Our Services - Research & Development Tax Incentive (R&D)

RJED Consulting helps businesses claim their full entitlements under the generous R&D Tax Incentive and ensure they meet the rigorous government compliance requirements.

The R&D Tax Incentive is federal government program which helps Australian businesses to innovate through research and development (R&D). In many cases, businesses can receive a cash refund of 43.5 cents for every dollar spent on R&D. For businesses with turnover of less than $20 million per annum a 43.5% refundable tax offset applies. The tax benefit applicable will depend on the company tax rate applicable to the applicant. For the 2016/17 income year, the company tax rate for applicant companies with a turnover less than $10 million is 27.5%, between $10 million and less than $20 million, the company tax rate is 30%. Businesses engaged in eligible R&D are entitled to:

• Cash refunds equal to 43.5 cents for every dollar of R&D spending, when the company has tax losses; or

• Tax offset equal to a benefit of 13.5 cents for every R&D dollar spent when the company has taxable profits.

 

 

Where turnover exceeds $20 million p.a. a 38.5% non-refundable tax offset applies. With the company tax rate of 30% , this equates to a 8.5% tax benefit.

The R&D Tax Incentive is a broad-based program. All Australian companies, regardless of size, are eligible. Unincorporated businesses, however, are not eligible - find out more about eligibility.

The tax incentive replaced a previous R&D tax concession on 1 July 2011, which operated quite differently. For income years prior to the 2012 income year the previous tax concession still applies – contact us for details.

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What is the R&D tax incentive?

Scheme has 2 core components;

1. A 43.5% refundable R&D tax offset for eligible R&D entities with a turnover less than $20 million. 
2. A 38.5% non-refundable R&D tax offset for all other entities.
3. Expenditure to be capped at $100 million for an applicant including groups of companies.  This measure was passed in February 2015 and comes into effect from 1st July 2014. 

Minimum threshold of $20,000 expenditure continues to apply, except where expenditure on R&D activities are performed by a Research Service Provider (RSP) or there are contributions to a Co-Operative Research Centre.

Note that an R&D deduction is a notional deduction in that it is a step in calculating an entity’s tax offset entitlement. Division 355 of the ITAA 1997 refers.

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R&D Activities & Eligible activities 

Research & Development (R&D) has a very specific meaning when it comes to the R&D Tax incentive. Our expertise and knowledge ensures that our clients never mistakenly claim a benefit to which they are not entitled.

Some of the money you spend will be on activities that are not considered R&D under these rules. This includes things like market research & legal costs – see the section ‘ineligible activities’ on this page for the complete list.

Under the rules, eligible R&D involves a ‘scientific process’. That means you:

1. Have an idea about how to solve a problem

2. Conduct a scientific experiment or test to see if your idea works

3. Continue, modify or improve development of your idea based on the results of the experiment

•  Identify the scientific principles on which the project was based;
• Describe the hypothesis and the experiments that were employed to test the hypothesis; and
• Describe the results of the experiment and the conclusions you reached

The experiment is called a ‘core activity’. You must have at least one core activity, but you could have a number of them. Expenditure incurred on core activities is eligible for the R&D tax incentive.

Core activities are experiments where current knowledge information or experience does not allow you to predict the outcome. Core activities address gaps in knowledge by creating new knowledge. This can be in areas as diverse as new or improved materials, products, devices, processes or services.

‘Supporting activities’ are directly related to the core activity or help support core activities. These activities are also eligible for the scheme, but care must be taken to categorise and account for them correctly.

 

Ineligible activities

Even though you may have spent money on them, these activities are not eligible for inclusion in R&D spending for the purposes of the tax incentive:

• Market research

• Management studies

• Research in social sciences or arts

• Commercial legal and administrative aspects of patenting or licensing

• Prospecting, exploring or drilling for minerals or petroleum

• Developing, modifying or customising computer software where the dominant purpose is for use by listed companies in internal administration

• Activities associated with complying with statutory requirements or standards

 

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Eligibility

To participate in the incentive scheme you must register annually with Innovation Australia, which is the operator of the scheme. 

This must be done by the end of April each year. This is a serious, critical point – if you do not register your activities in advance by the April deadline, they will not not eligible for the scheme.

But here the operation of the R&D Tax Incentive gets a little complex. You can’t register directly with Innovation Australia – you must do that do that through AusIndustry. That’s because Innovation Australia doesn’t actually run the program – it outsources that job to AusIndustry and the Australian Taxation Office (ATO). Their jobs are:

This can very quickly become complex to people who don’t know the system well, as each of these departments has its own requirements and procedures. Both also have a keen-eyed monitoring, in place to ensure that people are not claiming anything to which they are not entitled. We know these rules and systems inside-out and ensure our clients stay compliant with all requirements and get every dollar of their tax incentive entitlement.

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Eligibility for the R&D Tax Incentive

The R&D Tax Incentive is an entitlement. You do not have to compete with others for a ‘pool’ of funds – your benefit is assured if you meet the eligibility requirements.

To be eligible for the R&D Tax Incentive your business must:

1. Be an R&D Entity

This means the business is either a corporation created under Australian law or, in some cases, a foreign corporation operating here. This means that sole traders, trusts, partnerships and tax-exempt entities cannot participate in the scheme.

2. Have spent at least $20,000 on R&D activities in an income year.

There are some limited exceptions to the minimum requirements where a contribution is made to a Co-Operative Research Centre or is performed by a Research Service Provider. Your R&D must be undertaken on your own behalf. That means you must:

• Own, or have effective ownership of, the R&D results including the right to exploit them in the marketplace;

• Bear the technical and financial risks of conducting the research; and

• Be able to influence or control the conduct of the R&D.

Mostly, R&D activities must be undertaken within Australia. However, in exceptional circumstances some overseas work can be eligible - but only when it has the prior approval from Innovation Australia.

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Record keeping

Record keeping is critical

It is very important that your records are meticulously maintained.

Your business records must be sufficient to verify the amount of the expenditure incurred on R&D activities, the nature of the R&D activities and the relationship of the expenditure to the activities.

You must keep adequate records to be able to demonstrate to AusIndustry and the ATO that: 

1. You undertook R&D activities

•  Be able to show that the activities took place and met the legislative definitions of ‘core R&D activities’ or ‘supporting R&D activities’.

• Demonstrate the scientific method used to generate new knowledge

• Record the ‘knowledge gaps’ to be addressed by the R&D

 

2. You incurred eligible expenditure in conducting the R&D

Records usually relevant to support tax deductions such as time sheets or summaries of hours, costs of trials, travel and overheads

 

3. The activities and expenditure meet all legislative requirements

You are responsible for proving the claims you have made in your company tax return and R&D tax incentive schedule. Your company records will be crucial in substantiating your claims.

A penalty may be imposed if proper records are not kept. Records must be retained for at least 5 years.

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Other things to know

The expense must incurred by the applicant company in the current income year

• Applicants must demonstrate that payments to associates have been paid in the year under review
• Core technology and interest costs are excluded
• Software development is eligible 
• Generally, R&D must be conducted in Australia. However, some exceptions can apply if authorised by Ausindustry in advance
• You must prepare and lodge an R&D tax schedule with the company tax return (we can do this for our clients)
• Companies must retain very detailed records of any R&D activities and expenses.