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Industry Research and Development Amendment Bill 1998
Bills Digest No. 4 1998-99
This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official l egal status. Other sources should be consulted to determine the subsequent official status of the Bill.
Industry Research and Development Amendment Bill 1998
This Bill amends the Industry Research and Development Act 1986 (the IR&D Act) by addressing procedural and administrative issues relating to tax concessions for eligible companies involved in industry research and development activities (R&D).
The Bill also requires the Industry Research and Development Board (the Board) to consider six late registration applications lodged by eligible companies. These applications were mistakenly lodged with the Australian Taxation Office (ATO) instead of the Board. The Board did not receive them until after the time allowed for making an application for registration had ended.(1)
The object of the IR&D Act is to promote the developmen t, and improve the efficiency and international competitiveness, of Australian industry by encouraging R&D activities.(2)
The IR&D Act encourages R&D activities in two ways:
1. Grants(3) and
2. Tax concessions.(4)
The grants scheme is intended to address gaps in the tax concession scheme by providing direct assistance to those companies undertaking R&D activities which cannot take advantage of tax concessions. The activities eligible for the grants are beyond the scope of R&D expenditure eligible for the concessions of section 73B of the Income Tax Assessment Act 1936 (the Tax Act).
In 1986 the Labour Government introduced the IR&D Act to provide income tax concessions for expenditure on R&D. Section 73B of the Tax Act represents this expre ss government policy decision.
Initially, the concession was to be available for a limited number of years only; however, after various policy changes and consequential amendments to the legislation, the Labour Government announced in the 1992-93 Budget speech that the concession would be continued indefinitely, at the original rate of 150 per cent.
The new Coalition Government, as part of its Budget measures on R&D, decided to reduce the maximum concessional rate of deduction from 150 to 125 per cent, for expenditure incurred after 20 August 1996, except where the expenditure was required to be incurred by a contract (other than a contract of service) entered into before the announcement. Annual eligible R&D expenditure must exceed $20 000 to obtain the full 125 per cent deduction.
The value of R&D tax concessions is set out in the table below.(5)
A company wishing to claim a deduction must first be registered with the Board.(6)
The Board is charged, under the IR&D Act, with determining whether taxpayers qualify for the concessional deductions under section 73B of the Tax Act.(7) Taxpayers must satisfy two main limbs in order to claim deductions.
The first limb requires the expenditure to be incurred by an eligible company or by a partnership, which is treated as an eligible company for the purposes of the section.(8) Foreign companies are not eligible. Thus expenditure incurred in R&D activities by non-residents in receipt of Australian-sourced royalties is not deductable under section 73B of the Tax Act.(9)
The second limb requires R&D activities to be eligible activities .(10) The current definition no longer requires that the activities be carried on in Australia or in an external Territory.(11) This reflects the widening scope of the R&D concession.
The statutory requirement that R&D activities be systematic, investigative or experimental requires some methodology to be adopted by the Board in considering applications.(12) The methodology required by the legislation can be seen as including:
â¢ Basic research : experimental or theoretical work undertaken primarily to acquire new knowledge of the underlying foundations of phenomena, and observable facts, without any particular application or use in view.
â¢ Applied research : work undertaken for the advancement of knowledge with a specific practical application in view. It involves consideration of the available knowledge and its extension in order to solve particular problems, and to develop ideas into operational form.
â¢ Experimental development : systematic work using the results of basic or applied research and/or practical experience for the purpose of creating new or improving existing materials, devices, products, processes or services.
