Taxation Determination TD 95/44







[Note: This is a consolidated version of this document. Refer to the Tax Office Legal Database (http://law.ato.gov.au) to check its currency and to view the details of all changes.]: 1. Yes. In general terms, the expenditure is deductible under section 8-1 if it is both relevant and incidental to the income producing activities of the business, and not of a capital nature. | 2. Deductions for research and development ('R&D') expenditure are specifically provided for under section 73B of the Income Tax Assessment Act 1936 (the 1936 Act). If the criteria for deductibility under section 73B are not satisfied, the application of the general deduction provision, section 8-1 of the 1997 Act, may be relevant. In addition, section 73A of the 1936 Act allows a deduction for expenditure on scientific research (up to 30 June 1995) but only if the expenditure is not deductible under any other provision of the 1936 Act or the 1997 Act, including section 8-1 of the 1997 Act. | Connection to the business: 3. The connection required under section 8-1 will generally exist if the R&D activities are conducted for the purpose of developing new or improved products, processes or know-how for use in the income producing activities of the business. However, the R&D expenditure must be undertaken in and for the purposes of carrying on an existing business. Accordingly, R&D expenditure is not deductible if, for instance, it is incurred: | 4. Whether the R&D activities are successful or not in producing profitable results is not directly relevant to the deductibility of the expenditure. Provided the requisite connection to a business carried on for income-producing purposes exists, section 8-1 does not require expenditure to have actually produced income. Thus, for example, expenditure on developing an improved product which is never actually manufactured and sold may be deductible. | Capital/revenue aspects: 5. Distinguishing capital from revenue expenditure is a question of fact and degree. Relevant considerations include: whether the expenditure relates to the business structure itself or the process of operating it; the nature of the asset or advantage sought (including its lasting qualities); and the degree of recurrence (see Sun Newspapers Ltd & Associated Newspapers Ltd v. FC of T (1938) 61 CLR 337; 5 ATD 87). | 6. To be deductible, the nature of the business should require ongoing R&D activities as a necessary part of that business, so that recurring outlays on R&D are a part of the continual flow of working or operating expenses. This is most easily established where business is carried on in a field of high or rapidly advancing technology with a continuous need for R&D in order to carry on the business (see Goodman Fielder Wattie , supra). It may also be the case where the taxpayer undertakes continuous R&D activities the results of which are available for the purposes of producing products which are trading stock of the business (see 15 CTBR Case 24 ). | 7. If the R&D expenditure creates an asset or advantage of a lasting nature for the business, this may indicate that it is on capital account. For example, if R&D in a particular case is directed to obtaining patentable rights of a lasting kind, then related expenditure may, for that reason, be of a capital nature. | 8. Section 8-1 of the Income Tax Assessment Act 1997 , to which this Determination refers, expresses the same ideas as subsection 51(1) of the Income Tax Assessment Act 1936 . | Commissioner of Taxation 9 August 1995 | Previously issued as Draft TD 94/D83


Legislative references: ITAA 1997 8-1 ITAA 1936 73A ITAA 1936 73B
Case references: Goodman Fielder Wattie Ltd v. FC of T (1991) 91 ATC 4438 22 ATR 26
Subject references: deductible expenses research and development