R&D Tax Incentive – Feedstock Adjustment
What is Feedstock Adjustment?
A feedstock adjustment refers to an adjustment made when R&D activities result in a marketable product or something used by the business, impacting the R&D Tax Incentive claim.
Why is a Feedstock Adjustment Necessary?
The feedstock adjustment is required to ensure that the R&D Tax Incentive only applies to eligible R&D activities and expenses. When your research and development efforts result in a marketable product or a material that is used in your business, this adjustment accounts for the value of those items to prevent the R&D tax offset from being applied to production costs, which fall outside the scope of R&D. By making this adjustment, your claim remains compliant with government regulations and reflects the true cost of R&D activities.
“Feedstock adjustments align your R&D claim with eligible expenses.”
When Does a Feedstock Adjustment Apply?
A feedstock adjustment applies when your R&D activities result in a product or material that is either sold or used in your business. For example, if your R&D processes lead to the creation of a product that you later sell or incorporate into your operations, the value of that product must be accounted for through a feedstock adjustment. This adjustment ensures that the R&D Tax Incentive applies only to genuine research and development costs, not commercial production or use.
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How to Calculate a Feedstock Adjustment
The feedstock adjustment calculation may vary depending on your industry and the specific R&D activities. Some industries, such as software or service-based companies, rarely have feedstock components. However, if your R&D involves creating tangible products, such as in manufacturing or agriculture, a feedstock adjustment might apply.
You should consider a feedstock adjustment if you’re claiming the following types of costs during the financial year:
- Costs incurred in acquiring or producing feedstock materials (e.g., crude oil, grain).
- Energy costs related to processing or producing these materials.
- Any materials or prototypes sold or supplied as a result of the R&D activities.
- Using the finished product or material for your own business operations.
If any of these apply, you must factor a feedstock adjustment into your claim. However, keep in mind that you can choose not to claim these costs and avoid the adjustment altogether. In some cases, this might be beneficial if the inclusion doesn’t significantly improve your R&D tax rebate.
“Did you know a feedstock adjustment can reduce your R&D tax offset by up to 33%? Make sure you get it right!”
Example of R&D Feedstock Adjustment Calculation
Let’s break down the feedstock adjustment process using a simple example:
- First, determine the material costs associated with producing the feedstock materials involved in your R&D activities. For instance, your business spends $100,000 on raw materials during the R&D process.
- Next, calculate the revenue generated from selling the resulting product or using it in your business. In this example, you sell the product for $120,000.
- Compare the material costs and the revenue, and select the smaller figure. In this case, $100,000 (the material cost) is smaller than the $120,000 revenue.
- Then, apply the feedstock adjustment formula by multiplying the smaller figure by one-third (1/3). So, $100,000 × 1/3 equals $33,333.
- Finally, multiply this result by your company’s tax rate. Assuming your tax rate is 27.5%, the calculation would be $33,333 × 27.5%, which equals $9,167.
This $9,167 represents the reduction in your R&D tax offset due to the feedstock adjustment.
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Example 1: Standard Feedstock Adjustment
- A company spends $150,000 on raw materials during their R&D process.
- The revenue generated from selling the resulting product is $200,000.
- Since the material cost of $150,000 is lower than the revenue, this figure is used in the adjustment.
- Multiply $150,000 by one-third (1/3), resulting in $50,000.
- If the company’s tax rate is 27.5%, the calculation would be $50,000 × 27.5%, which equals $13,750.
In this case, the company’s R&D tax offset is reduced by $13,750 due to the feedstock adjustment.
Example 2: When Revenue is Lower Than Material Costs
- A business spends $120,000 on materials during R&D activities.
- The product from the R&D is sold for $80,000, which is lower than the material costs.
- Since the revenue of $80,000 is lower than the material costs, this smaller figure is used in the feedstock adjustment.
- Multiply $80,000 by one-third (1/3), resulting in $26,667.
- Using a 27.5% tax rate, the calculation is $26,667 × 27.5%, which equals $7,333.
Here, the R&D tax offset is reduced by $7,333 due to the feedstock adjustment.
Example 3: Self-Use of the Product
- A company spends $100,000 on materials during the R&D process to develop a product used internally rather than sold.
- The internal value assigned to the product is estimated at $110,000.
- The material cost of $100,000 is smaller than the internal value, so this figure is used for the adjustment.
- Multiply $100,000 by one-third (1/3), resulting in $33,333.
- With a tax rate of 27.5%, the calculation would be $33,333 × 27.5%, which equals $9,167.
In this case, the company’s R&D tax offset is reduced by $9,167 due to the feedstock adjustment, even though the product wasn’t sold.
Example 4: Low Material Costs, High Revenue
- A company spends $50,000 on materials during their R&D activities.
- The resulting product is sold for $300,000, generating significant revenue.
- Since the material costs of $50,000 are much lower than the revenue, this smaller figure is used for the feedstock adjustment.
- Multiply $50,000 by one-third (1/3), resulting in $16,667.
- With a tax rate of 27.5%, the calculation would be $16,667 × 27.5%, which equals $4,583.
In this case, the R&D tax offset is reduced by $4,583 due to the feedstock adjustment.
Example 5: Using Multiple Products from R&D
- A business spends $200,000 on materials during R&D, creating two separate products that are both sold.
- The first product is sold for $90,000, and the second is sold for $110,000, generating a total of $200,000 in revenue.
