Expenditure related to buildings

Expenditure incurred to acquire or construct a building, part of a building, or an extension, alteration or improvement to a building, is ineligible for a notional R&D deduction – even if that construction is to create an R&D facility such as a laboratory or pilot plant.

For R&D entities working in the construction industry, this exclusion is particularly troublesome if the experiment is ‘live’, such as a new construction technique. Experimentation is only eligible if it is off-site as a trial build or there is a mock-up which is disassembled before the actual construction is started.

There is an ATO tax alert TA 2017/2 explaining their concerns in this circumstance.

Expenditure on the construction of plant and equipment within the building (that forms part of a depreciating asset) can be claimed to the extent that it is used for conducting R&D experimentation (or producing materials for use in an experiment) under the decline in value eligibility.

When creating a pilot plant or similar facility, it is therefore important to differentiate what work is to be part of the building, and what work is to be part of the plant. Those rules are defined in the tax legalisation (within ITAA 1997):

Division 43 describes what expenditure is part of a building, and what is excluded.

Division 40 describes what expenditure can be included in the cost base of an asset.