R&D Tax Incentive – Aggregate Turnover

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Navigating Aggregate Turnover for the R&D Tax Incentive

For businesses looking to benefit from the R&D Tax Incentive, understanding “aggregate turnover” is a crucial first step. Aggregate turnover plays a major role in determining eligibility, yet it’s a term that often causes confusion. 

How to Lose $46 Million: The Case of Plutora

In one of the more striking cases of financial impact due to aggregated turnover rules, Australian software company Plutora faced substantial setbacks after receiving a $46 million investment from Macquarie Capital. Plutora’s eligibility for R&D tax rebates was challenged when the ATO denied the refundability of its claims, primarily due to the complexities of its ownership structure and aggregated turnover.

To qualify for the refundable R&D tax offset, a company’s aggregated turnover must be below $20 million. However, Plutora’s complex ownership, with significant stakes held by connected entities, meant that its total revenue calculation included income from these shareholders. This grouping pushed its aggregated turnover above the threshold, disqualifying Plutora from the refundable offset. The loss of R&D rebates severely impacted Plutora’s Australian operations, diminishing Macquarie’s investment valuation. Ultimately, Macquarie’s stake was bought back by Plutora’s CEO, Dalibor Siroky, for just $1, marking a dramatic financial loss.

The Plutora case highlights how essential it is for companies with complex ownership structures to carefully calculate aggregated turnover. Failing to account for grouping rules can lead to denied claims, diminished investment, and operational challenges.

What is Aggregate Turnover?

In the context of the R&D Tax Incentive, aggregate turnover is the combined annual income of your business and any associated or connected entities. Unlike a straightforward revenue number, aggregate turnover takes into account your broader financial relationships—such as with subsidiaries or other related entities. Why? The tax incentive program uses aggregate turnover to determine which category your business fits into and, subsequently, the level of tax offset you might qualify for.

For example, if your aggregate turnover is below $20 million, your business could be eligible for a refundable tax offset. For businesses over this threshold, a non-refundable tax offset may be available, though it impacts your benefit differently.

To make things more complex, there are rules around grouping entities for the purposes of calculating aggregate turnover. If this sounds complicated, that’s because it often is! For a closer look, check out our page on R&D grouping rules to see how related entities are assessed together.

When determining your aggregate turnover, we recommend thorough guidance to ensure your claim is positioned correctly. At Bulletpoint, we bring years of experience helping businesses navigate these requirements, identifying the best path forward to maximise benefits under the R&D Tax Incentive.

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Aggregate Turnover Definition According to Legislation

In the context of the R&D Tax Incentive, the term aggregate turnover is defined in the Income Tax Assessment Act 1997 (ITAA 1997). According to Section 328-115 of the legislation, aggregate turnover encompasses the annual turnover of a business and any connected or affiliated entities. Here’s a closer look at what this entails:

1. Annual Turnover – Defined as the total ordinary income a business derives in the ordinary course of business.
2. Connected or Affiliated Entities – Includes entities that are connected by ownership, control, or other affiliations, as well as any subsidiaries or controlled foreign entities.

This definition is significant as it clarifies that the R&D Tax Incentive applies a broader view of revenue than simply your primary business income. Aggregate turnover calculations are crucial in determining your eligibility for various offsets under the R&D Tax Incentive.

For the full legislative definition, refer to Section 328-115 of the Income Tax Assessment Act 1997 on the Australia Government’s legislation site.

Understanding “Ordinary Course of Business” in Aggregate Turnover

The concept of ordinary course of business is critical when calculating aggregate turnover for the R&D Tax Incentive. Essentially, this term refers to income generated from regular business activities, which contributes to the aggregate turnover calculation. But what happens when a business receives a one-off grant or other exceptional income? Let’s look at an example.

I once worked with a client whose revenue sat just under the $20 million threshold, around $19 million. Mid-year, they were awarded a $6 million government grant for a special project. This bumped their total revenue up over $20 million, which normally could have affected their eligibility for the refundable offset. However, because this grant was not part of the ordinary course of business, it was excluded from their aggregate turnover. The grant wasn’t revenue generated from typical operations, so it didn’t alter their standing under the R&D Tax Incentive rules.

