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05 Dec 13 R&D expenditure was "incurred" - Desalination Technology

The AAT has held that the taxpayer, Desalination Technology Pty Ltd ("DST"), was eligible for a tax offset of $363,281 for the 2009 income year in respect of research and development (R&D) expenditure payable to another company in the same group, Innovative Design Technologies Group Pty Limited ("IDTG").

During the relevant year, IDTG issued monthly invoices totalling $1,065,625 to DST. Of the total amount invoiced, DST paid $149,964. The balance of $915,661 was debited to an inter-company loan account between IDTG and DST. The balance remained unpaid.

In holding that the amount of expenditure had been "incurred" for the purposes of s 73B(14) of ITAA 1936, the AAT referred to a minute of meeting of the Board of DST and a service agreement that had been entered into between the parties in the following income year and said, at paras 23- 26:

"The DST directors’ minute acknowledges DST’s obligation to meet the charges invoiced to it by IDTG. It speaks of the 'payment due' to IDTG. It notes that each invoice will be 'treated as fully paid as at the date it is rendered'. There is no reason to treat them that way if there was no obligation to meet the expenditure in the first place. While it might be said against the taxpayer that the minute is unilateral and therefore does not speak for IDTG in relation to the arrangement, that argument ignores the fact that Mr Davey, who signed the minute on behalf of DST as a 'correct record', was also a director of IDTG.

The Service Agreement, entered into on 14 May 2010 but said to reflect 'the agreement between the parties which has been understood and operating between the parties since the inception of the project', is consistent with the directors’ minute. While it is not the most tightly drafted agreement of its kind, it acknowledges that IDTG will 'finance' the R&D work. In context, that can only mean that DST has a debt to IDTG for the value of the R&D work invoiced – IDTG has 'financed' the work by lending the invoiced amount to DST so that the invoices are not outstanding. The balance sheet for DST as at 30 June 2009 shows an inter-company loan of just over $1 million to IDTG, which is a proper reflection of the situation as documented in the directors’ minute and the Service Agreement.

The Commissioner concedes in his written submissions that the lack of a fixed date for payment of a liability will not prevent a liability from having been incurred. Referring to FCT v Citylink Melbourne Ltd [2006] HCA 35, at 228 CLR page 40 [136], he provides an example by which a date for payment can be specified but subject to provision for early or late payment. He then submits that if no date (or range of dates) is provided at all, this will contribute to a conclusion that there is no presently existing obligation.

It seems to me, however, that DST’s liability to IDTG was created during the 2009 income year (in the sense that DST was definitively committed and had completely subjected itself to the expenditure), notwithstanding the fact that there were conditions affecting the timing of the discharge of that liability. I do not read the directors’ minute and the Service Agreement as leaving in any sense 'contingent' the obligation placed on DST to pay the amounts that were invoiced to it."

Desalination Technology Pty Ltd and FCT [2013] AATA 846 (AAT, Frost DP, 29 November 2013).


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