Understanding Cooperative Research Companies and the R&D Tax Incentive

A city at night

 

Analysis of CRC Programs and R&D Tax Incentive

This article looks at s355-580 of the Income Tax Assessment Act 1997 (“Cth”) which relates to Cooperative Research Companies and their eligibility for the R&D Tax Incentive. Further to what extent do these provisions apply to an entity under what is known as the Cooperative Research Companies Projects Program. This article does not consider the at risk rule which may have relevant applications under these provisions depending on the nature of funding and the R&D activities.

Legislative Background

The starting point is the legislation, which is found in two acts:

The legislation I refer to is:

  1. Income Tax Assessment Act 1997 (Cth) (“ITAA97”) Division 355;
  2. Industry Research and Development Act 1987 (Cth) (“IRDA”); and

I will also make references to:

  1. Supporting legislation
  2. Extrinsic materials
  3. Legislative Instruments1; and
  4. Other grants as outlined on the grants’ website.

Income Tax Legislation

The principal legislation for the R&D tax incentive and the CRC provisions is found in the ITAA97, Division 355. There are many parts to the legislation, and it is useful to lay them out:

CRC Provisions

Specifically, s355-580 of the ITAA97 states when notional deductions for CRC contributions arise:2

(1) An R&D entity can deduct for an income year expenditure it incurs during that year to the extent that:

  1. the expenditure is in the form of monetary contributions under the * CRC program; and
  2. the contributions have been or will be spent under the CRC program on one or more * R&D activities for which the R&D entity is registered under section 27A of the Industry Research and Development Act 1986 for an income year.

Note 1: The R&D activities will need to be conducted during the income year the R&D entity is registered for those activities (see sections 27A and 27J of the Industry Research and Development Act 1986).

Note 2: Expenditure incurred in income years starting on or after 1 July 2011 may be deductible for activities registered for income years starting before 1 July 2011 (see section 355-200 of the Income Tax (Transitional Provisions) Act 1997).

(2) Subsection (1) does not apply to expenditure to the extent that it is incurred out of Commonwealth funding.

No other deductions arise for monetary contributions etc.

(3) Neither:

  1. a contribution an * R&D entity can deduct under subsection (1); nor
  2. expenditure incurred under the * CRC program, to the extent that the expenditure is incurred out of:
    1. a contribution an R&D entity can deduct under subsection (1); or
    2. Commonwealth funding;

can be deducted by any R&D entity under any other provision of this Division for any income year.

(4) If an asset’s * cost includes expenditure incurred under the * CRC program out of:

  1. a contribution an * R&D entity can deduct under subsection (1); or
  2. Commonwealth funding;

an amount equal to the asset’s decline in value cannot be deducted under this Division by any R&D entity for any income year.

  • the CRC program is defined as means the program administered by the Commonwealth known as the Cooperative Research Centres Program.3 Unfortunately this is the only legislative definition;
  • subsection 2 above prevents an R&D entity from claiming expenditure incurred that is sourced from other Commonwealth funding such as Australian government grants;
  • the subsection does not strictly apply to prevent claiming expenditure sourced from State government funding;

Clawback

The clawback provisions apply as follows:

s355-430 states:

an amount is included in an R&D entity’s assessable income if:

the R&D entity receives a recoupment from government of expenditure on R&D activities for which it has obtained tax offsets under this Division;

an R&D entity will have a clawback amount has amount if s355-440 applies;4

s355-440 states:5

(1) The * R&D entity has an amount under this section if:

  1. the entity, or another entity mentioned in subsection (5), receives or becomes entitled to receive a * recoupment from either of the following (otherwise than under the * CRC program):
    1. an * Australian government agency;
    2. an STB (within the meaning of Division 1AB of Part III of the Income Tax Assessment Act 1936);
  2. the recoupment is received, or the entitlement to receive the recoupment arises, during the present year; and
  3. either:
    1. the recoupment is of expenditure incurred on or in relation to certain activities; or
    2. the recoupment requires expenditure (the project expenditure) to have been incurred, or to be incurred, on certain activities.