Situations like these underscore the importance of understanding what qualifies as “ordinary” income and what doesn’t. While income from regular sales and services would be included, grants or one-off payments can be assessed differently, allowing some flexibility in meeting eligibility thresholds. This distinction can make a significant difference in your claim.

Typical Revenue Outside the “Ordinary Course of Business”

When calculating aggregate turnover for the R&D Tax Incentive, not all revenue is created equal. Certain types of income, such as grants or one-off payments, might not fall under the “ordinary course of business.” If they don’t align with a business’s regular, recurring activities, these income sources could potentially be excluded from the aggregate turnover. However, it’s worth noting that exclusions of this nature can be subject to interpretation by the ATO, so businesses should proceed with caution.

Examples of Non-Ordinary Course of Business Revenue

1. Government Grants – Grants are a common form of income that may fall outside a business’s ordinary course of business, especially if they’re awarded for special projects rather than routine operations. For example, a technology company receiving a one-time government grant for cybersecurity research may argue this isn’t part of its usual analytics software revenue. However, the ATO could still review whether this project aligns with core activities and decide differently.

2. Insurance Payouts – In cases of business interruption, property damage, or other events, insurance payouts can provide a financial boost. These are generally one-off payments and aren’t part of a company’s daily operations. If an insurance payout is substantial enough to affect the aggregate turnover, it may be classified as non-operational income. However, the ATO might assess whether the payout relates to core business risks, which could complicate exclusion eligibility.

3. Asset Sales – Selling business assets—such as equipment, real estate, or intellectual property—could bring in considerable revenue, but this is typically outside the scope of daily business operations. Asset sales are often seen as irregular and are generally considered for exclusion from aggregate turnover. Again, however, the ATO may evaluate whether these sales were part of a broader business strategy or restructuring, potentially affecting its interpretation.

4. Capital Contributions or Private Investments – Occasionally, businesses receive significant capital contributions from shareholders or private investors. Since these are capital injections rather than revenue from standard operations, they might not need to be included in aggregate turnover. Still, the ATO has the discretion to review how the funds are used, particularly if they directly fuel operational growth or expansion.

5. Litigation Settlements – Legal settlements—especially for IP disputes or contractual disagreements—are also typically one-off revenue sources. They don’t represent ordinary income but can inflate turnover. Although often excludable, the ATO may look closely if the settlement relates to a core component of the business.

The ATO’s approach to assessing non-ordinary income is often case-dependent. While it’s possible to justify certain exclusions, businesses should be prepared for the ATO to examine the nature of the income and its relevance to regular activities. For businesses considering these exclusions, well-documented evidence and, if necessary, a consultation with a tax professional are essential to building a case that withstands ATO scrutiny.

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What Qualifies as a Connected or Affiliated Entity?

The Income Tax Assessment Act 1997 outlines that connected or affiliated entities include any businesses that are owned or controlled by the same person or group. Generally, this means that if you have influence over the operations, management, or finances of another entity, or vice versa, these entities are “connected” for the purposes of aggregate turnover.

Examples of Connected or Affiliated Entities

1. Subsidiaries  – If your business owns a 60% stake in a smaller company, that subsidiary’s revenue will count towards your aggregate turnover. Even if this subsidiary operates independently or in a different sector, its income is part of your business’s broader financial picture.

2. Joint Ventures – Suppose your business and another company have created a joint venture, each owning 50%. In this case, the turnover generated by the joint venture would need to be considered proportionally based on your ownership stake when calculating aggregate turnover.

3. International Branches or Affiliates – If your business owns an overseas affiliate, such as a manufacturing plant or sales office, this foreign entity’s revenue would be part of your aggregate turnover. Even if the branch is in another country, its income can still impact your claim.

