Private ruling: Research and Development Tax Incentive
Published: August 2013
Ruling period: Year ending 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Q1: Is X Pty Ltd (the "Company") eligible to claim a 45% refundable tax offset pursuant to section 355-100(1) of the Income Tax Assessment Act 1997 (ITAA 1997) for the relevant income tax year? | A1: Yes.

Relevant facts and circumstances: X Pty Ltd (the "Company"), has applied for a private binding ruling (PBR). The following facts apply: 1. X Pty Ltd (the "Company") was incorporated on X date; 2. the Company is currently registered with AusIndustry (registration number X); 3. the Company's principle objective is to develop X; 4. the Company undertook eligible research and development (R&D) activities during the relevant income tax year; 5. the Company is funded by a number of different entities, some of which are Universities, or University owned entities; 6. At the direct shareholder level, Y Fund owned a total of X% of shares for the relevant income tax year and W (income tax exempt entity) owned a total of Y% of the shares. 7. the following ownership structure applies to the Company: a. Y Fund controlled the Company for the whole relevant income tax year; b. Y Fund is not a tax exempt entity; c. Y was controlled by Z Pty Ltd; d. Z Pty Ltd is not a tax exempt entity (however, it is controlled by tax exempt entities). 8. The Company's annual turnover for the relevant year ending was $X, being less than $20 million.

Relevant legislative provisions: Division 355 of the Income Tax Assessment Act 1997 | Subsection 355-100(1) of the Income Tax Assessment Act 1997 | Section 328-125 of the Income Tax Assessment Act 1997

Reasons for decision: Summary: Division 355 of the Income Tax Assessment Act 1997 (ITAA 1997) applies to tax periods commencing on or after 1 July 2011 to encourage companies to conduct research and development (R&D) activities in Australia. It does this by providing a revised tax incentive in the form of a tax offset referred to as the "R&D Tax Incentive" for eligible R&D expenditure. As the Company undertook eligible R&D expenditure in the relevant income tax year it is eligible to access the R&D tax incentive. The table in subsection 355-100(1) of the ITAA 1997 provides for two tax offsets, depending on the size of the R&D business: · A 45% refundable tax offset for eligible entities with an aggregated group turnover of less than $20m (as determined under section 328-115 of the ITAA 1997), provided they are not controlled by income tax exempt entities; or · A non-refundable 40% tax offset for all other eligible entities. Unused non-refundable offset amounts may be able to be carried forward to future income years under section 63-10(1) of the ITAA 1997. Broadly, a company will be controlled within the meaning of section 328-125 of the ITAA 1997 by another entity if that entity, its affiliates, or that entity together with its affiliates beneficially own, or have the right to beneficially own shares in the company which carry the right to at least 40% of: · Any distribution of income by the company; · Any distribution of capital by the company; or · The voting power Item 2 of the table in subsection 355-100(1) adopts the control test in section 328-125, although it is slightly modified. Firstly, the threshold is increased to 50%. Secondly, the requirement for control by an exempt entity is extended to include control by a combination of exempt entities. The term 'combination of exempt entities' in section 355-100 of the ITAA 1997 is not a defined term. The High Court stated (per Hayne, Heydon, Crennan and Kiefel JJ) in Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (NT) 2009 ATC 20-134 at 47: …the task of statutory construction must begin with a consideration of the text itself. Historical considerations and extrinsic materials cannot be relied on to displace the clear meaning of the text. The language which has actually been employed in the text of legislation is the surest guide to legislative intention. The meaning of the text may require consideration of the context, which includes the general purpose and policy of a provision, in particular the mischief it is seeking to remedy. In consideration of the text itself, The Concise Oxford Dictionary , 1987, rev.7 th edn., Oxford University Press, Melbourne, defines 'combination' as: …a combined state ( in combination with ); combined set of things or persons…group of things chosen from a larger number without regard to their arrangement. The above definition makes no reference to a relationship between the things combined, and in doing so it suggests that a 'combination' should be interpreted as a singular state. A strict reading of the term 'combination' using this definition indicates that once a set of entities are combined, further enquiry into the existence of any relationship is not required. Furthermore, if parliament had intended the words 'a combination of exempt entities' to require an exempt entity to be an affiliate of another exempt entity in order for the two to be combined, that objective would have been achieved by section 328-125 of the ITAA 1997, without the inclusion of those words in item 2 of the table in subsection 355-100(1) of the ITAA 1997. The definition, and the ordinary interpretation of the words used, supports the view that Parliament did not intend for there to be a requirement as to the relationship between the individual exempt entities that comprise the combination. Therefore, in accordance with the above, exempt entities that are not affiliates of each other are collectively capable of being a combination of exempt entities under subsection 355-100(1) of the ITAA 1997. | Detailed Reasoning - Conclusion: The Company's annual turnover for the relevant income tax year was less than $20 million. Therefore, the Company is eligible for the R&D Tax Incentive, provided it is not controlled by income tax exempt entities. During the relevant income tax year, the primary shareholder of the Company was Y Fund (Y Fund), owning a total of X% throughout the year. Y Fund has a number of shareholders, some of which are income tax exempt entities. The income tax exempt entities with shareholdings in Y Fund will collectively be a 'combination of exempt entities' under subsection 355-100(1) of the ITAA 1997, regardless of their relationship. However, in the present case, the combination of exempt entities does not own more than a 50% shareholding in Y Fund. As argued by the Company, at the direct shareholder level the only tax exempt entity of the Company is the X institute, which owned no more than Y% throughout the year. Furthermore, when analysing the indirect control provisions in section 328-125 of the ITAA 1997, the only shareholder that owned at least 50% in the Company was Y Fund, which is controlled by Z Pty Ltd. Neither Y Fund nor Z Pty Ltd are tax exempt entities. Therefore, in accordance with the above, item 2 of the table in subsection 355-100(1) of the ITAA 1997 does not apply to the Company, and it is therefore entitled to claim the 45% refundable tax offset.