In a world that is built on innovation, Research and Development (R&D) is key. Whether you’re the owner of a startup business or an existing business that has performed some product, device, service, materials or process innovation, the cost and risk associated with R&D would have definitely crossed your mind. The Government recognises there are costs associated with innovation and one way of showing support for businesses that innovate is the R&D Tax Incentive scheme.
Many business owners however are not aware of what constitutes eligible R&D activities, therefore are potentially missing out on a substantial cash injection for their business.
Eligible R&D activities are broken into two categories, Core R&D activities and Supporting R&D activities.
Core R&D Activities
Core activities are the part of the work where the company tries to do or make something that hasn’t been done before and cannot be done without experimenting. To prove it, the company must aim to create new knowledge by following a path from concept to conclusion with measurable experimental outcomes to support the reasons for the conclusion. Core R&D activities could be, for example, the testing of a new or improved product, device, process or service and the business must have at least one Core activity to make a claim.
Supporting R&D Activities
These activities need to have a direct, close and relatively immediate relationship to the core R&D activity. If these activities are involved in producing goods or services the dominant purpose of the activities must also be to support your eligible core R&D activities. Activities that make a direct contribution to the conduct, observation or evaluation of an experiment are likely to meet this requirement.
- The R&D Tax Incentive is open to Australian companies from any industry and tax offsets available are assessed based on turnover: Eligible companies with turnover of less than $20 million receive a 43.5% refundable tax offset on R&D expenditure, provided the entity is not controlled by income tax exempt entities.
- There is a non-refundable 38.5% tax offset for all other eligible entities. Unused non-refundable offset amounts may be able to be carried forward to future income years.
So, how can I tell if my business is eligible to submit an R&D Tax Incentive application?
The R&D program has five steps:
1. Assess if you have an eligible entity
You will need to have an Australian company to register and make a claim. There is more about the definition of eligible entities on the Business Australia website.
2. Conduct eligible R&D activities
It is suggested that companies should plan for their R & D activities including:
- Formulate a hypotheses ie what are you trying to prove?
- Conduct literature research to understand current level of public knowledge
- Prepare a budget for the R & D activities
- Plan and carry out experimental activities to prove / disprove the hypotheses
- Record results and analyse
As all applications are self assessed and then subject to review receiving support in submitting your claim brings lots of business owners piece of mind.
3. Register with AusIndustry
Companies with an income year of July 1, 2015 to June 30, 2016 who wish to apply for the R&D Tax Incentive for the 2016-17 financial year income would need to have lodged their registration application with AusIndustry by Thursday, April 30, 2017.
4. Ensure your books are in order
It is highly recommended that you have your books prepared by an Accountant (or bookkeeper under an experienced Accountant’s guidance) who has specific skills in accounting for R&D tax incentives. This will ensure your expenses are structured to maximise eligibility and assist in documenting expenses well to support the claims at review time.
5. Make a claim by lodging your company tax return
Be prepared to lodge your tax return promptly in the new financial year to obtain the grant at the earliest possible time.
The tax incentive is claimed by completing a Research and Development Tax Incentive Schedule which forms part of the company income tax return and needs to include the AusIndustry registration number. In addition to the direct costs associated with the activities, companies can also claim overheads, depreciation and other supporting expenses to the extent they relate to R & D activities.
Australia has a self-assessment income tax system, so tax incentive claims may be initially assessed, but may be subject to later audit by the ATO. It is crucial therefore to ensure your records withstand an audit by having an Accountant experienced in accounting for R&D tax incentives on your team.
Changes impacting 2016/17 R&D Tax Incentive claims
As Hanrick Curran is one of Brisbane's largest independent accounting firms, our specialists can assist your company with their R & D tax incentive claim including:
- Identifying your company's eligible activities;
- Applying for advance findings (if necessary) to determine eligibility (compulsory for overseas activities);
- Reviewing your expenditure to help maximise your claim;
- Reviewing or assisting with internal record keeping systems to simplify future compliance and audit activity;
- Prepare the annual AusIndustry application for registration of activities;
- Complete the ATO's Research and Development Tax Incentive schedule;
- Assisting with audits and reviews.
Please note that this publication is intended to provide a general summary and should not be relied upon as a substitute for personal advice.