First published in AMT Magazine July 2016.
What is the R&D Tax Incentive?
The R&D Tax Incentive is a self-assessment program designed to encourage industry to conduct R&D. AusIndustry (on behalf of Innovation Australia) and the Australian Tax Office (ATO) jointly administer the program. The program provides a tax incentive to companies who conduct experimental activities, in a scientific way, for the purpose of generating new knowledge.
Depending on the aggregated turnover of your business, eligible R&D entities incurring eligible expenditure on core and supporting R&D activities can claim a tax offset as follows:
- a 45% refundable tax offset where your turnover is less than $20 million; or
- a 40% non-refundable tax offset where your turnover is $20 million or over.
Companies in tax losses with less then $20m turnover in the income year, and undertaking R&D activities, may have the ability to cash out tax losses providing a direct refund of up to 45% of the eligible R&D expenditure claimed.
The R&D tax benefit is taken up within the claimant entity’s income tax return following registration of the eligible R&D activities undertaken with AusIndustry.
Eligible company structures
Before you commence your R&D activities ensure your company structure allows you to access the R&D Tax Incentive. The following types of companies are eligible for the R&D Tax Incentive:
- a company incorporated under an Australian law;
- a company incorporated under foreign law that is an Australian resident for tax purposes; or
- a company incorporated under a foreign law that is a resident of a foreign country with a double tax agreement with Australia that carries on a business in Australia through a permanent establishment of the body corporate in Australia.
If you are a Trust entity, you may still be eligible to claim the R&D Tax Incentive.
With this in mind it is most important to assess your particular company structure and under what contractual arrangements you are likely to be performing the R&D, prior to commencing any eligible R&D activities or incurring R&D expenditure.
To assist in determining if you are eligible for the R&D Tax Incentive, the following things must be considered:
Things to consider
Generally, only R&D activities conducted in Australia qualify for the R&D Tax Incentive. However, R&D activities conducted overseas may also qualify if Innovation Australia makes a finding that your activities meet certain conditions.
Your R&D expenditure incurred must have a direct nexus to the eligible R&D activities undertaken in the year of concern. There are specific expenditure categories which may be attributable to an eligible R&D project e.g. Salary and wages, contractor costs, overheads and depreciation.
In order for the incentive to be provided to the correct R&D applicant, there are integrity provisions that prevent two claimants seeking an R&D Tax benefit against the same R&D activities and expenditure.
Potential areas of R&D activity
Engineers are renowned for solving technical problems though they often see their work only as ‘getting on with business’. However, when viewed from a tax perspective, their project work may form part of a wider program of eligible R&D activities and be well worth assessing for the business.
Under the R&D Tax Incentive, the significant purpose of your eligible activities is for the generation of new knowledge. This includes new knowledge in the form of new and improved materials, products, devices, processes or services, the outcome of which cannot be known or determined in advance on the basis of current knowledge, information or experience.
Your R&D tax advisor should be able to assist you in the identification, capture and substantiation of the eligible R&D activities being conducted by the business.
Companies wishing to access the R&D Tax Incentive for R&D activities conducted, must first register with AusIndustry. Registration takes place post the activities having been undertaken. Annual registrations are required and must occur within 10 months of the end of the company’s income year in which the activities were conducted.
In terms of lodging an R&D Application with AusIndustry there can be distinct advantages in the timing so talk to your advisor about your specific situation as this may lead to the freeing up of much needed cash flow within your business.
Contemporaneous documentation of the R&D activities undertaken and the associated eligible expenditure must be maintained by the registrant entity for future audit and substantiation purposes.
Talk to a trusted advisor
Discussing your R&D activities with a trusted advisor that speaks your language and understands how integral R&D is to the furthering of your business, is paramount.