All Australian companies conducting research and development type activities should consider whether they are eligible to claim the Research and Development Tax Offset in relation to a particular income year. Eligible companies will either have their income tax bill reduced or receive cash refunds from the Australian Taxation Office.
The Research and Development (R&D) tax incentive – what is it?
The R&D Tax Incentive was introduced in Australia to encourage industry investment in R&D. It is a broad-based that can be accessed by all industry sectors. Its main objective is to promote R&D activities that otherwise would not be conducted because of an uncertain return from the activities, in cases where the knowledge gained is likely to benefit the wider Australian economy.
The R&D Tax Incentive may be available in respect of direct and indirect expenditures incurred in connection with qualifying ‘experimental activities’. The activities need to be conducted in a scientific way for the purpose of generating new knowledge or information in either a general or applied form.
Only company entities are entitled to this incentive.
A $20,000 minimum annual R&D expenditure threshold also applies.
What are the potential benefits?
Companies with an aggregated annual turnover of less than $20 million can obtain a refundable 43.5% tax offset. All other companies are entitled to a non-refundable 38.5% tax offset.
The actual tax benefit arising from the tax offset depends on the tax profile of the company and the prevailing company tax rates for the claim year. For the current income year (i.e. 2018):
- A net tax benefit of 16 cents in the dollar spent may be available for companies with an aggregated annual turnover of less than $20 million and that are otherwise in a tax payable position. The current tax rate for these companies is now 27.5%.
- If the aggregated annual turnover of the company is between $20 million and $25 million, the net tax benefit is reduced to 11 cents in the dollar spent.
- If the company has an aggregated turnover of less than $20 million and is otherwise in a tax loss position, the company will receive a full refund of 43.5 cents in the dollar spent.
- Companies with an aggregated annual turnover of in excess of $25 million and otherwise in a tax payable position will receive a net tax benefit of 8.5 cents in the dollar spent.
What is the claim process?
Companies that have determined they are eligible for the R&D Tax Incentive must obtain claim approval with AusIndustry. A relatively in-depth description of the nature of R&D activity must be set out in the application form, and all the relevant eligibility criteria must be addressed. Applications are due annually within 10 months after the end of the income year in which the activity was conducted. For 2017 income year claims, the R&D registrations must be lodged no later than 30 April 2018.
The claim itself is made in the company’s income tax return after AusIndustry approval is obtained.
What to do next
All businesses conducted from a company structure should be proactive and ask the following questions:
- Does the business take a product or service to the market?
- Has the business engaged in R&D activities to develop new products or services, or enhancements to existing products or services?
- Were there technical challenges or uncertainties around the product or service being developed such that experimentation was or will be required to prove the concept?
Get in touch with a specialist today
If you have answered ‘yes’ to the above questions, we highly recommend you consult a tax specialist to explore the making of an R&D Tax Incentive tax claim.
Crowe Horwath has a dedicated specialist tax division that regularly advises on R&D tax eligibility and facilitates claims for clients across a broad range of industries.
By Alex Duonis
Partner – Tax Advisory