ATO ID 2010/150: Research and development: clawback (section 73C) for grants and recouped expenditure where the grant or recoupment may be subject to a repayment obligation
Date of decision: 6 August 2010
Year of income: Year ended 30 June 2010
Business line: Public Groups and International

Issue
Does section 73C of the Income Tax Assessment Act 1936 (ITAA 1936) apply to a government payment that is received in respect of research and development activities if the receipt might be subject to a repayment obligation that may arise upon the happening of certain subsequent events?

Decision
Yes, section 73C of the ITAA 1936 applies to a government payment that is received in respect of research and development activities even though the receipt might be subject to a repayment obligation that may arise upon the happening of certain subsequent events. Subsequent repayment in an income year following the receipt of the grant does not alter the application of clawback in the year of receipt.

Facts
Funding is made available under a Commonwealth government program to successful applicants for the purpose of undertaking activities associated with the systematic work necessary for installing and establishing processes, systems and services that enable a new product, process or service to be effectively brought to market. The program aims to build capacity and opportunities for conversion of ideas into commercial ventures and increasing the global competitiveness of Australia. An eligible company (as defined in subsection 73B(1) of the ITAA 1936), has applied for funding under this program. Certain expenditure incurred in relation to projects supported by this funding will also be directly in respect of eligible research and development activities for which expenditure is claimed under section 73B of the ITAA 1936. The funding agreement provides that following receipt of a quarterly progress report from the eligible company the Commonwealth will make a progress payment equal to an agreed percentage of the expenditure incurred. The Commonwealth is not obliged to make the progress payment unless it is satisfied that the eligible company has expended a sufficient amount in order to meet all eligible expenditure incurred to date and that the eligible company has made sufficient progress on the project. The funding agreement provides that the receipt of the government payment is subject to a potential repayment obligation that aligns with the success of the project. The project is considered successful if a specified accumulated sales level arising out of or in connection with the project is achieved. The funding receivable under this program is not characterised as a loan as the essential feature of a loan (a definite obligation to repay the principal sum) is absent on entering into the funding agreement.

Reasons for decision
Summary: Section 73C of the ITAA 1936 will apply where: The practical effect of the clawback provisions in section 73C of the ITAA 1936 only arises however, where the eligible company has become entitled to claim deductions under sections 73B, 73BA or 73BH of the ITAA 1936 (refer to subsections 73C(8) and (9)). Whether the amounts received under the agreement with the Commonwealth qualify as either a 'grant' or 'recoupment' for the purposes of section 73C of the ITAA 1936 will depend on the circumstances in which they are paid, and the circumstances of the person who receives them. Recoupment is not defined in the ITAA 1936. However, the meaning of the term 'recoupment' was considered by the Supreme Court of Victoria in Dampier Mining Co Ltd v. FC of T 78 ATC 4237; (1978) 8 ATR 835, in relation to former Division 10AAA of the ITAA 1936. In determining that the taxpayer there was 'entitled to recoupment' in respect of the expenditure concerned, Jenkinson J stated: I think that recoupment connotes restoration of what has been expended without countervailing detriment to him who incurred the expenditure. On appeal to the Full Federal Court ( Dampier Mining Co Ltd v. Federal Commissioner of Taxation [1979] FCA 93; 79 ATC 4469; (1979) 10 ATR 193), Deane J (Brennan and Fisher JJ agreeing) equated the concept of expenditure being recouped with the taxpayer being reimbursed in respect of its expenditure. In this matter the Commonwealth provides funding on receipt of a progress report from the eligible company which details, among other things, expenditure incurred on the project to date. On favourable assessment of this report the Commonwealth pays the eligible company an amount equal to an agreed percentage of the expenditure incurred. This operates to reimburse the eligible company and restores the company to its former position in respect of this expenditure. As a result, the eligible company has not experienced any financial detriment in relation to the agreed amount of expenditure. To the extent that the expenditure incurred is in respect of research and development activities, the payment of funding by the Commonwealth is therefore a 'recoupment' of this expenditure for the purposes of section 73C of the ITAA 1936. Where the eligible company has claimed deductions in relation to this expenditure, as indicated above, then section 73C will have practical operation. In the absence of any express rule to reverse the effect of section 73C of the ITAA 1936 upon repayment of the recoupment, any subsequent repayment of the funding received under the program, or part of it, will not affect the application of the clawback provisions in the year the grantee received or became entitled to receive the funding or result in any reversal of this application of section 73C in a future year of income. Accordingly, section 73C of the ITAA 1936 applies to a government payment that is received in respect of research and development activities, even though the receipt may be subject to a repayment obligation that may arise upon the happening of certain subsequent events. Subsequent repayment in an income year following the receipt of the funding does not alter the application of the clawback provisions in the year of receipt.

Legislative references: Income Tax Assessment Act 1936 section 73C section 73B section 73L
Case references: Dampier Mining Co Ltd v FC of T 78 ATC 4237 (1978) 8 ATR 835
Related public rulings and determinations: Taxation Ruling TR 2006/3
Related ATO interpretative decisions: ATO ID 2010/147 | ATO ID 2004/568 | ATO ID 2004/871
Subject references: Government grants income Research & development expenses