With the end of 2016 quickly approaching, from a research and development (R&D) perspective, there are a few things that might be worth actioning or noting. For those companies with a December tax year end, it is the time to ensure you have lodged overseas finding applications for 31 December 2016 claims and ensure any amounts incurred to an associate for eligible R&D are `paid' prior to the end of the income year. When considering your future capital investment plans, it is a great time to explore the various State and Federal Government grant funding options currently available. The Federal Government, as part of its National Innovation and Science Agenda, is aiming to attract greater investments in startups. A new tax offset program for eligible investors provides an incentive for new investments into early stage innovative companies (ESIC). We also cover an update in the area of Government policy, including the recent Ferris-Finkel-Fraser Review and the release of additional taxpayer guidance on the R&D Tax Incentive program from Innovation Australia.
For 31 December 2016 year end companies
Overseas R&D activities
A company can only claim expenditure on R&D activities carried out overseas, if those activities are registered and are covered by a finding that meets the following conditions:
1. The overseas activity has a significant scientific link to `Australian core activities'. 2. The overseas activity cannot be conducted within Australia for a reason listed in the legislation. 3. The expenditure on the overseas activity and certain other overseas activities is less than the expenditure on the related core R&D activities and supporting R&D activities conducted in Australia. The overseas finding application must be lodged prior to the end of the first year to which it will apply.
Accordingly, for activities carried out in the current year, an application must be lodged by 31 December 2016. Please contact us if you believe you may have qualifying overseas activities and wish to consider this further.
Payments to associates
Provided the relevant eligibility requirements are met, a claimant may include expenditure incurred to an associate in their R&D claim. However the notional deduction can only be claimed when the expenditure is `paid' before the end of the income year.
For this purpose, an `associate' includes shareholders and directors of the company, and other related legal entities (such as trusts).
Where an amount is not `paid' until a later income year a claimant will forgo the notional R&D deduction altogether and claim a normal tax deduction on an incurred basis. Alternatively, (if a normal deduction is not claimed), the notional R&D deduction is deferred until the year in which payment is made. The term `paid' takes its general meaning under income tax law and includes constructive payment.
Therefore, claimants who are seeking to include an amount incurred to an associate as part of their R&D claim for the current tax year, need to ensure these amounts are paid prior to 31 December 2016.
There are some substantial Grant funding opportunities coming through from both State and Federal Governments. Grant funding is typically available for discretionary `yet-to-be-approved' capital investment projects which support economic growth in regional areas, specifically new jobs growth and productivity gains. Any major regional businesses ideally should be exploring such opportunities. Our grants specialists can assess your forward pipeline and make recommendations regarding grant funding opportunities.
Some current opportunities include:
Regional Jobs and Investment Package
The Federal Government has announced $220 million in growth funding to support disadvantaged regions of Australia. The program is expected to open shortly and provide grants to support new capital and infrastructure investments which stimulate growth and jobs. Examples of eligible projects could include capital facility upgrades or new infrastructure (i.e. transport, energy, communications and water). Eligible areas are:
- QLD Bundaberg/Wide Bay Burnett, Cairns and Bowen Basin.
- NSW NSW North Coast,
- NSW South Coast and Goulburn Valley
- TAS All regional areas
- VIC Latrobe Valley and Geelong
- SA Spencer Gulf
Building Better Regions Fund (BBRF)
Under the BBRF, there is a total pool of $297 million available, with large grants up to $10 million on a matched funding basis. The focus is on new capital investment projects in regional and isolated areas of Australia outside major capital cities and where the project is discretionary and `yet to be approved'. The applicant for this program must be a not-for-profit or Council, however private organisations can participate in a consortium and own the project assets. The program has a strong focus on country and isolated areas of Australia including projects which provide an indigenous benefit. The BBRF is focused on two funding streams:
- Infrastructure Projects Stream - will support projects which involve the construction of new infrastructure to stimulate economic growth in regional and remote areas. Examples include freight hubs, port upgrades, transport centres, catalyst infrastructure for new development sites.
- Community Investments Stream - will fund community building activities, including, but not limited to, new or expanded local events, strategic regional plans and leadership and capability building activities. Examples include community centres, sports facilities, health centres.
Applications close early 2017. If you are exploring options for capital expansion over the next two years, please contact your usual PwC R&D contact.