Note: Paragraph (c) includes expenditure incurred in purchasing a tangible depreciating asset to be used when conducting R&D activities.

Recoupment

Recoupment is defined as:6

(1) Recoupment of a loss or outgoing includes:

  1. any kind of recoupment, reimbursement, refund, insurance, indemnity or recovery, however described; and
  2. a grant in respect of the loss or outgoing.

(2) If some other entity pays an amount for you in respect of a loss or outgoing that you incur, you are taken to receive the amount as recoupment of the loss or outgoing.

I make the following comments:

  • recoupment appears to be a broadly defined phrase and in my view this includes any grant received from the Australian government;
  • clawback by virtue of s355-440(1) does not apply to CRC entities;
  • if an entity was a non-CRC entity then clawback will apply, in that case:
    • the expenditure sourced from government funds could be included as a notional deduction; and
    • the funding must be included as assessable income in the R&D entity’s tax return;

Explanatory Memorandum

The explanatory memoranda (“the EM”) states that:

a company operating a Cooperative Research Centre under the incorporated model would be eligible for a notional deduction for a monetary contribution out of its own funds but not for the contribution of Commonwealth funds.7

and further:

expenditure under the Cooperative Research Centre program out of Commonwealth funding (including as part of the cost of a depreciating asset) is not eligible for the R&D tax offset. The reasons are:

  • the availability of a second benefit (in the form of the tax offset) for spending Commonwealth funds is not justified in principle (the Commonwealth is giving generous assistance in the form of the Cooperative Research Centre grant and the ‘up front’ tax offset to the participants); and
  • if an offset were available, the simplification benefits of providing access to the R&D tax offset at the contribution stage would not be realised because it would be necessary to trace all the actual expenditures by the Cooperative Research Centre to each eligible R&D activity – this would add significantly to the compliance burden.8

Based on the interpretation of the EM above:

  • if an entity is part of the CRC program, then it is unable to notionally deduct expenditure related to funds received from the Commonwealth;
  • however, if the entity is not a participant in the CRC program but is a participant under the CRC-P program the issue therefore becomes whether the CRC-P program has been incorporated into the CRC program or whether CRC-P is its own standalone program; and
  • if CRC-P is its own standalone program of which an entity is a participant, to what extent do the legislative provisions detailed above apply.

Industry Research Legislation

In understanding whether CRC-P is its own standalone program it is relevant to analyse how the program was established, its history and any relevant materials supporting the program:

Principal Legislation

s33 of the IRDA allows the relevant Minister to prescribe programs:9

The Minister may, by legislative instrument, prescribe one or more programs in relation to industry, innovation, science or research, including in relation to the expenditure of Commonwealth money under such programs.

Establishment of the Programs

The following is a brief history of the establishment of the CRC and CRC-P programs:

  • CRCs in Australia have existed for about 35 years10 and were a feature of the previous R&D tax concession regime;
  • in 2011 the regime was amended to the R&D Tax Incentive regime;
  • the regime was overhauled to make it simpler;11 and
  • CRCs remained however were extensively amended;12
  • the amendments in 2011 envisaged CRCs to play an important role in Australia’s research capabilities;13
  • in 2015 the Australian Government commissioned a report into the CRC program:14
    • the report made 18-recommendations to the CRC programs;
    • one of the recommendations was the establishment of the CRC-P program. The following is extracted from recommendation 3:

The CRC Programme should be structured into two streams of activity:

  • traditional CRCs to support medium- to long-term industry-led collaborations; and
  • CRC projects (CRC-Ps) to support short-term, industry-led research.

CRC-Ps will be smaller collaborations operating on short project timelines with simpler governance and administration arrangements and less funding. The process of revising the programme guidelines should establish the selection criteria and details of the CRC-P stream.

