The Commissioner has released Taxation Ruling TR 2021/5 to assist companies in assessing whether their R&D expenses are considered 'at risk.' This rule denies notional R&D deductions for expenditures where consideration is expected regardless of the outcomes of the activities.
The 'At Risk' Rule
Expenditure eligible for the R&D tax offset is subject to the 'at risk' rule. This rule involves a comparison between consideration and R&D expenditure, potentially leading to the denial or reduction of the claimable amount for the R&D tax offset. In essence:
- The rule checks if the company can deduct its R&D expenses for tax benefits
- It focuses on whether the expenses are genuinely connected to the R&D activities
- If money received equals or exceeds what was spent, no tax benefits can be claimed
- If consideration is less than expenditure, benefits are proportionally reduced
What is 'Consideration'?
The term 'consideration' is interpreted broadly within Division 355 and is not narrowly confined to monetary benefits. The Commissioner's view includes non-monetary benefits in the term 'consideration,' aligning with the objective of the 'at risk' rule. Both cash payments and other forms of value received count.
The Nexus to Expenditure Test
This test evaluates consideration received or expected in relation to the R&D expenditure incurred. It assesses whether, at the time of incurring expenditure on R&D activities, an entity (or its associate) has received or could reasonably be expected to receive consideration as a result of that expenditure being incurred. The test focuses on actual expenditure incurred, as opposed to other potential expenditures or courses of action.
The Regardless of Results Test
This test applies in situations where consideration is received or expected irrespective of the outcomes of the R&D activities. The phrase 'regardless of' signifies that consideration is received without regard to, or irrespective of, the results of the R&D activities. It is an objective test requiring assessment of whether consideration has been received or could reasonably be expected to be received, regardless of the R&D results.
Quantifying Consideration
To apply the 'at risk' rule, entities must quantify the amount of consideration received or expected. In cases where non-monetary benefits are received, a determination of their value is required at the time the expenditure is incurred. Contracts with multiple deliverables or undissected lump-sum payments require a fair and reasonable determination of the portion of consideration satisfying the tests, considering economic substance over legal form.
Conclusion
In simple terms, this ruling helps companies understand the rules for claiming tax benefits on their R&D expenses and ensures that benefits are only given when expenses are genuinely connected to the R&D activities.
Source: ATO — TR 2021/5
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