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R&D Grant - what is a "constructive payment"

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Newbie

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Hi. I am hoping someone out there can please explain to me what is meant by the term "a constructive payment" in relation to Section 3.68 in the TAX LAWS AMENDMENT (RESEARCH AND DEVELOPMENT) BILL 2010. I have copied and pasted the section from the bill below.

 

If the R&D entity incurs an amount of expenditure to an associate and pays the amount in the same year, that amount is deductible in that year (assuming other conditions are satisfied).  Payment has its general legal meaning in the income tax law, which includes constructive payment.  Therefore, in working out whether an R&D entity has paid an amount to another entity, and when the payment is made, the amount is taken to be paid to the other entity when the R&D entity applies or deals with the amount in any way on the other’s behalf, or as the other directs. 

 

Thanks

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Hi @troy_rowe

 

Thanks for your patience whilst we received specialist information regarding your query.

 

An eligible company cannot claim a deduction for certain 'unpaid wages' under subsection 73B(14) of the Income Tax Assessment Act 1936 (ITAA 1936)?  The company cannot claim a deduction under subsection 73B(14) of the ITAA 1936 in respect of the 'unpaid wages' that have not been incurred by the company. For deductions to be allowable under section 73B of the ITAA 1936, a number of eligibility requirements must be satisfied. The unpaid amounts of salary or wages represent at best, only contingent liabilities, and not presently existing liabilities to which the company is definitely committed in the years of income in question. Therefore, the company has not incurred the unpaid salary and a deduction is not available under subsection 73B(14). You can find more information in ATO ID 2006/238 Research and development: unpaid wages

 

If you lent money to the company, then there should be a loan account whereby the company should be making principal and interest payments to pay off the loan. If this is the case then the payments may not necessarily be salary/wages but loan repayments.


If the payments from the company are salary/wages, then your tax and superannuation obligation are required to be met i.e. the company must withhold PAYGW on constructive payments and you must declare the income in your tax return.

 

While we can provide general information here about tax and super, if you'd like to receive a more tailored response relating to your specific circumstances it's recommended you write to us to request a private ruling. Private rulings is binding advice that sets out how tax law applies to you.

 

Thanks, JodieH. 

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Devotee

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Hi @troy_rowe 

 

"...the amount is taken to be paid to the other entity when the R&D entity applies or deals with the amount in any way on the other’s behalf, or as the other directs".

 

This leaves things pretty wide open. Essentially, it provides for a whole host of non-direct and/or non-cash options to be accepted counted "payment".

 

E.g. You owe me $50. I owe Tom $50. I ask you to pay Tom instead of paying me directly. You have made a constructive payment to me when you pay Tom.

 

E.g. You owe me $50. I owe you $50. We agree to write-off our debts. You have made a constructive payment when you write-off my debt.

 

E.g. You eat dinner at my restaurant but your credit card is declined. You have made a constructive payment to me when you finish washing the dishes.

 

JF

 

This is my personal view; I’m an ATO employee who chooses to help out here in my own time.

Newbie

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Thanks for the in depth reply James.

 

Can I ask this: if I choose to pay myself a wage for the year and simply pay myself the 'after tax' amount through my loan account (in lieu of actual cash payment once the business commercialises the R&D project - essentially so cash stays in the business) is that considered payment?

 

Regards

Troy

Community Support

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Hi @troy_rowe,

 

Thanks for getting in touch!
 
We're checking information with a specialist area regarding your query and we hope to get back to you with more information as soon as possible.
 
Thanks @JodieM

Best answer

ATO Certified

Community Support

Replies 0

Hi @troy_rowe

 

Thanks for your patience whilst we received specialist information regarding your query.

 

An eligible company cannot claim a deduction for certain 'unpaid wages' under subsection 73B(14) of the Income Tax Assessment Act 1936 (ITAA 1936)?  The company cannot claim a deduction under subsection 73B(14) of the ITAA 1936 in respect of the 'unpaid wages' that have not been incurred by the company. For deductions to be allowable under section 73B of the ITAA 1936, a number of eligibility requirements must be satisfied. The unpaid amounts of salary or wages represent at best, only contingent liabilities, and not presently existing liabilities to which the company is definitely committed in the years of income in question. Therefore, the company has not incurred the unpaid salary and a deduction is not available under subsection 73B(14). You can find more information in ATO ID 2006/238 Research and development: unpaid wages

 

If you lent money to the company, then there should be a loan account whereby the company should be making principal and interest payments to pay off the loan. If this is the case then the payments may not necessarily be salary/wages but loan repayments.


If the payments from the company are salary/wages, then your tax and superannuation obligation are required to be met i.e. the company must withhold PAYGW on constructive payments and you must declare the income in your tax return.

 

While we can provide general information here about tax and super, if you'd like to receive a more tailored response relating to your specific circumstances it's recommended you write to us to request a private ruling. Private rulings is binding advice that sets out how tax law applies to you.

 

Thanks, JodieH. 

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