R&D tax incentive – Grouping rules

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What are Grouping Rules With Regard to the R&D Tax Incentive?

Grouping rules determine how related entities are treated as a single entity for the purposes of the R&D tax incentive.

When Does This Issue Arise?

Grouping rules can become particularly problematic when a shareholder has more than 40% ownership in your company and the aggregate (combined) revenue exceeds $20 million.  

Why Is This Important?

When a major shareholder’s control brings the combined revenue of the group above $20 million, your eligibility for certain R&D tax offsets may be compromised. This scenario could lead to reduced benefits or even ineligibility for the incentive, significantly impacting your financial planning and R&D investments.

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What is Aggregated Turnover?

Aggregated turnover is the total annual turnover of your company combined with the turnover of any connected or affiliated entities. This figure determines your eligibility for different levels of the R&D tax incentive.

How to lose $46 million

In a notable case, Plutora, an Australian software and services company, received $46 million in funding from Macquarie Capital. However, Plutora faced significant challenges related to its eligibility for research and development (R&D) tax rebates, ultimately leading to its Australian operations’ shutdown. The Australian Taxation Office (ATO) denied the refundability of Plutora’s past R&D tax incentive claims, primarily due to issues surrounding aggregated turnover and grouping rules.

The key issue was whether Plutora’s aggregated turnover was less than $20 million. For companies to qualify for the refundable R&D tax offset, their aggregated turnover must be below this threshold. Plutora’s complex ownership structure, involving significant stakes held by major shareholders, complicated this calculation. The aggregation of revenues for tax purposes meant that Plutora’s overall turnover included the revenues of these connected entities, pushing it above the eligibility limit for the refundable offset.

As a result, Macquarie’s $46 million investment in Plutora was significantly devalued, with their stake being sold back to Plutora’s co-founder and CEO, Dalibor Siroky, for just $1. This case underscores the critical importance of understanding and correctly applying grouping rules and aggregated turnover calculations to maintain eligibility for R&D tax incentives.

For further details, you can read more about this case on William Buck’s article and Startup Daily.

The Problem with Major Shareholders and High Revenue

Here’s why this matters:

• Ownership Threshold – If a shareholder holds more than 40% of your company, their influence is substantial. This control links your company with others they own, impacting how you calculate combined turnover and expenses.
• Revenue Cap – Once the combined revenue of these related entities surpasses $20 million, your access to the refundable R&D tax offset is restricted. Instead, you might only qualify for the non-refundable offset, which is less beneficial, particularly for smaller or growing businesses.
  

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How Aggregated Turnover Affects Your R&D Tax Incentive

Even if your company’s individual turnover is below $20 million, the combined turnover with connected or affiliated entities could push you over the threshold. This aggregated figure is what the Australian Taxation Office (ATO) uses to assess your eligibility.

Implications for Your R&D Tax Offset

• Refundable R&D Tax Offset – For companies with an aggregated turnover of less than $20 million, this offset provides a cash refund, which can be crucial for smaller or cash-strapped businesses.
• Non-Refundable R&D Tax Offset – For companies with an aggregated turnover exceeding $20 million, only the non-refundable offset is available. This offset reduces the tax payable but does not provide a cash refund, which is less beneficial for cash flow.

Case Study 1
You operate a manufacturing business with an annual turnover of $18 million. However, you’re part of a group of companies with a combined aggregated turnover of $25 million due to common ownership. Despite your individual turnover being below the threshold, the aggregated figure means you only qualify for the non-refundable R&D tax offset, affecting your financial planning and R&D budget.  

Case Study 2
Imagine your Australian company incurs $500,000 in R&D expenses but has no income. Typically, you’d expect to get back 43.5% of these expenses through the refundable R&D tax offset. However, due to your ownership structure, things change.

• Your Company – $500,000 in R&D expenses
• Holding Company in Singapore – 100% ownership
• Multinational Corporation – 45% ownership in the Singapore holding company

Due to the aggregated turnover of these entities exceeding $20 million, you only qualify for the non-refundable R&D tax offset.

Therefore you get:

• Expected Refundable Offset – 43.5% of $500,000 = $217,500 cash rebate
• Actual Non-Refundable Offset – 38.5% of $500,000 = $192,500 future tax offset
  

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Case Study: How Grant Income Impacts R&D Tax Incentive Eligibility

Scenario
An Australian company has a turnover of $19.5 million from its regular business activities. The company also receives a $1 million government grant for a significant research and development (R&D) project. The question is whether this company would still be eligible for the 43.5% refundable R&D tax offset, or if the additional grant income would push them into the non-refundable offset category.

Aggregated Turnover Analysis
Under Section 328-120 of the Income Tax Assessment Act 1997, aggregated turnover includes the ordinary income derived from business activities, excluding GST. Importantly, the ATO’s guidance specifies that grant income is generally excluded from ordinary income unless the grant directly relates to the company’s regular sales or service revenue.

In this case, the company’s $19.5 million turnover is still below the $20 million threshold for the refundable tax offset, even with the $1 million grant, because the grant income is not considered ordinary income for the purpose of calculating aggregated turnover.

Outcome
The company would remain eligible for the refundable R&D tax offset, receiving a 43.5% cash refund on eligible R&D expenditure, assuming its aggregated turnover remains under the $20 million cap.

• Company turnover – $19.5 million
• Grant income – $1 million (excluded from aggregated turnover)
• Aggregated turnover – Still $19.5 million (below $20 million threshold)
• R&D tax offset – Refundable at 43.5%

This ensures that the company can benefit from the cash refund associated with the refundable R&D tax offset, a significant boost to cash flow, without the grant affecting its eligibility.

Key Lesson
Even when a company receives significant grant income, it’s important to assess whether that income is included in aggregated turnover. In this case, because the grant is excluded, the company still qualifies for the refundable R&D tax offset.

A bit more about control

Understanding these definitions is crucial when calculating your aggregated turnover for the R&D tax incentive, as it determines your eligibility for the refundable or non-refundable tax offsets. If you need further assistance with navigating these complexities:

• Direct Control – According to the ATO, direct control exists if your company owns or has the right to acquire interests in another entity that carry at least 40% of the rights to distributions of income, capital, or net income of the partnership if the other entity is a partnership, or at least 40% of the voting power if the other entity is a company 
• Indirect Control – Indirect control is established when your entity directly controls a second entity, and the second entity, in turn, controls a third entity. Essentially, control cascades down the chain of entities, meaning your control over the second entity extends to the third 
• Affiliate – An affiliate, as defined by the ATO, is an individual or company that acts, or could reasonably be expected to act, in accordance with your directions or wishes, or in concert with you, regarding the business affairs of the individual or company. This relationship can be less formal but is still based on fact, typically influenced by close family relationships or business connections 

You are playing advanced level R&D tax if you are on this page

When it comes to navigating the complexities of grouping rules for the R&D tax incentive, understanding the nuances of direct control, indirect control, and affiliates is crucial. These rules can significantly impact your eligibility for the refundable R&D tax offset. If your aggregated turnover exceeds $20 million due to these relationships, you may only qualify for the non-refundable offset, affecting your financial planning.

At Bulletpoint, we specialise in helping businesses like yours maximise their R&D tax claims. With over 10 years of experience and more than 500 successful R&D applications, we have the expertise to ensure your claims are robust and compliant. We’ve successfully defended claims against both the ATO and AusIndustry, so you can trust us to safeguard your interests.

Facing issues with grouping rules and aggregated turnover?

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