Under the R&D tax incentive, R&D entities can only obtain an R&D tax offset for expenditure they incur to an associate when the amount is paid.
Where a company incurs R&D expenditure from an associate during a year, the expenditure must be paid prior to the end of the financial year to be claimed as an R&D Tax Offset in that year.
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 initial year of incurrence.
If you incur expenditure to an associate, the answers to these frequently asked questions will help you to work out when the amount has been paid and; therefore, when you can claim an R&D tax offset for that expenditure.
I have read that amounts incurred to my company’s associates must be paid before I can claim a notional deduction for this expenditure. Can I follow other ATO guidance to assist me to determine if I have paid an amount?
‘Paid’ in relation to the R&D tax incentive has its general legal meaning, which includes constructive payment. This means that you can use our existing guidance products and rulings to assist you to determine your eligible notional deductions for amounts paid to associates.
I have issued a cheque to my associate, but it was not presented by 30 June 2012. Can I claim a notional R&D deduction for this amount?
A personal cheque is taken to be paid when it is received by the recipient, provided it is promptly presented and not refused. It will be taken to have been presented promptly if the presentation is within a few business days.
If it is clear to us that payment has not been promptly sought on a personal cheque, the payment will, in the absence of extenuating circumstances, be taken to be made if, and when, the cheque is presented and cleared.
Can a journal entry be considered payment?
Using a journal entry to transfer an obligation by way of a loan account will not, on its own, constitute payment.
A journal entry will only constitute payment if there are mutual liabilities between the two parties and there is a binding agreement between those parties to set off the liabilities.
Company A conducted all R&D activities on behalf of Company B.
Company A issued an invoice to Company B for the full amount of its services.
Company B did not have any funds to pay Company A, so Company A and Company B entered into a loan agreement for this amount.
Company B wants to claim the R&D tax incentive for this amount.
As no mutual liabilities existed between the two companies, Company B is unable to claim the R&D tax incentive for this amount until it has paid Company A.
Company C conducted all R&D activities on behalf of Company D.
Company C issued an invoice to Company D for the full amount of its services.
Company D did not have any funds to pay Company C. However, Company C owed Company D an amount in excess of the invoiced amount.
Company C and Company D agree in writing for the amount of this invoice to offset the amount Company C owes to Company D.
Company D wants to claim the R&D tax incentive for this amount.
As mutual liabilities existed between the two companies, and the binding agreement between Company C and Company D agreed that the liability would be offset, the invoice is considered to be paid. As a result, Company D can claim the R&D tax incentive for this amount.
My company is a subsidiary in a consolidated group for a full income year, and I contract another member of that group to undertake R&D activities for me. Does the amount under this contract need to be paid before claiming a notional deduction amount?
No. The claimant company in this scenario would be the head entity of your group. If the amounts were incurred, and meet all other eligibility criteria for the R&D tax incentive, all amounts incurred by a subsidiary while a member of a consolidated group are taken to have been incurred by the head company. Therefore, amounts incurred to other subsidiaries within a consolidated group are not required to be paid before being claimed under the R&D tax incentive.
Courtesy of the ATO