R&D Tax Incentive – Clawback Adjustment

Clawback Adjustment

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What Is a Clawback Adjustment? 

 

A clawback adjustment is the extra income tax a company must pay if it receives a grant for the same research and development activities for which it has already claimed an R&D tax incentive.

 

Why Is Clawback Adjustment Required?

The clawback adjustment is required to prevent “double-dipping,” where a company benefits twice for the same R&D activities—once through an R&D tax incentive and again through a grant or other recoupment.

 

ATO keeping it fair

By implementing a clawback adjustment, the government ensures that funds are distributed fairly and that no single entity gains undue advantage. This is crucial for maintaining the integrity of both the R&D tax incentive program and other grant schemes.

 

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Clawback Adjustment

What is the clawback rate?

The clawback percentage is typically set at 10%.

 

How does it work?

If you’ve received government funding or grants in addition to claiming the R&D tax incentive, you may need to repay 10% of the relevant R&D expenditure as additional income tax.

The 10% clawback adjustment is applied to ensure that your company doesn’t double-dip into both grant funding and the R&D tax incentive for the same expenditure. Therefore, it helps maintain fairness in the allocation of government resources and funding.

 

What is the ‘at risk’ rule?

The ‘at risk’ rule is crucial to the R&D tax incentive scheme, aiming to make sure that companies engage in real research and development activities that come with financial risk. This requirement encourages true innovation, as it asks for a genuine financial commitment from businesses.

The rule helps prevent companies from gaining tax benefits for everyday or risk-free activities.

 

Meeting the ‘At Risk’ Rule Despite Clawback Adjustment

Even when a clawback adjustment is applied—usually because your business has received grants or other funding in addition to the R&D tax incentive—the ‘at risk’ rule can still be met for several reasons:

  • Partial Funding: Grants usually cover only a portion of the total R&D expenditure. Therefore, your business still bears the financial risk for the remaining portion of the R&D expenditure.
  • Conditional Grants: Many grants come with conditionalities, such as project milestones or performance metrics, which must be met to retain the funding. Failure to meet these conditions poses a financial risk.
  • Time Lag: Grants are often disbursed after the R&D expenditure has been incurred, so the financial risk is borne by the business initially.
  • Non-Guaranteed Funding: In some cases, grant funding may be competitive or uncertain, so relying solely on it would constitute a financial risk.
  • Resource Allocation: Even with grant funding, resources like time, manpower, and other operational costs are committed to the R&D project without a guarantee of success, further emphasizing the financial risk involved.

So, while receiving a grant might trigger a clawback adjustment, it doesn’t necessarily negate the financial risk borne by the company, thereby still satisfying the ‘at risk’ criteria for the R&D tax incentive.

 

Worked Example – Industry Growth Program

A company receives a $500,000 grant from the Industry Growth Program to support a $1 million project focused on commercialising a black box flight recorder.

If the company also claims R&D tax incentives on the same $1 million expenditure, a clawback adjustment may apply.

Here’s a simple breakdown:

  • Total project cost: $1,000,000
  • Grant received: $500,000
  • Own contribution: $500,000

In accordance with the clawback provisions, the company may be required to pay 10% of the grant amount as additional income tax, since they are also benefiting from the R&D tax incentive scheme.

In this case, the clawback would be $50,000 (10% of $500,000).

 

Worked Example – CRC-P

In a $1 million CRC-P (Cooperative Research Centres Projects) project for developing spray-on skin, let’s consider that the lead company receives $500,000 specifically for R&D activities. The company then allocates $250,000 of this funding to another partner for undertaking some of the R&D work. The financial dynamics would be as follows:

  • Total project cost: $1,000,000
  • R&D Funding received: $500,000
  • Funding paid to partner: $250,000
  • Own contribution to R&D: $250,000

In this scenario, the lead company may be subject to a clawback adjustment because it received $500,000 for R&D and also stands to benefit from the R&D tax incentive.

However, the clawback will likely apply only to the $250,000 that the company retained for its own R&D activities and not on the $250,000 it paid to the partner.

The clawback could be calculated as follows: Clawback amount: 10% of $250,000 (own R&D spend) = $25,000

It’s important to note that the $250,000 paid to the partner would generally not be eligible for the lead company’s R&D tax incentive claim since it was not an expenditure directly undertaken by them. Therefore, it wouldn’t be subjected to a clawback adjustment.

The remaining $250,000 that was utilised by the company for its own R&D would still be considered ‘at risk,’ making it eligible for R&D tax incentives.

This is because the lead company retains the financial risk on that portion of the expenditure, fulfilling the intent of the R&D tax incentive program to stimulate genuine research and development.

