We are constantly seeking opportunities for our clients to gain the maximum possible value from their investment in innovation. As the end of the 2016 financial year approaches, it’s time to check that you have positioned yourself to achieve the maximum possible advantage from Government grants and funding available for IP and R&D.

1. Are you in a trust structure or are you an individual conducting R&D activities?

Only companies can access a refund associated with the R&D Tax Incentive.

2. Has your company had a change in shareholding during the 2016 year?

Changes in shareholding can adversely impact access to the refundable R&D Tax Credit.

3. Are you capitalising certain R&D expenditure?

Access to immediate R&D deductions for certain capitalised expenditure.

4. Have you conducted R&D activities overseas?

Overseas R&D activities must be registered by the end of the financial year – i.e. 30 June 2016.

5. Have you incurred R&D expenditure with an ‘associate’?

Ensure payment of expenses incurred to ‘associates’ by 30 June.

6. Have you incurred expenditure on seeking export markets?

How to get your EMDG refund quicker.

7. Are you under the limit with some of your EMDG expense categories?

Optimising your R&D claim by bringing expenditure forward.

8. Are you the Public Officer of a company?

New disclosure obligations associated with transfer pricing.

9. Do you have transactions with international related parties?

Transfer pricing documentation reviews required.

10. Do you have intangible assets on the balance sheet?

Financial reporting requirements.

11. Tax amortisation opportunities.

12. Why is specialist valuation expertise helpful?

1. Are you in a trust structure or are you an individual conducting R&D activities?

Only companies can access a refund associated with the R&D Tax Incentive.

To be eligible to claim the R&D Tax Incentive, generally speaking you must be a company, and the company must not be undertaking the research and development as a trustee for a trust.

New businesses often set up specific corporate structures (such as trusts and trustee companies) for commercial reasons or to protect assets and intellectual property. Unfortunately, this type of structure can be problematic in trying to make an R&D claim.

Where R&D activities and costs take place within a trust, in some instances it is possible to access the R&D Tax Incentive, by implementing changes to the current corporate structure. Incorporation of a company, responsible for the conduct of R&D activities, will enable access to the R&D Tax Incentive and access to a generous rebate of 45₵ in the dollar for many start-ups and SMEs. If R&D expenditure has been incurred within a trust prior to the company’s incorporation, it is possible for the company to incur some or all of the costs, and access the R&D Tax Incentive. If you find yourself in this position and want to optimise your access to the R&D Tax Incentive for the 2016 year, there is still time to implement the changes necessary, so contact your Griffith Hack R&D advisor immediately.

2. Has your company had a change in shareholding during the 2016 year?

Changes in shareholding can adversely impact access to the refundable R&D Tax Credit.

To access the refundable tax credit (which provides a generous 45₵ in the dollar), the business must be under the $20 million aggregated turnover limit. The aggregate turnover amount takes into account the turnover of the business, as well as the turnover of all shareholders that hold a 40% or more shareholding of the business. This includes those shareholders who held a 40% or more shareholding at any time during the year. The turnover of affiliates also needs to be included in the calculation of ‘aggregate’ turnover and can include shareholders that have significant influence of the direction of the business, even if their shareholding is less than 40%.

The calculation of aggregate turnover can be very complex, especially where there are multiple shareholders, trusts and complex corporate structures. In order to confirm your access to the 45₵ in the dollar R&D tax refund, contact your Griffith Hack advisor.

3. Are you capitalising certain R&D expenditure? 

Access to immediate R&D deductions for certain capitalised expenditure.

Businesses should be aware that they may be able to claim an R&D tax offset for costs that have been capitalised for accounting purposes.

There are different rules relating to whether you can deduct certain business expenses for accounting, tax and R&D tax purposes. Even though a business intends to capitalise certain costs in its accounts, there may be an opportunity to review these costs to assess if all or part of the expenditure is eligible for an R&D tax offset.

The two main benefits of identifying costs that fall into this category of expenditure include:

  • You will receive an immediate deduction for the expense in your tax return, instead of claiming deductions for depreciation over the life of the asset. This deduction gives you a greater opportunity to keep cash in your business.
  • It increases your access to the R&D Tax Incentive, at either the 40% rate (for businesses with a turnover of more than $20 million) or 45% R&D tax offset (for businesses with an aggregate turnover of less than $20 million).

 Examples of costs that are often capitalised for accounting purposes, which should be considered for an immediate deduction in a company’s income tax return include:

  • Design costs related to designs that do not form part of a final asset.
  • Salary and wage payments to employees engaged wholly or partly in the development of an asset.
  • Wastage that occurs during the development of an asset.
  • Certain IP costs.

