Research & Development (R&D) Tax Incentive
The R&D Tax Incentive offers significant cash benefits to innovative firms, both big & small.
With the 30 April deadline to register fast approaching, firms need to review their eligibility and start work on their application asap, or risk missing out.
What is the R&D Tax Incentive?
The R&D Tax Incentive is a program jointly administered by AusIndustry and the ATO. The objective of the program is to foster Australian innovation by providing a tax incentive to firms that undertake eligible R&D activities.
The R&D Tax Incentive consists of a tax offset for eligible R&D expenditure as follows:
Firms with annual turnover of less than $20M: A refundable tax offset of 45%.
Firms with annual turnover of $20M or more: A non-refundable tax offset of 40%. Any unused offset may be carried forwards.
Note: The Government has announced in the 2014/15 Federal Budget an intention to reduce the rates to 43.5% and 38.5% with effect from 1 July 2014. At the time of writing, the legislation to give effect to this announcement is currently before the Senate and has been since June 2015.
What firms are eligible?
The R&D Tax Incentive is only available to corporate entities, with the exception of tax exempt entities.
Entities such as trusts and partnerships are ineligible. These firms may wish to consider restructuring in order to access the R&D Tax Incentive.
What activities are eligible?
The tax offset can only be claimed for expenditure incurred in relation to "core activities" and "supporting activities".
Core activities are experimental activities whose outcome cannot be known or determined in advance on the basis of current knowledge, information or experience, but can only be determined by applying a systematic progression of work that:
is based on principles of established science; and
proceeds from hypothesis to experiment, observation and evaluation, and leads to logical conclusions; and
that is conducted for the purpose of generating new knowledge (including new knowledge in the form of new or improved materials, products, devices, processes or services).
Supporting activities are activities that do not constitute core activities, but are directly related to core R&D activities. The AusIndustry's online tool is a useful resource for identifying eligible supporting activities.
If unsure as to eligibility, a company can seek an Advance Finding from AusIndustry.
What expenditure is eligible?
The tax offset is only available where total notional deductions for the year are at least $20,000.
However, there are two exceptions to this rule where the the expenditure is incurred to a registered Research Service Provider (RSP) or is a monetary contribution under the Co-operative Research Centre (CRC) program.
Notional deductions include:
Expenditure incurred on R&D activities
Depreciation of assets used for conducting R&D activities
Balancing adjustments for assets used only for conducting R&D activities
Expenditure in relation to goods and materials transformed or processed during R&D activities to produce marketable products (feedstock expenditure)
Monetary contributions under the CRC program.
A proportion of remuneration paid to staff engaged in R&D activities can constitute eligible expenditure.
Note: Expenditure is eligible when incurred. This means that physical payment need not be made within the year. However, an amount incurred to an associate is only eligible in the year in which payment is made.
The following types of expenditure are ineligible:
Expenditure that is not at risk
Core technology expenditure
Expenditure included in the cost of a depreciating asset
Expenditure incurred to acquire or construct a building (or part of a building or an extension, alteration or improvement to a building).
How is the tax offset claimed?
The first step is to register the eligible activities with AusIndustry. This must be done within ten months of the company's end of financial year. Generally 30 April.
Once registered, the company can proceed to lodge its income tax return in order to claim the tax offset.
Are there additional requirements for offshore R&D?
Yes. A company can only claim expenditure on R&D activities carried out overseas, if the activities are registered and are covered by a finding that meets the following four conditions:
the overseas activity is covered by an Advance Finding that the activities are eligible R&D activities;
the overseas activity has a significant scientific link to ‘Australian core activities’;
the overseas activity cannot be conducted within Australia or the external Territories for a reason listed in the legislation; and
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 third condition is met where the overseas activity is unable to be conducted within Australia or the external Territories because:
conducting it requires access to a facility, expertise or equipment not available in Australia or the external Territories;
conducting it in Australia or the external Territories would contravene a law relating to quarantine;
conducting it requires access to a population (of living things) not available in Australia or the external Territories; or
conducting it requires access to a geographical or geological feature not available in Australia or the external Territories
Records must be retained to substantiate tax offset claims. These records must:
Demonstrate eligibility of activities; and
Show how expenditure claimed relates to those activities.
Further guidance on record keeping requirements can be found here.
The AusIndustry website contains a wealth of resources on the R&D Tax Incentive, including industry specific guidance/case studies for:
The ATO website also offers some useful guidance.
The information contained in this blog is general in nature and should not be relied upon as a substitute for professional advice. Any company seeking to claim the R&D Tax Offset should seek professional advice that takes into account specific circumstances.