The Australian Federal Government’s R&D Tax Incentive program encourages companies to engage in R&D to boost competitiveness and improve productivity in the Australian economy, by providing a tax offset for eligible R&D activities. Companies with eligible R&D expenditure may be eligible for either a refundable or non-refundable tax offset.
About the R&D Tax Incentive
Eligible Entities
Generally, an eligible R&D entity is a corporation that is incorporated under an Australian law or incorporated under a foreign law but an Australian resident for income tax purposes.
R&D Tax Benefit
The immediate benefit an R&D entity will receive with respect to each R&D claim is dependent on the aggregated turnover, eligible R&D expenditure, and available tax losses (if any, but only when the aggregated turnover is less than $20 million). The Total Cash Benefit (TCB) for companies with an aggregated turnover of less than $20 million may comprise of both a Permanent Tax Benefit (PTB), and a timing benefit (available only when tax losses exist). The PTB is the actual permanent income tax savings arising from the claim whilst the timing benefit is the cash received from cashing out income tax losses early. For companies with an aggregated turnover of $20 million or greater though, their total immediate benefit is the PTB but only if the company is profitable and paying tax.
More specifically:
- Companies with aggregated turnover < $20 million, PTB = 18.5% of its R&D expenditure, with TCB ranging from 18.5% – 43.5% depending on available tax
losses. For companies that do not have a tax loss the TCB will also be 18.5% of its R&D expenditure. - Companies with aggregated turnover >$20 million. R&D expenditure below 2% of total company expenses attracts a PTB of 8.5%, whereas any R&D expenditure above 2% of total company expenses attracts a PTB of 16.5%. There is an immediate benefit when the R&D entity is profitable and paying tax as the PTB will reduce the entities payable tax, but there is a non-immediate benefit when the R&D entity is in a tax loss. It can carry forward unused R&D tax offsets to a later profitable and tax paying income year to reduce its tax payable.
Please note that aggregated turnover is a defined term and means the sum of turnovers of all entities on a global basis that are ‘connected’ or ‘affiliated’ with the R&D entity.
Eligibility Criteria for the R&D Tax Incentive
Companies must have incurred eligible R&D expenditure or notional deductions of at least $20,000 (unless using a Research Service Provider or a Cooperative Research Centre).
R&D activities must also meet certain criteria to be eligible for the R&D tax incentive. They must be classified as either core R&D activities or supporting R&D activities.
Core R&D Activities are experimental activities whose outcome cannot be known or determined in advance and can only be determined by applying a systematic progression of work based on principles of established science; and proceeds from hypothesis to experiment, observation and evaluation and leads to logical conclusions.
In addition, core R&D activities are conducted for the purpose of generating new knowledge (including new or improved materials, products, devices, processes or services).
Supporting R&D Activities are activities that are directly related to core R&D activities or, for certain activities, have been undertaken for the dominant purpose of supporting core R&D activities.
Supporting activities are only eligible if the R&D entity can demonstrate that the directly related core activity has already commenced, or at the time the supporting activity commenced, it is clearly demonstrable that the R&D entity had every intention of commencing the directly related core activity in the very near future, even if ultimately it does not commence.
Overseas expenditure
You can only claim expenditure for activities conducted overseas where you have obtained an overseas finding from the Department Industry, Science and Resources and meet the following conditions:
- the overseas activity must be an eligible R&D activity
- there must be a significant scientific link to an Australian core R&D activity
- the overseas activity must not be able to be conducted in Australia
- the costs for overseas R&D activities must be less than the costs of related R&D activities undertaken solely in Australia.
In the absence of an Overseas Finding, claimants must be able to demonstrate the work was carried out in Australia and not subcontracted out or otherwise performed overseas. It is the physical location of where the work is being conducted that needs to be considered.
An R&D entity cannot include in its claim work performed overseas by a contractor (even if the contracted entity is based in Australia) should that contracted entity have subcontracted or otherwise engaged persons offshore to conduct part or all of the work. It is the responsibility of the R&D entity to prove that all of the work performed by the contractor was performed by persons in Australia. This will generally require the cooperation of the contracted entity to provide appropriate evidence that all of the work was conducted solely in Australia.
Excluded Core R&D activities
There are a range of activities that are not eligible core R&D activities. These include research into social sciences, management studies, efficiency surveys, marketing, sales, certain mining activities, compliance with statutory requirements or standards, software development for the dominant purpose of internal use, amongst others. These activities may be supporting activities if undertaken for the dominant purpose of supporting an eligible core activity.
The “For” test
Eligible R&D activities can be performed by another entity “for” a company, provided the company seeking to claim the R&D tax incentive, on balance:
- Bears the financial burden of carrying out the R&D activities
- Has a sufficient degree of beneficial ownership in the results of the R&D activities
- Has a sufficient degree of control over the conduct of the R&D activities
The “At Risk” test
An R&D entity must be at risk in relation to its R&D activities and the connected expenditure it incurs. Should an R&D entity be funded to conduct R&D under a loan arrangement it is likely that the provider of the loan is taking the risk (of not being repaid) should the R&D activities fail. Should the activities be funded through an equity injection of capital or through the R&D entities own operational profits (from existing product sales/provision of services), it is likely that the R&D entity is at risk, as it has the means to repay the loan. So, the type of funding the R&D entity receives to conduct the R&D is an important consideration as to the eligibility of the R&D activities. This test occurs each time the R&D entity incurs R&D expenditure.
Claiming the R&D Tax Offset
The Department of Industry, Science and Resources (program delivery by AusIndustry) and the ATO jointly administer the R&D Tax Incentive.
R&D activities must be registered with AusIndustry within 10 months after the end of a company’s income year before the tax offset can be claimed in the company’s income tax return.
