iWhat is the R&D Tax Incentive?
The R&D Tax Incentive is the largest single Australian Government incentive program for business. It aims to encourage and support businesses in undertaking R&D activities that they may not otherwise be willing to attempt. The program works by providing a tax offset or tax refund for companies claiming eligible R&D expenditure. See R&D Tax Incentive – what is it?
Who administers the R&D Tax Incentive?
AusIndustry is an operational division of the Department of Industry, Science, Energy and Resources (DISER) and is responsible for the applicant’s technical compliance.
The ATO is responsible for financial and taxation compliance.
Why should I consider the R&D Tax Incentive?
Effectively, the Government is subsidizing R&D in Australia via the R&D Tax Incentive. If you are undertaking R&D in Australia, there is a good chance that at least some of that R&D will qualify for the R&D Tax Incentive. To qualify, you need to spend more than $20,000 on R&D that is eligible under the program. You can claim up to 43.3% of that expenditure back from the Australian Government as a tax refund or tax credit.
If you are undertaking eligible R&D, then you should claim the R&D Tax Incentive. Unlike other Government (grant) programs, the R&D Tax Incentive is not capped, so if you qualify, you will receive a benefit. You aren’t competing with other companies.
How does the R&D tax incentive work?
The R&D Tax Incentive works by providing a tax offset or tax refund for companies claiming eligible R&D expenditure. To access the R&D Tax Incentive, you first need to spend more than $20,000 on eligible R&D activities and then claim a tax refund or tax offset for that expenditure. You need to register your R&D activities with AusIndustry first, and once you have your registration number, you can claim the tax offset or refund from the Australian Taxation Office.
When can I claim the R&D Tax Incentive?
You can submit your R&D Tax Incentive application to AusIndustry from July 1 for the preceding financial year. You must submit the application to AusIndustry by April 30 for the previous financial year.
Who qualifies for the R&D Tax Incentive?
You don’t need to be doing cutting edge research to access the R&D Tax Incentive! You don’t need to be a large (or even a medium-sized company). Even average small Australian businesses can qualify – you just need to be doing something new or different. If you make or develop products with an interesting twist (or have plans to do so) – you may well have eligible R&D.
To qualify, you need to be an R&D Entity as defined by the Australian Taxation Office.
Basically, you need to be a company, incorporated in Australia, or incorporated in a foreign country, but a resident in Australia for income tax purposes. Other categories are also defined. For a full description of who is eligible, refer to the ATO website.
Am I eligible for the R&D tax incentive?
If you are an eligible R&D entity, and you are conducting eligible R&D in Australia, then yes. So, you first need to know if you qualify as an eligible entity (see above). Then you need to know of your R&D fits the requirements of the R&D Tax Incentive. Generally speaking, the R&D Tax Incentive is intended for eligible R&D conducted in Australia, but you can apply for recognition of R&D conducted in another country.
How is R&D defined in the R&D Tax Incentive?
This might seem like a silly question – everyone knows what R&D is right? Not really. R&D is defined in a particular way in the R&D Tax Incentive – see R&D Tax Incentive legislation. Worse, this definition is at odds with the common understanding of ‘R&D’, as it is based on the principles of scientific experimentation.
Do I have to register my R&D activities with AusIndustry each year?
Yes, you do. New applications to AusIndustry and to the ATO need to be made each year that you claim. However, AusIndustry, in particular, makes it easy to to ‘roll-over’ your application form from one year to another, which can be a significant advantage where you have long-term R&D activities that span multiple years.
Is the R&D Tax Incentive worth it?
Some companies are put off by the apparent complexity or effort involved in submitting an R&D Tax Incentive application. However, you should not be put off by the program’s requirements, as there are many competent specialists who can help you navigate the application process. While there is some effort involved in applying for the R&D Tax Incentive, the benefit more than out-weighs the effort. The specialist’s fees will typically come out of the refund from the program, so there is often no direct cost for the applicant.
How is the R&D tax credit calculated?
If your company has an aggregated turnover of less than $20 M, then you can claim up to 43.5% of every dollar you spend on eligible R&D. Depending upon whether your company made a loss or a profit, you will receive either a refund, a tax credit or a combination of these to a total of 43.5%.
For companies with an aggregated turnover of over $20 M, the benefit is 38.5% – as a tax credit. See R&D Tax Incentive changes in 2020/2021 Budget.
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).
How do I claim R&D tax relief?
You can apply for the R&D Tax Incentive yourself, but it is strongly recommended that you engage an R&D Tax Incentive specialist to ensure a successful outcome, as the requirements are vague and can be difficult to understand (but they are published). It is also important to present the technical details of your claimed R&D in a way that is readily assessed as compliant by AusIndustry.
To maximize your R&D Tax Incentive claim, you should also consider structuring your R&D to maximise your eligibility. Your R&D Tax Incentive specialist can assist you in structuring your R&D appropriately.
What is the R&D tax offset?
The benefit from the R&D Tax Incentive can be ‘paid’ as a tax offset or a cash refund. A tax offset occurs when you have a tax liability to the ATO, or your company turnover is more than $20 M. The tax liability is reduced by the R&D Tax Incentive benefit. If the tax liability is less than the R&D Tax Incentive benefit than you will receive a cash refund if your company turnover is less than $20 M, or as a tax credit if your company turnover is more than $20 M.
What is the R&D tax credit?
