ATO ID 2006/138: Research and development: consolidated group - R & D activities of two subsidiary members - only one registered
Date of decision: 10 April 2006
Year of income: Year ending 30 June 2002
Business line: Public Groups and International

Issue
Can the head company of a consolidated group claim deductions under section 73B of the Income Tax Assessment Act 1936 (ITAA 1936) for research and development expenditure incurred by a subsidiary member where the only member of the consolidated group registered in relation to the relevant research and development activities is another subsidiary member?

Decision
Yes. The head company can claim a deduction under section 73B of the ITAA 1936 in respect of the research and development expenditure of the subsidiary member.

Facts
In the relevant income year, company A is the head company of a consolidated group for the purposes of Part 3-90 of the Income Tax Assessment Act 1997 (ITAA 1997). Company B and company C are 100% controlled subsidiaries of company A and are also subsidiary members of the consolidated group in the relevant income year. Company B and company C are eligible companies as defined in subsection 73B(1) of the ITAA 1936. In the relevant income year, company B and company C are participants in a joint venture, the manager of which carries out eligible research and development activities (as defined under subsection 73B(1) of the ITAA 1936) on their behalf. Apart from the operation of subsection 73B(10) of the ITAA 1936, the expenditure on these activities otherwise meets the relevant requirements for related amounts to be allowable as deductions under section 73B of the ITAA 1936. Only company B is registered with the Industry Research and Development Board under section 39J of the Industry Research and Development Act 1986 (IR&D Act), in relation to the joint venture research and development activities in the relevant income year. The joint venture research and development activities registered under section 39J of the IR&D Act by company B are the same activities on which company C incurred its expenditure.

Reasons for decision
Summary: For deductions to be allowable under section 73B of the ITAA 1936, a number of eligibility requirements must be satisfied. These eligibility requirements include that the company is an 'eligible company' and that 'research and development activities' are undertaken and registered with the IR&D Board in accordance with section 39J of the IR&D Act (see subsection 73B(10) of the ITAA 1936). The terms 'eligible company' and 'research and development activities' are defined in subsection 73B(1) of the ITAA 1936. The company must also incur expenditure that is deductible under section 73B of the ITAA 1936 and meet any associated eligibility requirements for that expenditure. It is necessary to consider whether the head company is considered to be an eligible company that is registered for the research and development activities undertaken by company C, as the expenditure meets all other relevant requirements for related amounts to be allowable as deductions under section 73B of the ITAA 1936. Section 73BAB of the ITAA 1936 provides that sections 73B to 73Z of the ITAA 1936 apply to the head company of a consolidated group as if it were an eligible company and were registered under section 39J of the IR&D Act in relation to particular activities during any period that a subsidiary member of the group is an eligible company and is registered for those activities in respect of that year of income. It is important to note that section 73BAB of the ITAA 1936 uses the words 'a subsidiary member'. Further, the wording of the provision also indicates that 'a subsidiary member' must meet both requirements: it must be both an eligible company; and registered under section 39J of the IR&D Act in relation to the research and development activities, for the head company to be taken to meet those requirements for the purposes of section 73B of the ITAA 1936. Although company C is an eligible company, it is not registered for the research and development activities in question. The Macquarie Dictionary (5th Edition) definitions of 'a' include: some; another; one; any. As section 73BAB of the ITAA 1936 uses the words 'a subsidiary member', the head company can consider if any, or another subsidiary member, is an eligible company that is registered under section 39J of the IR&D Act in relation to the same joint venture research and development activities on which company C incurred its research and development expenditure. Company B (another joint venture participant and a member of the consolidated group) is an eligible company that is registered under section 39J of the IR&D Act in respect of the same joint venture research and development activities. Therefore, section 73BAB of the ITAA 1936 applies to the head company as if it is an eligible company that is registered for the joint venture activities under section 39J of the IR&D Act, as these requirements are met by its subsidiary member company B. The expenditure on these activities otherwise meets the relevant requirements for the amounts to be allowable as deductions under section 73B of the ITAA 1936. Therefore in the relevant period, company A (the head company) can deduct under section 73B of the ITAA 1936 expenditure incurred on research and development activities by company C.

Legislative references: Income Tax Assessment Act 1936 section 73B section 73BAB
Related public rulings and determinations: Taxation Ruling TR 2004/11
Related ATO interpretative decisions: ATO ID 2006/135 | ATO ID 2006/136 | ATO ID 2006/137
Subject references: Australian Taxation Office Consolidation Consolidation - tax liabilities Deductions & expenses Eligible research and development expenditure Innovation segment LB & I segments Research & development expenses Single entity rule