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On 11 June 2014 the ATO issued a final taxation determination TD 2014/15, which asks the question: “Income tax: when is Design Expenditure incurred by an R&D entity included in the first element of the cost of a tangible depreciating asset for the purposes of paragraph 355-225(1)(b) of the Income Tax Assessment Act 1997 (and therefore not able to be deducted under section 355-205)?”

The determination is concerned with where an R&D entity incurs expenditure on various stages of design activities (Design Expenditure), connected with it beginning to hold a tangible depreciating asset, where that expenditure also falls within the terms of s 355-205. This expenditure will typically be incurred in cases where the R&D entity is constructing the asset itself, or having another entity construct it on its behalf, as distinct from acquiring the asset “off the shelf”. The asset begins to be “held” by the R&D entity at the time that construction is completed. At this time the R&D entity is the legal owner of the asset, and therefore, the holder under item 10 in the table in s 40-40.

Design Expenditure is tested for whether it is included in the asset’s first element of cost at the time the R&D entity begins to hold the asset: see s 40-180(1). This might be several years after the expenditure was incurred, and require a re-evaluation of whether or not amounts claimed under s 355-205 are deductible under that section because of s 355-225(1)(b).

Section 40-185(1) in Division 40 relevantly means that Design Expenditure will only be included in the cost of the asset where it has been incurred “in relation to holding” that asset. More particularly, s 40-180(3) will apply to include Design Expenditure in the cost of the asset where it has been incurred “in relation to starting to hold” the asset, on the proviso that the expenditure is “directly connected with holding the asset”. Whether Design Expenditure will be included in the cost of an asset for the purposes of Division 40 is a question of fact and degree, and will depend in large part on identifying the final shape, features and performance of the particular completed asset.

Design Expenditure will not be notionally deductible under s 355-205 where it is covered by s 355-225(1)(b) because it is “included in the *cost 4 of a tangible depreciating asset for the purposes of Division 40 (as that Division applies as described in section 355-3105 or otherwise)”.

This determination was previously issued in draft as TD 2013/D9.

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