ATO ID 2006/328 Income Tax Capital Allowances: cost – ‘section 73BA depreciating asset’ – new full-scale test model – re-use of components from earlier test model

August 20th, 2014

Yes. The first element of cost of the new test model does include, pursuant to subsection 40-180(3) of the ITAA 1997, the cost attributed to those components of the earlier test model that have been re-used in building the new test model.rdtaxincentive

The taxpayer is an ‘eligible company’, as defined in subsection 73B(1) of the Income Tax Assessment Act 1936 (ITAA 1936), that carries on ‘research and development activities’ (R&D activities) as defined in subsection 73B(1). The taxpayer has registered its R&D activities in the manner contemplated by subsection 73BD(1) of the ITAA 1936. The subject matter of the taxpayer’s R&D activities is an item of equipment capable of performing a specific manufacturing process. The taxpayer’s R&D activities encompass not only designing and developing the item of equipment but also testing the performance of the asset against the requisite specifications.

As an integral part of the R&D activities, the taxpayer built a full-scale model of the item of equipment for the purpose of testing the asset’s capacity to perform the specific manufacturing process at a commercially viable level. The test model is not an item of trading stock of the taxpayer and the expenditure on the test model does not represent ‘feedstock expenditure’ within the meaning of that term in subsection 73B(1) of the ITAA 1936. The test model was constructed after 29 January 2001 and no deduction under subsection 73B(15AA) of the ITAA 1936 is allowable in relation to it (see subsection 73B(15AAAA) of the ITAA 1936). However, testing revealed that the existing model could not operate in the manner required and that a major revision of the equipment’s design and functionality was needed to successfully continue with the R&D activities. The existing test model is a ‘section 73BA depreciating asset’ as defined in section 73BB of the ITAA 1936 and the taxpayer started to hold that asset from when they first built it. For the period of time that the taxpayer utilised the asset for monitoring and testing purposes in its R&D activities, deductions under subsection 73BA(2) of the ITAA 1936 have been allowed.

In view of the major revision required, any further use of the existing test model was abandoned in favour of building a completely new test model. This caused a balancing adjustment event to occur for the existing test model under paragraph 40-295(1)(b) of the ITAA 1997. As many of the components of the existing test model were of significant value, the existing test model was dismantled and those components of value retained and stored. Other less valuable components were discarded. Some of the components retained from the earlier test model were ultimately used as components in the new test model even though both the functionality and physicality of the new test model were materially different to the earlier test model. The new test model is also a ‘section 73BA depreciating asset’ which the taxpayer started to hold from when they first built it.

As with the earlier test model, the taxpayer’s R&D activities encompass testing the performance of the new test model against the revised specifications. When completed, the new test model will also not be an item of trading stock of the taxpayer and the expenditure on it will not represent ‘feedstock expenditure’ within the meaning of that term in subsection 73B(1) of the ITAA 1936.

Subsection 73BA(2) of the ITAA 1936 provides a deduction to an ‘eligible company’ for a ‘section 73BA depreciating asset’ if the company has a ‘notional Division 40 deduction’ for the asset.

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