ATO ID 2014/11 Income Tax Research and Development: building expenditure

August 19th, 2014

Does the exclusion for ‘expenditure incurred in the acquisition or construction of a building’ in the definition of ‘research and development expenditure’ in subsection 73B(1) of the Income Tax Assessment Act 1936 (ITAA 1936) only include structural elements that form the building?

No. ‘Building’ for the purposes of subsection 73B(1) of the ITAA 1936 also includes ‘a part of’ a building. For this purpose, ‘a part of’ a building takes on its ordinary meaning and refers to structural components of a building that make up the whole building. It also includes items that have a separate identifiable nature that nevertheless become an integral part of a building enabling the building to function as the setting for the taxpayer’s income-producing activities.

The taxpayer is a construction company undertaking some research and development (R&D) in relation to its buildings. Its expenditure on the construction of the buildings is incurred on revenue account. This means that an item of the taxpayer that is trading stock cannot be a depreciating asset for the purposes of Division 40 of the Income Tax Assessment Act 1997 (ITAA 1997).

The construction involves the development, design, build and demonstration of a highly automated end-to-end batch manufacturing process, involving physically separate structures connected by pipes and conductors to facilitate the automated manufacturing process. Some of the structures are heavily customised to support the R&D activity, and house specialised process plant equipment.

In the year ended 30 June 2010 the taxpayer registered the construction of the structures as its R&D project with Innovation Australia under section 39J of the Industry Research and Development Act 1986 .

The taxpayer is an eligible company as defined in subsection 73B(1) of the ITAA 1936.

Subsection 73B(14) of the ITAA 1936 provides a concessional deduction for ‘research and development expenditure’ where certain conditions are met.

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