Finance Scheme Guidelines

No. 2 of 1995

The Industry Research and Development Board formulates the following guidelines under subsection 39EA(1) of the Industry Research and Development act 1986.

Dated Twenty Second Day of November 1995

John Bertrand

Chairman

Industry Research and Development Board

Contents

 Guidelines for Eligibility of Finance Schemes

 Notes to Guidelines

  Overview

  Content of Marketing Plan

  Other Information

Citation

1. These guidelines may be cited as the Finance Scheme Guidelines No. 2 of 1995.

[NOTE: These guidelines commence on gazettal: see Acts Interpretation Act 1901, ss. 46A

and 48].

Authorisation

2.        These guidelines, which are made under section 39EA of the Industry Research and Development Act 1986 (“the Act”), enable eligible companies to ascertain whether finance schemes in relation to research and development activities carried on, or proposed to be carried on, by them will be taken to be ineligible finance schemes for the purposes of Part IIIA of the Act.

Revocation

3.        Subject to guideline 4, these Guidelines replace the guidelines previously made under subsection 39EA(1) of the Act.

Transitional Arrangements

4.        Finance Scheme Guidelines 1 of 1995 apply to a finance scheme where, prior to the date of gazettal of these Guidelines:

(i)  an application was submitted for an advance ruling in relation to that finance scheme, and the finance scheme is entered into no later than three months after the date of approval by the Board; or

(ii)     an application was submitted for joint registration under subsection 39P(3), and the finance scheme is entered into no later than three months after the date of registration by the Board; or

 (iii)  the finance scheme has been entered into.

Definitions

5.        Unless the contrary intention appears, the following definitions will apply in these Guidelines:

“net R&D expenditure” means the contract sum paid to the researcher, excluding any profit component, fees and other disbursements paid to the researcher;

“researcher” means the company that is a party to a finance scheme which undertakes, or manages the undertaking, of R&D activities;

“small business” means a manufacturing company with fewer than 100 employees or a service sector company with fewer than 20 employees (Australian Bureau of Statistics);

“syndicate” means companies that are either jointly registered, or applying in relation to joint registration under section 39P.

GUIDELINES FOR ELIGIBILITY OF FINANCE SCHEMES

6.        These Guidelines are formulated under section 39EA to enable eligible companies to ascertain whether finance schemes in relation to research and development activities carried on, or proposed to be carried on, by them will be taken to be ineligible finance schemes for the purposes of Part IIIA of the Act.  A finance scheme will not be taken to be ineligible by the Board if it complies with the following guidelines:

(a)     Where a finance scheme reduces the carry forward revenue tax losses of one or more parties to a finance scheme, the net R&D expenditure must be at least an amount equal to the application of the corporate tax rate to the carry forward revenue tax losses forgone by the researcher.  This requirement applies to each investor participating on a partially or fully guaranteed basis.  A concessional rate of four percentage points below the corporate tax rate shall apply if:

(і) net R&D expenditure does not exceed $AUD2,000,000; and

(ii) the researcher, or if more than one each of them, complies with the definition of a small business.

(b)     The level of investment not subject to any form of guaranteed return in a syndicate must be at least 10%.  An investor’s “at risk” investment must not be funded by way of a fee or disbursement originating from another party to the finance scheme, where the fee or disbursement would not have occurred in the absence of syndication.

(c)     Where a finance scheme involves the purchase of core technology by a syndicate, at least 50% of the total value of that core technology must have been:

(i) developed by the researcher; or

(ii) owned by the researcher for a period of at least two years prior to the date of application by the party or parties for approval of the finance scheme.

(d)     To the extent that core technology acquired by a syndicate is core technology of a kind not referred to in guidelines 6(c)(i) and 6(c)(ii) or technology the disposal of which by the researcher is not subject to capital gains tax, it must be a result of the overall arrangements that the deduction allowable to the investors in respect of core technology is matched, directly or indirectly by:

(i) the inclusion of an equivalent amount in the Australian taxable income of another person; or

(ii) the allowance of an equivalent amount in reduction of Australian carry forward revenue tax losses of the researcher.

(e)     Where a deduction is allowable to an investor in respect of payments made in relation to a finance scheme, other than in respect of core technology, it must be a result of the overall arrangements that the deduction is:

(i)       matched by an equivalent amount being included, directly or indirectly, in the Australian taxable income of another person; or

(ii)     being taken in reduction of Australian carry forward revenue tax losses of the researcher, unless the arrangements for payment of those amounts are explicable as ordinary business dealings.

