ATO ID 2006/68 Income Tax Research and Development: application of section 73CA of the ITAA 1936 to a reimbursement arrangement – expenditure ‘not at risk’

August 20th, 2014

Does section 73CA of the Income Tax Assessment Act 1936 (ITAA 1936) apply where an eligible company is entitled to reimbursement for expenditure on research and development activities in the form of a fee paid by a related entity?

Yes. Section 73CA of the ITAA 1936 applies in this case to amounts calculated by reference to the eligible company’s own expenditure on research and development activities, as it is possible to conclude, for the purposes of the section, that the company is ‘not at risk’ in respect of this expenditure.

Company X is an ‘eligible company’, as defined in subsection 73B(1) of the ITAA 1936. It registers its research and development (R&D) activities with the Industry, Research and Development Board, (the Board), under section 39J of the Industry Research and Development Act 1986 , (IR&D Act 1986). The company claims a deduction for its expenditure on these R&D activities, at the rate of 125%, under section 73B of the ITAA 1936.

Company X owns certain intellectual property connected with the conduct of the R&D activities, and has contracted with an associated company, company Y, to allow company Y to use this property for initial market testing and commercial promotion. This occurs under the ‘first agreement’.

Under a second, but related, agreement, company X pays amounts to company Y, as and when company Y manages and contracts with third parties in relation to the actual conduct of the R&D activities.

The fees payable under the first agreement exactly match the amounts payable under the second agreement, and whilst there is evidence of the R&D activities being carried out on behalf of company X, there is little evidence in support of the claim that company Y uses the intellectual property in a way consistent with the terms, or commensurate with the fees set under the first agreement.

Subsection 73CA(1) of the ITAA 1936 provides that section 73CA of the ITAA 1936 is to be ‘read and construed as if it were part of section 73B’ of the ITAA 1936.

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