As we approach the end of 2014, now is the time to address pre-year end issues. For December balancers that undertake R&D activities both here and overseas, this means consideration of Advance/Overseas Finding applications prior to 31 December 2014.
If you believe you have overseas activities that may be eligible, please contact your local PwC R&D specialist in the next few days.
Further, to help you keep abreast of the latest news on the R&D Tax Incentive program, we have also provided in this TaxTalk Alert a quick update on the progress of two pieces of R&D legislation currently before Parliament: Tax Laws Amendment (Research and Development) Bill 2013 and Tax and Superannuation Laws Amendment (2014 Measures No. 5) Bill 2014.
Deadline for Overseas Finding Applications approaching
Have you conducted overseas R&D activities for the December 2014 year? If the answer is yes and you have a December year-end, then now is the time to think about applying for an Advance/Overseas Finding.
In order to be able to claim R&D undertaken overseas, you must satisfy four criteria, which are broadly:
- The overseas activities must be covered by an Advance Finding
- The overseas activity must have a ‘significant scientific link’ to one or more core R&D activities conducted in Australia (and the Australian core activities must be registered, or reasonably likely to be conducted and registered in future)
- The overseas activity cannot be conducted within Australia – this could be for a number of reasons, including access to a facility, expertise or equipment not available in Australia
- The amount to be spent on the overseas R&D activities does not exceed the spend on the Australian aspects of the project.
The Overseas Finding application must be made in the year of income the overseas activities were undertaken. This means that if you undertook overseas R&D activities in the year ending December 2014, you must lodge an application by 31 December 2014.
The benefit of obtaining an Overseas Finding has now been extended. Previously, Overseas Findings only covered overseas activities for up to 3 income years (the current income year and up to another two consecutive years). Recent AusIndustry guidance has now advised that Overseas Findings will allow companies to claim those overseas R&D activities for the full duration of that activity. At the end of the 3 income years, it is noted that the Finding will no longer be binding on the ATO or AusIndustry.
However, if you conduct any overseas R&D activities that are new or materially different to what was described in the original Overseas Finding certificate, you will still need to re-apply for another Overseas Finding.
Please note that an Overseas Finding by itself does not mean that you become entitled to claim an R&D tax benefit on the overseas R&D activities. You must also register your R&D activities (local, overseas or both) by submitting an R&D Application within 10 months of your income year-end (i.e. 31 October 2015).
You may also seek an Advance Finding for Australian-based R&D activities. Advance Finding applications must similarly be made in the year of income the R&D activities were undertaken. An Advance Finding provides certainty as to the eligibility of R&D activities under the R&D Tax Incentive for up to 3 income years.
If you are considering applying for an Advance or Overseas Finding, please contact your local PwC R&D specialist as soon as possible.
A holding pattern: progress of R&D Bills in Senate
The Federal parliamentary year has ended with no resolution of two outstanding Bills that impact the R&D Tax Incentive program.
It had been expected that there would be a vote on at least one of the two Bills (the Tax Laws Amendment (Research and Development) Bill 2013 and the Tax and Superannuation Laws Amendment (2014 Measures No. 5) Bill 2014) before the end of the Senate’s 2014 sittings this month. These Bills relate to an overall incentive rate reduction as well as the exclusion of companies with turnover of greater than $20 billion.
But neither of these Bills even reached the chamber for debate, and the Government was unable to win agreement on the need for further sitting time.
The (lack of) developments on these Bills continues a protracted political process that commenced nearly two years ago.
In February 2013, the Gillard Government announced its intention to impose a ban on access to the program for all companies with turnover of greater than $20 billion. This move was criticised at the time by the Coalition in Opposition – before it ultimately reversed its position and announced its intention to accept many of the savings decisions (such as the $20 billion turnover change) that had been included in the 2013-14 Budget by Labor.
Separately, the Abbott Government also moved in this year’s Budget to make 1.5 cent reductions to each of the two sets of offset rates paid through the program.
But progress on both items of legislation essentially stalled until last month, when the Palmer United Party (PUP) moved for the alternative of a $100 million annual spending cap per entity rather than the unilateral $20 billion turnover exclusion.
As part of a motion to extend the Senate’s sitting hours in the last week of Parliament for 2014, the Government also earmarked the Tax Laws Amendment (Research and Development) Bill 2013 as one of the six most urgent items of legislation that it wished to have passed before the 2014 parliamentary program ended.
But Labor, the Greens and a group of the other crossbench Senators rejected a motion for further sitting time, ensuring that the uncertainty surrounding potential changes to the R&D program is likely to persist until at least the recommencement of Parliament in February 2015.
On the basis of the current wording of the Bill and the PUP amendment, and from PwC’s understanding following our involvement in many discussions with some of the key players, the three most likely potential outcomes that remain if and when the Tax Laws Amendment (Research and Development) Bill 2013 returns to the Senate are:
- the Bill passes without amendment, ushering in the $20 billion turnover threshold;
- the Bill passes with the PUP amendment, establishing the $100 million spending cap; or
- the Bill fails to pass, ensuring no change to the existing eligibility requirements for the program.
The possible outcomes from a return to Parliament of the Tax and Superannuation Laws Amendment (2014 Measures No. 5) Bill 2014 are more limited. If no amendments are made, then either the Bill will pass, and reduce each of the two offset rates in the program by 1.5 cents, or these changes will be rejected.
Status of Bills
However, the additional delays that will now result from the Bills’ stalled progress are also likely to cast increasing doubt on the willingness of the Senate to retrospectively apply the legislation, given that changes in both of the Bills are scheduled to be backdated to 1 July 2014. In the case of the $20 billion turnover exclusion, that change was originally meant to apply from 1 July 2013 – but was adjusted to 1 July 2014 as part of the Government’s Mid Year Economic and Fiscal Outlook (MYEFO) process earlier this week.
This latest change to 1 July 2014 start dates for the Tax Laws Amendment (Research and Development) Bill 2013 does now provide some certainty to affected companies as they can now proceed to register for the FY14 year.