Under section 73CA of the Income Tax Assessment Act 1936 (ITAA 1936), is a company ‘not at risk’ in respect of an amount of expenditure if:
- the company incurs the expenditure in an effort to comply with a contractual obligation to deliver a certain product; and
- when it is incurred, it can reasonably be expected that, as a result, the company will earn a fee under the contract at least equal to the amount of the expenditure; and
- that expectation is held because there are good technical grounds to anticipate that the expenditure will result in a product that satisfies the contract, rather than merely because of the terms and conditions of the contract itself or any other similar circumstance of the arrangement between the parties?
No, the company is not considered to be ‘not at risk’. Section 73CA of the ITAA 1936 therefore does not reduce the extent to which the company may claim a deduction under section 73B of the ITAA 1936 in respect of the expenditure.
ABC Pty Ltd (ABC) makes a contract with XYZ Pty Ltd (XYZ) under which ABC promises to develop a new type of machine. The machine is to be designed, built and tested to achieve certain specifications that have previously not been achieved. ABC will need to undertake a program of research and development to meet its contractual obligations.
The contract requires XYZ to pay ABC a fixed fee of $1 million if, and only if, ABC delivers the machine successfully and on time. However, ABC is confident, based on its extensive experience and technical capability, that it can deliver the machine in accordance with the contract and so will earn that fee.
At no time does ABC have any other arrangement or understanding with anybody, whether formal or informal, that allows ABC, or an associate of ABC, to receive any money back in respect of its expenditure. Nor is there any basis for suggesting that the terms of the contract do not reflect the true arrangement between the parties.
ABC expends $750,000 on research and development activities in an effort to meet its contractual obligation. The expenditure meets the requirements of section 73B of the ITAA 1936 (assume for the purpose of this ATO ID that subsection 73B(9) of the ITAA 1936 does not apply on these facts).
Section 73CA of the ITAA 1936 applies if the Commissioner is satisfied that, when the relevant expenditure was incurred, the company was not at risk in respect of the whole or a part of the expenditure.
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