R&D Tax incentives (including the R&D Tax Concession and the R&D Tax Incentive) are major Australian Government initiatives to encourage private sector R&D in Australia. The R&D Tax Incentives are broad-based and support much of the industry research and development activity in Australia.
While the R&D Tax Concession and R&D Tax Incentive (which is replacing the R&D Tax Concession) are similar in concept and objective, main points of difference include the level of support provided, the definition of eligible R&D activities and the mechanism by which the tax benefit is realised.
Important Points to Note
The application deadline for the R&D Tax Concession (for companies with a 30 June 2011 year-end) is imminent (30 April 2012) and may require your immediate attention. This first article will therefore focus on the R&D Tax Concession, including its the 175% 'Incremental' component and the R&D Tax Offset (also commonly referred to as the R&D Tax Rebate).
The R&D Tax Incentive has greater levels of benefit when compared to the R&D Tax Concession but has a more complex definition of eligible R&D activities and arguably demands more detailed R&D records management. The R&D Tax Incentive also has new provisions relating to software R&D. The R&D Tax Incentive and Other Grants and Incentives, including their benefits, definitions of eligible R&D activities and methods of operation will be discussed in later articles.
Because of the inherent complexity, particularly on relation to the R&D Tax incentives, and because of the necessarily abridged nature of the information presented, companies wishing to pursue a claim should seek professional advice before acting on the information provided here.
What are Research & Development Tax Incentives?
Research & Development (R&D) Tax Incentives represent a major Australian Government initiative to encourage private sector R&D in Australia. The R&D Tax Incentives are broad-based and support much of the industry research and development activity in Australia.
The R&D Tax Concession system operates for years of income that commenced prior to 1 July 2011. The R&D Tax Incentive replaces the T&D Tax Concession for years of income commencing 1 July 2011.
Benefits are derived by way of additional concessional deductions or refundable tax offsets (commonly referred to as rebates).
More than 8,400 companies applied for the R&D Tax Concession in the 2009-year of income, reporting over $17bn in R&D expenditure.
R&D Tax Concession Registration Deadline
The majority of Australian companies have a 30 June year-end. For those companies:
· The R&D Tax Concession applies up to and including the 2011 year of income; and
· Applications for Registration for R&D Tax Concession for the 2011-year of income must be lodged by 30 April 2012.
How Can the R&D Tax Concession Benefit My Company?
The R&D Tax Concession provides eligible companies with a mix of the following benefits (dependent on the applicant company meeting the various eligibility criteria):
· an additional 25% tax deduction for eligible expenditure on eligible R&D activities;
· a 175% Incremental (Premium) Tax Concession for eligible incremental expenditure on R&D activities, when measured against a three-year moving average.
· an R&D Tax Offset (refundable), available only to 'smaller'* companies undertaking R&D, enabling them to 'cash out' their R&D tax losses, typically providing a 'gross offset' of 37.5 cents per dollar of eligible R&D expenditure. In the case of the R&D Tax Offset, the concessional R&D tax deductions (including any incremental premium components) are effectively 'exchanged' for the offset, subject to the extent of available tax losses and any liabilities to the ATO.
* 'Smaller' Companies are defined as companies / company groups with aggregate turnover and R&D spend in the 2011 year of income of less than $5m and $2m respectively.
The applicable selection and combination of the above components depends on the company / company group meeting the various eligibility criteria, its eligible R&D expenditure and its tax position. The process of determining the applicable components is best performed by a person with specialist knowledge of the relevant provisions.
Who Can Apply?
Almost all eligible companies incorporated in Australia conducting eligible R&D activities could be eligible to apply for registration for the R&D Tax Concession. Annual registration of a company's R&D activities is a prerequisite for claiming the Tax Concession. Tax-exempt companies and companies acting in the capacity of a trustee or nominee (other than a trustee of a public trading trust) are not eligible for the R&D Tax Concession. Investee companies of tax-exempt entities may be subject to certain restrictions. Grouping rules and anti-avoidance mechanisms apply.
Companies must also have effective ownership of the underlying technology (including the capacity to exploit commercially), bear the technical and financial risks of the development program and control the direction of the R&D program. These are known as the 'At Risk' and 'Own Behalf' criteria.
Research and Development Activities
Having addressed whether your company is eligible and the project meets the 'At Risk' and 'Own Behalf' criteria, one has to categorise eligible project activities as either:
1) systematic, investigative and experimental activities; that
2) involve innovation or high levels of technical risk; and
3) are carried on for the purpose of:
(i) acquiring new knowledge (whether or not that knowledge will have a specific practical application); or
(ii) creating new or improved materials, products, devices, processes or services;
4) other activities that are carried on for a purpose directly related to the carrying on of the systematic, investigative and experimental activities.
Each project needs at least one activity that meets the criteria (1) to (3). The eligibility of the 'other' activities (4) depends on their relationships to the activities meeting the criteria (1) to (3).
For software R&D projects, the resultant product must be intended for sale, rent, licence, hire or lease to two or more non-associates of the company. This requirement for software development is commonly referred to as 'Multiple Sale Criterion'.
The process of evaluating eligibility of the project activities is best done with someone who has specialist knowledge in the application of the definitions and relevant case law.
What is the Potential Value of my Claim?
Calculating the cost of the activities deemed eligible in the above section will yield the base cost of the claim. Likely software R&D project cost categories include salary costs (including on-costs), contractor costs, certain direct costs, certain appropriately determined overhead costs, equipment / infrastructure depreciation, costs of acquiring project intellectual property and possibly interest. 'Clawback' and 'Not at Risk' provisions must also be taken into account.
Applicable concessional deduction rates (125% or 100%) are then applied and consideration is made regarding eligibility for the 175% incremental concessions and the offset to yield the final amount of the benefit. Effects on the franking account must be taken into account.
As a rough guide:
· For companies paying tax or exceeding the R&D Tax Offset limits, the R&D Tax Concession yields an additional deduction of 25% of eligible R&D expenditure. This typically results in a reduction in taxes payable of 7.5% of eligible R&D expenditure.
· For companies meeting the R&D Tax Offset eligibility requirements, the R&D Tax Offset typically yields a potentially refundable 37.5% of eligible R&D expenditure. The tax deductions giving rise to the offset are effectively 'exchanged' for the offset. This gives rise to a useful cash flow benefit at a time when carry forward tax losses would be of limited use.
The process of evaluating the value of the R&D Tax Concession is best performed by a person who has specialist knowledge in the application of the legislation.
Where Do I Go From Here?
The deadline for lodging Applications for Registration for the R&D Tax Concession for 30 June year-end companies for the 2011 year of income is 30 April 2012. If you believe your company could be eligible for the R&D Tax Concession for R&D activities conducted in the period 1 July 2010 to 30 June 2011, you have limited time to act and should immediately seek advice.
A future article will discuss actions that should be taken in relation to the new R&D Tax Incentive.
This article has been carefully prepared but has been written for general information purposes only. This article cannot be relied upon to cover specific circumstances. You should not act upon the information contained in this article without obtaining specific professional advice. The author does not accept or assume any liability or duty of care for any loss arising from any action taken (or not taken) or decision made by anyone relying on the information in this article.
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