Draft legislation has been introduced to Parliament to modify the Research & Development (R&D) tax incentive, effective from 1 July 2019. The intent is to better target the incentive, and better motivate some businesses to spend on R&D.
In a nutshell
Companies engaging in R&D receive a credit against their tax liability based on the amount spent on R&D. If group-wide turnover is below $20 million, the credit is the company tax rate plus 13.5%. So, for the current year, the credit is 27.5% + 13.5% = 41% of R&D expenditure. A cash refund is received if the credit exceeds the company’s tax liability for the year. But any refund is limited to $4 million (excluding any clinical trial component). All other companies receive a non-refundable credit equal to their tax rate plus a scaled additional percentage of 4.5%, 8.5% and 12.5%. Spend more, and get the higher percentage add-on.
The expenditure limit for the credit will also increase from $100 million to $150 million. The $4 million refund cap – against the Senate Committee advice – is disappointing. The Government is essentially saying they want smaller companies to engage in R&D, but not too much.
The real issues with R&D
The broader issues with the R&D incentive relate to practical and administrative difficulties. Two government agencies deal with the R&D incentive – the ATO and AusIndustry. AusIndustry oversees companies documenting their R&D activities, while the ATO administers the claiming of the tax credit itself.
Recent media coverage of the ATO’s handling of small business claims for the incentive have put a lot of people off. Even where there is a legitimate entitlement to the credit, some business owners hesitate, wondering if they are opening themselves up to a world of pain later on.
But that’s where Nexia can help. We can assess whether you are engaging in eligible R&D activities, and advise on documenting and calculating your R&D credit. A company must submit an R&D incentive “application” to AusIndustry every year that it seeks to make a claim. It’s due 10 months after your financial year end. Most companies have a 30 June year end, with the application therefore due by the following 30 April. It’s a hard deadline in the law, with no ability to extend. For example, if you miss submitting the application by this 30 April, no R&D credit for the 30 June 2019 year – end of story.
Myth: AusIndustry accepting your application confirms your tax credit
The use of the word “application” is misleading, as you’re not actually applying for anything. Rather, the law sets out the rules as to what constitutes eligible R&D activities and expenditure, and you have either satisfied those rules or you haven’t. AusIndustry doesn’t vet the validity of your R&D information, and accepting the “application” does not mean your R&D credit is confirmed or approved in any way. The AusIndustry application is an administrative process documenting your R&D activities, and comes with that hard deadline for submission. External advisors or consultants have no ability to influence whether what you have done is eligible for the R&D credit – it either is, or it isn’t.
That’s why we don’t do “success fee” arrangements for the AusIndustry R&D applications. They incentivise a consultant to pad your application with expenses that don’t relate to your R&D activities, or include expenses for activities that are not eligible R&D activities in the first place. It’s a clear conflict of interest.
At Nexia, we tell you your reality, even if it’s not what you hope to hear, because that’s what’s in your best interests. But we also set out your options, and what they mean for you.
Don’t wait until April… or March… or February, etc
The R&D incentive can mean a lot of money to you, so it’s best not to wait until April before thinking about your annual R&D application to AusIndustry. Leaving it until the last minute creates a rush to get it finalised, and heightens the risk of the application missing something such that AusIndustry doesn’t accept it. End. Of. Story.
Talk to your trusted Nexia advisor about whether you are eligible for the R&D tax incentive, and how to maximise it. And for your own peace of mind, do it now!