The work will relate to principles of physical sciences, biological sciences, chemical sciences, medical sciences, engineering or computer science.(13)
If the Board is of the opinion that any of the results of R&D activities have not been exploited on normal commercial terms, for the benefit of the Australian economy or that those activities do not have sufficient Australian content, no deduction is allowable.(14) However, the Board must notify the company of its intention to issue a certificate and allow the company 90 days to make a written submission to the Board before any certificate is issued.(15) A decision of the Board to issue a certificate is reviewable by the Administrative Appeals Tribunal.(16)
Clause 4 requires the Board to consider late applications for registration by the following 6 companies:
â¢ Aussie Diamond Products Pty. Limited (ACN 051 488 656)
â¢ Creative Objects Pty. Ltd. (ACN 065 617 781)
â¢ Cutler Brands Pty. Ltd. (ACN 050 166 160)
â¢ Futureweld Pty. Ltd. (CAN 053 762 744)
â¢ Learning Curve Pty. Limited (ACN 008 658 624), and
â¢ NSJA Investments Pty. Limited (ACN 007 288 637) (pr eciously known as Strategos Pty. Ltd.).
Items 1 - 5 relate to the appointment of the Board and committee members. The maximum term of an appointment of appointed members of the Board will be reduced from 5 years to 3 years. The Minister will now determine the period of an appointment of a committee member up to a maximum of 3 years. Persons will not be eligible to be an appointed member if they have already served 2 consecutive terms as a member of the Board. The Minister is also directed to consider the desirability of staggering appointments to the Board.
Item 6 provides that consultants may assist the Board and committees and others engaged by the Commonwealth, in addition to persons appointed under the Public Service Act 1922 .
Item 8 provides that a provisional certificate for overseas R&D expenditure is deemed to take effect from the day the application was received by the Board.(17) Companies are unable to claim the concessional deduction for overseas expenditure made prior to the effective date of the certificate.
Item 9 inserts a new section 39EF, which allows the Board to amend or revoke a provisional certificate for overseas R&D expenditure to ensure that the maximum deduction that a company may claim for overseas R&D expenditure is 10 per cent of total project expenditure of R&D activities. This new provision ensures that the Board will be able to restrict a company's access to concessional deductions for the overseas expenditures if the initial undertaking by the company is not fully met. This provision operates retrospectively as if a provisional certificate had originally been given as amended in accordance with the determination.
Items 10 and 11 allow the Board to give a registered Australian research agency an annual notice requesting advice as to whether it wishes to remain registered.(18)
Currently, Australian research agencies are registered indefinitely. If a research agency does not return a completed notice form within 30 days, or such longer period as the Board allows, the registration is cancelled. The government's intention is to provide the Board with the means of gaining up to date information about these agencies which might then be used by companies seeking to use their expertise.
Items 13 and 14 increase the current period for applying for registration from 6 months to 10 months.(19)
Item 15 gives the Board a limited discretion to alter the registration of a company to correct a mistake in the registration. This provision operates retrospectively as if an application had originally been made as altered.
Items 16, 17 and 18 allow the Board further flexibility to alter the information requirements imposed on companies in the registration process. Currently, the level of information required of applicants is the same regardless of the expenditure levels associated with R&D activities. These new provisions will allow the Board to seek different information for different classes of applicant. Accordingly, information requirements may tend to vary according to the amount of individual claims.
The current application process requires companies to specify and describe the R&D activities in relation to which registration is sought.(20) This will be repealed. Instead, companies will be required to furnish information about their R&D activities in accordance with application forms approved by the Board. These new provisions compel applicants to reply to specific questions as determined by the Board.
Each registration application must be accompanied by a declaration, by a person authorised by the company, that the company has maintained records, which substantiate its activities. This provision will reduce the possible abuse of the tax concession scheme by companies constructing research records after the event in order to justify an expenditure claim.
Items 19 and 20 remove the power of the Board to extend the deadline for making an application for registration (previously 3 months). This is in lieu of the new provision in Items 13 and 14 allowing 10 months instead of than 6 months for making applications.