Tax Incentive for Early Stage Investors
The Federal Government announced a new tax offset program for investors as part of its National Innovation and Science Agenda. Effective from 1 July 2016, the program provides an incentive for new investments into early stage innovative companies (ESIC). The policy aim is to attract greater investments in the start-up sector. The benefit available to eligible investors are:
1. A non-refundable tax offset at 20 per cent of the investment amount (capped at $200,000 per annum).
2. CGT exemptions for investments held for a minimum of 12 months and maximum of 10 years.
The incentives are available to eligible investors which excludes certain type of investors. The investment amount available for the tax offset is also capped at $50,000 for non-sophisticated investors.
For a company to qualify as an ESIC, it needs to be both early stage and innovative. The innovative aspect can either be met by satisfying a principles based test, or a points test. In general terms, in order to satisfy the 'early stage' limb of the test, the company must have existed for less than 3 years (or 6 years in some specific cases), spent less than $1 million in expenditure, and have less than $200,000 in income. To achieve certainty for potential investors, a company can apply for a ruling from the Australian Taxation Office (ATO). While a company can also chose to self-assess, in practice it is likely that eligibility for the offset will be assessed in any case when a claim is made.
If you are looking to make investments, or you are a start-up looking to attract capital, this program could be a useful mechanism to consider. If you would like to discuss further, please contact your usual PwC R&D contact.
Recent R&D Tax Incentive Program Guidance
Innovation Australia has recently made available additional guidance materials with the aim to assist taxpayer's self-assess eligibility, the eligibility of your activities under the R&D Tax Incentive program, and to register those activities. These include `Specific Issue' and `Applying the Law' guidance documents. These are available on the AusIndustry website and include:
- `Specific Issue' Guidance
o Agriculture - Getting farming R&D Tax Incentive claims right
o Building and Construction - Getting building and construction R&D Tax Incentive claims right
o Mining - Getting mining R&D Tax Incentive claims right
o Software Development - Getting software development R&D Tax Incentive claims right
- `Applying the Law' Guidance
o Mining 2016/01 Mining projects to extract minerals
o Agriculture 2016/03 `Whole of farm' claim
o Agriculture 2016/02 No new knowledge
If you would like to discuss further, please contact your usual PwC R&D contact.
In the area of policy, the year broadly ended where it began with the Government still in the process of formally considering potential changes to the R&D Tax Incentive program.
The final outcome of the Ferris-Finkel-Fraser Review, initiated in 2015, will still not be known until sometime in 2017. The report of the Review Panel was released in September 2016, but consultations and deliberations are likely to continue for a number of months.
Like many other stakeholders who recently lodged submissions, PwC has concerns with two particular recommendations in the Review. These are the proposed imposition of an 'intensity threshold' penalty on all claimants with greater than $20 million turnover, and establishment of a new $2 million cap on annual benefits for refundable recipients. Especially in the case of the intensity threshold, we believe these measures would disqualify the overwhelming majority of current participants in the program, and severely diminish R&D investment in Australia. However, it remains to be seen exactly how the Government reacts to the considerable feedback it has received.
In another major policy development for the year, Labor announced a change of position in June 2016 by stating it would seek to make the same level of savings from the program as the Government was then proposing with its 1.5 percentage point cut to the rates of benefit. Otherwise, R&D policy did not feature heavily in announcements by the major parties in the lead-up to the Federal election on 2 July 2016.
Upon Parliament's return following the election, the two major parties agreed to finally pass the 1.5 percentage point reductions in the amount of the R&D offset. These changes were enacted in September 2016 and take effect for income years commencing on or after 1 July 2016, as a result of the passage of the so-called Omnibus Bill, which ushered in more than $6 billion in cuts across various portfolios.
For relevant 31 December 2016 year end companies, make sure you:
- lodge overseas finding applications before 31 December 2016
- pay any R&D amounts incurred to an associate prior to 31 December 2016.
Explore the available Grant funding options for your future capital investment plans. Consider eligibility for the new tax offset program for investors for new investments into early stage innovative companies (ESIC).
A more active compliance focus by AusIndustry and the ATO also means that more than ever correctly navigating the R&D Tax Incentive rules is critical.
No doubt 2017 will bring further changes and issues relevant to the R&D Tax Incentive once we see the final decision by Government in response to the conclusion of the recent Ferris-Finkel-Fraser Review.