Quantum of R&D benefit
The R&D Tax Incentive is a great benefit to many companies. In particular, Australian companies with less than $20 million in group turnover and at least $20,000 in R&D expenditure can claim back 43.5% of their eligible R&D costs through the tax system, including by way of cash payment from the Government where the R&D tax offset that they are entitled to exceeds their tax payable.
Australian companies with $20 million or greater in group turnover are also able to claim a tax offset for their eligible R&D costs. Those companies are able to claim a tax offset equal to their tax rate plus 8.5% for R&D costs to the extent that those R&D costs do not exceed 2% of total expenses and a tax offset equal to their tax rate plus 16.5% to the extent that those R&D costs do exceed 2% of total expenses. Companies with $20 million or greater in group turnover are not entitled to receive cash payments through the tax system to the extent that the R&D offset they are entitled to exceeds their tax payable, but they are able to carry forward the excess to reduce tax payable in future income years.
What is R&D
Core R&D activities are experimental activities whose outcomes cannot be known in advance based on current knowledge but are based on principles of established science, proceeding from hypothesis to experiment, observation and evaluation and then the drawing of logical conclusions for the purposes of generating new knowledge. Claims can also be made for supporting R&D activities such as cleaning and maintaining equipment.
In addition to direct costs, claims can be made for the depreciation of assets used for R&D activities.
Issues that can arise
The R&D rules are relatively complex. Here are some of the issues that can arise:
- For groups with under $20 million in turnover, the benefits of having a separate R&D company can include ensuring that the R&D cash refunds do not interfere with the group’s ability to pay franked dividends.
- Where staff spend part of their time on R&D it can be difficult to determine what proportion of their salary plus labour on costs can be claimed as R&D expenditure. Contemporaneous timesheets should be maintained.
- Determining what percentage of overheads such as rent and insurance can be claimed as R&D expenditure.
- There are some specific exclusions from R&D expenditure such as patent costs, market research and development of software used for internal administration.
- R&D must normally be conducted solely within Australia unless a special exception is obtained.
- There are special rules where R&D expenditure is incurred to a related entity. For example, expenditure must be on arm’s terms, there can be adjustments to eliminate group mark-ups, and expenditure to a related party must be actually paid to be treated as R&D expenditure.
- R&D expenditure that is not at risk is disallowed.
- There are clawback rules where a company receives recoupments of their R&D expenditure from Government (for example, through a grants program).
- There are special rules apply to R&D feedstock.
- There are special rules for depreciable assets that are used only partly for R&D.
Process of making an R&D claim
In order to make an R&D claim, a company must register their R&D activities with AusIndustry within 10 months of the end of their income year. This involves filling out a standard smart form in which the R&D activities are set out in detail and it is explained why they are R&D. AusIndustry processes claims within 40 business days for first time registrants. Once the claim has been processed by AusIndustry, the company is given a code which the company can use to make an R&D claim through its tax return.
Companies with group turnover under $20 million that are entitled to receive cash payment for the R&D activities through the tax system will often submit an R&D application with AusIndustry as soon as possible after year end without waiting until near the deadline in order to be able to get their money sooner. Companies with group turnover of $20 million or greater receive a reduction in income tax payable through the R&D Tax Offset, but they are not eligible for a tax refund.
R&D claims for the year ended 30 June 2024 must be lodged by 30 April 2025. Contact us today if you need our assistance with your R&D claim.