4. Common Ownership in Family Trusts or Private Companies – For family businesses or privately held companies, it’s common to see ownership structures involving multiple trusts or companies. For example, if a business owner also controls a separate company that provides ancillary services to the main business (like IT or HR support), this related entity’s revenue may also need to be included.

In each of these cases, adding revenue from connected or affiliated entities can easily push a business over the $20 million threshold. For businesses with complex structures, it’s critical to thoroughly assess all connections to get an accurate aggregate turnover calculation. This ensures your claim aligns with the R&D Tax Incentive’s criteria and avoids potential compliance issues down the track.

Is Your Business Positioned to Claim?

Calculating aggregate turnover can be more complex than it seems, particularly if your business involves multiple entities or has overseas connections. Getting this calculation right is essential, as it influences your eligibility for the R&D Tax Incentive and ensures your claim is compliant. For businesses with layered structures or foreign entities, it’s worth taking the time to accurately assess aggregate turnover to avoid potential missteps.

Our main R&D Tax Incentive page offers a deeper look at how aggregate turnover fits into the broader criteria and what it means for claim eligibility.

How to Calculate Aggregate Turnover for the R&D Tax Incentive

Calculating aggregate turnover isn’t always straightforward, but understanding the basics is crucial. Aggregate turnover for the R&D Tax Incentive includes the total revenue your business and any connected or controlled entities earned in a financial year. This doesn’t just mean sales revenue; it also covers other types of income, such as rental income or foreign revenue, depending on how your entities are structured.

To avoid issues, it’s essential to:

• Identify All Related Entities – Include revenue from subsidiaries, affiliates, and any connected foreign businesses.
• Consider Both Domestic and Foreign Income – Revenue from overseas entities counts, which can make the calculation more complex.
• Exclude Non-Relevant Income – Certain items, like dividends or capital gains, may not need to be included, depending on your situation.

If your business structure is more complex, calculating aggregate turnover accurately is vital to your eligibility and claim positioning. A thorough review of your business’s income streams and ownership structure can help ensure compliance.

Common Mistakes When Calculating Aggregate Turnover and How to Avoid Them

Calculating aggregate turnover can be tricky, and errors can have serious implications on your R&D claim. Here are some common pitfalls and how to avoid them:

• Overlooking Connected Entities – Businesses often miss including revenue from entities they control, which can lead to underreported aggregate turnover and potential compliance issues.
• Misclassifying Revenue – It’s easy to make mistakes with foreign income or revenue types like interest, but correctly categorising these is essential for an accurate calculation.
• Assuming Aggregate Turnover is the Same as Business Revenue – Aggregate turnover isn’t limited to your primary revenue; it includes income from all connected businesses. Missing these streams can lead to inaccurate eligibility assessments.

These errors are easy to make, especially for businesses with complex structures or multiple revenue types. Correctly identifying and classifying income ensures you stay within the R&D Tax Incentive guidelines.

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The Importance of Grouping Rules in Aggregate Turnover

The R&D Tax Incentive requires that businesses group connected or affiliated entities when calculating aggregate turnover. This is done to prevent businesses from breaking down their structure to fall below the $20 million threshold. If your business has subsidiaries or overseas branches, understanding the R&D grouping rules is essential.

Grouping rules mean that your aggregate turnover includes all revenue from these entities, not just your main business. This can have a big impact on the type of tax offset available:

• Entities under Common Control – Revenue from any entity controlled by the same owners must be included.
• Cross-Border Connections – Foreign subsidiaries or affiliates count towards your turnover, which is especially important if you operate globally.

Carefully applying these grouping rules is critical for determining whether you’re eligible for the refundable or non-refundable offset.

How Aggregate Turnover Impacts the R&D Intensity Calculation

One factor that’s gaining attention isR&D intensity, a measure of your R&D expenditure as a percentage of your total turnover. Aggregate turnover directly affects this calculation, which in turn can impact the benefits you receive from the R&D Tax Incentive. For more on R&D intensity, refer to our dedicated page here.

