The Commissioner’s position is that where an entity incurs expenditure on various stages of design activities, this Design Expenditure will be included in the cost of a depreciating asset if it forms part of the final shape, feature and performance of the particular completed asset.
Where expenditure is part of the cost of a depreciating asset, the expenditure is not able to be claimed as R&D expenditure in the year incurred, but will only be able to be claimed as part of the depreciation of the asset during the time it is used for R&D activities.
The Commissioner acknowledges that in some instances it may take a company several years to complete the construction of the asset(s) connected with the Design Expenditure. As such re-evaluation of R&D claims may be required upon completion of the construction of the asset(s).
Key considerations from this determination include:
- the requirement for a direct connection whereby Design Expenditure is ‘directed to and results in’ the R&D entity beginning to hold the resultant asset. The entity must determine how the asset comes into existence and evaluate the role of Design Expenditure in that process
- Design Expenditure that may be part of a project ‘directed to’ the creation of an asset but does not ‘result in’ that asset coming into existence will be excluded from the cost of the asset
- the extent of the connection between the Design Expenditure and the asset is a question a fact and degree.
Capital expenditure can still be claimed as R&D expenditure, however R&D claimants that design, build, construct or purchase assets (in part or whole) should review their projects within the context of the Determination.