 

What if my customer gives me the money? 

Clawback adjustments typically apply to government grants or funds, rather than customer payments, in the context of the R&D tax incentive.

The core idea behind a clawback is to reclaim the benefit received through an R&D tax incentive where you’ve also received government funding for the same R&D activities. This ensures that you don’t ‘double-dip’ by receiving both a tax offset and a grant for the same expenditure.

In contrast, customer funds usually represent a commercial transaction for services rendered or products delivered. Such funds do not usually trigger a clawback adjustment under the R&D tax incentive program. However, customer funds may affect the eligibility of your R&D activities for the tax incentive, as only ‘at risk’ expenditures typically qualify.

 

What about the timing? 

The timing of receiving a grant can have a crucial impact on your R&D tax incentive claim as well as any potential clawback adjustments.

The period when the grant funds are received relative to the lodgement of your R&D tax claim can affect the calculations and obligations tied to both the incentive and the clawback. Understanding this timing is pivotal for accurate financial planning, compliance, and maximising the benefits of the R&D tax incentive program.

In the following sections, we will delve into various scenarios to illustrate how grant timing interacts with the R&D tax incentive and clawback adjustments.

 

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Scenario 1: Grant Received in the Previous Financial Year

  • Total project cost: $1,000,000
  • Grant received (previous financial year): $500,000
  • Own contribution: $500,000
  • Clawback adjustment for the previous financial year: $50,000
  • In the previous year when the grant was received, the clawback would be calculated as 10% of the grant amount ($500,000 * 10% = $50,000).

Scenario 2: Grant Received All in the Current Financial Year

  • Total project cost: $1,000,000
  • Grant received (current financial year): $500,000
  • Own contribution: $500,000
  • Clawback adjustment for the current financial year: $50,000
  • The clawback adjustment is calculated as 10% of the grant amount ($500,000 * 10% = $50,000).

Scenario 3: Grant Received Half This Year and Half Next Year

  • Total project cost: $1,000,000
  • Grant received (current financial year): $250,000
  • Grant to be received (next financial year): $250,000
  • Own contribution: $500,000
  • Clawback adjustment for the current financial year: $25,000
  • The clawback for the current year is 10% of the grant amount received this year ($250,000 * 10% = $25,000).
  • Clawback adjustment for the next financial year: $25,000
  • For the next year, the clawback is based on the remaining grant amount ($250,000 * 10% = $25,000).

This should provide a complete picture of how the clawback adjustment works depending on the timing of the grant receipt. For more personalised advice, please book a meeting, call us at 1300 658 508, or get in touch via our contact page.

 

What if I am repaid for my R&D activities?

If you are repaid for your R&D activities, thereby removing the financial risk involved, the “at risk” requirement is not met, which makes the R&D tax incentive ineligible for those repaid expenditures. In such a situation, you wouldn’t be subjected to a clawback adjustment on the tax incentive, because you’d need to amend your original claim to remove the activities for which you were reimbursed. Essentially, those activities would no longer qualify for the R&D tax incentive, negating the need for a clawback adjustment on them.

In this case, you may need to submit an amendment to your income tax return to exclude the reimbursed amounts from your eligible R&D expenditure. The 10% clawback adjustment wouldn’t apply here, because there would be no R&D tax benefit claimed on the repaid expenses in the first place.

 

What to put in the ATO schedule?

Here’s a description of each of the sections in the ATO schedule related to clawback:

  • Recoupment(s) – (entitled to/received) – This field captures the amount of funds that the company has either already received or is entitled to receive. It distinguishes between funds that have actually been received and those that are expected to be received.
  • R&D expenditure related to recoupment(s) – Here, the company needs to specify the portion of its total R&D expenditure that relates to the recoupment(s). Essentially, this represents the R&D costs that have been or will be reimbursed.
  • Project expenditure for which recoupment(s) paid – This section asks for the total cost of the project or projects for which the recoupments have been made. It provides context to the R&D expenditure by detailing the overall scale and scope of the project.
  • R&D recoupment tax – 10% tax payable – Based on the funds received or entitled to be received, this section calculates the tax that is payable. Typically, this is set at 10% of the recoupment amount, representing the clawback adjustment.

Each of these sections provides the ATO with a clearer picture of how much a company has claimed in R&D tax incentives and how much of that has been or will be reimbursed, ensuring transparency and fairness in the system.

 

Ready for a full scale assault on the clawback?

So, you reckon you’ve got the hang of this? Donning your clawback black belt and feeling ready to challenge the reigning champ?

