ATO ID 2006/238 Income tax Research and development: unpaid wages

August 20th, 2014

Can an eligible company claim a deduction for certain ‘unpaid wages’ under subsection 73B(14) of the Income Tax Assessment Act 1936 (ITAA 1936)?

No. The company cannot claim a deduction under subsection 73B(14) of the ITAA 1936 in respect of the ‘unpaid wages’ that have not been incurred by the company.

The company is an ‘eligible company’ which undertakes on its own behalf ‘research and development activities’, as defined by subsection 73B(1) of the ITAA 1936.

The company’s ‘research and development activities’ are registered with the Industry Research and Development Board (IRDB) under section 39J of the Industry Research and Development Act 1986 (IR&D Act), as required by subsection 73B(10) of the ITAA 1936, and the company has an ‘R&D Plan’ in respect of the relevant income year(s), in accordance with subsection 73B(2BA) of the ITAA 1936.

The company has entered into an oral contract for services with an entity, the express terms of which include:

 the company will pay the entity $500 per week
 the entity will perform ‘research and development activities’ for the company; and
 the $500 will be due to the entity at the end of each week in respect of ‘research and development activities’ performed during that week.

Over several years, the entity performed ‘research and development activities’ for the company in accordance with the oral contract. However, at the end of each week the company determined it could not afford to pay the entity $500 and so paid only $50 per week. To be able to pay the balance the company would require sufficient funds to be able to do so, which it did not have, and it would need to decide that making payment would not jeopardise its operations.

The entity accepted the payment of $50 per week and continued to perform its side of the oral agreement. Further, the entity did not make any demand for payment of the ‘unpaid wages’ of $450 each week and did not otherwise attempt to enforce the payment terms of the oral contract.

Neither the company nor the entity sought to bring the oral contract to an end.

The company treated the ‘unpaid’ wages as current liabilities in its books of account. However, at no time was it in a position to pay the ‘unpaid wages’, as it derived no income and was continually in a loss position.

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 are registered with the IRDB under 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.

Click here for full ATO ID.