R&D Tax Concessions
Do you spend time investing more than $20,000 in experimental activities that are conducted for the purpose of generating new knowledge in your industry? Are you a company with an annual turnover of less than $20m per annum?
If the answer to these questions is ‘yes’, you may be eligible to apply for the research and development tax incentive (R&D Incentive).
The R&D Incentive is an Australian government initiative which is intended to encourage companies to engage in research and development that benefits Australia. It does this by providing a refundable tax offset of 43.5% for certain eligible activities.
What activities are eligible for the R&D Incentive?
R&D activities are divided into two main categories; ‘core’ activities and ‘supporting activities’.
Core activities are experimental activities conducted for the purpose of generating new knowledge. They must have the following characteristics:
- The activities are ‘experimental’
- The outcome cannot be known in advance on the basis of current knowledge, information or experience
- The outcome must be determined by applying a systematic progression of work using scientific principles and methods
- The purpose of the activities must be to generate new knowledge
Supporting activities are activities that are directly related to core activities. Some activities cannot qualify as supporting activities unless they are undertaken for the dominant purpose of supporting core activities.
How to obtain the R&D Incentive
In order to access the R&D Incentive, it is necessary for the company who has incurred the expenditure to register its R&D activities with the Department of Industry, Innovation and Science (Department).
Once R&D activities are registered, the company can claim the tax offset in its income tax return for the income year in which eligible R&D expenditure is incurred. This is done by completing the R&D Tax Incentive Schedule, including quoting the registration number.
Please note that registration takes place in the income year after R&D activities have been conducted. Registration applications are due annually, within 10 months after the end of the company’s income year.
Practical example of the refundable tax offset
The following is a practical example of how the Incentive applies to eligible R&D expenditure. The numbers are for illustrative purposes only.
Year 1 R&D expenditure $2,000,000
Income $0
Year 2 Company registers for R&D Activities
Aggregated turnover $1,500,000
Refundable tax offset $2,000,000 x 43.5% = $870,000
Assessable income $1,500,000
Less expenses –$3,000,000 (including R&D expenditure)
-$1,500,000
Add back R&D exp +$2,000,000
Taxable income $500,000
Tax on taxable income $500,000 x 28% = $142,500
Refundable tax offset reduces tax liability to $0
Remaining tax offset $870,000 – $142,500 = $727,500 paid by ATO
If you believe you may be eligible for the R&D Incentive, get in touch for some advice regarding the prospects of successfully making an application to the Department.
We’re here to help.
Ann-Maree Ventura Special Counsel
Level 3, 1 Palmerston Crescent
South Melbourne, VIC 3205, Australia