Feedstock Adjustment Overview
When applying to register for the R&D Tax Incentive, you must include a feedstock adjustment when you R&D activities produce a marketable product or something you use.
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 a Feedstock Adjustment?
Basically, if you are supplying or using products produced by your R&D, you need to make a feedstock adjustment.
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.
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.
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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
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
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.
Basically, we identify eligible R&D activities and identify eligible R&D costs.
Call for Assistance 1300 658 508