R&D Tax Incentive eligibility
To apply for the R&D Tax Incentive, you (your company) needs to be eligible, and the R&D that your company undertakes also needs to be eligible. But what does this mean, and why is it important?
As with any Australian Government assistance programme, there are strict rules around applying for the R&D Tax Incentive, and to what you can claim. These rules are governed by legislation – see R&D Tax Incentive Legislation.
Think of it this way – the government is investing in your R&D, so they just want to do what they can to protect that investment. See Offset your R&D costs to help innovate and grow your business for a full description of The R&D Tax Incentive from AusIndustry. In particular, from a c0mpliance point of view this will be useful: Compliance readiness guide on record-keeping for the R&D Tax Incentive
Why is R&D Tax Incentive eligibility important?
The R&D Tax Incentive is a self-assessment programme – you are responsible for your application. Whilst some R&D Tax Incentive applications will be checked in detail when they are submitted; most will not be.
AusIndustry and the Australian Taxation Office will assume that you have been through a formal compliance checking process before submitting your R&D Tax Incentive application.
AusIndustry or the ATO may check your application later (see AusIndustry reviews), in some instances after you receive your refund, and potentially some years after the submission. If AusIndustry or the ATO decides that your application wasn’t compliant after all, you will be asked to repay your refund (possibly with penalties).
In summary, you need to be confident that your R&D Tax Incentive application is compliant before you submit it.
R&D Tax Incentive eligibility criteria
So what does it mean to have a compliant application, and to have eligible R&D?
Compliance involves the following criteria:
- Are you eligible to submit an R&D Tax Incentive application?
- Are your R&D activities eligible under the R&D Tax Incentive?
- Are the claimed expenses eligible under the R&D Tax Incentive?
- Did you spend more than $20,000 on R&D (and less than $100M)?
- Timing – you must submit your AusIndustry application by April 30.
- Do you have the documentation (evidence) you need to support your R&D Tax Incentive application, and have you satisfied the requirements for that documentation?
Each of these points needs to be covered off before you submit an R&D Tax Incentive application. More particularly, you need to cover off these points before you start your R&D activities as filling in gaps may be difficult or impossible in retrospect.
Who can claim the R&D Tax Incentive?
The R&D Tax Incentive is open to Australian incorporated companies and internationally incorporated companies that satisfy certain criteria. Individuals, trusts and partnerships are not eligible. A more detailed explanation of who can claim can be found here: Who can claim the R&D Tax Incentive.
Are my R&D activities eligible?
The nature of the R&D activities that you can claim is difficult to define in any objective way, largely because the R&D Tax Incentive legislation is quite vague. This is deliberate to avoid ruling out R&D activities that are worthy of the R&D Tax Incentive.
This makes it difficult however for newcomers to submit compliant applications. See Do you have eligible R&D?. This is a key reason why most applicants use an R&D Tax Incentive specialist to submit their application – see Using an R&D Tax Incentive consultant.
Things get even more complicated and confusing with software-based R&D Tax Incentive applications – see Eligible Software R&D.
It is strongly advisable to engage the services of an R&D Tax Incentive specialist.
What expenses can I claim?
Eligible expenses need to be directly associated with the experimental R&D activities being claimed. There are strict rules that define what can and cannot be claimed. It is important to note that these R&D Tax Incentive rules are distinct from the rules governing what can be claimed in your company’s tax return. This means that your company accountant may not be familiar with this distinction.
An R&D Tax Incentive consultant does not replace your company accountant (the roles are quite distinct) but will work closely with your accountant in managing your R&D Tax Incentive application.
How much do I need to spend on R&D?
To claim under the R&D Tax Incentive, you must spend more than $20,000 on eligible R&D expenses in the financial year you are claiming. The exception is where the expenditure is incurred to a registered Research Service Provider (RSP) or is a monetary contribution to a Cooperative Research Centre (CRC) under the CRC program.
The maximum amount you can claim is $100M (to be increased to $150M on 1 July 2021).
You have 10 months after the end of the financial year (April 30) to register your R&D activities with AusIndustry, but you can do this any time after June 30. Note that this is an annual requirement – you need to register each year you wish to claim R&D activity in.
AusIndustry will respond with a registration number, which you will need for the second part of the application – submitting the R&D Tax Schedule to the Australian Taxation Office as part of your company tax return.
This is where things do get tricky. To have a compliant R&D Tax Incentive application, you must have documentation that proves that you undertook the claimed R&D activities and that you incurred the claimed expenses in the course of that R&D.
Having eligible R&D and claiming eligible expenses is of no use if you cannot substantiate that R&D and those expenses if you are asked to by AusIndustry or the ATO – see AusIndustry reviews.
Supporting documentation must be created around the time the R&D is undertaken, and certainly before the end of the financial year. For an in-depth description of the supporting evidence you need, please read Supporting Documentation.
Best Practice R&D planning
An R&D Tax Incentive application must be submitted to AusIndustry after the financial year’s end (but before April 30 the following year). The problem is that the claimed R&D must have been performed (and more particularly) the supporting documentation must have been prepared before the end of the financial year.
This means that you must plan your R&D to optimize your use of the R&D Incentive and ensure compliance. You certainly must know at the time whether an R&D activity is potentially claimable under the R&D Tax Incentive. See How to structure your R&D for the R&D Tax Incentive.
Using an R&D Tax Incentive consultant
The bottom line is – find a reputable R&D Tax Incentive consultant before you embark on any R&D that you may be able to claim under the R&D Tax Incentive. The consultant will help you identify the eligible R&D activities before you start them, which means that the appropriate technical and financial record keeping can be put in place. The consultant will work with you to ensure that your documentation strategy is adequate. This means that when the time comes to submit your R&D Tax Incentive application:
- The consultant will have all the information they need to complete the AusIndustry application.
- You would have all the supporting documentation you need if AusIndustry or the ATO were to review your R&D Tax Incentive application.
For this reason, it is strongly advisable to engage the services of a reputable R&D Tax Incentive specialist. See Using an R&D Tax Incentive consultant.