  • in 2017 the CRC-P was established by Legislative Instrument.15 the following is extracted from the explanatory statement:16

(the Instrument) is to prescribe the Cooperative Research Centre Projects Program (the Program). The Program is incorporated in the Department of Industry, Innovation and Science Portfolio Budget Statements 2017-18 under the contributing component Cooperative Research Centres (CRCs) Programme, of Sub-programme

The explanatory statement highlights that funding for CRC and CRC-Ps is from the same pool of funds allocated in the federal budget for that purpose;

There have been subsequent amendments to the Legislative Instruments establishing CRC program and the CRC-P program:

  • Industry Research and Development (Cooperative Research Centres Program) Instrument 2019; and
  • Industry Research and Development (Cooperative Research Centres Projects Program) Instrument 2018;

I have also found that there are currently at least 44 additional programs made pursuant to s33 all created by separate Legislative Instruments;17

In examining the explanatory statement to the Legislative Instrument at 3.3.2 above:18

CRC Program is designed to provide incentives for business research, development and commercialisation to drive innovation and thus contribute to improved productivity.

The Cooperative Research Centres Projects (CRC-Ps) Program (the Program) supports short term (no longer than three years) industry-led collaborations between industry, researchers and the community to develop a product, service or process that will solve problems for industry and deliver tangible outcomes. Projects must maintain two industry entities, including at least one small or medium sized entity, and one research organisation amongst its partners.

The purpose of the Industry Research and Development (Cooperative Research Centres Projects Program) Instrument 2018 (the Legislative Instrument) is to prescribe the Cooperative Research Centres Projects Program (the Program). The funding for the Program has been secured through the Department of Industry, Innovation and Science 2018-19 Budget under the contributing component Cooperative Research Centres (CRC) Program.

The CRC-P program was to be administered by the Business Grants Hub which delivers similar programs:

  • there are 620 grants listed on the Business Grants Hub website (at the time of writing, noting this number changes frequently);19 and
  • CRC grants and CRC-P grants are listed as separate grants;

The statement at 3.5 above makes numerous references to the CRC Program and the CRC-P program each being “the Program”;

This can be interpreted to mean that each is a separate program, and if the intent was to categorise this as one program, the drafters of the provisions would have done so, I have expanded on this later in this article;

If the intent to have them classed as one program the explanatory statement would refer to them as being two streams of the one program. A couple of examples are:

  • the original recommendation was that they be classed as streams or sub classes;20 and
  • Parliament has passed other non-related legislation which uses the concept of ‘streams’ to separate instruments of the same class;21

Business Grants

As stated at paragraph 3.6 above both CRC and CRC-P grants are administered by the Business Grants Hub, I make the following observations:

The webpage describes:

Cooperative Research Centres Projects (CRC-P) Grants:

Cooperative Research Centres Projects (CRC-P) Grants provide funding for short-term research collaborations. Find out how to apply for a CRC-P Grant to develop a new technology, product or service.

Cooperative Research Centres (CRC) Grants – Round 25:

Cooperative Research Centres (CRC) Grants provide funding for medium to long-term, industry-led research collaborations. Find out about CRC Grants and how to help improve the competitiveness, productivity and sustainability of Australian industries.

Defence Cooperative Research Centres Program:

The Defence CRC Program links industry with researchers to deliver game-changing Defence capabilities. Find out how to participate in a Defence CRC.

  • the webpage does not list any other grants or programs relating to cooperative research centres;
  • if there were other grants for example CRC-Q., CRC-R, etc it is reasonable to conclude that those grants were established under the broader CRC program and were different streams of the program (see paragraph 3.9 above)
  • however, there are only two grants established other than the CRC (being CRC-P and a second for defence);
  • based on those it is reasonable to conclude that this has been established as a separate program to the CRC;
  • the defence CRC is not referred to anywhere else in the CRC material and is kept separate;
  • CRC-P is also listed separately on the webpage, if the programs were intended to be one (CRC) then they would be listed under the same program or grant and be listed as separate ‘streams’.

