Historically, and prior to FY21:
- The capital cost of a tangible depreciating asset is not eligible as R&D expenditure;
- A company is able to claim the decline in value on an R&D asset (as calculated under the depreciating asset provisions in Division 40) for the period that an asset is used in R&D activity;
- However, where the decline in value was calculated under a concessional/accelerated method such as via pooling or the instant asset write-off (section 328-180 of the Income Tax (Transitional Provisions) Act 1997) the decline in value was NOT eligible as R&D expenditure.
This historical treatment was altered by the introduction of the Temporary Full Expensing (TFE) provisions in Subdivision 40-BB of the Income Tax Assessment Act 1997:
- TFE applies to assets that an R&D entity first acquires/installs between 7:30pm AEDT on 6 October 2020 (the 2020 Budget time) and 30 June 2022;
- Subdivision 40-BB will apply to the Division 40 decline in value of assets when an R&D entity has not elected to use Division 328;
- Where a company deducts the cost of an asset using the Temporary Full Expensing provided for under subdivision 40-BB of the Income Tax Assessment Act 1997, it is able to claim the tax write-off amount as a notional R&D deduction for the purposes of Subsection 355-310 to the extent of the asset’s R&D use.
There is not yet detailed ATO guidance or rulings on the issue of claiming a notional deduction for TFE of R&D assets. Companies seeking to utilise the TFE provisions should consider the following (in addition to the general requirements access to TFE of assets):
- Apportionment of a notional deduction for TFE may be required where there is any non-R&D use of an asset. How such apportionment calculations should be performed and documented is uncertain and potentially challenging, noting that the asset’s usage in R&D may not be able to be accurately determined at the point that the TFE on the asset arises. The ATO guidance material on the website currently states:
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- The notional deduction is reduced to the extent that the asset is used for a purpose other than R&D activities. The R&D entity may be entitled to an actual Division 40 deduction for that other use (for example, the other use is in carrying on a business for the purpose of producing assessable income). This also applies to any immediate asset write off you may be entitled to. That is, you need to consider the extent to which the asset is used for R&D purposes and for a purpose other than R&D during the income year.
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- If a TFE on an R&D asset is taken for tax purposes, it’s adjustable value for tax becomes nil. This may impact upon future R&D tax balancing adjustment calculations and clawback if the R&D entity disposes of the asset for consideration in the future
***Disclaimer: The provisions for R&D assets are complex and regulator guidance material on recent changes is still potentially forthcoming. The above should not be taken as tax advice, and should you require clarity on your particular situation you should review the ATO website for the latest material, and contact our office.
