| Subject: Research and development---info. |
Author:
Steve Bonkers.
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Date Posted: 08:21:50 02/03/02 Sun
Example 2.1 Manufacturing Co Pty Ltd is developing a new manufacturing process to produce widgets in a revolutionary way. It has constructed an experimental production scale plant to test this process, at a cost of $1,000.
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This plant has an effective life of 10 years (ignoring any risk that it will not be able to be successfully developed for production use see paragraph 2.16), and its R&D use of testing, analysis and modification commences on 1 July in Year 1. In the initial stages of the R&D activities carried on, output from the machine was of poor quality and of little resale value.
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In Year 2, however, modifications and adaptations made to the plant during the course of the R&D activities have resulted in much improved quality and output. As a result, the R&D activities cease at the end of the second year and the plant is used in production from then on.
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Year 1 feedstock output $50 feedstock inputs $150 depreciation (diminishing value 15% $1,000) $150 As there is no excess of feedstock outputs over inputs in Year 1, the full amount of depreciation remains eligible for deduction at 125% (i.e. deduction is $187.50).Year 2 feedstock output $250 feedstock input $150 depreciation (15% $850) $127.50 The excess of feedstock output over input is $100. Consequently, the R&D depreciation amount of $127.50 is deductible in the following way: deductible at 100%: $100 (i.e. deduction is $100) deductible at 125%: $27.50 (i.e. deduction is $34.38)
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Effective life
2.16 Where it is reasonably likely that a company will use a unit of plant for the purposes of carrying on R&D activities, the plants effective life under Division 42 of the ITAA 1997 will be the longest period for which the plant can be used for R&D purposes, for assessable income purposes, or for exempt income producing purposes.
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That is, the effective life of the asset will be the longest period of use resulting from any one, or combination of 2 or more, of the purposes. [Schedule 2, Part 3, item 11, paragraph 73BN(2)(a)]
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2.17 Further, in determining the effective life, it is to be concluded that the plant will not be scrapped because of the inherent technical risk of the R&D activities. In the event that the technical risk in the R&D activities should result in the early scrapping of the plant, the balancing adjustment provisions will ensure that the appropriate concessional write-off is given (see paragraphs 2.18 to 2.20). [Schedule 2, Part 3, item 11, paragraph 73BN(2)(b)]
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