ATO ID 2006/136 Income Tax Research and development: consolidated group – effect of single entity rule – R & D activities of subsidiary deemed to be carried out on behalf of head company

August 20th, 2014

Is the effect of the single entity rule (section 701-1 of the Income Tax Assessment Act 1997 (ITAA 1997)) such that the head company of a consolidated group is considered to have carried out on its own behalf the research and development activities carried out by or on behalf of its subsidiary member for the purposes of the definition of research and development expenditure, in subsection 73B(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Yes. Research and development activities carried out by or on behalf of a subsidiary member of the consolidated group are considered to be carried out by or on behalf of the head company of that group.

In the relevant income year, a company is the head company of a consolidated group for the purposes of Part 3-90 of the ITAA 1997.

‘Research and development activities’ (as defined in subsection 73B(1) of the ITAA 1936 are carried out by and/or on behalf of a subsidiary member of the consolidated group in the relevant year (the subsidiary member effectively owns the results, controls the conduct and bears the financial risk of the research and development activities undertaken).

The subsidiary member was part of the consolidated group for the whole of the relevant income year.

‘Research and development expenditure’, ‘salary expenditure’ and ‘contracted expenditure’ are defined in subsection 73B(1) of the ITAA 1936 (note that research and development expenditure is defined to include salary expenditure and contracted expenditure). Paragraph (c) of the definition of ‘research and development expenditure’ and the definition of ‘salary expenditure’ require that the research and development activities are carried out by or on behalf of the eligible company. Similarly, the definition of the term ‘contracted expenditure’, requires that the research and development activities are carried out on behalf of the eligible company.

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