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22 Oct 14 Taxpayer incurred payment of R&D expenditure - Desalination Technology

The Federal Court (Perram J) has dismissed the Commissioner's appeal from the decision of the AAT in Desalination Technology Pty Ltd and FCT [2013] AATA 846, in which the AAT held that the taxpayer had incurred expenditure payable to a related company in respect of services provided in relation to the taxpayer's research and development activities.

Perram J described the case at paras [1] to [3] as follows:

"It concerns the position of a taxpayer who pays an invoice by debiting a running account in favour of a supplier in circumstances where that account does not have to be settled until:

(a) the taxpayer is in a position to do so; and
(b) the taxpayer regards it as prudent to do so.

The question is whether such a taxpayer has ‘incurred’ expenditure within the meaning of the general deduction provision of the Income Tax Assessment Act 1997 (Cth) (‘ITAA 1997’), s 8-1. The competing views are that:

(a) the expenditure was ‘incurred’ because the taxpayer was definitively committed to paying the invoice. On this view, the fact that repayment of the running account was subject to the two contingencies referred to in (a) and (b) above does not alter that analysis; or
(b) the expenditure was not ‘incurred’ because the taxpayer’s obligation to settle the running account was subject to sufficiently uncertain contingencies that it could not be said definitively to have committed itself to the expenditure reflective in the invoice.

The Tribunal preferred the former view and it was right to do so."

Perram J held that it was only the running account that was subject to the two contingencies, not the invoice. In relation to the invoice, the taxpayer was "definitively committed" to its payment.

FCT v Desalination Technology Pty Limited [2014] FCA 1120 (Federal Court, Perram J, 21 October 2014).

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