ATO ID 2004/808: Research and Development: 'group membership period' and effect of viable business transfer
Date of decision: 16 September 2004
Year of income: Year ended 30 June 2004
Business line: Public Groups and International

Issue
Is a viable business transfer necessary for an eligible company to claim the research and development additional deduction under section 73Y of the Income Tax Assessment Act 1936 (ITAA 1936), where that company has:

Decision
No. An eligible company which has met the eligibility requirements of subsection 73Q(1) of the ITAA 1936, can be eligible to claim the research and development additional deduction under section 73Y of the ITAA 1936 without a viable business transfer, even where it has experienced this change in control.

Facts
Company A is an eligible company which undertakes research and development activities in Australia. For the 2003-04 year of income, and for each of the preceding three years of income, Company A has deducted amounts for 'incremental expenditure' under subsection 73B(14) of the ITAA 1936. 'Incremental expenditure' is defined by section 73P of the ITAA 1936. Company A was wholly owned by Company D until 30 April 2004 when it was acquired by Company E. No change to the business of Company A occurred. Company D and Company E are foreign companies which are not liable to tax in Australia. They cannot and do not claim deductions for research and development in Australia. Company A acquired 100% of shares in both Company B1 and Company B2 on 30 June 2003. Both Company B1 and Company B2 are eligible companies and undertake research and development activities in Australia. Both have deducted amounts for 'incremental expenditure' under subsection 73B(14) of the ITAA 1936, for the 2003-04 year of income. The group is not consolidated and does not intend to consolidate.

Reasons for decision
Summary: Subsection 73Q(1) of the ITAA 1936 allows an eligible company to deduct an amount under section 73Y of the ITAA 1936, if that company: Company A has deducted amounts for 'incremental expenditure', as defined by section 73P of the ITAA 1936, under subsection 73B(14) of the ITAA 1936, for the 2003-04, 2002-03, 2001-02 and 2000-01 years of income. Company A is therefore eligible to claim the additional deduction under section 73Y of the ITAA 1936. | Detailed Reasoning - Group membership period: Subsection 73R(2) of the ITAA 1936, requires Company A to work out which companies are grouped with it under section 73L of the ITAA 1936, on the last day of the Y 0 year of income (section 73P of the ITAA 1936 provides that Y 0 is the year of income for which an eligible company is working out its assessable income and deductions. Y -1 , Y -2 and Y -3 are, respectively, the three years preceding the Y 0 year of income). Here, the last day of Y 0 is 30 June 2004. At 30 June 2004, Company A was grouped with Company B1, Company B2 and Company E. Company A, Company B1, Company B2 and Company E are therefore 'primary group members'. Note that Company A is itself a primary group member. Company A must also work out the day before the last day of the Y 0 year of income or the first day of the Y -3 year of income (here 1 July 2000), whichever is the later, when any primary group member was controlled by a person other than the person who controlled it on the last day of Y 0 . The period between this day and the last day of the Y 0 year of income is 'that' company's (that is, the company of whom control has changed) 'group membership period'. Control of Company A changed on 30 April 2004 when it was acquired by Company E. As this is the later date, Company A's 'group membership period' is 30 April 2004 to 30 June 2004 (inclusive). Control of Company B1 and Company B2 changed on 30 June 2003 when they were acquired by Company A. However, control of Company B1 and Company B2 also changed again, on 30 April 2004, when Company A was acquired by Company E, so their group membership periods are also 30 April 2004 to 30 June 2004 (inclusive). | Detailed Reasoning - Calculating the additional deduction: Sections 73T to 73V of the ITAA 1936 require a company seeking to claim the additional deduction to calculate its 'R&D spend' for each of the Y 0 , Y -1 , Y -2 and Y -3 years of income. 'R&D spend' is defined by section 73P of the ITAA 1936 as 'the sum of: Paragraph (a) relates to the group membership period of the claimant (that is Company A) whereas paragraph (b) is concerned with the group membership period of the particular other group member (that is, Company B1 or Company B2, as relevant). The R&D Spend for Company A for Y 0 will include only the incremental expenditure it incurred during the portion of its group membership period that falls within the Y 0 year of income. That is, the incremental expenditure incurred from between 30 April 2004 and 30 June 2004. We have called this amount of expenditure 'XA'. To this amount, is added the incremental expenditure of Company B1 and Company B2 incurred during the portion of their respective group membership periods that fall within the Y 0 year of income. We have called these amounts 'XB1' and 'XB2'. The total of 'XA', 'XB1' and 'XB2' equals Company A's R&D spend for the Y 0 year of income. We have called this total amount 'XX'. (There were no intra-group transactions). No part of Company A's group membership period covers the Y -1 , Y -2 or Y -3 years of income. Therefore the amounts included under paragraph (a) of the definition of 'R&D spend' for each of these income years is zero. Similarly, no part of the group membership periods of Company B1 and Company B2 fall within the Y -1 , Y -2 and Y -3 years of income, so the amounts included in Company A's 'R&D spend' under paragraph (b) of the definition in section 73P of the ITAA 1936, for each of these years is also zero. R&D Spend for Company A is therefore: Section 73W of the ITAA 1936 provides that the premium amount is based on the excess of the current year R&D Spend over the average R&D Spend for the previous three years, less any adjustment where annual incremental expenditure during the three year history fluctuated by more than 20%. Under subsection 73X(1) of the ITAA 1936 the premium amount will only be distributed between group members who increased the incremental expenditure incurred during their individual group membership period for the Y 0 year of income above the level of incremental expenditure incurred during their individual group membership period for the Y -1 year. These group members are called 'increasing members'. Company A incurred an amount of incremental expenditure ($XP) in the Y 0 year of income during its group membership period. However, as Company A's group membership period is 30 April 2004 to 30 June 2004, Company A has incurred nil incremental expenditure during its group membership period for the Y -1 year. Company A is therefore an 'increasing member' and can claim a deduction under section 73Y of the ITAA 1936 for the amount worked out under subsection 73Y(2) of the ITAA 1936. Company A's entitlement to this deduction arises without there having been any written agreement concerning it becoming a group member with a viable business ('a viable business transfer' agreement), for the purposes of subsection 73R(4) and subsection 73R(5) of the ITAA 1936.

Legislative references: Income Tax Assessment Act 1936 subsection 73Q(1) section 73B section 73P section 73R section 73T section 73U section 73V section 73X section 73Y
Subject references: Research and development expenses Research and development additional deduction Viable business transfer