Aim

The aim of the proposal is to reduce uncertainty in the tax treatment of research and development (R&D) expenditure by clarifying when R&D expenditure is immediately deductible.

Summary of Proposal

Broadly, the proposal permits taxpayers immediately to deduct for tax purposes R&D costs that are treated as an immediate expense for accounting.

In essence, all R&D would be immediately deductible for tax unless the expenditure gives rise to an identifiable and valuable asset under paragraph 5 of the accounting standard for R&D.

Details of Proposal

These will be discussed in a discussion paper which will be released for public consultation.

R&D expenditure that is treated as an immediate expense under paragraph 5 of FRS-13 in the year it is incurred will be immediately deductible for tax purposes provided the link with the income earning process is satisfied.

This means that all expenditure on research will be immediately deductible for tax purposes. Expenditure on development will be immediately deductible unless and until all of the following criteria contained in paragraph 5 are satisfied -

1. the product or process is clearly defined and the costs attributable to the product or process can be identified separately and measured reliably;

2. the technical feasibility of the product or process can be demonstrated;

3. the entity intends to produce and market, or use, the product or process;

4. the existence of a market for the product or process or its usefulness to the entity, if it is to be used internally, can be demonstrated;

5. adequate resources exist, or their availability can be demonstrated, to complete the project and market or use the product or process.

Only development costs incurred after all the criteria are satisfied will not be automatically immediately deductible for tax. (They may be deductible under existing provisions.)

Taxpayers will need to comply with paragraph 5 of FRS-13 in relation to R&D costs (including costs that are immaterial for accounting) in order to obtain the benefit of the proposal. Existing provisions will continue to apply to taxpayers who are not required to comply with paragraph 5 and who choose not to. This means that no one will be disadvantaged by the proposal relative to current treatment.