Implications Of R&D Incentives On Listed Companies In Australia

Understanding the topic and identification of relevant issues

The Research and development activities allow both business and non-business organizations to achieve excellence in their regular operations. The management of an organization always looks to improve its operating efficiency. Research and development initiatives are helpful in providing better and efficient ways to an organization to improve its overall functioning. The amount of expenditures needed for research and development activities often are huge in quantum thus, in order to motivate the organizations, both business and non-business organizations to spend on research and development activities to find a better and improved way of functioning the tax authority in the country has provided incentive schemes, known as R&D incentives. In this document a detailed discussion shall be made on the implications of R&D incentives on list companies in Australia (Gallemore and Labro 2015).

The TR 92/2 is the specific ruling governing the provision of tax incentives for research and development activities in an organization. The particular ruling explains the types of expenditures incurred for scientific research which will be allowed as deduction from income under section 73A of Income Tax Assessment Act, 1936 (ITAA, 1936) to compute taxable income of an organization. Sub-section 1 of section 73A of ITAA, 1936 provides that scientific research expenditures will be allowed as deduction under this particular sub-section only if the expenditure has not been allowed as deduction under any other section (Richardson et al. 2014).

A listed company in the recognized stock of exchange of the country will be allowed to deduct certain payments and expenditures made on the scientific research related activities. However, section 73A (1) makes it clear that the amount of payments and expenditures in relation to scientific research must be made to earn assessable income from the business of the listed company. Thus, if the amount of expenditures and payments made towards the scientific research is not for the purpose of business of the company then the amount of such expenditures will not be allowed as deduction in computation of the assessable income of the listed company (Peiros and Smyth 2017).

The R&D incentives for ascertaining the assessable income of a listed company is mainly to inspire the business organization to spend on research and development related activities in a country. The subsection 1 of section 73A of ITAA, 1936 along with TR 92/2 provide that the following expenditures will be allowed to deduct from the income of a business organization to compute the assessable income of the business to ascertain the tax liability of the business;

1. Payments to an approved research institute for activities relating to scientific research by such approved research institute on behalf of the business organization (Bloom 2015).
2. Payments made to an approved research institute with the objective of undertaking scientific research in the field of business to which the business organization belongs.

Nature and content of relevant law

Thus, from above points it is clear that the payments must be made to an approved research institute for carrying research related activities on behalf of the business organization. However, the research related activities could be conducted either in the premises of the business organization or these could be carried out at the premises of approved research institute (Bennett and James 2017). Thus, the place at where the scientific research is to be conducted is not a factor in deciding whether the payments will be allowed as deduction in computation of the assessable income of the business though the activities, i.e. the scientific research activities must be for the purpose of the business (Cunningham 2016).

Apart from the above payments a listed company will be allowed to avail the benefits of tax incentives in accordance with section 73A of ITAA, 1936 for the capital expenditures made for scientific research provided the necessary conditions provided in the ITAA, 1936 are followed properly. According to TR 92/2 a listed company will be allowed deduct the capital expenditure incurred for scientific research provided that the capital expenditure is related to the business and have not been incurred for any of the following purposes:

1. Payments made to acquire plant and machinery for the scientific research of the company.
2. Payments made to acquire land and building or,

• Payments made to alter, add or extend the existing buildings.

Thus, apart from the above all other scientific expenditures even if capital in nature will be allowed as deduction for computation of assessable income of the business provided that expenditures have been incurred solely and wholly for the purpose of the business (Braithwaite 2017).

Further, a listed company will be allowed to deduct an amount equal to 1/3 of the total expenditures incurred for acquisition of land and building used for scientific research purpose. The deduction will also be allowed for alterations to be made to land and building or for extensions to be made for land and building if such building will be used for the scientific research purpose of the business and the expenditures have been incurred on or after the day of 1^st July 1946. According to subsection 2 of section 73A of the ITAA, 1936 the assessable income of an entity will be reduced by the 1/3 of such expenditures which have been incurred to acquire land and building or for altering the existing land and building or for extension to the existing land and building if such land and building is used for the scientific research purposes of the entity. However, this particular section is not applicable for the expenditures incurred on construction of a building or part of a building if the construction has commenced before the day of 21^st of November 1987 (Ernst et. al. 2014).

Types of expenditures that qualify for tax deductions under the Income Tax Assessment Act

TR 92/2 has laid down rules to further explain the tax incentives for expenditures incurred on scientific research as provided in section 73A (1) of ITAA, 1936. The ruling explains the expenditures and conditions which must be fulfilled by the business organizations to avail the tax incentive benefits of section 73A (1) of ITAA, 1936 (Taylor and Richardson 2014).

