Bills Digest No. 66  1998-99 Industry Research and Development Amendment Bill 1998


Numerical Index | Alphabetical Index

WARNING:
This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments. This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

CONTENTS

Passage History
Purpose of Legislation
Background
Main Provisions
Concluding Comments
Endnotes
Contact Officer and Copyright Details

Passage History

Industry Research and Development Amendment Bill 1998

Date Introduced: 3 December 1998

House: House of Representatives

Portfolio: Industry, Science and Resources

Commencement: On Royal Assent

Purpose of Legislation

This Bill amends the Industry Research and Development Act 1986 (IR&D Act) by addressing procedural and administrative issues relating to tax concessions for eligible companies involved in industry research and development activities (R&D).

The Bill also requires the Industry Research and Development Board (the Board) to consider six late registration applications lodged by eligible companies. These applications were mistakenly lodged with the Australian Taxation Office (ATO) instead of the Board. The Board did not receive them until after the time allowed for making an application for registration had ended.(1)

Background

The Bill was originally introduced in the House of Representatives on 1 July 1998 but lapsed when Parliament was prorogued on 31 August 1998. It is now being re-introduced in the House.

The object of the IR&D Act is to promote the development, and improve the efficiency and international competitiveness, of Australian industry by encouraging R&D activities.(2)

The IR&D Act encourages R&D activities in two ways:

  1. Tax concessions(3)and

  2. Grants.(4)

Tax Concessions

In 1986 the Labor Government introduced the IR&D Act to provide income tax concessions for expenditure on R&D. Section 73B of the Income Tax Assessment Act 1936 (Tax Act) represents this express government policy decision.

Initially, the concession was to be available only for a limited number of years however, after various policy changes and consequential amendments to the legislation, the Labor Government announced in the 1992-93 Budget speech that the concession would be continued indefinitely, at the original rate of 150 per cent.

The new Coalition Government, as part of its Budget measures on R&D, reduced the maximum concessional rate of deduction from 150 to 125 per cent, for expenditure incurred after 20 August 1996.

Eligible R&D expenditure must exceed $20 000 to obtain the full 125 per cent deduction.

The value of R&D tax concessions is set out in the table below.(5)

1993-94

$m

1994-5

$m

1995-96

$m

1996-97

$m

1997-98

$m

1998-99

$m

1999-00

$m

2000-01

$m

465

685

675

710

440

370

380

400

Grants

The grants scheme is intended to address gaps in the tax concession scheme by providing direct assistance to those companies undertaking R&D activities which cannot take advantage of tax concessions. Activities eligible for grants are beyond the scope of concessions available under section 73B of the Tax Act.

The Board

A company wishing to claim a deduction must first register with the Board.(6) The Board is charged with determining whether taxpayers qualify for the concessional deductions under section 73B of the Tax Act.(7) Taxpayers must satisfy two main limbs in order to claim deductions.

Eligible company

The first limb requires the expenditure to be incurred by an 'eligible company' or by a partnership,(8) which is treated as an eligible company for the purposes of the section.(9) Foreign companies are not eligible. Thus, expenditure incurred on R&D activities by non-residents in receipt of Australian-sourced royalties is not deductable under section 73B of the Tax Act.(10)

Eligible activities

The second limb requires R&D activities to be 'eligible activities'.(11) The current definition no longer requires that the activities be carried on in Australia or in an external Territory.(12) This reflects the widening scope of the R&D concession.

The statutory requirement that R&D activities be systematic, investigative or experimental requires some methodology to be adopted by the Board in considering applications.(13) The methodology required by the legislation can be seen as including:

  • Basic research: experimental or theoretical work undertaken primarily to acquire new knowledge of the underlying foundations of phenomena, and observable facts, without any particular application or use in view.
  • Applied research: work undertaken for the advancement of knowledge with a specific practical application in view. It involves consideration of the available knowledge and its extension in order to solve particular problems, and to develop ideas into operational form.
  • Experimental development: systematic work using the results of basic or applied research and/or practical experience for the purpose of creating new or improving existing materials, devices, products, processes or services.

