R&D Tax Incentive – Depreciation Expense

 

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What is a depreciation expense?

Depreciation is the process of reducing the value of a business asset over time. In accounting, it’s a way to allocate the cost of an asset across its useful life. When it comes to the R&D tax incentive, you can claim the portion of depreciation that relates to assets used in eligible R&D activities.

Why is this important?

Depreciation is a major expense for many businesses, especially those involved in research and development. Knowing what you can and cannot claim under the R&D tax incentive can save you money and help you maximise your deductions. If you don’t handle it correctly, you might miss out on significant tax benefits.

What do you need to do?

You need to ensure that only the portion of an asset used for R&D is claimed under the R&D tax incentive. This requires careful record-keeping and, where necessary, apportioning the depreciation between R&D and non-R&D activities.

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Background on R&D tax incentive and depreciation

The R&D tax incentive is designed to support businesses that are conducting research and development activities. However, not all expenses are eligible for this incentive. Depreciation is one of the expenses that can be claimed, but only for assets directly used in R&D activities. If an asset is used partly for R&D and partly for other business activities, you must apportion the depreciation expense to reflect this.

 

How do you claim depreciation for R&D purposes?

To claim depreciation under the R&D tax incentive, follow these steps:

  • Identify your assets – Make sure the assets you are claiming depreciation for are being used directly in your R&D activities.
  • Apportion the depreciation – If an asset is used for both R&D and non-R&D purposes, only the portion used for R&D can be claimed.
  • Maintain records – Keep detailed records of how the asset is used, including time spent on R&D versus non-R&D activities.

Understanding Pooled Depreciation for R&D Tax Incentive Claims

Pooled depreciation allows businesses to group multiple low-value or similar assets and depreciate them collectively, simplifying accounting processes.

However, pooled depreciation under Division 328-D (which is commonly used by small businesses) is not eligible for the R&D tax incentive in Australia.

This is because the R&D tax incentive allows claims only for the decline in value of assets that are depreciated under Division 40, which calculates depreciation based on each asset’s individual usage.

If you’re conducting eligible R&D activities, choosing Division 40 depreciation methods for relevant assets is essential to ensure you’re maximising your R&D tax claims. This allows you to claim the portion of the depreciation that directly relates to R&D activities, which is not possible under pooled depreciation.

For businesses engaged in significant R&D activities, opting for individual depreciation under Division 40 may yield greater benefits in terms of eligible deductions, particularly for assets directly used in research and development.

It’s important to evaluate your overall tax position and asset use to determine the most beneficial depreciation method. While pooled depreciation offers simplicity, its limitations for R&D tax claims make it less advantageous if your assets are used extensively in eligible R&D projects.

Instant Asset Write-Off and Its Impact on R&D Tax Incentive Claims

The Instant Asset Write-Off (IAWO) allows businesses to claim an immediate deduction for the full cost of an eligible asset in the year it’s first used or installed. This can be a valuable tax benefit for companies that would otherwise depreciate assets over several years. However, if you’re conducting R&D activities, it’s important to carefully consider how using the IAWO impacts your R&D tax claims.

For assets written off under the simplified depreciation rules (Division 328-D), you cannot claim a notional R&D deduction for the decline in value of these assets under Division 355.

In other words, if you opt for the IAWO, the ability to claim R&D tax incentives on these assets is forfeited.

On the other hand, if you choose to depreciate the asset under Division 40 (which requires depreciating over the asset’s effective life), you can claim a portion of the asset’s depreciation as part of your R&D tax incentive—provided the asset is used in eligible R&D activities. This option may be more beneficial for companies heavily engaged in R&D, as it allows for ongoing deductions.

Ultimately, while the IAWO offers immediate tax relief, it may not be the best option for businesses focused on R&D. By opting for Division 40 depreciation, you can ensure that you’re maximising your tax benefits under the R&D tax incentive

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Need help with the R&D tax incentive?

