R&D Tax Incentive Program
THE R&D TAX INCENTIVE
The R&D Tax Incentive program provides generous benefits for Australian or foreign companies resident in Australia, or permanent establishments of foreign companies carrying on R&D in Australia.
Assistance for the 2015/16 financial year is provided via two core components:
- A 45% refundable tax offset for eligible entities with aggregated turnover of less than $20 million; or
- A 40% non-refundable tax offset for other eligible entities.
For income years starting on or after 1 July 2016, the following rates will apply:
- A 43.5% refundable tax offset for eligible entities with aggregated turnover of less than $20 million; or
- A 38.5% non-refundable tax offset for other eligible entities.
The net after-tax benefit of the R&D Tax Incentive varies depending on which offset the applicant qualifies for, and the extent of current or prior year tax losses being carried by the business.
Where a company is eligible for the 45% refundable tax offset, and is in a tax paying position with no tax losses, the net after-tax benefit of the program is equal to 15% of the eligible R&D expenditure claimed. For example, a company with aggregated turnover of less than $20 million, which is in profit and has spent $200,000 on eligible R&D activities in an income year, would obtain a tax saving of $30,000. With the new rates coming in from 1 July 2016, this will be reduced to $27,000.
Applicants must register their R&D activities with AusIndustry within 10 months of the end of the financial year in which they were conducted (e.g. a company with year ending on 30 June, who conducted R&D in 2015/16 must lodge the Application Form for that year before 30 April 2017).
Once AusIndustry have registered a company’s R&D activities, an R&D Tax Schedule is prepared and lodged with the ATO as an attachment to their tax return.
ELIGIBLE R&D ACTIVITIES
Division 355 of the Income Tax Assessment Act 1997 contains the definition of R&D activities and makes the distinction between ‘core’ and ‘supporting’ activities.
A company must have conducted at least one core R&D activity in order to make an R&D Tax Incentive claim.
Core R&D activities are experimental activities:
a) Whose outcomes cannot be known or determined in advance on the basis of current knowledge, information or experience, but can only be determined by applying a systematic progression of work that:
i. Is based on the principles of established science; and
ii. Proceeds from hypothesis to experiment, observation and evaluation, and leads to logical conclusions; and
b) That are conducted for the purpose of generating new knowledge (including new knowledge in the form of new or improved materials, products, devices, processes or services.
Supporting R&D activities are those activities directly related to core R&D activities. Supporting R&D activities may include:
- Project management and administration
- Literature reviews and state of the art searches including patent searches
- The design and set up of experiments
R&D activities that result in the production or goods or services are excluded from being a core activity, however they may still be eligible if they were conducted for the dominant purpose of supporting core R&D activities.
ELIGIBLE R&D EXPENDITURE
To make a claim for an R&D Tax Offset a company must have incurred at least $20,000 of eligible R&D expenditure in the relevant income year. Typically, eligible expenditure would include a combination of the following:
- Salaries/wages (plus on-costs) paid to employees and internal contractors for their time spent working on R&D activities;
- Payments to external contractors and other direct costs that were incurred directly on the R&D activities;
- The decline in value of depreciating assets used in R&D activities; and
- A portion of eligible overheads that provided support for the R&D activities. This may include operating overhead items such as rent, electricity, internet expenses etc.
OVERSEAS R&D ACTIVITIES
In certain circumstances, and as long as related overseas R&D expenditure is less than 50% of the total eligible project expenditure, overseas R&D activities can be claimed.
If a company wishes to claim expenditure on overseas R&D activities they must satisfy a number of additional requirements, and the company must lodge an Advance Overseas Finding prior to the end of the income year in which they commence conducting the overseas activities.
The R&D Tax Incentive program can be a valuable tool in providing funding support for your R&D program. Speak to a BSI Innovation consultant today about how we can ensure your benefits entitlements are accessed for the lowest possible compliance costs.