This Draft TD, released on Wed 4.12.2013, concerns a situation where an R&D entity incurs expenditure on various stages of design activities connected with it beginning to hold a tangible depreciating asset, where that expenditure also falls within the terms of s 355-205 of the ITAA 1997.

The Draft broadly states that design expenditure will not be deductible under s 355-205 where it is covered by s 355-225(1)(b) as it is included in the cost of a tangible depreciating asset for the purposes of Div 40. In addition, it states that s 40-180(3) will apply to include design expenditure in the cost of the asset 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).

DATE OF EFFECT: When the final Determination is issued, it is proposed to apply both before and after its date of issue.

COMMENTS due by 24 January 2014. ATO Contact: Paul Cichowski – Tel: (08) 7422 2661; Fax: (08) 8208 1899; Email: paul.cichowski@ato.gov.au.

[LTN 235, 4/12/13]

s355-205 of the ITAA97 – When notional deductions for R&D expenditure arise

(1)      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 355210 (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.

Note 1:       If the matters in subparagraphs (a)(i) and (ii) are not satisfied until a later income year, the R&D entity will need to wait until then before it can deduct the expenditure for the present year.

Note 2:       The R&D activities will need to be conducted during the income year the R&D entity is registered for those activities (see sections 27A and 27J of the Industry Research and Development Act 1986 ).

Note 3:       The entity may also be able to deduct expenditure incurred to an associate in an earlier income year (see section 355-480).

Note 4:       Expenditure incurred in income years starting on or after 1 July 2011 may be deductible for activities registered for income years starting before 1 July 2011 (see section 355-200 of the Income Tax (Transitional Provisions) Act 1997 ).

(2)      This section has effect subject to section 355225 (excluded expenditure), Subdivision 355-F (integrity rules) and subsection 355 -580(3) (CRC contributions).

S355-255 of the ITAA97 – Expenditure that cannot be notionally deducted

Expenditure on buildings, certain assets and interest

(1)      Sections 355205 (deductions for R&D expenditure) and 355-480 (deductions for earlier year associate R&D expenditure) do not apply to the following expenditure:

(a)      expenditure incurred to acquire or construct:

(i)      a building or a part of a building; or

(ii)     an extension, alteration or improvement to a building;

(b)      expenditure included in the * cost of a tangible * depreciating asset for the purposes of Division 40 (as that Division applies as described in section 355310 or otherwise);

(c)      expenditure incurred for interest (within the meaning of Division 11A of Part III of the Income Tax Assessment Act 1936 ) payable to an entity.

Note 1:       Expenditure covered by paragraph (a) may be deductible under Division 43 (capital works).

Note 2:       The decline in value of an asset covered by paragraph (b) may be notionally deductible under section 355305.

Note 3:       Expenditure covered by paragraph (c) may be deductible under section 8-1.

Expenditure on core technology

(2)  Sections 355205 (deductions for R&D expenditure) and 355-480 (deductions for earlier year associate R&D expenditure) do not apply to expenditure incurred in acquiring, or in acquiring the right to use, technology wholly or partly for the purposes of one or more * R&D activities if:

(a)      a purpose of the R&D activities was or is:

(i)      to obtain new knowledge based on that technology; or

(ii)     to create new or improved materials, products, devices, processes, techniques or services to be based on that technology; or

(b)      the R&D activities were or are an extension, continuation, development or completion of the activities that produced that technology.

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