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Payment to Associates

March 16th, 2014

  • R&D entities are only eligible for a R&D Tax offset for R&D expenditure incurred by an associate entity if the expenditure has been paid during the claim period.
  • If you incur an amount of expenditure to an associate and you pay the amount in the same year, you can include this amount when working out your R&D tax offset in that year (if you meet all other eligibility requirements for the R&D tax incentive).
  • Paying an amount to an associate can include making a constructive payment, where you apply or deal with the amount on their behalf or as they direct.
  • If an amount of R&D expenditure has been incurred by an associate and not been paid during the claim period, a company must determine whether to deduct the amount under general tax provisions, or forfeit a tax deduction and carry forward to claim as a R&D Tax offset in a future period when the amount is paid.

In broad terms, associates are those entities that, by reason of family or business connections, might appropriately be regarded as being associates of a particular entity.

For example, a consulting fee or wage charged by a controlling director for R&D Services would be subject to the associate entity payment provisions. Likewise, any charges from associate business entities for R&D Services would also be subject to the associate entity payment provisions.

Where a company incurs R&D expenditure from associates that is not paid by the end of the financial year, the company is able to carry forward the amount and claim as R&D expenditure in subsequent years when the item is paid.

To carry R&D expenditure forward for claiming in a subsequent year however, a general income tax deduction for the expenditure item must be foregone in the year that the associate R&D expenditure is incurred, though not paid.

Companies should also ensure any associate entity R&D expenditure amounts have been documented and that the claim amount does not include any profit margin on intragroup charges.

For the latest ATO guidance on this matter, please visit www.ato.gov.au.

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