Example - no add-back

In March 2009, A Co incurs $100,000 of eligible R&D expenditure on services to be provided by a research organisation. The services have not been performed by the end of A Co's income year.

The amount of the "unexpired portion" (calculated under section EA 3) is $100,000. This is income of A Co in the 2008-09 year under section CH 2. The R&D expenditure eligible for the credit in that year is $0.

The services are provided in May 2009. The $100,000 is deductible in the 2009-10 income year. No tax credits are available for this expenditure.

Note: Examples are simplified. You should check the detailed R&D information and/or consult your professional advisor

Example - eligibility of add-back

B Co is owned by B, who is a shareholder-employee of the company. B is engaged as an employee to do eligible R&D. In March 2009, B Co accrues a liability for B's salary, but has not paid this by the last date for filing its return of income (as provided in section EA 4(3)).

So, the salary is added back as income under section CH 3(2) and is not eligible for the R&D tax credit in the 2008-09 year. The salary is paid out in the 2009-10 year. No tax credits are available for this expenditure.

Note: Examples are simplified. You should check the detailed R&D information and/or consult your professional advisor.

Example - stock remaining on hand

In February 2009, A Co buys $100 of trading stock, which it intends to transform in R&D. It still has not been transformed in the R&D activity at 31 March 2009.

The value of the closing stock is added back as income in the 2008-09 year. This add-back also applies for the purpose of calculating the credit and there is no eligible expenditure for the tax credit.

Note: Examples are simplified. You should check the detailed R&D information and/or consult your professional advisor.

Example - calculating depreciation loss for tax-exempt income

PHB, a charitable society, undertakes eligible R&D in 2008-09. A digital serial analyser, bought new in 2007, is mainly used in the R&D activity. The resulting depreciation loss would be deductible if PHB earned taxable income. PHB's income year runs from 1 April to 31 March, and an independent valuation of the analyser on 1 April 2008 puts its market value at $35,000.

When calculating the depreciation loss that is eligible for the credit in 2008-09, PHB assumes the analyser was bought on 1 April 2008 for $35,000. The applicable depreciation rate for the analyser is 26.4% (diminishing value rate for an oscilloscope with 20% loading).

PHB is treated as being allowed a deduction for depreciation loss in the 2008-09 income year, which is the completed income year following deemed acquisition. The assumed amounts of depreciation loss and adjusted tax values (ATV) in each year are:

In the 2008-09 income year, PHB can claim a tax credit for $9,240 of eligible depreciation loss.

If the digital serial analyser was bought secondhand in 2006, the applicable depreciation rate for the analyser would be 22% (diminishing value rate for an oscilloscope without 20% loading).

Note: Examples are simplified. You should check the detailed R&D information and/or consult your professional advisor.

Example - deferral of deduction

A Co is owned by A, who is a shareholder-employee of the company. A is engaged as an employee in doing eligible R&D.

In March 2009, A Co pays a salary to A but elects to defer a deduction for this expenditure. The expenditure is eligible for the credit in the 2008-09 year.

Note: Examples are simplified: You should check the detailed R&D information and/or consult your professional advisor.

Example - assumed salary add-back

B Co is owned by B, who is a shareholder-employee. B is engaged as an employee in doing eligible R&D.

In March 2009, B Co accrues a liability for B's salary but has not paid it out by the last date for filing its return of income as provided in EA 4(3). B Co elects to defer a deduction for the expenditure under section EJ 23.

For the purposes of calculating the credit only, there is an assumed salary add-back under section CH 3(2), and the salary is not eligible for the credit in the 2008-09 year.

The salary is paid out in the 2009-10 year. The expenditure is not eligible for a tax credit.

Note: Examples are simplified: You should check the detailed R&D information and/or consult your professional advisor.

Note

The rule does not create a separate category of eligible expenditure.

Example - expenditure on intangible asset

A Co has eligible R&D salary expenditure in developing a new plant variety. The ownership rights to this are intangible depreciable property.

Much of this is expensed for accounting and is immediately deductible for tax under section DB 34. The expenditure satisfies section LH 5 and the tax credit applies in the year the expenditure is incurred.

The development expenditure capitalised for accounting falls within LH 5(4) and also attracts the tax credit in the year in which it is incurred.

Note: Examples are simplified. You should check the detailed R&D information and/or consult your professional advisor.

Example - expenditure on assets constructed solely for R&D use

In the 2008-09 year, A Co incurs eligible salary and materials costs in constructing a preliminary version of a product that will be added to its range of trading stock. The sole purpose of the prototype is use in the R&D process, developing a model for the trading stock. Expenditure on the prototype is treated as capital cost for accounting and tax. The costs attract the credit in that year.

Note: Examples are simplified. You should check the detailed R&D information and/or consult your professional advisor.

Example - capital expenditure

A business is developing a new production line to produce items in a way that has never been done before. Developing the new production line involves the following stages:

• The company's production scientists design the new production line. On the facts of this case, designing the production line qualifies as R&D.
• The company's engineers construct the new machinery which makes up the production line. They are supervised by the production scientists.

If the production line works satisfactorily, the business will use it in its normal business. The costs of the production scientists, the engineers, and the various materials used to construct the production line are capitalised as part of the costs of the new production line.

The work of the production scientists in designing the new production line is eligible for the R&D tax credit under new section LH 5(4)(c)(ii). So is any expenditure relating to those scientists falling under paragraph 3 of part A of schedule 21. The expenditure on the engineers who build the production line, and the production scientists in supervising them, is not eligible because it is incurred "directly in the construction of tangible property". The expenditure on materials does not qualify.

In this example, the R&D credit will not be available under the depreciation rules if the production line, once completed, is used in the R&D process - perhaps for testing. This is because the requirement in schedule 21, part A, paragraph 2(b) that "all the activities involved in the construction of the property are research and development activities" is not met.

Note: Examples are simplified. You should check the detailed R&D information and/or consult your professional advisor.