Consequential R&D amendments
2010 amendment to Income Tax Act clarifies the income tax rules for grants in relation to two new research and development incentives. Applies from 1 Oct 2010.
Sections CX 47 and DF 1 of the Income Tax Act 2007
Technology Development Grants and Technology Transfer Vouchers were two new R&D incentives announced in Budget 2010. Several consequential amendments have been made to the special income tax rules for grants to make the tax treatment of these incentives clear and to deal with a compliance issue.
Part of the payment under a Technology Development Grant may be paid after the end of the income year in which a relevant deduction is incurred. Dealing with the deduction and the payment under the special grant rules where the deduction arises in one year and the grant is received in a subsequent year can result in disproportionate compliance costs. This problem is addressed by these amendments.
Technology Transfer Vouchers deliver R&D support in a way which does not fall clearly within the normal grant rules. These rules have been amended to make the tax treatment of Technology Transfer Vouchers straightforward.
As part of Budget 2010, the Government announced two new research and development (R&D) initiatives:
- Technology Development Grants to be made to businesses. The amount claimed by the business under a grant will be paid out in instalments over the course of its R&D programme. However, a proportion of the grant amount will be withheld until the grant administrator is satisfied that the grant claims which have been made meet the eligible expenditure criteria that are a condition of the award of a grant. The grant administrator will initially be the Foundation for Research, Science and Technology and, from 1 February 2011, the Ministry of Science and Innovation (MSI).
- Technology Transfer Vouchers. Under this initiative, the Government will pay 50% of the costs of R&D work which a business contracts out to a third party research provider.
The Technology Development Grant initiative takes effect from 1 October 2010 and the Technology Transfer Vouchers from 1 November 2010.
Tax legislation contains special rules which deal with grants. In short, grants are treated as excluded income, but the expenditure to which the grants relate is not deductible (or not depreciable, if the grants relate to expenditure on the acquisition of depreciable property).
The changes will:
- provide the facility for businesses to "opt out" of the special grant rules when a payment is received in an income year later than the year in which the relevant expense was incurred; and
- make the application of the special grant rules to Technology Transfer Voucher transactions clear.
The amendments apply from 1 October 2010.
Section CX 47 of the Income Tax Act essentially provides that, when a business receives a grant, and that grant relates to either deductible expenditure or expenditure on a capital asset which is depreciable, that grant is excluded income.
Two amendments have been made to section CX 47. Section CX 47(1) is replaced. Paragraph (b) has been amended to make it clear that section CX 47 cannot apply to a research provider who receives an amount from the Crown under a Technology Transfer Voucher arrangement. Paragraph (d) is amended to make the application to Technology Transfer Vouchers clear, and in the case of subparagraph (ii), to make it consistent with subparagraph (i).
The second amendment to section CX 47 is to insert a new subsection (4). Under this subsection, a person who receives a grant payment as a Technology Development Grant or under a Technology Transfer Voucher which has been withheld until the conditions of the grant are satisfied, and when the payment is received in a year subsequent to the year the expenditure was incurred can elect that section CX 47 not apply. If the person makes this election, the grant payment will be income of the person, and not excluded income.
Section DF 1 essentially provides that, if a person incurs expenditure which is either deductible or on an asset which is depreciable, and the person receives a grant which relates to that expenditure which is excluded income under section CX 47, that expenditure is not deductible, and no depreciation loss can be claimed in relation to it.
New subsection (1) excludes from the denial of deduction circumstances where a person has made an election under section CX 47(4). The section has generally been restructured, with subsection (1) providing a single point of entry into the section. This is the reason for the new subsection (1B), and the simplification of subsection (3).