In running the business operations to earn assessable income from business if an entity, listed in the recognized stock exchange of the country, incurs expenditures for scientific research purposes then such amount will be allowed as deduction. Such expenditures, i.e. R&D expenditures, for the tax purposes have been classified under four different categories in TR 92/2 for ascertaining the tax implications of such expenditures on the assessable income of an entity. The four categories are as following:

1. Expenditures incurred with respect to payments made to approved scientific research institutes in the country.
2. Capital expenditures incurred for the scientific research for the business of an organization.

• Expenditures incurred foracquisition of plant if the plant has been used for the scientific research.

1. Capital expenditures incurred to acquire building for scientific research activities.

TR 92/2 has however, only dealt with the first two items listed above, i.e. the payments made to approved research institutes and the capital expenditures incurred exclusively for the scientific purposes in the organization (Taylor et. al. 2015).

Thus, the assessable income of a listed entity will be reduced by the amount of expenditures incurred on scientific research to motive the business entities to invest on research and development initiatives to improve the overall functioning of an entity (Tran 2015).

The deduction is allowed only to the business making such payment for gaining and producing assessable income from business activities. Thus, like other sections of ITAA, 1936 the benefit to claim deduction in respect of expenditures incurred on scientific research is only available to the entity making payment for deriving assessable income from business. Thus, the taxpayers have to fulfil two conditions simultaneously, these are, firstly the taxpayer will have to carry on the business activities to derive assessable income from business and the payments for research activities have been made in relation to the business. Hence, the listed entities will be able to take the advantage of section 73A (1) only if the company specifically make payments for expenditures as provided in the act (Firth and Gounopoulos 2017).

The implications of tax incentives for scientific research expenditures are numerous. As even capital expenditures are also allowed as deduction except acquisition of plant and machinery, acquisition of land and building and alternation or extension of land and building. The implications of section 73A (1) and TR 92/2 are summarized below:

As a result of tax incentives the listed entities have been motivated further to spend huge amount of money on research and development activities. The tax incentives have allowed business organizations an opportunity to use the tax shield provided by the ITAA to reduce the assessable income by using the tax incentives for expenditures on scientific research and development activities by the entity.

The entities operating in the country and who have spent large amount of money on research and development expenditures for earning assessable income have been allowed to leverage their tax positions by using the benefits of section 73A (1) of the ITAA, 1936. Just like other expenditures, listed entities have been allowed to set off expenditures incurred on research and development activities including expenditures of capital nature to reduce their taxable income and subsequently the tax liability to leverage their tax positions (Xynas et. al. 2014).

As the companies have been inspired to spend huge amount of expenditures on research and development activities by the tax incentives provided in the TR 92/2 and section 73A of ITAA, 1936 and ITAA, 1997 the overall operating efficiencies have increased many folds. The research and development activities have helped the companies to find better and improved ways to operate the business. Accordingly, the overall efficiency of business entities have improved (Eriksson and Kovalainen 2015).

Subsequent to the research and development initiatives the companies have found better ways to operate their businesses. As a result of these the financial performances of the business entities have improved significantly. The research and development activities are mainly taken up by business organizations to improve the operating efficiency and effectiveness (Kleven et al. 2016). Both the objectives are achieved with the successful research and development stints in the companies. As the operating effectiveness and efficiency have increased multiple folds subsequent to the successful research and development, phases the financial performances of these entities have improved simultaneously (Simon et al. 2014).

Maintenance of proper records and documentation have become necessary to avail the tax incentives for research and development activities. The listed entities must maintain proper documentation and keep record of all financial transactions in relation to the research and development activities to deduct these expenditures from revenue to ascertain the assessable income. Thus, the maintenance of proper documentation and keeping proper records of financial transactions have improved in the listed entities (Orlova and Khafizova 2014).

In order to avail the tax incentives of research and development activities the companies must adhere to the mandatory provisions of the ITAA. Accordingly, the listed entities have complied with the mandatory requirements of tax provisions of ITAA, 1936 and ITAA, 1997 to avail the benefit of tax incentives of R&D without any problem.

Conclusion: 

Taking into consideration the provision of 73A of Income Tax Assessment Act, 1936 and Taxation Ruling (TR) 92/2 it can be said that the implications of R&D incentives on listed companies are mostly positive. Especially the motivation and inspiration to the listed entities to spend large amount of money on research and development initiatives including scientific research have only helped such companies to improve their overall operating efficiency and financial performance subsequently.

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