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CONTENTS
Passage History
Purpose of Legislation
Background
Main Provisions
Concluding Comments
Endnotes
Contact Officer and Copyright Details
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
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)
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:
-
- Tax concessions(3)and
- 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)
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.
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.
-
- Industry Research and Development Bill 1998, Explanatory
Memorandum, p.1. Clause 4 of the Bill lists the companies
concerned.
- Industry Research and Development Act 1986 (IR&D
Act), section 3.
- Ibid., Part IIIA.
- Ibid., Part III.
- Tax Expenditure Statement, 1996-97, published by the Department
of the Treasury, December 1997, p.36.
- IR&D Act, section 39J, and Income Tax Assessment Act
1936 (Tax Act), section 73B (10).
- IR&D Act, Part II.
- Note that only partnerships involving eligible companies can
claim the concession. Individuals, trusts and other types of
'partnerships' cannot claim the concession.
- 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.
- Tax Ruling IT 2671.
- 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'.
- 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.
- Australian Tax Practice: Commentary, p.2514.15.
- Ibid., p.2514.16.
- To effect this, a certificate is issued to the Commissioner of
Taxation under section 39M of the IR&D Act.
- IR&D Act, section 39M(2).
- Ibid., section 39T.
- 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.
- 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.
- The period begins to run after the end of the company's year of
income.
- IR&D Act, section 39JD(1)(b).
- Industry Research and Development Amendment Bill 1998,
Explanatory Memorandum, p.6.
- Ibid., p.1
- Ibid., notes on clause 4.
Ross Kilmurray
8 December 1998
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ISSN 1328-8091
© Commonwealth of Australia 1998
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