Guide to R&D Tax Concession Updated – R&D Tax Concession Rulings Withdrawn
AusIndustry and the ATO have been jointly publishing a Guide to the R&D Tax Concession for some years now.
On 6 August 2008 the ATO released an update to Part C of the Guide to the R&D Tax Concession covering Expenditure on Research and Development. This completes the June 2008 update (Version 4.1) process as Part A (Introduction) and Part B (Research and Development Activities) were released by AusIndustry recently.
Changes incorporated in the updated guide include:
- Changes to the legislation on the Tax Offset including extending right of appeal to offsets, extend the time for claiming an offset, apply the $20,000 minimum,
- Improve the allocation of the 175% incremental concession between companies within the group
- Extend the 175% incremental concession to Australian subsidiaries of multinational enterprises (MNE) where the R&D activities are on behalf of the MNE.
- Other general changes to bring the Guide up to date with current legislation and ATO views.
In the process of releasing the update, a number of older rulings were withdrawn from this date. These are:
- IT 2442: This is an early general ruling on R&D expenditure
- IT 2451: This ruling discusses investor funding of R&D and “on own behalf” issues
- IT 2552: This ruling gives a detailed guide to costing R&D expenditure.
These 3 rulings are pre-1992 rulings. As such they only gave guidance and were not legally binding on the ATO. In the Notice of Withdrawal for each ruling the ATO states that “material in these rulings which is current is now included in Part C of the Guide to the R&D Tax Concession”. “The withdrawal of [these rulings] does not mean that the views expressed in that Ruling have changed.”
However, their replacement with the Guide rather than new public binding rulings fails to maintain or improve certainty for taxpayers. Given that the ATO has recently sought public comment on a potential ruling on “Guaranteed returns to investors” (s73CA) we can expect new rulings in due course. Notably, IT 2635 on risk provisions and syndicated R&D as the last pre-1992 ruling was not withdrawn.
We are currently completing a detailed review of the updated Guide.
Contact us if you would like more information.
What is the ATO up to now?
A couple of weeks ago, the Innovation Segment of the Australian Taxation Office (ATO) circulated a consultation paper regarding the operation of Section 73CA ITAA 1936 (”Guaranteed returns to investors”) in the research and development (R&D) tax concession.
Background
Section 73CA was introduced in 1990 to principally deal with R&D claims made by companies involved in R&D syndication arrangements. Claimant companies entered into syndicated R&D arrangements that removed most of the commercial risks to investors by guaranteeing a minimum return. The section operates to deny the concessional component to deductions based on expenditure related to R&D activities where the company is not at risk in respect of the whole or a part of the expenditure
Implications
The paper proposes scenarios beyond syndicate arrangements where it suggests that claimed R&D expenditure may not longer be considered to be at risk. The areas discussed include arrangements relating to the subsequent sale of the results of R&D activities, potential insurance payouts, guarantee/warranty agreements and grants/recoupments. However, no guidance as to how such a view could be reached is provided. Nor are any concrete examples put forward for discussion.
Our Concerns
We are concerned with the overall quality of the consultation paper in that it does not state the objective or direction of the potential tax ruling nor does it provide any examples of how the ATO believes that the provisions could operate to restrict claims made with respect to certain R&D arrangements.
MJA’s Planned Submission
In responding to the paper, MJA will be submitting that the intent of the legislation is to prevent a taxpayer from getting a concessional deduction where the expenditure is truly not at risk and the return is fully guaranteed such as was the case in the old R&D syndication arrangements. Expansion of the interpretation of the legislation into the four areas highlighted above should be vigorously resisted.
And what about the timing?
Finally, our eyebrows have been raised by the ATO opening up a discussion on a restrictive view of this aspect of the R&D tax concession some 16 years after the provision was legislated! And just when the National Innovation Review (NIR) is looking at sprucing up the support offered by the R&D program. We’re reminded of the draft ruling on the old exclusive use of plant provisions that appeared 14 years after the R&D tax concession began. It appeared just prior to the Prime Minister’s Innovation Action Plan. It died a quiet death and we look forward to this view of Section 73CA doing the same as the results of the NIR emerge.
Your reactions?
If you would like your concerns included in our response, please contact Kris Gale, Managing Director, MJA on (02) 9810 7211.