- Since the revenue and material costs are equal at $200,000, this figure is used in the adjustment.
- Multiply $200,000 by one-third (1/3), resulting in $66,667.
- With a tax rate of 27.5%, the calculation would be $66,667 × 27.5%, which equals $18,333.
In this scenario, the company’s R&D tax offset is reduced by $18,333 due to the feedstock adjustment.
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Common Mistakes to Avoid with Feedstock Adjustments
Feedstock adjustments can be tricky, and many businesses make mistakes that could impact their R&D tax claim. Here are a few common pitfalls to watch out for:
- Overlooking the need for an adjustment – If your R&D activities produce a marketable product or material, a feedstock adjustment is required. Failing to apply it can lead to non-compliance.
- Incorrectly valuing materials or products – Miscalculating the material costs or the revenue generated from the resulting product can skew the adjustment, leading to an inaccurate claim.
- Ignoring internal use – Even if the product isn’t sold but used within your business, a feedstock adjustment may still apply.
Navigating these potential pitfalls is essential to ensuring your R&D tax claim is accurate and compliant. Feedstock adjustments, in particular, require careful attention to detail. Getting it wrong can lead to reduced tax benefits or increased risk of an audit.
Why Consult Bulletpoint?
The R&D tax incentive process, including feedstock adjustments, involves strict regulations and complex calculations. At Bulletpoint, we specialize in helping businesses successfully navigate this process to maximize their claims and ensure compliance. With over 500 successful R&D claims lodged and an average rating of 4.8 stars from over 250 Google reviews, we’re Australia’s highest-rated R&D tax consultant.
By partnering with Bulletpoint, you can be confident that your claim will be handled with expertise, attention to detail, and a deep understanding of R&D tax regulations. We cut through the jargon and make sure you get the benefits your business deserves.
If you’re ready to optimize your R&D tax claim or need help managing your feedstock adjustment, book a meeting with us today through Calendly, call us at 1300 658 508, or send a message via our contact page. Let us guide you through the process, so you can focus on what matters most—innovation.
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How to Complete the ATO Feedstock Adjustment Schedule
When preparing your R&D Tax Incentive claim, the ATO requires businesses to accurately complete the feedstock adjustment schedule. Here’s how to ensure your feedstock adjustment is calculated and reported correctly:
- Identify Feedstock Input Costs – Begin by determining the total costs of the feedstock materials used in your R&D activities. These costs include raw materials, components, and any energy used to transform these materials into a product. Accurately document all material costs during the R&D process, as these will be the basis for your adjustment.
- Calculate Feedstock Output Revenue – Next, calculate the revenue or value of the product that resulted from your R&D activities. This includes any revenue from selling the product, or if it was used internally, the estimated market value of the product. Ensure you have records that substantiate this figure in case of an audit.
- Compare Input Costs and Output Revenue – Once both input costs and output revenue are calculated, compare the two. Select the smaller amount, as this will be used in the adjustment formula.
- Apply the Adjustment Formula – Use the ATO’s formula to calculate the feedstock adjustment: Feedstock Adjustment = (Smaller figure of input costs or output revenue) × 1/3. This figure will then be multiplied by your company’s tax rate to determine the reduction in your R&D tax offset.
- Enter the Results in the ATO Schedule – Enter the feedstock adjustment calculation in the appropriate section of the ATO R&D Tax Incentive schedule. Ensure all supporting documentation for your calculations is ready, as the ATO may request evidence during an audit.
Why Use Bulletpoint for R&D Tax Compliance?
The feedstock adjustment process can be complex, and ensuring accuracy in your ATO schedule is critical to avoid mistakes that could lead to non-compliance or reduced tax benefits. At Bulletpoint, we handle the entire process for you, ensuring your claim is compliant and maximized. With over 500 successful R&D claims, we know how to navigate the intricacies of ATO requirements.
If you need assistance completing the feedstock adjustment schedule or have questions about your R&D tax claim, book a meeting via Calendly, call 1300 658 508, or reach out through our contact page.
Frequently Asked Questions
A feedstock adjustment is an adjustment made when your R&D activities result in a marketable product or a material that is sold or used in your business. It ensures that the R&D tax offset only applies to eligible R&D costs, not production or commercial use.
A feedstock adjustment applies when your R&D activities result in a tangible product or material, either sold or used internally. You must calculate the market value or revenue of the resulting product and adjust your R&D tax claim accordingly.
To calculate a feedstock adjustment, determine the smaller of the input costs (materials used during R&D) or output revenue (value of the product). Multiply this figure by one-third, and then multiply the result by your company’s tax rate to determine the adjustment amount.
Yes, if the product resulting from your R&D activities is not claimed as part of the R&D costs, you can avoid the feedstock adjustment. However, this may reduce the overall benefit of your R&D claim, so it’s important to assess the impact carefully.
You’ll need detailed records of material costs, revenue from sales, or the internal value of the product created from R&D activities. Proper documentation is essential for complying with the ATO’s guidelines and supporting your feedstock adjustment in case of an audit.
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You may find it useful to schedule a chat to ask any questions you may have like:
- Are you actually doing eligible R&D?
- What is the difference between core and supporting?
- How much can I claim?
- What should my hypothesis be?
- How much should I pay myself?
- How do I put the financials together?
- What if I sell a prototype or get a grant?
- What overhead percentage should I use?
- What should I do when I am reviewed by AusIndustry?
- What records should I show the ATO?