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ATO ID 2006/74 Income Tax Research and Development: subsection 73B(3B) – partnership

Is there a ‘partnership’ under subsection 73B(3B) of the Income Tax Assessment Act 1936 (ITAA 1936), where two companies collaborate to conduct research and development activities, and to engage the services of a third to conduct some of these activities on their behalf?

Yes. The collaboration between the two companies results in a ‘partnership’ under subsection 73B(3B) of the ITAA 1936, as the joint conduct of the research and development activities is ‘taken to constitute carrying on business with a view to profit’.

The taxpayers are both eligible companies (as defined in subsection 73B(1) of the ITAA 1936), jointly conducting a project of research and development (R&D) activities.

These two companies engage a third company (researcher co), to carry out some of the R&D activities on their behalf. Part of the terms and conditions under which researcher co is engaged involve it contributing to a pool to fund some of these activities, as well as supplying certain of its own intellectual property towards the conduct of some of the research in question.

The two eligible companies agree to share in the results of the R&D activities, as well as in the net proceeds from any commercial exploitation of those results. Under this agreement, which is separate from that under which researcher co is engaged, each company acts as agent for the other in the conduct of the activities and mutual rights and obligations between the two eligible companies are created. However, the agreement between them and researcher co does not give rise to any mutual rights and obligations between those parties.

In the years of income in question no commercial exploitation of any results of the R&D activities occurs.

Subsection 73B(3B) of the ITAA 1936 states:

In determining whether a relationship between persons for the purpose of engaging in research and development activities constitutes a partnership for the purposes of this Act, the engaging by those persons in those activities is to be taken to constitute carrying on business with a view to profit.

Subsection 6(1) of the ITAA 1936 provides that ‘partnership’ has the same meaning as in the Income Tax Assessment Act 1997 (ITAA 1997), and that the term ‘this Act’, includes the ITAA 1997.

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