ATO ID 2005/23: Research and Development Tax Offset: legal ownership of interests in a company by an exempt entity
Date of decision: 17 December 2004
Year of income: Year ended 30 June 2004
Business line: Public Groups and International

Issue
Does an exempt entity legally own interests in a company within the meaning of subsection 73J(2) of the Income Tax Assessment Act 1936 (ITAA 1936), where the Corporations Act 2001 requirements for membership of a company have not been met?

Decision
No. The exception in subsection 73J(2) of the ITAA 1936 will not operate to preclude a company from choosing a tax offset under section 73I of the ITAA 1936 where the exempt entity is not a member of the company under the Corporations Act.

Facts
Section 231 of the Corporations Act states that a person is a member of a company if they are a member of the company on its registration. Under section 120 of the Corporations Act, a person becomes a member of a company on registration if the person is specified in the application with their consent as a proposed member of the company. Section 175 of the Corporations Act, provides that a register of members kept under section 168 of the Corporations Act, is only evidence of the matters contained in it, in the absence of evidence to the contrary. On the company's Application for registration as an Australian company, lodged with the Australian Securities and Investment Commission (ASIC), an exempt entity was included as member of the company, with an interest totalling more than 25% of shares in the company. The exempt entity was also recorded as a member of the company in its register of members kept under the Corporations Act. The company is an eligible company within the definition in subsection 73B(1) of the ITAA 1936. It incurred research and development expenditure during the year of income and satisfied the eligibility requirements of subsection 73J(1) of the ITAA 1936. The exempt entity had not at any time consented to become a member of the company, and nor had it authorised any payment from its own funds as consideration for the shares registered in its name.

Reasons for decision
Summary: Section 73J of the ITAA 1936 provides that an eligible company will be eligible to choose a tax offset instead of a deduction for research and development expenditure if it satisfies the requirements of subsection 73J(1) of the ITAA 1936. However, even though the requirements of subsection 73J(1) of the ITAA 1936 may be satisfied, subsection 73J(2) of the ITAA 1936 prevents an eligible company from choosing the tax offset for the relevant year, if an exempt entity, the affiliates of an exempt entity, an exempt entity together with its affiliates, or two or more exempt entities, at any time during the tax offset year, legally or beneficially own, or have the right to acquire, the legal or beneficial ownership of: For the purpose of subsection 73J(2) of the ITAA 1936, 'interest' is used in the ordinary sense to denote 'a legal concern, title or right (in property)'. To fall within the exception, the relevant entity or entities must 'legally or beneficially own . . .' the prescribed interests. In this case those interests are the shares in the eligible company. Legal owners of shares in a company are referred to as 'members' under the Corporations Act. Under section 231 of the Corporations Act, a person is member of a company if they are a member of the company on its registration. Section 120 of the Corporations Act provides that a person becomes a member of a company on registration if the person is specified in the application with their consent as a proposed member of the company. (emphasis added) Under section 176 of the Corporations Act, in the absence of evidence to the contrary, a register kept under section 168 of the Corporations Act, is proof of the matters shown in the register. The exempt entity was specified in the company's Application for registration as a member holding more than the 25% stipulated by subsection 73J(2) of the ITAA 1936. The contemporaneous register of members also shows the exempt entity as the legal owner of more than 25% of shares in the company. However, the exempt entity had not consented to become a member of the company. Therefore, sections 231 and 120 of the Corporations Act did not operate to make the exempt entity a member of the company upon registration. Therefore, at the relevant times, the exempt entity did not legally own a relevant interest in the company for the purposes of subsection 73J(2) of the ITAA 1936. On the facts there is also no basis on which to conclude that any exempt entity beneficially owned any such relevant interests. Subsection 73J(2) of the ITAA 1936 therefore, does not preclude the eligible company from claiming the research and development tax offset.

Legislative references: Income Tax Assessment Act 1936 section 73I section 73J
Subject references: Deductions & expenses Research & development expenses R&D tax offset