At Bulletpoint, we have over ten years of experience in helping businesses navigate the complexities of the R&D tax incentive. With over 500 successful applications and numerous reviews and audits handled, we know how to ensure your application is strong and compliant. In fact, we’re Australia’s highest-rated R&D tax consultant, with over 250 Google reviews and an average rating of 4.8 stars. You can check out our Google reviews here.

If you need help with your R&D tax claim, call Bulletpoint on 1300 658 508, send us a message or book a meeting today.

Detailed Example #1 – Apportionment

Let’s take a detailed look at how depreciation, electricity usage, and the R&D tax incentive would work for a hypothetical company that is in a tax loss position. Assume your business, TechPro Pty Ltd, spends $1 million on manufacturing equipment that is used partly for R&D activities.

Asset Depreciation

The manufacturing equipment is classified as a depreciating asset under Division 40 of the Income Tax Assessment Act 1997. For this example, we’ll assume a standard accounting lifetime of 10 years (commonly used for industrial machinery). This means that each year, the business can depreciate the equipment by $100,000 ($1,000,000 ÷ 10 years).

Now, let’s assume that over the year, the equipment was used 60% of the time for eligible R&D activities and the remaining 40% for general manufacturing. The depreciation expense that can be claimed under the R&D tax incentive would be $60,000 ($100,000 × 60%).

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R&D Tax Incentive Calculation

Because the company is in a tax loss position, they are eligible for the 43.5% refundable R&D tax offset. This means that for the R&D-related depreciation expense, you can claim $26,100 (43.5% of $60,000) as a cash refund.

Additional Electricity Costs

In addition to depreciation, the equipment also consumes electricity. Let’s assume the total electricity cost for running the machine for the year is $50,000. Again, 60% of this cost is attributable to R&D usage, meaning $30,000 can be claimed as an eligible R&D expense.

Applying the 43.5% tax offset to the electricity costs, you can claim $13,050 (43.5% of $30,000) as a cash refund.

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Total R&D Tax Offset

To summarise, for the first year, the total claimable amount under the R&D tax incentive for this equipment is:

  • Depreciation Claim: $26,100
  • Electricity Claim: $13,050

Total Refund: $39,150

This refund can provide a significant cash flow boost to your business, especially when you are in a loss-making position. By correctly apportioning your expenses and ensuring they are R&D-related, you can take full advantage of the R&D tax incentive.

Key Takeaways

  • Depreciation for equipment used in R&D can be apportioned and claimed under the R&D tax incentive.
  • In a tax loss position, businesses receive a 43.5% refundable offset.
  • Ensure you are also capturing additional costs, such as electricity, which are directly linked to R&D activities.

If you need help maximising your R&D tax incentive claim, call Bulletpoint on 1300 658 508 or book a meeting to ensure your claim is fully optimised. We’ve helped hundreds of businesses get the most out of the R&D tax incentive, with over 500 successful claims lodged and a wealth of experience handling reviews and audits by AusIndustry and the ATO.

Detailed Example #2  – Instant Asset Write Off

Let’s consider how a loss-making entity (with no revenue) would handle the purchase of a 3D printer costing $20,000 that is used 100% for eligible R&D activities. In this case, because the entity is not generating any revenue, the instant asset write-off provides little benefit. Instead, the business would gain much more from depreciating the asset over time and claiming the R&D tax incentive.

Why Instant Asset Write-Off Is Not Useful

If the business is in a loss-making position, the instant asset write-off provides no immediate benefit because there is no taxable income to offset the deduction. This means that, even though the business could deduct the entire $20,000 in the first year, it would not result in any cash benefit, making this option less appealing for a loss-making entity.

Depreciation Over Time with the R&D Tax Incentive

Instead of opting for the instant asset write-off, the business can choose to depreciate the 3D printer over its useful life of 5 years. Since the asset is used 100% for R&D, the business can claim the 43.5% refundable R&D tax offset on the depreciation expense. Here’s how it works:

  • Depreciation per year: $20,000 ÷ 5 = $4,000 per year
  • R&D tax offset: 43.5% of $4,000 = $1,740 per year

This provides the business with an annual refundable tax benefit of $1,740. Over the 5-year period, the total tax refund amounts to $8,700.

