ATO ID 2006/138 Income Tax Research and development: consolidated group – R & D activities of two subsidiary members – only one registered

August 20th, 2014

Can the head company of a consolidated group claim deductions under section 73B of the Income Tax Assessment Act 1936 (ITAA 1936) for research and development expenditure incurred by a subsidiary member where the only member of the consolidated group registered in relation to the relevant research and development activities is another subsidiary member?

Yes. The head company can claim a deduction under section 73B of the ITAA 1936 in respect of the research and development expenditure of the subsidiary member.

In the relevant income year, company A is the head company of a consolidated group for the purposes of Part 3-90 of the Income Tax Assessment Act 1997 (ITAA 1997).

Company B and company C are 100% controlled subsidiaries of company A and are also subsidiary members of the consolidated group in the relevant income year.

Company B and company C are eligible companies as defined in subsection 73B(1) of the ITAA 1936.

In the relevant income year, company B and company C are participants in a joint venture, the manager of which carries out eligible research and development activities (as defined under subsection 73B(1) of the ITAA 1936) on their behalf.

Apart from the operation of subsection 73B(10) of the ITAA 1936, the expenditure on these activities otherwise meets the relevant requirements for related amounts to be allowable as deductions under section 73B of the ITAA 1936.

Only company B is registered with the Industry Research and Development Board under section 39J of the Industry Research and Development Act 1986 (IR&D Act), in relation to the joint venture research and development activities in the relevant income year.

The joint venture research and development activities registered under section 39J of the IR&D Act by company B are the same activities on which company C incurred its expenditure.

For deductions to be allowable under section 73B of the ITAA 1936, a number of eligibility requirements must be satisfied. These eligibility requirements include that the company is an ‘eligible company’ and that ‘research and development activities’ are undertaken and registered with the IR&D Board in accordance with section 39J of the IR&D Act (see subsection 73B(10) of the ITAA 1936). The terms ‘eligible company’ and ‘research and development activities’ are defined in subsection 73B(1) of the ITAA 1936. The company must also incur expenditure that is deductible under section 73B of the ITAA 1936 and meet any associated eligibility requirements for that expenditure.

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