(f)      The value of the core technology allowable as a deduction under the scheme must not exceed the arm’s length commercial value of the core technology interests that are acquired.

(g)     If a finance scheme relates to the R&D activities of a company registered, or proposing to be registered, under section 39J of the Act, the core technology expenditure allowable as a deduction as part of the scheme must not exceed the net R&D expenditure.

(h)     It must be evident from the form and substance of the transactions relating to the finance scheme that the primary purpose of the parties is to fund research and development and commercialise the output of the R&D activities, not profit through tax effective arrangements.

(i)       Companies seeking joint registration must be able to demonstrate prior to registration that commercialisation of the results of the R&D activities is likely to result in a substantial net benefit to the Australian economy.  This benefit may be demonstrated by commitment to manufacturing of R&D outputs in Australia, retention of profits from commercialisation in Australia, net taxation returns to the Commonwealth, spillover impacts, etc.

(j)       Unless the Board otherwise determines, the amount of the net R&D expenditure funded by any single syndicate arrangement that involves a guaranteed investor must not exceed $AUD15,000,000.

(k)     A company registered under section 39J or companies registered jointly under section 39P must have exclusive rights to use and exploit any core technology in respect of which a deduction is to be claimed.

(l)       No participant in a finance scheme can be in receivership, in liquidation or under administration.

(m)   A researcher utilising tax losses cannot participate in more than three registered syndicates.

(n)     Companies seeking joint registration must be able to demonstrate prior to registration the commercial potential of the output of the R&D through a marketing plan, as outlined in guideline 15 below.

7. Notwithstanding guideline 6, a finance scheme may, in exceptional circumstances, be declared by the Board not to be ineligible if, having regard to the form and substance of the scheme, and with reference to the principles in guideline 9, it would be appropriate to do so.

8. Notwithstanding guideline 6, where an application made in relation to registration under section 39P:

(a)      includes a finance scheme; and

(b)     that scheme complies with guideline 6,

the Board may, having regard to section 39EA and the principles contained in guideline 9, form the opinion that the finance scheme involves undue exploitation of the Guidelines and declare the scheme to be ineligible.

9. For purposes of exercising its powers and functions under guidelines 7 and 8, the Board will have regard to the following principles:

(a)  it must be clear on objective examination that the primary purpose of the parties entering into a finance scheme arrangement is to fund R&D and commercialise the output of that R&D activity, not profit through tax effective arrangements;

(b)  the finance scheme is not to contain financial, legal or administrative arrangements contrived to avoid the intent of these Guidelines;

(c)  a party to a finance scheme must bring substantial R&D, commercialisation skills, experience, resources, or capital to the project;

(d)  amounts receivable under or in connection with a finance scheme are not to be sheltered from Australian tax otherwise than through the absorption of researcher carry forward revenue tax losses;

(e)  the researcher must have developed (or owned for at least two years) the majority of the core technology used by the syndicate;

(f)  In relation to applications for joint registration;

(i)       there must be a significant commercialisation potential for the output of the R&D and a demonstrated route to market; and

(ii)     the commercial exploitation of the results of the R&D must be expected to provide a substantial net benefit to the Australian economy.

NOTES ON GUIDELINES

OVERVIEW

10. The Act provides for two forms of registration with the Industry Research and Development Board (the Board):

 (a) registration for individual eligible companies under section 39J of the Act; and

 (b) joint registration under subsection 39P(3) of the Act.

Under subsection 39P(3), before the Board can register companies jointly, it must be of the opinion that, among other things, the finance scheme in relation to the research and development activities is not an ineligible finance scheme.

11. Subsection 39EA(3) of the Act provides that, in making finance scheme guidelines, the matters to which the Board is to have regard include, but are not limited to:

 (a) the manner in which the scheme was entered into or carried out;

 (b) the form and substance of the scheme;

 (c) matters relating to the research and development activities to which the scheme relates; and

 (d)  the likelihood that section 73CB of the Income Tax Assessment Act 1936 will apply to expenditure incurred in connection with the research and development activities to which the scheme relates.  (This section relates to the role of tax-exempt organisations in syndication).

12. Subsection 39EA(4) of the Act provides that the Finance Scheme Guidelines may confer powers and functions on the Board.

13. The purpose of these guidelines is to enable eligible companies to ascertain whether a proposed finance scheme in relation to R&D activities will be taken to be an ineligible finance scheme for the purposes of Part IIIA of the Act.