This is where the company turnover is more than $20 M. If the tax liability is less than the R&D Tax Incentive benefit, any residual amount will be carried forward as a tax credit.
What is involved in applying for the R&D Tax Incentive?
If you do engage an R&D Tax Incentive specialist, then your effort is considerably reduced. However, you still need to do some preparation and planning. The consultant will look after the actual application, but you are still responsible for the planning, execution and documentation of your R&D – with guidance from the consultant.
To maximize your R&D Tax Incentive claim, you may also need to make slight adjustments to the structure of your R&D activities. Largely, this is about keeping records for your claimed R&D activities separate from other activities and keeping adequate records for the claimed R&D – both technical and financial.
Talk to your R&D Tax Incentive specialist before you start your R&D – this will minimise your effort and maximise your benefit. With a little bit of forethought and a modest and well-focused approach to documentation, the effort is quite manageable.
I don’t have a product yet – can I still access the R&D Tax Incentive?
Yes, you can. The criteria for the R&D Tax Incentive is activity-based, not outcome-based. You may be working towards having a product, or you may still be in the research phase. The key thing is that you are conducting experimental activities and looking for new knowledge that you cannot access any other way. You may never achieve a product – as long as your experimentation results in new knowledge you may be eligible.
Is R&D tax offset taxable?
No – it is a refund or tax credit and is not taxable.
Is the R&D Tax Incentive risky?
There has been considerable recent publicity concerning an ongoing government initiative to ‘clawback’ some R&D Tax Incentive payments. This has led to a misconception that the R&D Tax Incentive is risky, and best avoided. However, a competent R&D Tax Incentive consultant will ensure that you only claim eligible R&D activities and will prepare an application that can readily be assessed as compliant by AusIndustry.
What R&D activities are eligible for the R&D Tax Incentive?
AusIndustry publishes a considerable amount of material to aid claimants in determining eligibility. See Research and Development Tax Incentive. In principle, it is possible for you to answer this question for yourself. In practice, however, it is difficult, and it is very easy to make a mistake. See Do you have eligible R&D?
What expenses can I claim under the R&D Tax Incentive?
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.
Why doesn’t Tech Abstract offer services related to other Government incentives?
Quite simply, it isn’t worth it for our clients. Whilst there are many Government grants, they all have various problems. They are often temporary, have short application periods, have a capped amount to be distributed, or have undocumented selection strategies. There is absolutely no way of knowing whether you will be successful with some Governments grants or not.
Even if your application is submitted in good time, and you think you have a good case, you may well still miss out, for reasons you will never know. The consultant preparing your grant application will typically still get their money (which is why they are so heavily promoted) – even if you the client are unsuccessful. TechAbstract will not waste our client’s money.
I have my tax incentive refund – can I assume that the application was approved?
No – the R&D Tax Incentive is a self-assessment scheme, so you can’t assume that everything is fine because the application was apparently accepted and a refund gained – applications can be reviewed up to 4 years later. See R&D Tax Incentive Self-assessment for more information.
Why are R&D Tax consultants needed and what does an R&D Tax Incentive consultant do?
AusIndustry and the ATO both publish guidance on the requirements of the R&D Tax Incentive, and how to apply for the programme. However, achieving a fully compliant application is much more difficult than it looks, so mistakes are very likely if you have little experience with the programme.
Also, the R&D Tax Incentove is a self-assessment programme, so you will not necessarily know if your application is non-compliant – you may only discover this some years later when AusIndustry or the ATO reviews your application (see AusIndustry reviews).
An R&D Tax Incentive consultant can ensure that your application is fully compliant on submission – see Using an R&D Tax Incentive consultant.
Does my R&D Tax Incentive consultant need to understand my R&D?
Yes – to a point. An often-underrated part of the R&D Tax Incentive application is the narrative of the R&D core activities that form part of the application to AusIndustry. It is very important for this narrative to be well-structured, clear and informative so that AusIndustry can assess each core activity. To do that, the consultant needs to have a working understanding of your R&D.
See R&D Consultant understand your R&D? for more information.
Is it better to use a tax incentive consultant or draft my own application?
Whilst there are arguments for both alternatives, it is actually easier for a tax incentive consultant to understand enough of your R&D to draft the application than it is for you to understand the requirements of the R&D Tax Incentive program. Drafting a good application also requires experience which is not easily learnt. Also, consider this – the application will be assessed by someone in AusIndustry who is unfamiliar with your R&D but knows the R&D Tax Incentive requirements inside-out.
What documentation do I need to prove my eligibility?
The R&D Tax Incentive is a self-assessment programme, so you are responsible for your eligibility. However, AusIndustry or the ATO may check (review) your application, either at the time of submission or in future years. If your application is reviewed, you will need to prove that your claimed R&D is eligible under the programme. This means showing that you satisfy the requirements of the programme – see Supporting Documentation.
Can I claim multiple years in the R&D Tax Incentive?
Yes, you can. It is very common for R&D projects of significant size to span multiple years. In fact, the same Core Activity may span more than one year. As long as you are conducting eligible R&D, you are fine.
The important thing to note is that each Core Activity should have a common focus, and be concerned with a related series of experiments. Don’t start new R&D in an existing Core Activity unless it really is closely related – start a new one. See What is a Core Activity in the R&D Tax Incentive? If you are intending to continue work in a Core Activity into the following financial year, it is a good idea to say so in the application.