For start-ups and other innovative companies, the R&D Tax Incentive is designed to reduce the cost and risk of undertaking research and development, by reducing their tax. Each year approximately 14,000 companies register for the incIentive and receive benefits estimated at $3 billion.
Subject to eligibility criteria and exclusions, a company can generally claim a tax offset for:
- expenditure incurred on R&D activities
- decline in value of depreciating assets used for R&D activities, and
- balancing adjustments for depreciating assets used only for R&D activities.
Review and recommendations
When the Federal Government handed down its 2017 Budget this month, some people expected it would address the recommendations resulting from last year’s Review of the R&D Tax Incentive. It didn’t.
Co-chairs of the Report committee, Bill Ferris (Chair of Innovation Australia), Alan Finkel (Chief Scientist) and John Fraser (Secretary to the Treasury), summarised the recommendations as follows:
‘Three of these recommendations encourage research that would otherwise not take place… These include providing extra incentives for businesses to hire PhD graduates and to collaborate with Australia’s world-class research institutions. The other three recommendations seek to strengthen the integrity and effectiveness of the program, including through reducing compliance costs for companies. The R&D Tax Incentive is, and should remain, an important investment in a prosperous future for Australia.’
‘The Federal Budget for 2017 was mute on the R&D Tax Incentive Program,’ says expert Claire Thompson, ‘so we must assume the recommendations remain just that.
‘However, key changes to the program announced last September apply to the current financial year, so companies should be ready for those.’
Revisions and registrations
For 2016/17, the tax offset rates for all eligible entities under the R&D Tax Incentive Program decrease by 1.5%. Rates are 43.5% for companies with aggregated turnover under $20 million, and 38.5% for companies with aggregated turnover greater than $20 million.
In other words, companies with more than $20M turnover can effectively receive 8.5c for every R&D dollar spent ($100K eligible R&D expenditure = $8.5K less tax).
…in loss or pre-revenue, can receive up to 43.5c for every R&D dollar spent ($100K eligible R&D expenditure = up to $43.5K cash rebate)
…in profit, can effectively receive at least 13.5c for every R&D dollar spent ($100K eligible R&D expenditure = at least $13.5K less tax).
Applications for registration of R&D activities must be lodged with AusIndustry within 10 months after the end of the company’s Australian income year in which the activities were conducted.
‘Now is a good time to seek advice on your eligibility or answers to other questions about the R&D Tax Incentive from a specialist,’ Ms Thompson says.
Records and enriching results
The R&D Tax Incentive Program replaced the R&D Tax Concession in 2011.
‘Though many eligible companies remain unaware of the program, at this point, the focus of its administrators is moving from education to compliance,’ explains Ms Thompson.
In February 2017, four taxpayer alerts on the R&D Tax Incentive identified the ATO’s key areas of concern, particularly for companies claiming ordinary business activities in the building & construction, agricultural and software development sectors.
‘Claim reviews are increasingly thorough, so comprehensive documentation is critical,’ Ms Thompson says. ‘Early advice on establishing and maintaining good records will maximise your chances of a successful claim in the event of a review or audit.
‘To justify your R&D tax incentive claim, your documentation must demonstrate that you are developing something novel, requiring experimentation, with unknown outcomes. You need to contemporaneously record both your R&D expenditure and activities.
‘Records of activities can include notes from meetings with expert consultants, technical research, detailed timesheets and test results – including failures. Expenditure documentation includes ledger entries and invoices.
‘In my experience with innovative companies, their quality of documentation correlates with the general quality of their business planning and operations, which correlates with success.’
About Claire Thompson
Claire is a Chartered Accountant and registered Tax Agent 17 years’ experience in managing R&D tax incentive claims for a diverse range of companies, from start-up innovators to large multi-national corporations. She has extensive experience across industries including life sciences, food and agribusiness, advanced manufacturing, biotechnology, infrastructure, building and construction, mining and energy resources.