With EOFY just around the corner, we’ve outlined simple steps businesses can take before year-end to ensure they receive the maximum amount from their Research and Development (R&D) Tax Incentive claim. But first, in case you’re unfamiliar with the RDTI scheme, or need a refresher, here’s some background information to help you catch up.
What is the R&D Tax Incentive?
The Research & Development (R&D) Tax Incentive was introduced by the Federal Government to encourage businesses to conduct research and development activities that are likely to benefit the wider Australian economy.
The incentive is in the form of a tax offset that is received upon lodgement of the tax return. The incentive is:
- A 43.5% refundable tax offset for most companies with an aggregated turnover of less than $20 million
- A non-refundable tax offset of between 33.5% – 46.5% for companies with an aggregated turnover of at least $20 million. The rate of the tax offset will depend on the company’s corporate tax rate and proportion of the company’s R&D expenditure to total business expenditure.
What is ‘R&D’?
Research and development for the purposes of the R&D Tax Incentive requires the applicant to conduct at least one ‘core R&D activity’ during the income year, which has three key components:
- New technical knowledge: the activity is carried out for the purpose of generating new knowledge in the form of new or improved materials, products, devices, processes or services.
- Technical uncertainty: the outcome of the activity cannot be known or determined in advance on the basis of current knowledge, information or expertise.
- Experimentation: the activity is experimental in nature and involves a systematic progression of work based on the principles of established science that proceeds from hypothesis to experiment, observations and evaluations, and leads to logical conclusions.
Where a core R&D activity has been conducted during the income year, any ‘supporting R&D activities’ that have a nexus to the R&D activities may also be eligible for the incentive. As the name suggests, supporting R&D activities are those activities conducted for the purpose of supporting the core activity (but do not form a part of the experimentation) and can include preliminary research, project management and data collection.
Am I eligible?
In addition to conducting at least one core or supporting R&D activity during the income year, businesses intending to claim the incentive must also satisfy the following eligibility criteria:
- The applicant is an Australian tax resident company
- The R&D activities are conducted in Australia, and
- The company incurs at least $20,000 of eligible R&D expenditure during the income year (i.e., expenditure attributable to the core and supporting R&D activities).
What expenditure is eligible?
Eligible R&D expenditure includes:
- Employee salary and wages
- Labour on-costs such as superannuation and payroll tax
- Contractor expenses
- Depreciation of plant and equipment
- Expenditure to research service providers and co-operative research centres
- Overhead expenses including rent, electricity, and internet
- Travelling expenses from attending technical conferences or on-site testing.
What expenditure is not eligible?
The following expenditure is unlikely to be eligible for the incentive:
- Financing costs such as interest and bank charges
- Sales, marketing and advertising costs
- Legal and accounting fee
- Building construction costs, fit outs or improvements
- Cost of acquiring depreciating assets (but the depreciation of that asset may be eligible)
- Other routine or ‘business as usual’ expenses.
What about overseas activities?
Overseas activities are generally not eligible for the R&D tax incentive. However, there are limited situations where the overseas activity may qualify for the incentive. Broadly, the company must be able to demonstrate that:
- The overseas R&D activity is necessary to progress an Australian core R&D activity that it has a significant scientific link to because the activity cannot be carried out in Australia (for reasons other than cheaper cost); and
- The overseas R&D expenditure is less than domestic R&D expenditure (i.e., the majority of the company’s R&D expenditure is still incurred locally).
For the overseas expenditure to be eligible, the company must submit an Overseas Finding or Advance Finding for pre-approval of those activities and expenditure.
What’s the process of claiming the R&D Tax Incentive?
The R&D Tax Incentive is jointly administered by AusIndustry and the Australian Taxation Office. At the end of the company’s income year, the company submits an R&D application with AusIndustry detailing the core and supporting activities conducted during the income year.
The application must be submitted within 10 months of the end of the company’s income year, so for companies with a 30 June year-end, the application must be submitted by 30 April of the following year.
Once the application has been processed by AusIndustry, a registration number is provided for input into the company’s income tax return. Upon lodgement of the tax return, the Australian Taxation Office applies the R&D tax offset against the company’s income tax liability, which reduces the overall tax liability or in some instances results in a refund of tax.
Applicants are strongly encouraged to commence the R&D claim process during the income year, not afterwards, as applicants are required to maintain documentation that is ‘contemporaneous’ – i.e. documentation in existence at the time the R&D activities are conducted.
What documentation am I required to keep?
Companies are required to maintain contemporaneous documentation detailing the core and supporting R&D activities that took place during the income year. There are two types of documentation that must be kept – expenditure documentation and R&D activities documentation.
Expenditure documentation must evidence all expenditure claimed on R&D activities and how that expenditure is directly related to the R&D activities conducted. Examples of expenditure documentation include tax invoices, asset registers, accounting records and staff timesheets showing the length of time spent by each employee on R&D activities.
R&D activities documentation must show that the claimed R&D activities took place, and they meet the requirements of a core or supporting activity. Examples of R&D activities documentation include project plans, lab results, testing and progress reports, before and after photos and enterprise management software records.
Can AusIndustry or the ATO review or audit an R&D claim?
Yes, the R&D claim can be reviewed up to four years after lodgement of the company tax return (by the ATO) or four years after the end of the relevant income year (by AusIndustry), so applicants are required to maintain their R&D records for at least five years.
Can I claim the R&D Tax Incentive while claiming other Government grants?
Yes, but an adjustment may be required for R&D expenditure claimed under other government grants such as JobKeeper and JobSaver, the Accelerated Commercialisation Grant or the MVP Grant.
Is there anything I need to do before year-end?
There are some simple steps businesses can take before year-end to maximise the amount of their R&D claim:
- Pay any outstanding employee superannuation liabilities
- Prepay expenses
- Pay any amounts owing to associates, and
- Choose appropriate depreciation rates (such as those available under the Temporary Full Expensing provisions)
If the business is intending to submit an Overseas or Advance Finding in respect of overseas expenditure, that application must be submitted with AusIndustry before the end of the income year.
I am contracted to conduct research and development activities on behalf of another entity – can I claim the R&D Tax Incentive?
Generally, the entity that satisfies all the following is the proper claimant of the R&D Tax Incentive:
- Owns or has rights to exploit any intellectual property / know-how generated from the R&D activities
- Bears the financial risk of conducting the R&D activities, and
- Controls the R&D activities and the way in which they are being conducted.
There are some exceptions to this, such as R&D activities conducted on behalf of a foreign parent company.
What about income tax consolidated groups?
If R&D activities are conducted by one or more entities that are part of an income tax consolidated group or MEC group, only one R&D Application is submitted with AusIndustry by the head company of the group on behalf of all group members.
I am looking to expand business operations to Australia – is there anything further I need to know about claiming the R&D Tax Incentive?
In addition to satisfying the standard eligibility criteria, multinational corporations conducting R&D activities in Australia may need certain written agreements in place prior to conducting those activities. The nature of these agreements will depend on the corporate structure and which entity owns the IP from the R&D activities.
There are numerous other considerations these businesses should be aware of, and these are discussed in our Doing business in Australia guide – https://williambuck.com/lp/doing-business-in-australia/.
Interaction of the incentive with other tax provisions
As the benefit of the R&D scheme is in the form of a tax incentive, a company’s R&D claim can impact other areas of income tax including franking accounts, transfer pricing, commercial debt forgiveness and the small business instant asset write off.
Accordingly, holistic R&D and tax advice is recommended.
Please contact your local William Buck R&D Tax Specialist for more information.