R&D Tax Incentive
Provides a tax offset designed to encourage more companies to engage in research and development.
Overview of the R&D Tax Incentive
The R&D Tax Incentive has two core components:
- a 45 per cent refundable tax offset (equivalent to a 150 per cent deduction) to eligible entities with an aggregated turnover of less than $20 million per annum
- a non-refundable 40 per cent tax offset (equivalent to 133 per cent deduction) to all other eligible entities.
R&D Tax Incentive Benefits
The R&D Tax Incentive has two core components:
1. Entities with an aggregate annual turnover of less than $20M- are eligible for a 45% refundable tax offset (equivalent to a 150% deduction), provided they are not controlled by income tax exempt entities.
Example:
- A company which is in profit will receive a reduction in tax of $150,000 for every $1M of eligible R&D;
- A company which is in tax loss will receive a cash payment of $450,000 for every $1M of eligible R&D.
2. Entities with an aggregate annual turnover of greater than $20M- are eligible for a nonrefundable 40% tax offset (equivalent to 133% deduction). Unused non-refundable offset amounts may be able to be carried forward to future income years.
Example:
- A company which is in profit will receive a reduction in tax of $100,000 for every $1M of eligible R&D.
R&D Tax Incentive Eligibility
Structure
The types of entities eligible for the R&D Tax Incentive are corporations (called ‘R&D entities’) that are:
- incorporated under an Australian law; or
- incorporated under foreign law but are Australian residents for income tax purposes; or
- incorporated under foreign law, and
- are residents of a country with which Australia has a double tax agreement, including a definition of ‘permanent establishment’; and
- carry on business in Australia through a permanent establishment as defined in the double tax agreement.
Generally trusts are not R&D entities. The definition of R&D entities extends to body corporates in the capacity of trustees of public trading trusts, but not to trustees of any other sort of trusts.
R&D Activites
R&D activities must meet certain criteria to be eligible and are categorised as either Core R&D activities or Supporting R&D activities.
Core R&D Activities are experimental activities
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; andthat are conducted for the purpose of generating new knowledge (including new knowledge in the form of improved materials, products, devices, processes or services).
Supporting R&D activities:
An activity is eligible as a supporting R&D activity where:
- it is directly related to a core R&D activity ( for an activity to be ‘directly related’, the activity needs to have a direct, close and relatively immediate relationship with the core R&D activities); or
- for certain activities, it has been undertaken for the dominant purpose of supporting core R&D activities.
Supporting R&D activities are usually required in order for the core R&D activities to take place. They can occur at a different location or time to the core R&D activities so long as they maintain the required relationship
Eligible R&D Costs
The key eligible R&D amounts that company can take in account in calculating their offsets are referred to as ‘Notional Deductions’. A company must have notional deductions for an income year of at least $20,000 in order to claim a R&D Tax offset – (this is amount is subject to some exceptions).
Eligible costs incurred on registered R&D activities may include the following amounts:
- Operating costs such as salaries, contractors and consumables;
- Plant & Equipment – depreciation costs relating to the decline in value of depreciating assets used for R&D activities;
- Balancing adjustments for depreciating assets used only for R&D activities;
- Expenditure incurred to an associate in an earlier income year, but paid in the current year (subject to restrictions);
- A partner’s proportion of expenditure incurred by a R&D partnership on eligible, registered R&D activities, and the decline in value of, and balancing adjustments for, R&D partnership assets; and
- Monetary contributions made under the Cooperative Research Centre (CRC) program.
Overseas Expenditure
In certain circumstances R&D activities conducted overseas may be eligible to claim, however it will be necessary to apply to Innovation Australia for approval. The key requirements for approval will be:
- The overseas activity must have a significant link to one of more core activities conducted in Australia;
- The overseas activity cannot be conducted in Australia;
- The total amount to be spent in all income years is less than the total amount to be spent in all income years on the Australian Core activities and the Supporting R&D activities undertaken in relation to the Australian core activities.
Advance findings for confirmation of eligibility
Under the R&D Tax Incentive it is possible to apply for an advance finding on the work to be undertaken.
This will allow increased the certainty as to whether Innovation Australia considers the planned R&D activities are eligible under the program. An advance finding by Innovation Australia binds the ATO for the year the application was made, and the next two income years. A company will still need to register their R&D activities annually to claim the R&D Tax Incentive even if they have an advance finding covering those activities. However as long as there has been no change in the work program they can be certain of the eligibility of the claim.
Our R&D Claim Experience
Our associates are registered R&D tax practitioners with over 15 years experience. They have lodged over 700 successful claims for clients and assisted clients with over $75M in taxation benefits. We are the leading provider of R&D claims in the Biotech, IT and Clean Technology industries.
Call us on 03 9005 6789 or email to see how we can assist with your R&D tax incentive claim.