Statutory Interpretation

I make the following further comments on whether the CRC-P program is to be included in the definition of CRC:

  • this is an issue of statutory interpretation as whether previously drafted legislation is taken to include later legislative instruments;
  • the legislation that governs interpretation of Commonwealth statutes is the Acts Interpretation Act 1901 (Cth) (“AIA”), the following are relevant sections:

s15AA which states:

In interpreting a provision of an Act, the interpretation that would best achieve the purpose or object of the Act (whether or not that purpose or object is expressly stated in the Act) is to be preferred to each other interpretation.

s15AB, which relevantly states:

(2) Without limiting the generality of subsection (1), the material that may be considered in accordance with that subsection in the interpretation of a provision of an Act includes:

  1. any explanatory memorandum relating to the Bill containing the provision, or any other relevant document, that was laid before, or furnished to the members of, either House of the Parliament by a Minister before the time when the provision was enacted;
  2. any document (whether or not a document to which a preceding paragraph applies) that is declared by the Act to be a relevant document for the purposes of this section;

Business Grants

As stated at paragraph 3.6 above both CRC and CRC-P grants are administered by the Business Grants Hub, I make the following observations:

The webpage describes:

Cooperative Research Centres Projects (CRC-P) Grants:

Cooperative Research Centres Projects (CRC-P) Grants provide funding for short-term research collaborations. Find out how to apply for a CRC-P Grant to develop a new technology, product or service.

Cooperative Research Centres (CRC) Grants – Round 25:

Cooperative Research Centres (CRC) Grants provide funding for medium to long-term, industry-led research collaborations. Find out about CRC Grants and how to help improve the competitiveness, productivity and sustainability of Australian industries.

Defence Cooperative Research Centres Program:

The Defence CRC Program links industry with researchers to deliver game-changing Defence capabilities. Find out how to participate in a Defence CRC.

  • the webpage does not list any other grants or programs relating to cooperative research centres;
  • if there were other grants for example CRC-Q., CRC-R, etc it is reasonable to conclude that those grants were established under the broader CRC program and were different streams of the program (see paragraph 3.9 above)
  • however, there are only two grants established other than the CRC (being CRC-P and a second for defence);
  • based on those it is reasonable to conclude that this has been established as a separate program to the CRC;
  • the defence CRC is not referred to anywhere else in the CRC material and is kept separate;
  • CRC-P is also listed separately on the webpage, if the programs were intended to be one (CRC) then they would be listed under the same program or grant and be listed as separate ‘streams’.

Statutory Interpretation

I make the following further comments on whether the CRC-P program is to be included in the definition of CRC:

  • this is an issue of statutory interpretation as whether previously drafted legislation is taken to include later legislative instruments;
  • the legislation that governs interpretation of Commonwealth statutes is the Acts Interpretation Act 1901 (Cth) (“AIA”), the following are relevant sections:

s15AA which states:

In interpreting a provision of an Act, the interpretation that would best achieve the purpose or object of the Act (whether or not that purpose or object is expressly stated in the Act) is to be preferred to each other interpretation.

s15AB, which relevantly states:

(2) Without limiting the generality of subsection (1), the material that may be considered in accordance with that subsection in the interpretation of a provision of an Act includes:

  1. any explanatory memorandum relating to the Bill containing the provision, or any other relevant document, that was laid before, or furnished to the members of, either House of the Parliament by a Minister before the time when the provision was enacted;
  2. any document (whether or not a document to which a preceding paragraph applies) that is declared by the Act to be a relevant document for the purposes of this section;

Previous Court Decisions

The Courts has previously shown that in decided statutory interpretation cases they will be cautious when relying on extrinsic materials. The below are examples to demonstrate this:

In R v Boulton; Ex Parte Douglas Beane22 the Court stated:

the words of a Minister must not be substituted for the text of the law … It is always possible that through oversight or inadvertence the clear intention of the Parliament fails to be translated into the text of the law. However unfortunate it may be when that happens, the task of the Court remains clear. The function of the Court is to give effect to the will of Parliament as expressed in the law;

The case and statement above has been followed in several subsequent cases;23

In Alcan24 Moshinsky J referred to the words of French CJ and Gaurdron J stated:

After stating that the starting point in considering the question of construction was ‘the ordinary and grammatical sense of the statutory words to be interpreted having regard to their context and [the] legislative purpose’, [French CJ] said:25

