ATO ID 2006/137 Income Tax R&D: consolidated group - R & D activities of subsidiary member deemed to be carried out on behalf of head company

August 20th, 2014

Does subsection 73B(9) of the Income Tax Assessment Act 1936 (ITAA 1936), when affected by the single entity rule (section 701-1 of the Income Tax Assessment Act 1997 (ITAA 1997), prevent the head company of a consolidated group from claiming a deduction under section 73B of the ITAA 1936, for expenditure on research and development activities carried out on behalf of a subsidiary member of the consolidated group?

No Research and development activities carried out ‘on behalf of’ a subsidiary member of the consolidated group are taken to be carried out on behalf of the head company, and not on behalf of any other person, for the purposes of subsection 73B(9) of the ITAA 1936.

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 an unrelated entity ‘on behalf of’ a subsidiary member of the consolidated group (the subsidiary member effectively owns the results, controls the conduct and bears the financial risk of the research and development activities undertaken).

The research and development activities are not undertaken on behalf of any other person.

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

Subsection 73B(9) of the ITAA 1936 provides that a deduction is not allowable under section 73B of the ITAA 1936 in respect of expenditure incurred by an eligible company for the purpose of carrying on research and development activities ‘on behalf of any other person’. Expenditure of that kind is disregarded for the purposes of determining a deduction under section 73B. As the company in question is the head company of a consolidated group, it is necessary to consider how subsection 73B(9) applies when affected by the single entity rule.

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