ATO ID 2006/136: Research and development: consolidated group - effect of single entity rule - R & D activities of subsidiary deemed to be carried out on behalf of head company
Date of decision: 10 April 2006
Year of income: Year ending 30 June 2002
Business line: Public Groups and International

Issue
Is the effect of the single entity rule (section 701-1 of the Income Tax Assessment Act 1997 (ITAA 1997)) such that the head company of a consolidated group is considered to have carried out on its own behalf the research and development activities carried out by or on behalf of its subsidiary member for the purposes of the definition of research and development expenditure, in subsection 73B(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Decision
Yes. Research and development activities carried out by or on behalf of a subsidiary member of the consolidated group are considered to be carried out by or on behalf of the head company of that group.

Facts
In the relevant income year, a company is the head company of a consolidated group for the purposes of Part 3-90 of the ITAA 1997. 'Research and development activities' (as defined in subsection 73B(1) of the ITAA 1936 are carried out by and/or on behalf of a subsidiary member of the consolidated group in the relevant year (the subsidiary member effectively owns the results, controls the conduct and bears the financial risk of the research and development activities undertaken). The subsidiary member was part of the consolidated group for the whole of the relevant income year.

Reasons for decision
Summary: 'Research and development expenditure', 'salary expenditure' and 'contracted expenditure' are defined in subsection 73B(1) of the ITAA 1936 (note that research and development expenditure is defined to include salary expenditure and contracted expenditure). Paragraph (c) of the definition of 'research and development expenditure' and the definition of 'salary expenditure' require that the research and development activities are carried out by or on behalf of the eligible company. Similarly, the definition of the term 'contracted expenditure', requires that the research and development activities are carried out on behalf of the eligible company. As the company is the head company of a consolidated group, it is necessary to consider how subsection 73B(1) of the ITAA 1936 applies when affected by the single entity rule. Section 701-1 of the ITAA 1997 (the single entity rule) provides that if an entity is a subsidiary member of a consolidated group for any period, it and any other subsidiary member of the group are taken for 'head company core purposes' and 'entity core purposes' to be part of the head company, rather than separate entities during that period. The intended operation of the single entity rule is to apply the income tax laws to the consolidated group as if it were a single entity (being the head company) (see Taxation Ruling TR 2004/11). The subsidiary member of the consolidated group is treated as part of the head company, rather than as a separate entity for the purposes of working out income tax liability or losses. The single entity rule results in actions and transactions of the subsidiary member (including the carrying out of research and development activities or the engaging of another to carry out research and development activities on the subsidiary member's behalf) being treated as if undertaken by the head company. Therefore, any research and development activities carried out by, or on behalf of the subsidiary member are taken to be carried out by, or on behalf of the head company, as required by the definition of research and development expenditure and associated definitions in subsection 73B(1) of the ITAA 1936.

Legislative references: Income Tax Assessment Act 1936 subsection 73B(1)
Related public rulings and determinations: Taxation Ruling TR 2004/11
Related ATO interpretative decisions: ATO ID 2006/135 | ATO ID 2006/137 | ATO ID 2006/138
Subject references: Australian Taxation Office Consolidation Consolidation - tax liabilities Deductions & expenses Eligible research and development expenditure Innovation segment LB & I segments Research & development expenses Research & development expenses on own behalf Single entity rule