That proposition accords with the approach to construction characterised by Gaudron J in Corporate Affairs Commission (NSW) v Yuill as: ‘dictated by elementary considerations of fairness, for, after all, those who are subject to the law’s commands are entitled to conduct themselves on the basis that those commands have meaning and effect according to ordinary grammar and usage.’26

Considering this further in cases interpreting revenue statutes:

In Cooper Brookes27 the High Court stated:

In revenue statutes as in other cases, the Courts must ascertain the legislative intention from the terms of the instrument viewed as a whole;

In Westraders28 Barwick CJ stated:

“It is for the Parliament to specify, and to do so, in my opinion, as far as language will permit with unambiguous clarity, the circumstances which will attract an obligation on the part of the citizen to pay tax”.

When this is understood in the context of 5.2.1 revenue legislation is often now no longer automatically construed in favour of the taxpayer;

The Courts may also look to the purposes of the legislation:

Dawson J in Mills v Meeking29 stated:

The approach required by s.35 needs no ambiguity or inconsistency; it allows a court to consider the purposes of an Act in determining whether there is more than one possible construction. Reference to the purposes may reveal that the draftsman has inadvertently overlooked something which he would have dealt with had his attention been drawn to it and if it is possible as a matter of construction to repair the defect, then this must be done. However, if the literal meaning of a provision is to be modified by reference to the purposes of the Act, the modification must be precisely identifiable as that which is necessary to effectuate those purposes and it must be consistent with the wording otherwise adopted by the draftsman. Section 35 requires a court to construe an Act, not to rewrite it, in the light of its purposes.

In applying this, the Full Court of the Federal Court stated in R v L30:

The requirement of sub-s.15AA(1) that one construction be preferred to another can have meaning only where two constructions are otherwise open, and sub-s.15AA(1) is not a warrant for redrafting legislation nearer to an assumed desire of the legislature: Trevisan and Another v. Commissioner of Taxation (1991) 29 FCR 157 at 162 per Burchett J. As Bowen CJ said in Re Application of The News Corp Ltd (1987) 15 FCR 227 at 236:

“A more important rule in this context is that embodied in s.15AA of the Acts Interpretation Act 1901 (Cth) requiring the court to lean towards the construction that will promote the purpose of the Act. In the end the task of the court is to ascertain and to enforce the actual commands of the legislature: Scott v. Cawsey [1907] HCA 80; (1907) 5 CLR 132 at 155. This will best be achieved by studying the words used and the context and the purpose or object underlying the Act.”

Additional Comments

The comments of the then Hon. Chief Justice Gleeson regarding the intention of legislation:31

…of course, the practical and political reality is that doubts about the meaning of statutes may arise because the problem that confronts a court is one on which there never was any relevant intention, perhaps because the problem was overlooked, or perhaps because it was politically inexpedient to deal with it clearly. Furthermore, issues of statutory construction may involve competing policy considerations such that it is politically difficult to reverse a judicial decision. Even so, if there is a question about what an Act of Parliament means, the ultimate authority and, therefore, the ultimate responsibility, is with Parliament. If Parliament has been misunderstood, it can correct the misunderstanding by exercising its power of amendment.

The views of the Hon. Chief Justice Gleeson show that it was available to the Parliament to make their intentions clear, either through updated legislation or specifically drafted Legislative Instruments.

In which case it makes it suitable to consider the background and enactment of the legislation for the CRC-P program.