Comparison: Depreciation vs Instant Asset Write-Off for a Loss-Making Entity

  • Instant Asset Write-Off: Offers no immediate tax benefit because the business has no taxable income to offset.
  • Depreciation with R&D Tax Incentive: Provides an annual tax benefit of $1,740 over 5 years, totalling $8,700 in refundable tax offsets, which can significantly improve cash flow for a loss-making business.

Key Takeaway

For a loss-making entity, depreciation with the R&D tax incentive offers significant cash flow benefits that can’t be realised through the instant asset write-off. By spreading the depreciation over several years and applying the R&D tax offset, the business receives a real, tangible cash benefit.

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

Navigating the complexities of the R&D tax incentive can be challenging, with numerous potential pitfalls and areas of concern. Common issues include accurately reporting aggregated turnover, ensuring genuine payments to associates, conducting R&D activities for your benefit, justifying overseas expenditures, and proving that expenditures are genuinely at risk.

At Bulletpoint, we have over 10 years of experience specialising in R&D tax incentives. With a proven track record of successfully lodging over 500 R&D claims, we have established ourselves as experts in the field. Our team is well-versed in handling both ATO and AusIndustry reviews and audits, ensuring your claims are robust and compliant.

Don’t just take our word for it – read our reviews and see why we are Australia’s highest-rated R&D tax consultant, with an average rating of 4.8 stars from over 250 Google reviews.

We are here to help you every step of the way. For expert guidance and to ensure your R&D tax incentive claims are compliant and maximised, reach out to us today:

Let Bulletpoint be your trusted partner in navigating the R&D tax incentive process. Contact us now and secure the benefits you deserve.

FAQ

Depreciation refers to the decline in value of an asset over time. Under the R&D tax incentive, you can claim depreciation on assets used in eligible R&D activities.

No, you can only claim the portion of depreciation that relates to the asset’s use in R&D activities. If the asset is used for non-R&D activities as well, you must apportion the depreciation accordingly.

Yes, you can claim pooled depreciation for assets used in R&D, but the amount must be apportioned to reflect the proportion of use for R&D purposes.

No, if you’ve claimed an asset under the instant asset write-off, you cannot claim it again under the R&D tax incentive. The ATO does not allow double-dipping on tax benefits.

You must apportion the depreciation based on how much the asset is used for R&D activities. Only the R&D-related portion can be claimed under the R&D tax incentive.

Yes, costs directly related to R&D activities, such as electricity for equipment used in R&D, can also be claimed under the R&D tax incentive.

Yes, temporary full expensing allows businesses to fully deduct the cost of assets used in R&D activities and claim the proportionate R&D-related expenses under the R&D tax incentive.

You should maintain detailed records showing the asset’s use, including time or percentage spent on R&D activities, to support your depreciation claim.

Yes, if you’re in a tax loss position, you may receive the 43.5% refundable R&D tax offset on eligible depreciation expenses for assets used in R&D.

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Bulletpoint is a Melbourne-based consultancy specialising in guiding businesses through the complex process of the R&D tax incentive. With a decade of experience under our belt, we’re proud to be led by Australia’s highest-rated R&D tax consultant. We’ve successfully lodged over 500 R&D claims, demonstrating a proven track record.

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We’re proud to have an average rating of 4.8 stars from over 250 Google reviews. Despite our success, we continue to strive for improvement, learning from every piece of feedback we receive.

At Bulletpoint, we excel in helping businesses navigate the complexities of the R&D tax incentive process, ensuring they reap the benefits they deserve. As experts in our field, we’re well-versed in what works and what doesn’t when it comes to aligning businesses’ perceptions of R&D with the government’s eligibility criteria.

So, if you’re looking for accessible expertise and a proven success rate, you’ll find it with us at Bulletpoint. We’re ready to guide you through the R&D tax incentive process with a blend of professionalism and personality, ensuring your experience with us is not just successful, but enjoyable as well.

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