R&D tax incentive – Grouping rules

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What are Grouping Rules?

Grouping rules determine how related entities are treated as a single entity for the purposes of the R&D tax incentive.


When Does This Issue Arise?

Grouping rules can become particularly problematic when a shareholder has more than 40% ownership in your company and the aggregate (combined) revenue exceeds $20 million.  

Why Is This Important?

When a major shareholder’s control brings the combined revenue of the group above $20 million, your eligibility for certain R&D tax offsets may be compromised. This scenario could lead to reduced benefits or even ineligibility for the incentive, significantly impacting your financial planning and R&D investments.

 

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What is Aggregated Turnover?

Aggregated turnover is the total annual turnover of your company combined with the turnover of any connected or affiliated entities. This figure determines your eligibility for different levels of the R&D tax incentive.


How to lose $46 million

In a notable case, Plutora, an Australian software and services company, received $46 million in funding from Macquarie Capital. However, Plutora faced significant challenges related to its eligibility for research and development (R&D) tax rebates, ultimately leading to its Australian operations’ shutdown. The Australian Taxation Office (ATO) denied the refundability of Plutora’s past R&D tax incentive claims, primarily due to issues surrounding aggregated turnover and grouping rules.

The key issue was whether Plutora’s aggregated turnover was less than $20 million. For companies to qualify for the refundable R&D tax offset, their aggregated turnover must be below this threshold. Plutora’s complex ownership structure, involving significant stakes held by major shareholders, complicated this calculation. The aggregation of revenues for tax purposes meant that Plutora’s overall turnover included the revenues of these connected entities, pushing it above the eligibility limit for the refundable offset.

As a result, Macquarie’s $46 million investment in Plutora was significantly devalued, with their stake being sold back to Plutora’s co-founder and CEO, Dalibor Siroky, for just $1. This case underscores the critical importance of understanding and correctly applying grouping rules and aggregated turnover calculations to maintain eligibility for R&D tax incentives.

For further details, you can read more about this case on William Buck’s article and Startup Daily.


The Problem with Major Shareholders and High Revenue

Here’s why this matters:

  • Ownership Threshold: If a shareholder holds more than 40% of your company, their influence is substantial. This control links your company with others they own, impacting how you calculate combined turnover and expenses.
  • Revenue Cap: Once the combined revenue of these related entities surpasses $20 million, your access to the refundable R&D tax offset is restricted. Instead, you might only qualify for the non-refundable offset, which is less beneficial, particularly for smaller or growing businesses.

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How Aggregated Turnover Affects Your R&D Tax Incentive

Even if your company’s individual turnover is below $20 million, the combined turnover with connected or affiliated entities could push you over the threshold. This aggregated figure is what the Australian Taxation Office (ATO) uses to assess your eligibility.

Implications for Your R&D Tax Offset:

  • Refundable R&D Tax Offset: For companies with an aggregated turnover of less than $20 million, this offset provides a cash refund, which can be crucial for smaller or cash-strapped businesses.
  • Non-Refundable R&D Tax Offset: For companies with an aggregated turnover exceeding $20 million, only the non-refundable offset is available. This offset reduces the tax payable but does not provide a cash refund, which is less beneficial for cash flow.

Case Study 1
You operate a manufacturing business with an annual turnover of $18 million. However, you’re part of a group of companies with a combined aggregated turnover of $25 million due to common ownership. Despite your individual turnover being below the threshold, the aggregated figure means you only qualify for the non-refundable R&D tax offset, affecting your financial planning and R&D budget.  

Case Study 2
Imagine your Australian company incurs $500,000 in R&D expenses but has no income. Typically, you’d expect to get back 43.5% of these expenses through the refundable R&D tax offset. However, due to your ownership structure, things change.

  • Your Company: $500,000 in R&D expenses
  • Holding Company in Singapore: 100% ownership
  • Multinational Corporation: 45% ownership in the Singapore holding company

Due to the aggregated turnover of these entities exceeding $20 million, you only qualify for the non-refundable R&D tax offset.

Therefore you get:

  • Expected Refundable Offset: 43.5% of $500,000 = $217,500 cash rebate
  • Actual Non-Refundable Offset: 38.5% of $500,000 = $192,500 future tax offset

 

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A bit more about control

Understanding these definitions is crucial when calculating your aggregated turnover for the R&D tax incentive, as it determines your eligibility for the refundable or non-refundable tax offsets. If you need further assistance with navigating these complexities:

  • Direct Control – According to the ATO, direct control exists if your company owns or has the right to acquire interests in another entity that carry at least 40% of the rights to distributions of income, capital, or net income of the partnership if the other entity is a partnership, or at least 40% of the voting power if the other entity is a company 
  • Indirect Control – Indirect control is established when your entity directly controls a second entity, and the second entity, in turn, controls a third entity. Essentially, control cascades down the chain of entities, meaning your control over the second entity extends to the third 
  • Affiliate – An affiliate, as defined by the ATO, is an individual or company that acts, or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you, regarding the business affairs of the individual or company. This relationship can be less formal but is still based on fact, typically influenced by close family relationships or business connections 


You are playing advanced level R&D tax if you are on this page

When it comes to navigating the complexities of grouping rules for the R&D tax incentive, understanding the nuances of direct control, indirect control, and affiliates is crucial. These rules can significantly impact your eligibility for the refundable R&D tax offset. If your aggregated turnover exceeds $20 million due to these relationships, you may only qualify for the non-refundable offset, affecting your financial planning.

At Bulletpoint, we specialise in helping businesses like yours maximise their R&D tax claims. With over 10 years of experience and more than 500 successful R&D applications, we have the expertise to ensure your claims are robust and compliant. We’ve successfully defended claims against both the ATO and AusIndustry, so you can trust us to safeguard your interests.

Facing issues with grouping rules and aggregated turnover?

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FAQ

Grouping rules determine how related entities are treated as a single entity for R&D tax incentive purposes, impacting eligibility and the amount claimable.

Aggregated turnover, which is the combined annual turnover of all related entities, is crucial for determining whether you qualify for the refundable or non-refundable R&D tax offset.

Direct control exists when your company owns or has the right to acquire at least 40% of another entity’s interests, affecting how turnovers are aggregated for the tax incentive.

Indirect control occurs when your entity controls another entity, which in turn controls a third entity, requiring all these turnovers to be aggregated.

An affiliate is an individual or company that acts in accordance with your directions or wishes regarding business affairs, influencing aggregated turnover calculations.

If your aggregated turnover exceeds $20 million, you are only eligible for the non-refundable R&D tax offset, which reduces tax payable but doesn’t provide a cash refund.

A shareholder with more than 40% control means their turnover must be included in the aggregated turnover, which can affect your eligibility for the refundable offset.

Yes, international ownership can impact your aggregated turnover if the foreign entities are connected or affiliated, affecting your eligibility for the refundable offset.

The refundable R&D tax offset provides a cash refund for companies with an aggregated turnover of less than $20 million, making it highly beneficial for cash flow.

Maximise your R&D tax benefits and navigate complex grouping rules with Bulletpoint. Contact us today for expert guidance.

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