18th June 2020 | Grants
What is the Research and Development Tax Incentive?
The Research and Development (R&D) Tax Incentive offsets certain costs of a company in carrying out eligible R&D activities. It is not a competitive grant but a targeted tax offset or rebate of expenditure.
The program reduces the cost and risk of undertaking R&D activities for your business and incentivises companies to create new or improved products, processes and services.
What is Eligible R&D Expenditure?
You must have spent $20k or over on eligible expenditure in any given financial year.
(This threshold is waived if R&D is contracted to a registered research provider)
Most expenditure related to R&D activities is deemed eligible expenditure and include but are not limited to: Salaries – Overheads – Contractor Costs – Feedstock – R&D Plant Depreciation – Materials
– Raw Ingredients – Modification to Equipment – Travel Expenses for Sourcing.
Who is Eligible for the R&D Tax Incentive
- A PTY LTD company incorporated in Australia.
- A Partnership if all partners are PTY LTD’s
- A corporation that is an Australian resident for tax purposes.
- A foreign corporation that carries out R&D activities though a permanent establishment in Australia.
- A corporation acting as trustee of a public trading trust.
(Ineligible structures are tax exempt entities, partnerships, sole traders and trusts)
What is Eligible R&D Activity?
Your R&D activity must bear technical and financial risk to you and you alone must influence or control the conduct and direction of the R&D activity. You must either own or have effective ownership of the R&D results which will include the right to exploit the results.
Activities must be undertaken within Australia but if approved under certain conditions, overseas activities may be deemed eligible by Ausindustry prior to them occurring overseas
It is difficult to cover off every conceivable type of project, but in assessing whether a project is eligible, we need to address the following:
- Were you testing a hypothesis?
- Did you undertake systematic, investigative and experimental processes? That is, to test the hypothesis you needed to design a new process and then test and trial the process to evaluate its performance.
- Is the project innovative? Were there points of novelty in the project? If you designed a testing process from scratch, for example and can point to clear differences between your process and standard industry processes then you should be able to identify innovation.
- Were the outcomes of the project unknown at the outset of the project? If you didn’t know what the end result would be and were uncertain about the eventual outcome. Not knowing what would work to give you the outcome you needed to conduct trials and tests, then that can demonstrate that eligible activities were undertaken.
All expenses relating to the research and development of a new product or service where the outcome/knowledge of, is not readily available elsewhere. In other words, you need to be researching how to make something – a product or do something – a service. It needs to be a product or service that requires experimentation of ingredients/materials (the substance that makes it) or process (the way in which it’s done) that involves trial and error /testing until the desired “new” outcome is achieved.
How is it applied?
Example for a company with turnover less than $10,000,000
If your turnover is $1,000,000 (gross) and your running expenditure is $800,000 this would leave you with a taxable income of $200,000. Therefore, the tax payable would normally be
However, if you were to spend $200,000 on R&D, the tax incentive on that would be $87,000 (i.e. 43.5% uplift of the $200k R&D expenditure) which would be offset against your tax payable of $55,000. Thus, the $87,000 tax incentive would give you a benefit of $32,000 which would be reduced from your initial tax payable, so you would pay $23,000 instead of $55,000.
If you are trading at a loss, e.g. – $1,000,000 turnover and your running expenditure is
$1,300,000, thus showing a loss of $300,000, therefore taxable income is 0 (zero). However, if you have spent $200,000 in R&D your tax incentive would be $87,000 (43.5% uplift on R&D expenditure) which would be paid as a tax rebate to you for that full amount i.e. $87,000. As there was