Here’s how aggregate turnover comes into play:

• Higher Turnover, Lower R&D Intensity – If your aggregate turnover is high, your R&D intensity percentage may be lower, potentially affecting the value of your offset.
• Strategic Planning for R&D Investment – Understanding your turnover and its impact on R&D intensity allows you to plan your R&D spending more strategically to maximise your claim.

A well-calculated R&D intensity can help position your business for the best possible incentive outcome, so understanding the relationship between turnover and R&D spending is key.

Hypothetical Scenario: Innovative Solutions Pty Ltd

Innovate Solutions Pty Ltd is an Australian technology company focusing on AI-powered data solutions. The business includes multiple entities and income sources, some of which may not fit into the “ordinary course of business” for aggregate turnover calculations. Initially, the aggregate turnover was calculated at over $20 million, but after a careful review, Innovate Solutions was able to adjust this to fall below the threshold.

Business Structure and Revenue Breakdown

1. Innovate Solutions Pty Ltd (Head Office) – Main operations generating $13 million in revenue from software and services in Australia.

2. Innovate Research Inc. – A U.S.-based subsidiary, 100% owned by Innovate Solutions, with $5 million in revenue from U.S. research projects.

3. Innovate Labs Pty Ltd – An Australian R&D entity, 55% owned, bringing in $2.5 million from local partnerships and projects.

4. One-Time Government Grant – Innovate Solutions received a $4 million Australian government grant to develop cybersecurity technology—a special project distinct from its core software operations.

Initial Aggregate Turnover Calculation (Above $20M)

Initially, Innovate Solutions calculated aggregate turnover as follows, including all revenue without exclusions:

• Revenue from Innovate Solutions Pty Ltd – $13 million
• Revenue from Innovate Research Inc. – $5 million
• Revenue from Innovate Labs Pty Ltd – $2.5 million
• One-Time Government Grant – $4 million

Total Initial Aggregate Turnover: $13 million + $5 million + $2.5 million + $4 million = $24.5 million

This amount placed Innovate Solutions above the $20 million threshold, impacting its R&D Tax Incentive eligibility and reducing potential benefits.

Adjusted Calculation (After Exclusions) to Bring it Under $20M

Upon review, Innovate Solutions identified potential exclusions:

1. Exclusion of One-Time Government Grant
   The $4 million government grant is classified as a unique, non-recurring payment supporting a special R&D project unrelated to Innovate Solutions’ regular business. Since it isn’t part of the ordinary course of business, Innovate Solutions justified excluding it from aggregate turnover.

2. Partial Revenue from Innovate Labs Pty Ltd
   With only a 55% ownership in Innovate Labs Pty Ltd, Innovate Solutions re-evaluated the structure and excluded the remaining 45% of the revenue ($2.5 million x 45% = $1.125 million) since it falls under an R&D-focused partnership rather than typical operational income.

After these adjustments, the revised calculation is as follows:

• Revenue from Innovate Solutions Pty Ltd – $13 million
• Revenue from Innovate Research Inc. – $5 million
• Adjusted Revenue from Innovate Labs Pty Ltd – $1.375 million (after excluding the non-controlled portion)
• Exclusion of Government Grant – -$4 million

Total Adjusted Aggregate Turnover = $13 million + $5 million + $1.375 million = $19.375 million

By strategically excluding the non-recurring government grant and adjusting the partially owned subsidiary’s revenue, Innovate Solutions successfully brought its aggregate turnover below the $20 million threshold. This allows the company to qualify for the refundable R&D tax offset, maximising its R&D Tax Incentive benefits.

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Why Choose Bulletpoint for Your R&D Tax Incentive Claim?

Navigating the R&D Tax Incentive can be complex, especially when it comes to issues like aggregate turnover, connected entities, and interpreting “ordinary course of business.” At Bulletpoint, we bring a decade of experience and a strong track record, with over 500 successful claims lodged across a variety of industries.

Our clients have rated us an average of 4.8 stars on Google Reviews, thanks to our straightforward, hands-on approach. If you’re ready to maximise your R&D benefits and need expert guidance, book a meeting with us today to get started.

 

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