As part of the Government’s strategy to promote innovation, from 1 July 2014, the Research and Development (R&D) Tax Incentive was improved.
However many eligible businesses are still not claiming the R&D Tax Incentive. One of the reasons is that many businesses do not know that they qualify for the R&D Tax Incentive. Many more do not understand how to claim the R&D Tax Incentive. Furthermore, numerous firms have shied away from claiming the R&D Tax Incentive because of fear of unscrupulous and high commission based fees.
Who Qualifies for the R&D Tax Incentive?
The R&D Tax Incentive is available to Australian companies that spend at least $20,000 or more on eligible R&D activities during their fiscal year. The R&D Tax Incentive is a tax offset that is available annually on an ongoing basis to companies of all sizes and within all industry sectors.
Can Businesses Who Trade Through Other Entities Claim R&D?
Many Australian businesses operate through other business structures such as a sole trader, partnership or trust but cannot claim the R&D Tax Incentive because only companies are eligible for the R&D Tax Incentive. If significant R&D expenditure is being incurred, advice should be sought on whether restructuring your business as a company is appropriate in order to claim the R&D Tax Incentive.
What are Eligible R&D Activities?
Broadly speaking, eligible R&D activities will create new or improved materials, products, devices, software, processes or services. The eligible R&D expenditure can consist of:
- Core R&D activities involving systematic experimental activities conducted to create new knowledge across the world.
- Supporting R&D activities that relate to the core R&D activities.
For software to qualify, the software must be intended for sale to external customers.
Please note that reverse engineering existing products, market research, management studies, social sciences studies and mineral exploration do not qualify for R&D.
How Does the R&D Tax Incentive Work?
The R&D Tax Incentive is a tax offset. Companies with a group turnover of less than $20 million can qualify for a 45% refundable tax offset. A tax offset is an amount that reduces tax payable. Companies with a group turnover of $20 million or more can qualify for a 40% non-refundable offset. Furthermore the maximum R&D expenditure that can be included in the claim is $100 million.
Example – a loss making company with turnover of less than $20 million.
ABC Pty Ltd has made a loss of $2 million for the year ended 30 June 2016. The Company has identified $1 million of qualifying R&D expenditure. The $1 million of qualifying R&D expenditure is initially disallowed as an expense on the Company tax return, reducing the Company’s loss to $1 million. Instead, a refundable tax offset of 45% of the $1 million R&D expenditure is available. ABC Pty Ltd receives a tax refund of $450,000 (being $1 million x 45%). The tax refund of $450,000 is welcomed by the company to assist in the Company’s cashflow.
In order to claim the R&D Tax Incentive a company must register their R&D activities with AusIndustry within 10 months of the end of the company’s income year i.e. by 30 April 2017 for a 30 June 2016 year end.
To register, the company must provide details of all of its R&D projects and core and supporting activities undertaken in the income tax year. Once the company is registered, the R&D Tax Incentive can be claimed when the company lodges its tax return. An R&D schedule must be lodged with the tax return detailing all expenditure relating to each R&D activity.
One of the major challenges for companies claiming the R&D Tax Incentive is that the ATO requires that the Company keeps detailed records of the R&D activities, including details of the experiments conducted and employee time spent on R&D activities. Importantly, the tax law allows companies to claim for materials, staff employment costs, travel costs, depreciation on plant and machinery, and premises costs, to the extent that these costs relate to the R&D activities.
At Nexia Canberra we offer a refreshingly different approach. Our fees for preparing your R&D Tax Incentive claim are at hourly rates and not on a commission basis. This means that we are not “incentivised” to increase beyond the R&D expenditure amount that is allowed under the tax law. This also provides the opportunity for internal accountants to assist with information gathering thereby reducing our fees.