While IP acquisition costs are likely to be of a capital nature, some IP creation costs may be deductible for tax and/or eligible for an R&D tax offset.

4. Have you conducted R&D activities overseas?

Overseas R&D activities must be registered by the end of the financial year – i.e. 30 June 2016.

While the R&D Tax Incentive primarily rewards R&D conducted within Australia, you may be able to claim costs associated with activities conducted overseas. Overseas R&D activities can be included in an annual R&D Tax Incentive claim, but an Overseas Finding application must be lodged with AusIndustry by the end of the financial year in which the activities took place. For June year enders, this means by 30 June 2016.

If a company misses the 30 June deadline, any overseas activities cannot be claimed for that year, although Australian based R&D activities and costs are still eligible.

When lodging an Overseas Finding with AusIndustry, companies also need to demonstrate that:

  • The overseas activities have a ‘significant scientific link’ to one or more core R&D activities conducted in Australia.
  • The overseas activities could not be conducted in Australia for a valid reason. For example Australia lacks the facilities, expertise, equipment, population, geographical/geological features, etc.
  • The expenditure on these overseas R&D activities will not exceed the amounts to be spent on the Australian R&D activities.

Approved Overseas Findings will apply for the duration of the registered activities. If the overseas R&D activities extend more than 3 years, a new finding is now only required if they have significantly changed.

5. Have you incurred R&D expenditure with an ‘associate’?

Ensure payment of expenses incurred to ‘associates’ by 30 June.

In instances where a company is in losses and has access to the 45₵ in the dollar R&D rebate, if the company incurs R&D expenditure to an ‘associate’,  the expense must be constructively ‘paid’ prior to the end of the financial year in order to be an eligible R&D expense for that year.

A range of related entities and parties can be considered a company’s ‘associate’. The definition is very wide and can include the owners or subsidiaries of a company and any entities or persons that ‘sufficiently influence’ the company.

If amounts incurred to an associate remain unpaid at the end of the financial year, companies can elect to either:

  • claim a deduction under the normal income tax provisions (for example, the general deduction provision under s 8-1 of the Income Tax Assessment Act 1997 (Cth); or
  • include the amount in the calculation of its R&D tax offset in the year in which the amount is actually paid.

Given these options, it is important to understand that by claiming the deduction under a normal income tax provision, companies will forego the right to claim the amount for R&D tax purposes (and thus do not get the benefit of the 45₵ in the dollar refund). Accordingly, it is essential that companies seeking to claim the R&D tax offset for the 2016 financial year establish whether any expenditure has been incurred to an associate and, secondly, ensure that these amounts are paid prior to 30 June so they can be claimed for R&D tax purposes.

6. Have you incurred expenditure on seeking export markets?

How to get your EMDG refund quicker.

Applications for the 2016 EMDG program open from 1 July 2016 and refunds can be processed immediately following this date. Austrade generally assesses EMDG applications on a ‘first come, first served basis’.

Clients who lodge late in the program, either as self-lodgers or via non-accredited consultants, lodgement is due 30 November 2016. Grants will be assessed within a 10 to 14 week time frame. For those who use Austrade accredited consultants, such as Griffith Hack, lodgement is due 28 February 2017 and will also be assessed within a 10 to 14 week time frame. This delay in assessment is due to the fact that a significant proportion of EMDG claimants lodge their claim between November and February, placing significant stress on Austrade’s EMDG resources.

By organising your EMDG documentation now you can lodge your EMDG claim early in the grant year (i.e. July/August 2016). Austrade has indicated early lodgers will have their application reviewed in a 2-4 week timeframe, with payment of the grant shortly thereafter. Early payment of EMDG grants provides a significant cash flow advantage for claimants. In order to arrange early lodgement of your 2016 EMDG claim, please contact your Griffith Hack EMDG advisor.

7. Are you under the limit with some of your EMDG expense categories?

Optimising your R&D claim by bringing expenditure forward.

The ability to claim expenditure as part of a 2016 EMDG claim is dependent on ensuring that the expense was incurred in the 2016 grant year. In instances whereby a claimant has not reached maximum claim limits or where the claimant may not be eligible for an EMDG claim for the 2017 grant year (due to lack of export earnings), there is an opportunity to maximise the 2016 EMDG grant by bringing certain expenditure forward to the 2016 grant year.

In order to optimise your 2016 EMDG grant, this requires the expense be paid (by either the business or a director/employee of the business) by 30 June 2016.

