Australia

Details

  • Service: Tax, R&D Incentives
  • Type: Regulatory update
  • Date: 4/02/2014

Tax Insights

KPMG's analysis of tax issues and developments.

Alan Garcia

Alan Garcia
Partner, Tax

+61 3 9288 6094

afgarcia@kpmg.com.au

Design R&D Expenditure 

by Alan Garcia, ASPAC R&D Regional Lead

In December 2013, the Australian Taxation Office (ATO) released Draft Tax Determination TD 2013/D9 regarding design expenditure incurred as part of an Research and Development (R&D) project. Whilst a draft Tax Determination, representing the Commissioner’s preliminary view available for public comment and affording taxpayers interest and penalty protection, it is an interpretation unfavourable to taxpayers seeking to claim design expenditure which may otherwise be eligible under the R&D Tax Incentive.

Design expenditure is incurred where an asset is constructed by or on behalf of an R&D entity, as distinct from off-the-shelf asset purchases.

 

Key considerations from this draft ruling include:

 

  • determining when an entity starts to hold a tangible depreciating asset where it has incurred expenditure on various design activities
  • design expenditure will be excluded under the R&D entitlement because it will now be included in the cost of a tangible depreciating asset (Div. 40 of the ITAA 1997)
  • 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
  • holding an asset for the purposes of design expenditure recognition may occur several years after the expenditure was incurred. This may require a re-evaluation of amounts claimed under the R&D entitlement.

 

R&D claimants that design, build, construct or purchase assets (in part or whole) should review their projects within the context of the design expenditure draft ruling. KPMG has contributed to an industry submission to the ATO.

 

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