The Research and Development Tax Incentive has been around in its current form since 2011 when it replaced the Research and Development Tax Concession. For many years it has remained a somewhat steady grant when compared to other industries. The reason of course is that it inherently promotes research and development activities for the benefit of the Australian economy, a vital area of future growth.
Broadly, there are two key categories within the grant, and they are based solely on turnover (grouped, but we will get to that). For businesses that have an aggregate turnover of less than $20 million per year, they receive a 43.5% refundable tax offset. For businesses with turnover above this level, they receive a 38.5% non-refundable tax offset.
So, what is a refundable tax offset? A refundable tax offset carries far more benefit than a non-refundable offset in regard to cash flow. Consider a business that is due to pay $500 in
tax for the financial year. After calculations, the business is entitled to a refundable research and development tax offset of $600. This would subsequently become a negative tax payable for the year ($500 - $600 = -$100). As this tax offset is refundable, the business would receive the $100 back via bank transfer. If this offset was non-refundable, the business would not receive this $100 back via transfer (it may receive a future benefit by carrying forward the non-refundable offset).
OK, how is the research and development tax offset calculated? The eligibility and method of calculating expenses in the R&D Tax Incentive is the difficult part but calculating the offset itself is quite simple. Essentially, you total all of your eligible R&D notional deductions (costs) for the year, and multiply by the applicable rate, being 43.5% of 38.5% depending on turnover. For example, if a business that turns over $10 million per year spent $2 million on R&D activities and supporting costs, they would be entitled to a $870,000 refundable tax offset under the scheme.
Where do I start? Businesses must first be an ‘Eligible Entity’ to qualify for the scheme, and this generally means the business must be incorporated under Australian law and carrying out Research and Development Activities for itself (exceptions apply). Secondly, the
business must have carried out ‘eligible R&D activities’ in the financial year of claim and spent more than $20,000 in the financial year on these activities. Within this, there are ‘core’ activities and ‘supporting’ activities, these are incredibly detailed and require a thorough assessment (see Department of Industry, Innovation and Science for more information). Finally, you must register your activities with the Department of Industry, Innovation and Science before lodging a claim. After this it is merely a task of classifying expenses as notional R&D deductions under the scheme and claiming them in each year the project is under development. Eligible expenditure can include depreciation, direct and indirect (apportioned) wages, occupancy costs (apportioned if necessary) and just generally R&D in nature.
The scheme is actually quite generous once qualification is obtained, however the record keeping requirements are strict, and all workpapers and evidence of R&D activities must be maintained as there is a high degree of scrutiny in R&D Tax Incentive claims. Qualification and eligibility must be formally assessed and the correct steps must be followed in order for a successful claim. An experienced Chartered Accounting Firm should always be consulted with R&D Tax Incentive Claims, particularly given that the final application step is lodging the tax return with the ATO (who has final oversight over the tax implications).