The Guidelines are also used to:

 (a) enable the Board to form an opinion as to whether or not there is or was an ineligible finance scheme in relation to particular R&D activities for the purposes of registration under section 39 P(3);

 (b) enable the Board to form an opinion as to whether or not there is or was an ineligible finance scheme in relation to particular R&D activities for the purposes of issuing a certificate under section 39MA; and

 (c) assist companies, served with a notice stating that the Board is considering issuing a certificate under section 39MA, to make submissions to the Board in relation to their finance scheme[1].

14. The Board presently allows applications for a ruling on the eligibility of a finance scheme in advance of registration (an ‘advance ruling’).  In forming an opinion on the eligibility of the scheme in response to a request for an advance ruling, the Board will apply these guidelines.

CONTENT OF MARKETING PLAN

15. The Marketing Plan, referred to in guideline 6(n), must address as many of the following factors as are relevant:

 (a) background and profiles of the parties to the finance scheme, including any previous involvement in government grants and the R&D tax concession;

 (b) evidence of resources, experience and a proven track record in commercialising technology, or of the ability to undertake the proposed commercialisation activities, for example demonstrated by commercialisation partners;

 (c) a broad description of the industry in terms of market size and demand in Australia and the world for the R&D outputs (in units and dollars);

 (d) the needs of the market that the R&D output will address, identifying opportunities to increase market share or market size or create new markets from the R&D program;

 (e) identification of any barriers to entry, such as legal, environmental, cultural or political factors or required standards;

 (f) an evaluation of strengths and weaknesses of rival products, including an explanation of how the new technology outcome will gain market acceptance and sustain a competitive advantage, any market research which supports the need for the new technology, and the product life cycle;

 (g) an identification of target markets for the R&D outcomes, including estimated market share and revenue (in units and dollars);

(h)    a description of how the R&D output was or will be marketed, that is, marketing channels that were or will be used including an explanation of why these distribution channels were adopted, and the arrangements that have been or will be entered into in order to successfully and effectively distribute the R&D outcome (eg royalty arrangements);

 (i) a description of the reputation of the associated international marketing alliances and how they will benefit the commercialisation of the R&D output;

 (j) an estimation of the export/import replacement impact from commercialisation of the R&D output and its overall benefit to the Australian economy;

 (k) a description of potential future applications of the technology which do not fall within the markets defined above or the R&D program in relation to new markets and products;

 (l) outputs from the R&D program should require minimal development after the end of the R&D program to produce the outcome(s) analysed in the commercialisation plan.  While it is acknowledged that the length and amount of further development typically differs by industries, the route to market must be known at the outset;

 (m) if the commercialisation party does not have a proven track record in commercialising similar research and development output then arrangements should be in place to obtain access to marketing expertise or a marketing partner should be identified in the plan; and

 (n) the plan must identify commercialisation milestones for purposes of monitoring progress with exploitation of the outputs of the R&D.

other information

16. For the purposes of registration under section 39P, it is the responsibility of the applicant to provide full and complete disclosure of the proposed finance scheme.  Under the Act, companies registered under section 39P or section 39J must give to the Board any information requested by the Board which is needed for the purposes of performing the Board’s functions.  In particular, the Board will expect to receive the following background information:

 (a) the age, amount, and origin of core technology;

 (b) certification that the core technology is to be acquired for no more than its arm’s length market value;

 (c) involvement of foreign entities;

(d) source of tax losses;

(e) the corporate structure of the participants;

(f) degree, nature and reason for R&D activities being sub-contracted;

(g) on-going association between the parties;

(h) any involvement of tax-exempt organisations;

(i) use of recently incorporated organisations; and

 (j) details of the costing for the proposed R&D.

17.         An advance ruling made by the Board in respect of a finance scheme is a decision for the purposes of internal review under Section 39S of the Act.  A decision of the Board under section 39S is reviewable by the Administrative Appeals Tribunal under section 39T.

More detailed information on the concession can be found in:

•   150% R&D Tax Incentive - Guide To Benefits
•        the Income Tax Assessment Act 1936, specifically Section 73B
•        Part IIIA of the Industry Research and Development Act 1986

and by contacting the Board either in writing or by telephone as set out below:

The Director

Syndication and Performance Monitoring Section

Office of AusIndustry

Department of Industry, Science and Technology

GPO Box 2704 51 Allara Street              

CANBERRA ACT 2601 CANBERRA ACT 2601

Phone: (06) 276 1422 Fax: (06) 276 1091

Or the AusIndustry Hotline 132 846

[1] If a section 39MA certificate is issued to the Commissioner of Taxation, any deductions claimed by a company in respect of R&D activities related to that finance scheme could be disallowed