins to hold the asset.

The final determination is proposed to apply both before and after its date of issue. The draft determination can be viewed here.