R&D tax incentive

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There are variations, but the basic business maxim goes something like: 'Stand still, and you'll actually be moving backwards.'

The financial realities of the economy over the past couple of years may have dampened many a business operator's enthusiasm for active innovation and efforts in the area of research and development, but the accepted wisdom from many sources is that to compete effectively and to rebuild a solid enterprise, businesses will need to be on the front foot.

To discourage any tendencies to hunker down, or rather to encourage the spirit of innovation in Australian businesses, the government's research and development tax incentive scheme offers companies a way to get back some of their R&D spend. Broad-based and not industry specific, the concession is also market driven in that the eligible business has free rein to decide on the scope and timing of their level of R&D expenditure.

The research and development (R&D) tax incentive provides a tax offset for eligible R&D activities and is targeted toward R&D that benefits Australia. The incentive, which came into effect on July 1, 2011 and replaces the R&D tax concession, is geared towards encouraging companies to engage in R&D.

The incentive has two core components. Entities engaged in R&D may be eligible for:

• a 45% refundable tax offset (equivalent to a 150% deduction) for eligible entities with an aggregated annual turnover of less than $20 million, provided they are not controlled by income tax exempt entities
• a 40% non-refundable tax offset (equivalent to 133% deduction) for all other eligible entities (entities may be able to carry forward unused offset amounts to future income years).

For example, for the first component (45% refundable offset), a company that is in profit will receive a reduction in tax of $150,000 for every $1 million of eligible R&D. If in tax loss, it will receive a cash payment of $450,000 for every $1 million.  For the second component (40% non-refundable), a company in profit will receive a reduction in tax of $100,000 for every $1 million of eligible R&D.

The R&D tax incentive has several objectives. It aims to:

• boost competitiveness and improve productivity
• encourage industry to conduct R&D that may not otherwise have occured
• provide business with more predictable, less complex support
• improve the incentive for smaller firms to engage in R&D.

The Tax Office and AusIndustry (which acts on behalf of Innovation Australia) administer the R&D tax incentive jointly, with the former determining if the expenditure being claimed for R&D activities is eligible, and AusIndustry managing the registration of R&D activities and checking that they comply with the law.

Eligibility
Broadly speaking, your eligibility to claim R&D tax offsets will depend on whether or not you are an R&D entity and, if you are, whether or not you have incurred notional deductions of at least $20,000 on eligible R&D activities (more below).

An R&D entity is either a corporation that is incorporated under an Australian law or, in some circumstances, a foreign corporation. Trusts are generally not R&D entities. Special rules apply to consolidated groups and R&D partnerships. Other conditions may also apply, depending on who the R&D activities are being conducted for.

Research and development activities must 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 (more details via the links).

Costs and expenditure
Key eligible amounts that a company can take into account in calculating offsets are referred to a "notional deductions", and a business must have notional deductions for an income year of at least $20,000 in order to claim.

Eligible costs may include:

• operating costs such as salaries, consumables and contractor costs
• plant and equipment, and the decline in value of these assets used for R&D activities
• expenditure incurred to an associate in an earlier income year, but paid in a current year (subject to some restrictions)
• a partner's proportion of costs incurred, and balancing adjustments.

Some overseas R&D expenditure may also be eligible, however it may be necessary to apply for approval with Innovation Australia. The key requirements would be:

• the overseas activity must have a significant link to the core activity conducted in Australia
• it is impossible to carry out the overseas aspect locally
• the total spend is less (in all income years) than that spent in Australia.

Registering and claiming
If you want to claim an R&D tax offset in your company's income tax return, you must first register your R&D activities with AusIndustry. There is also an online eligibility tool which you can access here.

You must register your R&D activities:

• for every income year you want to claim the offset
• within 10 months of the end of your company's income year
• prior to claiming the R&D tax offset in your company income tax return.

It is also possible to apply for an "advanced finding" on the work proposed. This can allow for certainty that the activity will be eligible for the offsets, and will lock the Tax Office into accepting the R&D claims for the following two income years.

Click here to access all the relevant forms, including a sample application form.

Revised August 6, 2012