Principal Legislation

The principal legislation (Division 355) was enacted prior to the establishment of the CRC-P program:

  • for this reason, the program is not referenced anywhere in ITAA97 or in the explanatory memorandum;
  • when the CRC-P program was established, Parliament did not amend the legislation even though it had sufficient and prior opportunity to do so;
  • in applying the case mentioned at 5.3.1 there appears to have been some oversight by Parliament when introducing the CRC-P program:
    • Parliament may have intended that the CRC and CRC-P be considered the same program, however, the written law does not reflect this;
    • it is not the role of the Court to read into the will of the Parliament as expressed in the written law;
  • in considering subsequent cases at paragraph 5.3.3 above:
    • we should look to the ordinary meaning and grammar of the words in legislation;
    • from that it is important to consider the ordinary meaning of CRC program, to be that program alone as established by Legislative Instrument; and
    • it is not reasonable to read in any other program established by Legislative Instrument as that would not fit the ordinary meaning of the provisions;

Separate Instruments

  • the programs are established by two separate Legislative Instruments;
  • numerous and unrelated industry research programs have been established by other Legislative Instrument;
  • it is not reasonable to consider those unrelated programs as part of the CRC program;
  • it is further unreasonable to consider two or more of the unrelated programs as being linked to one another in the absence of further records to that effect;
  • in addition, if those programs are to be considered as separate programs by virtue of their establishment by separate Legislative Instruments, then it is consistent to apply the same reasoning to the CRC and CRC-P Legislative Instruments (that is each Legislative Instrument establishes a separate program);
  • at the creation of the program described in paragraph 3.2.5 above the CRC-P program was incorporated in DISR’s budget statements;32 this can be interpreted as being purely for administrative reasons that is they are two separate programs being dually administered by the DISR;
  • in addition, if the intent was for the two programs to be one program, it was available for the Minister to create them in the same Legislative Instrument and create them in line with the recommendations of the review (that is as different “streams”) this was not done in this case;
  • additionally:
    • despite the programs being governed by the same department and described in policy documents as the same program, this is not conclusive that they are the same program and is a misunderstanding of the legislation by the department; or
    • this is done purely for administrative purposes, it would be unreasonable for the two programs to be administered differently and administered differently by different departments; and
  • the view that the administration of the programs being the same is not a strong position that they are the same program;

Powers of Parliament

Also noted is that there is an interplay between the Courts and the Parliament in determining the meaning of legislation:

  • it is not the role of the Courts to rewrite or alter the legislation;
  • only the Parliament has the power to amend legislation;
  • Parliament has had sufficient opportunity to amend the legislation to include CRC-Ps in the legislation;
  • in this view if Parliament has been misunderstood, it is the Parliament that has the sole power of amendment to correct the misunderstanding:
    • the recommendations were published in 2015, the CRC-P program was established in its first form in 2017;
    • accordingly, the Parliament has had sufficient opportunity to amend the legislation and include the CRC-P into the CRC provisions;
  • there are numerous ways they could have done this:
    • creating a new section for CRC-Ps;
    • amending s355-580 to remove ambiguity; and
    • amending the definition of CRC entity;
  • further based on what is stated earlier it is not the role of the Courts to amend legislation, but to interpret the legislation as it is written, had the Parliament intended to include CRC-Ps into the legislation, it would have done so; and
  • as the law is written a CRC-P is not expressly included in the CRC program.

Conclusion

The ambiguity creates uncertainty whether CRC-P funding is CRC funding or not CRC, however:

  • the structure of IRDA and its history (as set out in paragraph 3 above) indicates that the CRC-P program sits along side the CRC program, rather than being a subsidiary part of the program;
  • the structure of the business grants, including the naming and description of the CRC and CRC-P programs indicates that the common language in their names is related more to the similarity of commonly used words (such as “program” and “research”) as opposed to CRC-P being a subset of CRC for the reasons set out in paragraph 4 above; and
  • in considering appropriate construction of the statute including its legislative history, interplay with other sections, the lack of updating or clarification over time, and an ordinary reading of the legislation (as set out in paragraph 5 above) CRC and CRC-P appear to be separate programs.

Summary

If an entity is a CRC entity, then the provisions set out in s355-580 will apply and the recoupment provisions in s355-440 will not. However, if the entity is a CRC-P entity and therefore not a CRC entity, it is arguable that the provisions in s355-580 will not apply to the CRC-P. Instead, the recoupment provisions in s355-440 will apply to the CRC-P entity. This will potentially allow a CRC-P entity to notionally deduct expenditure, where those funds are derived from places such as Commonwealth grants.

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