What is Feedstock Adjustment?
When applying for the R&D Tax Incentive, you must include a feedstock adjustment when your R&D activities produce a marketable product or something you use.
Background
Much of the government advice on how to apply the R&D tax incentive feedstock adjustment isn’t a great indication on what you are supposed to do.
Let’s break it down:
Essentially, if you are conducting R&D work on something that becomes something you:
- are going to sell, i.e. has a tangible market price
- will use yourself
You need to factor the feedstock adjustment into your company net position.
It will ultimately affect the amount you get back.
What the ATO want you to do is factor in experimental costs that financially benefit you.
It seems obvious, right?
Everyone developing something new does it to sell it somehow.
Let’s break down the government information and make what they want clear.
What is Feedstock
Feedstock is whatever raw materials you use to supply or fuel your work.
This could be raw materials (crude oil, etc.) or other goods or materials that are transferred during the process of an experimental activity that makes a product.
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Example
Let’s say you are making customisations on a vehicle.
You are changing the way the engine works or other components that require experimentation.
After you are done with that, you then sell the vehicle for a certain amount.
Essentially, this amount you are selling it for needs to be factored into an feedstock adjustment into your R&D tax incentive claim.
Only claim the feedstock adjustment element for the year in which it is sold
You are only required to calculate this when it is relevant, not predict its market value, etc.
What do you include in the Calculation?
The calculation will come from a number of things, usually industry specific.
Some industries and projects will rarely have feedstock components.
You should consider a feedstock adjustment if you are claiming the following within the FY being claimed:
- Costs on acquiring or producing feedstock materials (crude oil, grain, etc.)
- The energy required to process or produce the materials
- Any materials or prototypes being sold or supplied
- Using the finished product for your own use
Keep in mind you are allowed to not claim the costs for these activities and avoid claiming the feedstock.
This is usually a self-assessment, i.e. is the rebate even improved by including these activities?
Things to check prior to undertaking this are:
- Both Core and Supporting Activities can be counted as feedstock
- Look at the costs of the feedstock activity—is it worth including in the claim?
R&D Feedstock Calculation
The feedstock adjustment guidance on this is a simple enough, but the examples and methods can get a little convoluted.
What you essentially need to be able to do is calculate:
- Revenue – the relevant amount made from selling or applying
- Costs – what the material costs
We can break the feedstock adjustment down with a simple process:
- Determine what your material costs are
- Determine what the revenue figure is for the activity
- Select the smallest figure and multiply it by 1/3
- Multiply this by the company tax rate (27.5%)
This final figure is what your rebate (feedstock adjustment) is likely to be altered by.
Sounds, easy? It should be, but the information circling it is unnecessarily dense.
Things to check before applying the R&D tax incentive feedstock adjustment are:
- The company tax rate will differ, so keep up to date with what yours is
- Ensure these are the material costs for the work being claimed—the activities
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Worked Example
Let’s use one of the government’s examples and make it clearer.
You are a company that is developing a granite crushing process.
- Revenue – You sell the granite sand you produce for $9,000.
- Costs – The granite cost $10,000 to produce.
- Feedstock Analysis – Your smaller figure is $9,000, so multiple this by a third.
- Feedstock Adjustment – $3,000.
To further understand it, you would multiply this by 27.5% (giving you $825), which is the amount of income tax you are likely to pay (rebate reduction).
Things to check:
- The revenue figure received is the actual amount received upon selling it
- Your feedstock expenditure figure is your feedstock adjustment figure
Feedstock Adjustment Timing
When are you expected to include this?
You aren’t to make a feedstock adjustment every year you are working with feedstock.
The main element of the feedstock adjustment is that you factor it in once the material has been sold or supplied.
That is, if it won’t be sold or supplied until the following financial year, you will do the calculation in the following year’s claim.
Just know, as soon as you have a physical receipt or supply revenue for your development, you need to include a feedstock adjustment.
Things to check:
- Keep accounts of when you plan to sell or supply your activity
- Make prospective R&D claim year plans, if you know you are going to be dealing with feedstock
Summary
Much of the government guidance around the feedstock adjustment is convoluted and poorly worded.
It is something they have tried to crack down on before but have realised their own guidance needs a bit of work.
Unfortunately, this doesn’t protect you from being caught out.
The feedstock adjustment is there to mitigate and handle net benefit returns.
Even if you’re unsure, make the calculation anyway and determine its material effect on the claim.
Further Assistance
An R&D Tax Incentive consultant essentially makes sure that what the business is claiming is compliant with the Income Tax Assessment Act 1997 in particular Division 355 – Research and Development.
Basically, we identify eligible R&D activities and identify eligible R&D costs.
Frequently Asked Questions
The feedstock adjustment ensures that when R&D outcomes (products or services) are sold or used, the amount of R&D tax offset claimed on inputs (feedstock inputs) is balanced against any revenue earned.
The feedstock adjustment is calculated based on the difference between the amount of R&D tax offset you claimed on feedstock inputs and the market value of the product or service derived from those inputs.
Companies need to make a feedstock adjustment when they receive a benefit from selling or using the goods or materials (feedstock outputs) that result from their R&D activities.
No, even if the R&D outputs (like a prototype) are used for the company’s purposes instead of being sold, a feedstock adjustment may still be necessary.
Feedstock inputs typically include raw materials or components that are transformed or processed during R&D activities.
The feedstock adjustment reduces the amount of R&D tax offset you can claim, ensuring you don’t get double benefits from both the sale (or use) of the R&D outcome and the R&D tax offset.
Yes, the feedstock adjustment should be made in the income year in which the feedstock output is sold or used.
Overestimating feedstock input costs can result in a higher initial R&D tax offset claim, but when the feedstock adjustment is made, any excess amount will be balanced out, possibly leading to tax liabilities.
Companies should use a reasonable approach to determine the market value, considering factors like sale prices of similar products, production costs, and other relevant market conditions.
If there’s no established market value, companies should use a reasonable basis to determine an arm’s length value for the R&D output.
Yes, there are specific circumstances where feedstock adjustments may not apply, such as when the feedstock output has no market value and is not used for the company’s benefit.
Companies should maintain detailed records of feedstock input costs, methodologies used for valuing R&D outputs, sales records, and any internal use of the R&D outputs.
No, feedstock inputs relate to the year in which the R&D activities were conducted and cannot be carried forward to future years.
All entities, irrespective of their size, are subject to feedstock provisions, ensuring that they don’t receive double benefits from both the R&D tax offset and the commercialisation of R&D outcomes.
The “arm’s length” principle ensures that the valuation of R&D outputs is consistent with what independent parties would agree upon in the same circumstances.
The ATO may challenge aggressive or unreasonable feedstock valuation methodologies, which could lead to adjustments, penalties, and interest.
Even if no direct consideration is received, if there’s a benefit to the company from disposing of the R&D output, a feedstock adjustment may still be necessary.
Feedstock provisions specifically relate to the R&D tax offset and ensure no double benefit is received. They operate in conjunction with other aspects of tax law to ensure the correct tax treatment of R&D activities.
Companies can refer to ATO guidance or consult with R&D tax specialists, like those at Bulletpoint, to ensure they comply with feedstock provisions.
Yes, if there are changes to the feedstock input amounts, it may necessitate amendments to previously lodged R&D tax offset claims.
