The Research & Development Tax Incentive can allow a business to recoup some of the costs incurred during the development phase of eligible activities. This can assist cash-flow throughout the research and development phase, which is often draining on cash-flow.
The rules and processes for the R&D tax incentive are based on complex legislation, however we have compiled a basic overview of what is involved below.
Who can receive it?
The criteria to be eligible is quite broad and encompasses the following:
– An Australian Company, or a foreign company that is liable to pay tax in Australia, AND
– Must conduct at least one activity that meets the definition of a core R&D activity, AND
– Must have incurred R&D expenses of at least $20,000 during the year.
An eligible R&D activity should be experimental in nature to derive or create a new process, product or material. This is usually achieved via a scientific or systematic method.
How much is it?
The Tax Incentive rate depends on the Total Group Turnover. Currently the rates are as follows:
– 43.5% Refundable R&D Tax Offset for companies with Group Turnover less than $20 million, and
– 38.5% Non-refundable R&D Tax Offset for companies with Group Turnover greater than $20 million.
The non-refundable offset can only be used to reduce the company’s tax liability, as opposed to the refundable offset which can create a tax refund depending on primary tax liability amount.
What can I claim?
The eligible costs must relate to the R&D activities. This would usually include the goods, services and materials processed as part of the R&D activities. It is critical to review what expenses have been physically paid and appropriate supporting documentation exists – for example for director salaries and superannuation payments time sheet evidence showing proportion of time spent on eligible R & D activities would be required, along with substantiation on the appropriateness of the overall remuneration package. This should be discussed with an R&D tax specialist before the end of financial year to ensure that any eligible claims are maximised.
The grant has been primarily established to promote R&D within Australia. There are options to claim for costs incurred outside of Australia, however these can only be approved by applying for an Overseas Finding.
When is the Due Date?
The company must lodge an application for registration of the activities with AusIndustry within 10 months of the end of your income year. For example, if your income year ends on the 30 June, then you must register by 30 April of the following year. The income tax return lodgement, which includes the R&D claim must be lodged by the respective due date. Additional time should be allowed to ensure that AusIndustry are able to process the approval before the lodgement due date.
There is currently a bill before the parliament proposing to enact the following changes from 1 July 2019.
For entities with a Total Group Turnover below $20 million, the refundable R&D tax offset:
– will be a premium of 13.5 percentage points above the company’s tax rate.
(The tax incentive on a base-rate entity with a current tax rate of 27.5% would be 41%)
– will be capped at $4 million per annum, with the balance converted to a non-refundable tax offset that may be carried forward. R&D expenditure on clinical trials will be exempt from the $4 million per annum cap.
– Increase the R&D expenditure threshold from $100 million to $150 million per annum.
For companies with an aggregated turnover of $20 million or more, there will be a new formula that apportions the non-refundable R&D tax offset. The R&D tax offset will have different rates depending on the percentage of R&D costs compared to total business expenditure.
How do I proceed?
If you believe you may be incurring eligible R&D expenditure, we can discuss how to best structure your business and costs to ensure you are eligible for a claim. There are additional layers of structuring considerations that must be taken into account, such as protecting Intellectual Property and various tax considerations, to ensure the best outcome. If you wish to discuss your specific situation further, please feel free to contact our office to discuss with our structuring specialists.