The work will relate to principles of physical sciences, biological sciences, chemical sciences, medical sciences, engineering or computer science.(14)

If the Board is of the opinion that any of the results of R&D activities have not been exploited on normal commercial terms, for the benefit of the Australian economy or that those activities do not have sufficient Australian content, no deduction is allowable.(15) However, the Board must first notify the company of its intention to issue a certificate and allow the company 90 days to make a written submission to the Board before a certificate is issued.(16) A decision of the Board to issue a certificate is reviewable by the Administrative Appeals Tribunal.(17)

 

Main Provisions

Clause 4 lists six companies and requires the Board to consider their late applications for registration.

Schedule 1

Items 1 - 5 relate to the appointment of the Board and committee members. These provisions reduce the maximum term of appointed members from 5 years to 3 years. The Minister will determine the period of an appointment of a committee member up to a maximum of 3 years. Persons will not be eligible to be an appointed member if they have already served 2 consecutive terms as a member of the Board. The Minister is also directed to consider the desirability of staggering appointments to the Board.

Item 6 provides that consultants may assist the Board and committees and others engaged by the Commonwealth, in addition to persons appointed under the Public Service Act 1922.

Item 8 provides that a provisional certificate for overseas R&D expenditure is deemed to take effect from the day the application was received by the Board.(18) Companies are unable to claim the deduction for overseas expenditure made prior to the effective date of the certificate.

Item 9 allows the Board to amend or revoke a provisional certificate for overseas R&D expenditure to ensure that the maximum deduction that a company may claim is 10 per cent of total project expenditure of R&D activities. This new provision ensures that the Board can restrict a company's access to concessional deductions for the overseas expenditures if the initial undertaking by the company is not fully met. This provision operates retrospectively.

Items 10 and 11 allow the Board to give a registered Australian research agency an annual notice requesting advice as to whether it wishes to remain registered.(19)

Currently, Australian research agencies are registered indefinitely. If a research agency does not return a completed notice form within 30 days, or such longer period as the Board allows, the registration is cancelled. The Government's intention is to provide the Board with the means of gaining up-to-date information about these agencies which might then be used by companies seeking to use their expertise.

Items 13 and 14 increase the current application period for registration from 6 months to 10 months.(20)

Item 15 gives the Board a limited discretion to correct a registration mistake. This provision operates retrospectively.

Items 16, 17 and 18 allow the Board further flexibility to alter the information requirements imposed on companies in the registration process. The current application process requires companies to specify and describe the R&D activities in relation to which registration is sought.(21) This will be repealed. Instead, companies will be required to furnish information about their R&D activities in accordance with application forms approved by the Board. These new provisions will allow the Board to seek different information for different classes of applicant. Accordingly, information requirements may tend to vary according to the amount of each individual claim.

Each registration application must be accompanied by a declaration, by a person authorised by the company, that the company has maintained records, which substantiate its activities. This provision aims to reduce possible abuse of the tax concession scheme by companies constructing research records after the event in order to justify an expenditure claim.

Items 19 and 20 remove the power of the Board to extend the deadline for making an application for registration (previously 3 months). This is in lieu of the new provision in items 13 and 14 allowing 10 months instead of 6 months for making applications.

Item 21 allows the Board to consider late applications caused through exceptional circumstances. Examples of exceptional circumstances may be postal delays or the untimely death of a person responsible for preparing the application on behalf of the company.(22)

Item 22 relates to companies who fail to exploit the results of successful R&D activities. If the Board considers it reasonable that the results be exploited, it may issue a certificate to the Commissioner of Taxation causing the company to be ineligible for the R&D deduction for those activities.

Items 23, 24 and 25 make certain provisions listed in this Bill subject to internal review.

Item 28 adds 'consultants' to other specified persons mentioned under confidentiality provisions in section 47 of the IR&D Act.

Concluding Comments

The Government considers the mistake of lodging the six applications with the ATO (instead of the Board) to be reasonable given the joint administration of the scheme by the ATO and the Board.(23) The extension of the registration period from 6 months to 10 months seeks to address this problem. If the Board decides to register all six companies there would be a total cost to revenue of approximately $80 000.(24)

The Bill allows the Board, and not the applicants, to determine the nature of information, which it considers necessary and appropriate for registration. Though this initiative may streamline the application process, applicants will be mindful of confidential information issues in view of allowable outsourcing under Item 6. Section 47 of the IR&D Act seeks to addresses this potential problem area however, specific confidential information agreements may need to be considered by all parties in order to clarify and make certain their obligations under these new arrangements.

