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A guide to claiming the R&D tax incentive

One of the key responsibilities of the modern CFO is to obtain appropriate funding for the business. While debt and equity have always been key sources of funding, one area that tends to be overlooked is government grants.

Government grants, in particular the Research and Development Tax Incentive (R&D Tax Incentive), can be a great source of non-dilutive capital for businesses. Companies that qualify for the incentive and have an aggregated turnover of less than $20 million may be entitled to a 43.5% tax offset of eligible R&D expenditure. The offset is claimed through the company tax return and is refundable, so businesses that are not in a tax-paying position can receive the tax offset as a cash refund, effectively subsidising almost half of their R&D spend.

For businesses with a turnover of at least $20 million, the tax offset becomes non-refundable and is between 33.5% – 46.5% depending on the company’s corporate tax rate and proportion of the company’s R&D expenditure to total business expenditure.

Research and development

The R&D Tax Incentive was introduced by the Federal Government to encourage businesses to conduct research and development activities that are likely to benefit the wider Australian economy. For the purposes of the incentive, ‘research and development’ requires the company to conduct at least one ‘core R&D activity’ during the income year, which has three key components:

  1. New technical knowledge: the activity is carried out for the purpose of generating new knowledge in the form of new or improved materials, products, devices, processes or services.
  2. Technical uncertainty: the outcome of the activity cannot be known or determined in advance on the basis of current knowledge, information or expertise.
  3. Experimentation: the activity is experimental in nature and involves a systematic progression of work based on the principles of established science that proceeds from hypothesis to experiment, observations and evaluations, and leads to logical conclusions.
ABF media

Where a core R&D activity has been conducted during the income year, any ‘supporting R&D activities’ may also be eligible for the incentive. As the name suggests, supporting R&D activities are those activities conducted for the purpose of supporting the core R&D activity (but do not form a part of the experimentation) and can include preliminary research, project management and data collection.

The R&D Tax Incentive tends to be claimed by businesses in the following industries:

  • Software development
  • Advanced manufacturing
  • Energy and renewables, and
  • Life sciences.

Accordingly, CFOs of businesses in these industries that are not currently claiming the R&D Tax Incentive should consider whether they may be eligible to do so.

However, businesses from any industry may be eligible for the incentive provided they satisfy the eligibility criteria.

Eligibility

In addition to conducting at least one core R&D activity during the income year, businesses intending to claim the incentive must also satisfy the following eligibility criteria:

  • The applicant is an Australian tax resident company
  • The R&D activities are conducted in Australia
  • The company incurs at least $20,000 of eligible R&D expenditure during the income year

Eligible expenditure

ABF media

If a business is conducting at least one core R&D activity during the year and satisfies the above eligibility criteria, then the next step is to calculate the expenditure attributable to the core and supporting R&D activities conducted.

Eligible R&D expenditure may include:

  • Employee salary and wages
  • Labour on-costs such as superannuation, workers compensation and payroll tax
  • Contractor expenses
  • Depreciation of plant and equipment
  • Expenditure to research service providers and co-operative research centres
  • Overhead expenses including rent, electricity, telephone and internet
  • Travelling expenses from attending technical conferences or on-site testing

In contrast, the following expenditure is unlikely to be eligible for the incentive:

  • Financing costs such as interest and bank charges
  • Sales, marketing and advertising costs
  • Legal and accounting fees
  • Building construction costs, fit outs or improvements
  • Cost of acquiring depreciating assets (but the depreciation of that asset may be eligible)
  • Other routine or ‘business as usual’ expenses
  • Overseas expenditure (unless pre-approval has been granted by the government)

Process of claiming the R&D Tax Incentive

The R&D Tax Incentive is jointly administered by AusIndustry and the Australian Taxation Office. At the end of the company’s income year, the company submits an R&D application with AusIndustry detailing the core and supporting R&D activities conducted during the income year.

The application must be submitted within 10 months of the end of the company’s income year, so for companies with a 30 June year-end, the deadline is 30 April of the following year.

Australia Asia Forum

Once the application has been processed by AusIndustry, a registration number is provided for input into the company’s income tax return. Upon lodgement of the tax return, the ATO applies the R&D tax offset against the company’s income tax liability and in some instances results in a tax refund for the company.

With the new financial year having just started, now is the ideal time to commence the R&D claim process. This is because applicants are required to maintain documentation that is ‘contemporaneous’ – i.e., documentation in existence at the time the R&D activities are conducted.

Record-keeping requirements

Companies are required to maintain contemporaneous documentation detailing the core and supporting R&D activities that took place during the income year. There are two types of documentation that must be kept – expenditure documentation and R&D activities documentation.

Expenditure documentation must evidence all expenditure claimed on R&D activities and how that expenditure is directly related to the R&D activities conducted. Examples of expenditure documentation include tax invoices, asset registers, accounting records and staff timesheets showing the length of time spent by each employee on R&D activities.

R&D activities documentation must show that the claimed R&D activities took place and they meet the requirements of a core or supporting activity. Examples of R&D activities documentation include project plans, lab results, testing and progress reports, before and after photos, enterprise management software records and statements from industry experts.

ABF media

Maintaining the appropriate contemporaneous documentation will go a long way towards ‘audit-proofing’ the company’s R&D claim in the event of an AusIndustry or ATO review.

Holistic advice

As the benefit of the R&D scheme is in the form of a tax incentive, a company’s R&D claim can impact other areas of income tax including franking accounts, transfer pricing, commercial debt forgiveness and the small business instant asset write off.

Accordingly, holistic R&D and tax advice is always recommended. Contact your local R&D Tax Advisor if you would like to know more about how we work together with businesses on the R&D claim process.

Source: William Buck

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