ATO ID 2005/23 Income Tax Research and Development Tax Offset: legal ownership of interests in a company by an exempt entity

August 19th, 2014

Does an exempt entity legally own interests in a company within the meaning of subsection 73J(2) of the Income Tax Assessment Act 1936 (ITAA 1936), where the Corporations Act 2001 requirements for membership of a company have not been met?

No. The exception in subsection 73J(2) of the ITAA 1936 will not operate to preclude a company from choosing a tax offset under section 73I of the ITAA 1936 where the exempt entity is not a member of the company under the Corporations Act.

Section 231 of the Corporations Act states that a person is a member of a company if they are a member of the company on its registration.

Under section 120 of the Corporations Act, a person becomes a member of a company on registration if the person is specified in the application with their consent as a proposed member of the company.

Section 175 of the Corporations Act, provides that a register of members kept under section 168 of the Corporations Act, is only evidence of the matters contained in it, in the absence of evidence to the contrary.

On the company’s Application for registration as an Australian company, lodged with the Australian Securities and Investment Commission (ASIC), an exempt entity was included as member of the company, with an interest totalling more than 25% of shares in the company.

The exempt entity was also recorded as a member of the company in its register of members kept under the Corporations Act.

The company is an eligible company within the definition in subsection 73B(1) of the ITAA 1936. It incurred research and development expenditure during the year of income and satisfied the eligibility requirements of subsection 73J(1) of the ITAA 1936.

The exempt entity had not at any time consented to become a member of the company, and nor had it authorised any payment from its own funds as consideration for the shares registered in its name.

Section 73J of the ITAA 1936 provides that an eligible company will be eligible to choose a tax offset instead of a deduction for research and development expenditure if it satisfies the requirements of subsection 73J(1) of the ITAA 1936.

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