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Claiming transactions with associates under the R&D Tax Incentive Friday 14 Jun 2019

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Action may be required before end of year

With end of the 2018-19 financial year approaching, now is the time to ensure that any amounts incurred to associates throughout the year have actually been ‘paid’.

Claimants under the R&D Tax Incentive Program may include expenditure incurred to an ‘associate’ in their R&D claim. However, this expenditure is subject to an additional eligibility requirement – it is claimable only when the expenditure is ‘paid’ before the end of the income year.

Who is an Associate of your R&D entity?

Under s318 ITAA 1936, associates are broadly defined to include entities (including natural persons, companies, partnerships and trustees) that share family or business connections.

Two key examples of an associate of a company include:

  • another entity (including a natural person) that, acting alone or with another entity or entities, sufficiently influences the company – for example a controlling director of a company; or
  • an entity (including a natural person) that, either alone or together with associates, holds a majority voting interest in the company – for example a parent company or individual who holds more that 50% of shares in a company.

What to consider prior to the end of the financial year?

If you think you have incurred amounts to an associate of the R&D entity, consider the following:

  • Where an amount is incurred to an associate and not ‘paid’ until a later income year, the R&D claimant must either
    • omit the amount from the R&D claim (and claim a normal tax deduction in the current year), or
    • carry the amount forward to claim as an R&D Tax offset in the future period when the amount is paid (provided you meet all other eligibility requirements for the R&D Tax Incentive).
  • The term ‘paid’ takes its meaning under income tax law and includes physical transfer of funds or constructive payment. Constructive payment occurs when the payor entity applies or deals with the amount in any way on the payee’s behalf or as the payee directs.
  • Additional integrity rules may apply when dealing with associated entities – for example under s355-400 ITAA 1997 if the expenditure incurred in a non-arm’s length transaction, or in a transaction with an associate, is not equal to the market value of the R&D activities, the eligible R&D expenditure is instead taken to have the market value.

If you have incurred amounts to an associate, it is important to consider your specific circumstances. For further advice, contact our R&D Tax team.

Authored by Nicholas Trotter & Ivan Tan

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