By way of example, in order to access the maximum grant of $150,000, a claimant must incur $305,000 of eligible expenditure (reimbursed at 50₵ in the dollar, after the first $5,000). In instances where the maximum limit has not been reached, it may be possible to bring expenditure forward into the 2016 year, in order to maximise the chance of being awarded a maximum $150,000 grant. A specific example may be to request costs associated with protection of IP in overseas jurisdictions be billed by your service provider before 30 June 2016, taking into account the maximum expenditure cap of $50,000 for this category of expenditure. This expense will fall into the 2016 grant year, provided it is paid by either the business or a director/employee of the business, prior to 30 June 2016.

If you would like further information as to how to optimise your EMDG grant, please contact a Griffith Hack EMDG specialist.

8. Are you the Public Officer of a company?

New disclosure obligations associated with transfer pricing.

In signing a company’s income tax return, the Public Officer is confirming that all transfer pricing disclosures are accurate. Under Australia’s new Transfer Pricing rules, the Public Officer is now personally liable if statements made with respect to transfer pricing compliance (via signing the International Related Party Dealing schedule and income tax return), are found to be false or misleading.

Given the significant and material recent changes to Australia’s transfer pricing legislation, it is unlikely that existing documentation will enable a Public Officer to confirm the accuracy of a company’s transfer pricing position, particularly given the introduction of the ATO’s ‘reconstruction’ powers.

Prior to signing off on a company’s income tax return and transfer pricing documentation, we suggest that Public Officers ensure they have been briefed by their tax team or transfer pricing advisor, in order to satisfy themselves that the declarations being made are accurate. In the event no transfer pricing documentation exists, or it does not document what method has been used to prove the international related party transactions are arm’s length, it will be difficult for a Public officer to support a claim that the company’s transfer pricing position is accurate.

If you are uncertain as to the new Public Officer obligations with respect to transfer pricing, please contact Griffith Hack’s transfer pricing specialists.

9. Do you have transactions with international related parties?

Transfer pricing documentation reviews required.

The end of the financial year is a good time to review whether a business has complied with its Australian transfer pricing obligations and whether any adjustments or additional documentation needs to be put in place in order to ensure compliance with Australia’s new transfer pricing provisions.

Given the recently introduced significant changes to the legislation, documentation prepared prior to the 2016 year is unlikely to meet the ATO’s new obligations, as the previously prepared documentation does not take into account the ‘reconstruction provisions’ (see the Chevron case for further details as to how the ATO interprets and implements these provisions).

Businesses with a turnover of $2 million or more need to complete an ‘International Related Party Dealing’ (IRPD) schedule as part of the lodgement of its income tax return. The absence of up to date transfer pricing documentation will make it difficult for the Public Officer to confirm the company’s transfer pricing practices are accurate, which can lead to the imposition of significant penalties. For businesses with an Australian group turnover of less than $25 million, the ATO has provided a number of simplified record keeping options in specific circumstances.

To assess if you meet the criteria for opting into the simplified record keeping regime or to discuss the impact of the most recent changes to Australia’s transfer pricing obligations for businesses, contact your Griffith Hack transfer pricing expert.

10. Do you have intangible assets on the balance sheet?

Financial reporting requirements.

If your organisation has intangible assets - such as brands, technology, contract or goodwill - on its balance sheet, an impairment review might be required for the year-end accounts. An impairment review estimates the recoverable amount of an asset (either through its use or sale) and compares it to the carrying value. Any excess of the carrying amount over the recoverable has to be written off as an impairment loss. If there are any signs of impairment, the board often requires an independent opinion on the carrying value of intangible assets.

11. Tax amortisation opportunities.

Tax amortisation rates are different for intangible assets such as copyright, patents, trade marks, in-house software and goodwill. In business combination reporting, imprecise allocation of value to ‘brands’, ‘technology’ and ‘goodwill’ can result in missed opportunities for tax deductions. However, within four years taxpayers have the ability to re-assess the allocation of value between assets. If you have acquired intangible assets on your balance sheet, Griffith Hack can help you determine the likelihood of incremental tax amortisation opportunities.

12. Why is specialist valuation expertise helpful?

Brands, content, software, patents and other intangibles are complex asset categories. Companies seldom have sufficient internal expertise to carry out robust valuations, and business valuers tend not to be familiar with the legal and functional characteristics of IP. As intangible asset valuations can have a direct impact on reported profits and taxable income, it is recommended that the advice is obtained from a specialist IP valuer.