As the global and domestic business landscape continues to evolve, innovation has never been more critical.

Recognizing the importance of fostering research and development (R&D), governments around the world have implemented various incentives to encourage businesses to invest in innovation.

In Australia, the Research & Development Tax Incentive (RDTI) stands as the central mechanism to support companies to innovate.

Understanding the R&D Tax Incentive

The R&D Tax Incentive is a program designed to stimulate R&D activities in Australia by providing tax offsets for eligible expenses incurred during the development process.

Administered jointly by the Australian Taxation Office (ATO) and AusIndustry, the incentive aims to drive innovation across diverse industries, from technology and healthcare to manufacturing and agriculture.

The R&D Tax Incentive tax offset for eligible R&D expenditure is calculated as:

· Firms with annual turnover of less than $20M – A refundable tax offset based on the company tax rate plus 18.5%. In most instances, this means a 43.5% offset.

· Firms with annual turnover of $20M or more – A non-refundable tax offset based on R&D intensity of:

o 0% to 2% intensity: the company tax rate plus an 8.5% premium; and

o >2% intensity: the company tax rate plus a 16.5% premium.

The tax offset can be claimed for eligible 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:

o is based on principles of established science; and

o proceeds from hypothesis to experiment, observation and evaluation, and leads to logical conclusions; and

o 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 that are directly related to core R&D activities.

Key Insights from a Recent AAT Case:

A recent case heard by the Administrative Appeals Tribunal sheds light on the eligibility requirements of the R&D Tax Incentive and underscores the importance of meticulous record-keeping.

In the case [Active Sports Management Pty Ltd & Industry Innovation & Science Australia], the tribunal considered whether the company had satisfied the eligibility requirements in respect to a project to develop a basketball shoe.

The key takeaways from this case are:

• Formulation of Hypotheses: One critical aspect illuminated by the case is the necessity for contemporaneous evidence regarding the formulation of hypotheses before the execution of R&D activities.
• Defining ‘New Knowledge’: The case delved into the interpretation of the ‘new knowledge’ requirement, emphasizing that the evidence must demonstrate that the knowledge sought from the R&D activities goes beyond validating a simple progression from what is already known and/or merely implementing existing knowledge in a different context.
• Thorough Documentation is Crucial: The case highlights the importance of maintaining detailed records to substantiate R&D claims. Clear documentation not only supports the application process but also strengthens a company’s position in the event of an audit.

The 30 April 2024 Deadline:

As companies navigate the intricacies of the R&D Tax Incentive, it is crucial to keep the looming deadline in mind.

The 30th of April 2024 marks the cutoff for registering R&D activities for the 2022/23 financial year.

Failing to register by this deadline will result in the loss of valuable tax benefits, making it imperative for eligible businesses to act promptly.

To register for the incentive, companies must submit their application through AusIndustry’s online portal. Once AusIndustry register the R&D, the company can then proceed to complete their claim via the annual company Income Tax Return.

Further information on the R&D Tax Incentive and the application process can be found in AusIndustry’s Guide to Interpretation.

If you would like to know more about the R&D Tax Incentive or require assistance to complete an application, please get in touch.

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Sky Accountants Ballarat

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