Well, step into the arena! This next example is not for the faint-hearted.

Think you can keep up and vie for the title? Let’s see what you’re made of.

Let’s go!

Overview

Consider a hypothetical commercialisation project with a total budget of $1M, financially assisted by a $500,000 grant, dispersed over a four-year period. Here’s a year-by-year breakdown of the scenario, detailing the grant received, the R&D expenditure, and the corresponding clawback adjustments: 

Year 1:

  • Grant received: $100,000
  • R&D Expenditure: $0

Year 1 Clawback and R&D Calculations:

  • Recoupment(s) – (entitled to/received): $100,000
  • R&D expenditure related to recoupment(s): $0 (since no R&D was conducted this year)
  • Project expenditure for which recoupment(s) paid: $100,000
  • R&D recoupment tax – 10% tax payable: 10% of $0 = $0

Year 2:

  • Grant received: $200,000
  • R&D Expenditure: $300,000

Year 2 Clawback and R&D Calculations:

  • Recoupment(s) – (entitled to/received): $200,000
  • R&D expenditure related to recoupment(s): $300,000
  • Project expenditure for which recoupment(s) paid: $300,000 + Year 1’s $100,000 = $400,000
  • R&D recoupment tax – 10% tax payable: 10% of $300,000 = $30,000

Year 3:

  • Grant received: $0
  • R&D Expenditure: $700,000

Year 3 Clawback and R&D Calculations:

  • Recoupment(s) – (entitled to/received): $0 (since no grant was received this year)
  • R&D expenditure related to recoupment(s): $700,000
  • Project expenditure for which recoupment(s) paid: $700,000 + Year 2’s $400,000 = $1,100,000 (assuming cumulative)
  • R&D recoupment tax – 10% tax payable: 10% of $0 = $0

Year 4:

  • Grant received: $200,000
  • R&D Expenditure: $0

Year 4 Clawback and R&D Calculations:

  • Recoupment(s) – (entitled to/received): $200,000
  • R&D expenditure related to recoupment(s): $0 (since no R&D was conducted this year)
  • Project expenditure for which recoupment(s) paid: $200,000 + Year 3’s $1,100,000 = $1,300,000 (assuming cumulative)
  • R&D recoupment tax – 10% tax payable: 10% of $0 = $0

 

Nice Work Tax Ninja

We’ve just navigated the treacherous waters of a hypothetical commercialisation project with its twists and turns of R&D tax calculations and clawback adjustments.

Not a stroll in the park, was it?

But, like a thrilling rollercoaster, I hope it gave you some exhilarating insights.

If you’re feeling a tad dizzy or just want someone to double-check the loops and turns, remember that Bulletpoint is always here to guide you.

 

So, think you’ve got your R&D tax black belt now?

Challenge accepted!

Reach out to Bulletpoint and let’s dive deeper together.

Ready to take the next step? Send us a message or book a meeting and let’s tackle those tax turns together.

FAQ

An adjustment preventing businesses from claiming both grants and R&D tax offsets on the same expenditure

They prevent ‘double-dipping’ by offsetting government grants against the R&D tax incentive.

No, clawbacks primarily target government grants and reimbursements

Clawbacks can reduce the eligible R&D expenditure, affecting your claim.

Yes, depending on the timing of grants and R&D spend across the project’s lifespan.

Reimbursements can influence eligibility, especially concerning the ‘at risk’ rule.

This can necessitate a retrospective clawback adjustment.

It’s based on the total grants received in relation to eligible R&D expenditure.

Recoupments can challenge the ‘at risk’ criteria, potentially lowering R&D claims.

Professional consultants, like Bulletpoint, offer guidance on R&D tax incentives and clawbacks.

Debunking Myths

Truth: Clawback primarily targets specific government grants and reimbursements. Private funds, customer payments, or other types of financial support typically aren’t subject to this provision.

Truth: Securing a grant post R&D claim can necessitate a retrospective clawback adjustment. The timing matters!

Truth: While clawback adjustments reduce eligible R&D expenditure, they don’t usually nullify the entire R&D claim. The exact impact varies depending on specific circumstances.

Truth: Clawback adjustments relate to the timing of grants and R&D spend throughout the project. They can span multiple years.

Truth: Although grants can affect eligibility, especially concerning the ‘at risk’ rule, they don’t automatically render R&D expenditures ineligible.

Truth: Even partial reimbursements can trigger the clawback provision, depending on the nature and amount of the recoupment.

Truth: Due to their complexity, consulting with R&D tax professionals, like Bulletpoint, can be invaluable in ensuring compliance and maximising claims.

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