Item 21 allows the Board to consider a company for registration, which fails to meet the deadline for making an application because of exceptional circumstances. Examples of exceptional circumstances may be postal delays or the untimely death of a person responsible for preparing the application on behalf of the company.(21)
This provision does not allow retrospective access to the R&D Tax Concession scheme, which the current deadlines in the IR&D Act are designed to prevent.(22)
Item 22 relates to companies, which fail to exploit the results of successful R&D activities. If the Board considers that it would have been reasonable to expect that the results would be exploited, but the company has failed to do so, the Board may issue a certificate to the Commissioner of Taxation causing the company to be ineligible for the R&D deduction for those activities.
Items 23, 24 and 25 provide that certain new provisions listed in this Bill shall be subject to internal review.
Item 28 adds consultants to other specified persons mentioned under confidentiality provisions in section 47 of the IR&D Act.
The Government considers the mistake of lodging the six applications(23) with the ATO and not the Board to be reasonable given the joint administration of the Research and Development Tax Concession scheme by the ATO and the Board.(24) The extension of the application for registration period from 6 months to 10 months seeks to address this problem. If the Board decides to register all six companies there would be a total cost to revenue of approximately $80 000.(25)
The Bill allows the Board, and not the applicants, to determine the nature of information, which it considers necessary and appropriate for determining applications for registration. Though this initiative may streamline the application process, applicants will be mindful of confidential information issues in view of allowable outsourcing under Item 6 of this proposal. Section 47 of the IR&D Act seeks to addresses this potential problem area. However, specific confidential information agreements may need to be drafted and executed by all parties in order to clarify and make certain their obligations under these new arrangements.
1. Industry Research and Development Amendment Bill 1998, Explanatory Memorandum , p.1.
2. Industry Research and Development Act 1986 (IR&D Act), section 3.
3. Ibid., Part III.
4. Ibid., Part IIIA.
5. Tax Expenditure Statement, 1996-97, published by the Department of the Treasury, December 1997, p.36.
6. Ibid., section 39J.
7. Ibid., Part II.
8. Income Tax Assessment Act 1936 (Tax Act), section 73B(1) defines eligible ompany to mean a body corporate, incorporated under a law of the Commonwealth or State or Territory.
9. Tax Ruling IT 2671.
10. Tax Act, section 73B(1) defines eligible activities to mean:
(a) systematic, investigative or experimental activities that involve innovation or technical risk and are carried on for the purpose of acquiring new knowledge (whether or not that knowledge will have a specific practical application) or creating new or improved materials, products, devices, processes or services; or
(b) other activities that are carried on for the purpose directly related to the carrying on of activities of the kind referred to in paragraph (a).
11. Section 39EB of the IR&D Act sets out the guidelines relating to expenditure on over seas R&D activities. Section 39EB(3)(c) further provides that expenditure incurred in respect of the overseas component of R&D activities must not exceed 10 per cent of the total expenditure that the company has incurred or proposes to incur on the project of R&D activities.
12. Australian Tax Practice: Commentary , p.2514.15
13. Ibid., p.2514.16.
14. A certificate is issued to the Commissioner of Taxation under section 39M of the IR&D Act.
15. IR&D Act, section 39M(2).
16. Ibid., section 39T.
17. Section 39 EC of the IR&D Act provides that an eligible company proposing to claim a deduction under section 73B of the Tax Act for overseas R&D activities may apply to the Board for a provisional certificate. A provisional certificate is issued to the Commissioner of Taxation based on advice from the applicant company that the Australian-based components of the proposed R&D project will proceed.
18. Section 4 of the IR&D Act defines a researcher as a person, body, organisation or institution that, in the opinion of the Board, is capable or carrying out a project of R&D activities.
19. The period begins to run after the end of the company's year of income.
20. IR&D Act, section 39JD(1)(b).
21. Industry Research and Development Amendment Bill 1998, Explanatory Memorandum , p. 6.
22. Ibid., p.6.
23. Industry Research and Development Amendment Bill 1998, Clause 4.
24 Ibid., p.1.
25 Ibid., Notes on Clause 4.
16 July 1998
Bills Digest Service
Information and Research Services
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