Endnotes

  1. Industry Research and Development Bill 1998, Explanatory Memorandum, p.1. Clause 4 of the Bill lists the companies concerned.

  2. Industry Research and Development Act 1986 (IR&D Act), section 3.

  3. Ibid., Part IIIA.

  4. Ibid., Part III.

  5. Tax Expenditure Statement, 1996-97, published by the Department of the Treasury, December 1997, p.36.

  6. IR&D Act, section 39J, and Income Tax Assessment Act 1936 (Tax Act), section 73B (10).

  7. IR&D Act, Part II.

  8. Note that only partnerships involving eligible companies can claim the concession. Individuals, trusts and other types of 'partnerships' cannot claim the concession.

  9. Tax Act, section 73B(1) defines 'eligible company' to mean a body corporate, incorporated under a law of the Commonwealth or State or Territory. Sections 73B(3) to (3B) are also relevant.

  10. Tax Ruling IT 2671.

  11. Tax Act, section 73B(1) defines 'eligible activities' to mean:

    (a)systematic, investigative or experimental activities that involve innovation or technical risk and are carried on for the purpose of acquiring new knowledge (whether or not that knowledge will have a specific practical application) or creating new or improved materials, products, devices, processes or services; or

    (b)other activities that are carried on for the purpose directly related to the carrying on of activities of the kind referred to in paragraph (a).

    Paragraph (a) activities are usually referred to as 'core activities'. Paragraph (b) activities are usually referred to as 'supporting activities'.

  12. Section 39EB of the IR&D Act sets out the guidelines relating to expenditure on overseas activities. Section 39EB(3)(c) further provides that expenditure incurred in respect of the overseas component of R&D activities must not exceed 10 per cent of the total expenditure that the company has incurred or proposes to incur on the project of R&D activities.

  13. Australian Tax Practice: Commentary, p.2514.15.

  14. Ibid., p.2514.16.

  15. To effect this, a certificate is issued to the Commissioner of Taxation under section 39M of the IR&D Act.

  16. IR&D Act, section 39M(2).

  17. Ibid., section 39T.

  18. Section 39EC of the IR&D Act provides that an eligible company proposing to claim a deduction under section 73B of the Tax Act for overseas R&D activities may apply to the Board for a provisional certificate. A provisional certificate is issued to the Commissioner of Taxation based on advice from the applicant company that the Australian-based components of the proposed R&D project will proceed.

  19. Section 4 of the IR&D Act defines a 'researcher' as a person, body, organisation or institution that, in the opinion of the Board, is capable of carrying out a project of R&D.

  20. The period begins to run after the end of the company's year of income.

  21. IR&D Act, section 39JD(1)(b).

  22. Industry Research and Development Amendment Bill 1998, Explanatory Memorandum, p.6.

  23. Ibid., p.1

  24. Ibid., notes on clause 4.

Contact Officer and Copyright Details

Ross Kilmurray
8 December 1998
Bills Digest Service
Information and Research Services

This paper has been prepared for general distribution to Senators and Members of the Australian Parliament. While great care is taken to ensure that the paper is accurate and balanced, the paper is written using information publicly available at the time of production. The views expressed are those of the author and should not be attributed to the Information and Research Services (IRS). Advice on legislation or legal policy issues contained in this paper is provided for use in parliamentary debate and for related parliamentary purposes. This paper is not professional legal opinion. Readers are reminded that the paper is not an official parliamentary or Australian government document.

IRS staff are available to discuss the paper's contents with Senators and Members
and their staff but not with members of the public.

ISSN 1328-8091
© Commonwealth of Australia 1998

Except to the extent of the uses permitted under the Copyright Act 1968, no part of this publication may be reproduced or transmitted in any form or by any means, including information storage and retrieval systems, without the prior written consent of the Parliamentary Library, other than by Members of the Australian Parliament in the course of their official duties.

Published by the Department of the Parliamentary Library, 1998.

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