Issue
Is a company eligible under section 73J of the Income Tax Assessment Act 1936 (ITAA 1936) to choose a research and development tax offset when two or more exempt entities, together with their affiliates, at any time during the tax offset year, own interests in the company carrying between them at least 25% of voting rights or rights to a distribution of income or capital?
Decision
No. The company will not be eligible under section 73J of the ITAA 1936 to choose a research and development tax offset when two or more exempt entities, together with their affiliates, at any time during the tax offset year own interests in the company carrying between them at least 25% of voting rights or rights to a distribution of income or capital, because subsection 73J(2) of the ITAA 1936 will prevent the choice.
Facts
During the tax offset year, the shareholdings in the company were comprised of a number of tax paying entities and tax exempt entities.
One of the tax paying entities was an affiliate of one of the tax exempt entities.
The total shareholdings of the tax exempt entities in the company did not exceed 25%.
The total shareholdings of the tax exempt entities and the affiliate of one of the tax exempt entities in the company exceeded 25%.
The shareholdings carried with them voting rights and rights to distributions of income or capital.
The company incurred research and development expenditure during the income year and satisfied the eligibility requirements of subsection 73J(1) of the ITAA 1936.
Reasons for Decision
Section 73J of the ITAA 1936 provides that a company will be eligible to choose a tax offset rather than a deduction for research and development expenditure if it satisfies certain requirements contained in subsection 73J(1) of the ITAA 1936.
However, even though the requirements of subsection 73J(1) of the ITAA 1936 may be satisfied, subsection 73J(2) of the ITAA 1936 provides that an eligible company will not be able to choose the tax offset for the relevant year, if: • an exempt entity • the affiliates of an exempt entity • an exempt entity together with its affiliates; or • two or more exempt entities at any time during the tax offset year, legally or beneficially own, or have the right to acquire, the legal or beneficial ownership of: (a) interests in the company that carry between them the right to exercise or control the exercise of, at least 25% of the voting power in the company; or (b) interests in the company that carry between them the right to receive at least 25% of any distribution of income or capital by the company.
Subsection 73J(2) of the ITAA 1936 does not prescribe four separate tests. Rather, as paragraph 3.10 of the Explanatory Memorandum to the Taxation Laws Amendment (Research and Development) Act 2001 (the Explanatory Memorandum) states: ... a company will not be eligible for the tax offset where at least 25% of the voting power or 25% of the right to distributions from the company is held, legally or beneficially by an exempt person (or 2 or more exempt persons), or the affiliates of an exempt person, or any combination thereof [emphasis added].
Indeed, under the ordinary rules of statutory interpretation, there is a presumption that words in the singular include the plural and vice versa. The primary authority in Australia in relation to that presumption is Blue Metal Industries v. Dilley (1969) 117 CLR 651. At page 656, the Privy Council stated that: It follows that the mere fact that the reading of words in a section suggests an emphasis on singularity as opposed to plurality is not enough to exclude plurality. Words in the singular will include the plural unless contrary intention appears. But in considering whether a contrary intention appears there need be no confinement of attention to any one particular section of an Act. It must be appropriate to consider the section in its setting in the legislation and furthermore to consider the substance and tenor of the legislation as a whole.
This common law rule was enacted by section 23 of the Acts Interpretation Act 1901 (Cth), which provides that '[i]n any Act, unless the contrary intention appears ... words in the singular number include the plural and words in the plural number include the singular'.
Neither the words of subsection 73J(2) of the ITAA 1936, nor the Explanatory Memorandum, disclose any intention to confine the operation of the exception to companies in whom the requisite ownership of interests is held by two or more exempt entities together, or by a single exempt entity together with its affiliates. To the contrary, the Explanatory Memorandum demonstrates that the subsection was intended to cover situations in which the prohibited ownership consists of the holdings of two or more exempt entities together with their affiliates.
The combined shareholdings of the company during the tax offset year of tax exempt entities and an affiliate of one of the tax exempt entities exceeded 25%.
Accordingly, the company will be ineligible to choose a tax offset because two or more exempt entities, together with their affiliates, at any time during the tax offset year owned interests in the company carrying between them at least 25% of voting rights or rights to a distribution of income or capital.