Income tax: when are 'Factor (f)' payments derived by pharmaceutical companies?

Payments derived by pharmaceutical companies under the Factor (f) program are assessable under either section 6-5 or section 15-10 of the Income Tax Assessment Act 1997 (ITAA 1997). In accordance with Taxation Ruling TR 98/1 Income tax: determination of income; receipts versus earnings, recipients of Factor (f) payments should account for them by the method that is most appropriate to their business operations. However, subject to subsection 6-5(4) and subsection 6-10(3) of the ITAA 1997, they would generally be regarded as being derived when received by the taxpayer. It is at this time that the recipient has to account for the payments for tax purposes.

Prices for pharmaceutical products listed under the Pharmaceutical Benefits Scheme are negotiated by the Pharmaceutical Benefits Pricing Authority and pharmaceutical companies. One of the eight factors to be considered when negotiating prices is the level of Australian activity pricing guideline known as Factor (f) which allows for higher notional prices to be paid to a company in return for approved programs of development and a significant commitment to local production, research and development.