Private ruling: R & D - feedstock expenditure
Date of advice: 25 January 2017
Published: June 2017
Ruling period: 1 July 2011 to 30 June 2012 | 1 July 2012 to 30 June 2013 | 1 July 2013 to 30 June 2014 | 1 July 2014 to 30 June 2015 | 1 July 2015 to 30 June 2016
Date scheme commenced: 1 July 2011

Ruling: Q1: Whether the cost of feed to an animal during experimentation which qualifies as research and development under the Income Tax Assessment 1997 (ITAA 1997) is feedstock expenditure for the purposes of subsection 355-465(1)? | A1: No.

Relevant facts and circumstances: You are engaged in the business of obtaining goods which you transform for human consumption. You are an R&D entity within the meaning provided by section 355-35 of the ITAA 1997. You have registered your activities as per section 27A of the Industry Research and Development Act 1986 . You incurred expenditure on experimentation which satisfied the definition of R&D activities. You have acquired product from a third party. The product is used to transform the goods for human consumption.

Relevant legislative provisions: Section 355-465 of the ITAA 1997.

Reasons for decision: Summary: Division 355 of ITAA 1997 generally allows an R&D entity that has engaged in registered R&D activities to claim either: ● A refundable tax offset calculated as 45% of the notional deductions it is entitled to under the Division where its aggregated turnover is less than $20 million (and it is not controlled by one or more exempt entities); or ● A non-refundable tax offset calculated as 40% of its notional deductions. Subdivision 355-H of the ITAA 1997 reduces the concessional effect of allowing a tax offset for expenditure on registered R&D activities, where these activities involve the production of one or more tangible productions. Subdivision 355-H applies to all activities for which the three conditions for a feedstock adjustment in subsection 355-465(1) are met. Subsection 355-465(1) of the ITAA 1997 states: This section applies to an R&D entity for an income year (the present year) if: (a) it incurs expenditure in one or more income years in acquiring or producing goods or materials, (the feedstock inputs) transformed or processed during R&D activities in producing one or more tangible products (the feedstock outputs); and (b) it obtains under section 355-100 tax offsets for one or more income years for deductions under this Division: (i) for the expenditure, or (ii) for expenditure it incurs on any energy input directly into the transformation or processing, (iii) for the decline in value of assets used in acquiring or producing the feedstock inputs, and (c) during the present year, a feedstock output, or a transformed feedstock output (the marketable product) is: (i) supplied by the R&D entity to another entity, or (ii) applied by the R&D entity to the R&D entity’s own sue, other than use for the purpose of transforming that production for supply. Taxation Ruling TR 2013/3 (TR 2013/3) considers certain aspects of the feedstock adjustment provisions in Subdivision 355-H of the ITAA 1997. Paragraph 9 of TR 2013/3 provides some key explanations. This includes: ● Feedstock inputs which refers to goods or materials acquired or produced by the R&D entity and transformed or processed during R&D activities where the transformation or processing also results in the production of one or more tangible products, ● Feedstock outputs which refers to a tangible product produced from the transformation or processing of feedstock inputs. Paragraph 11 of TR 2013/3 states: The words 'expenditure … in acquiring or producing goods, or materials’ form a composite phrase in paragraph 355-465(1)(a), where the phrase describes expenditure of a particular character and is limited in its scope to only covering expenditure incurred up to the time transformation or processing activities begin. This expenditure does not include expenditure incurred on the transformation or processing of the relevant goods or materials…. Paragraph 18 of TR 2013/3 states: …the first condition does not apply to expenditure on the transformation or process activities themselves. This limitation is consistent with the fact that where section 355-465 intends to bring such expenditure into the calculation of a feedstock adjustment it does not so expressly; and then only where it is incurred on energy input directly into the transformation or processing; see subparagraph 355-465 (1)(b)(ii). This limitation also applies to expenditure on good and materials which are merely acquired or created to subject other goods and materials to transformation or processing during R&D activities. Such items represent a cost of the process of transforming or processing other goods or materials, rather than something to be transformed or processed in their own right. In this case, you purchased a product from a third party which is used during the transformation process. The product is not an expense for the acquisition of the goods before the transformation process begins. Taking into consideration the above information, the product is used during the transformation process. The cost of the product is not included as expenditure incurred on the transformation or processing of the goods. As a result, the cost of the product would not be included as part of the feedstock expenditure for the purposes of subsection 355-465(1) of the ITAA 1997.

This notice must not be taken to imply anything about: | ● the binding nature of the private advice issued to the applicant | ● the correctness of other edited versions. | Edited versions cannot be relied upon as precedent or used for determining how the ATO will apply the law in other cases.