ATO ID 2010/74 Income Tax R&D tax concession: meaning of ‘primarily’ in paragraph 73B(14C)(c) of the Income Tax Assessment Act 1936

August 20th, 2014

Can the requirement in paragraph 73B(14C)(c) of the Income Tax Assessment Act 1936 ( ITAA 1936), that activities need to be carried on ‘wholly or primarily on behalf of the foreign company’ be met, where the relevant activities are not carried out by the eligible company solely on behalf of the foreign company?

Yes. The requirement in paragraph 73B(14C)(c) of the ITAA 1936 can be met if the R&D activities are carried on chiefly or mainly on behalf of the foreign company.

Company A is a ‘foreign company’, as defined in subsection 73B(1) of the ITAA 1936.

Company B is an ‘eligible company’ for the purposes of subsection 73B(1) of the ITAA 1936, and a wholly owned subsidiary of Company A.

Company B carries out certain activities which come within the definition of ‘Australian-centred research and development activities’ in subsection 73B(1) of the ITAA 1936.

Company A retains all of the intellectual property (IP) generated from these Australian-centred research and development activities that are carried out by Company B.

Company A pays Company B a fee equal to the costs incurred on carrying out these activities, plus an agreed mark-up.

Paragraphs (a) and (b), and (d) to (g) (inclusive), of subsection 73B(14C) of the ITAA 1936, are all satisfied in relation to Company B’s expenditure.

Company B has registered its R&D activities with Innovation Australia for the relevant year of income.

An agreement exists between Company A and Company B under which the parties will cooperate to fund, develop and licence the results from carrying out the activities in question. Under the agreement, Company A has the right to commercially exploit or otherwise use these results, except in certain limited situations in which it can allow Company B to do so without any fee being charged.

Company A initiated this agreement and stipulated the scope of the activities to be carried out in accordance with its terms.

An eligible company may claim a deduction under subsection 73B(14C) of the ITAA 1936 for expenditure on foreign owned R&D where the prerequisites of that subsection are met.

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