The R&D Tax Incentive’s primary objective is to enhance and increase the amount of private sector R&D being conducted within Australia, with a view towards stimulating economic growth and prosperity via the development of new and improved products, processes and services.
The R&D Tax Incentive is ‘broad-based’ in that it can apply to virtually any industry sector. The key determinants are whether the applicant is eligible and whether the R&D objectives and activities being conducted meet with the definitions provided in the legislation. In essence, the R&D activities must aim to create new or improved products, processes, services and / or knowledge, involve experimentation and innovation or technical risk and be based on the principles of science or engineering.
R&D Tax Incentive in its Current Form
In its current form, the R&D Tax Concession facility provides companies meeting the eligibility criteria and conducting eligible R&D with a concessional 125% deduction for certain expenditure relating to those activities, and a 175% deduction for qualifying ‘incremental’ R&D expenditure; and the R&D Tax Offset facility allows companies meeting certain additional criteria to receive a refundable tax offset in lieu of the 125% / 175%deduction. The cash value of the R&D Tax Offset is 37.5c in the dollar for eligible R&D expenditure and 52.5c in the dollar for ‘incremental’ R&D expenditure.
Whilst the determination of eligibility of the R&D activities and the quantum of eligible expenditure claimed is self-assessed, claims of eligibility and expenditures can be (and are) reviewed by the scheme’s two administrating bodies - AusIndustry (technical eligibility) and the Australian Taxation Office (ATO, expenditure claims).
Companies wishing to claim the R&D Tax Incentives must lodge applications on an annual basis with AusIndustry, within ten months of their financial year-end. The majority of Australian companies have 30 June year-ends, meaning that their deadline for the 2008/2009 year would be 30 April 2010.
AusIndustry then provides a registration number, which the applicant company inserts in its Company Tax Return for the relevant year (applicant companies should delay lodging their company Tax Return until they have received their registration number). Receipt of the additional deduction or refundable offset benefits is effected via the ATO’s assessment of the Company Tax Return. Refundable offset benefits are typically received within three months of lodgement of the Company Tax Return.
Proposed Changes to the R&D Tax Incentive
From 1 July 2010 onwards, the Government has announced its intention to implement extensive changes the R&D Tax Incentive system. These changes will include changing from a ‘tax deduction’ to a ‘tax credit’ system, increasing the level of benefits, modifying the categories and extent of expenditures that can be claimed, abolishing the 175% ‘incremental deduction’ and, most likely, changing (and narrowing) the definitions of eligible R&D activities. Administration and review mechanisms are likely to remain the same, with the exception that claims involving refunds of tax credits may undergo automatic (as opposed to selective) reviews prior to payment of the refund.
A major improvement from 1 July 2010 onwards will be the removal of the $1 million R&D expenditure limit for eligibility for the refundable credit. A transitional arrangement will increase the R&D expenditure limit for the R&D Tax Offset from $1 million to $2 million for the 2009/10 year of income. These changes will provide welcome relief and recognition to successful and growing early stage companies that have increased their R&D expenditure beyond $1million, but which are still in a carry-forward loss situation.
In September the Government released a Consultation Paper on the proposed R&D Tax Credit System. BSI is actively involved in this consultation process and is advocating measures aimed at increasing the level of benefits, improving the administration of the system and maintaining the existing definition of eligible R&D activities.
Please contact BSI on 02 9212 5505 if you wish to be kept informed of the passage of these proposed changes!
Lodging claims for the 2008/09 and 2009/10 Years of Income
What should you be doing to lodge claims for the 2008/09 and 2009/10 years of income?
One of the R&D Tax Concession’s eligibility requirements is that companies must have planned the R&D and obtained company Board (or a Board delegate’s) sign-off to embark on the R&D projects (“R&D Plans”). Companies must also be able to show evidence of a ‘systematic, investigative and experimental approach’ to the R&D projects as well as historical timesheets and cost records associated with the project, to substantiate the expenditures being claimed.
If you wish to claim the R&D Tax Incentive for the past (2008/09) year of income, we would recommend that you start compiling the required information and applications as soon as possible, to accelerate your company’s access to the claim benefits.
To prepare for claiming the R&D Tax Incentive for the current (2009/10) year of income, we would recommend a focus on ensuring that your company has compliant R&D Planning material and the necessary systems and processes to track and capture R&D progress, staff times and other expenditures.
In both cases, BSI would be pleased to discuss your projects and processes, to gauge eligibility, ensure compliance and maximise your company’s potential entitlements.
Article by Jeremy Levitt
Manager, BSI Innovation Pty Ltd.