In an effort to drive innovation, the Australian Government offers an R&D tax incentive to companies who invest in research and development (R&D).
However, according to a recent submission by CPA Australia, only 11,935 companies out of 1 million corporate taxpayers, claimed R&D tax offsets in the 2016 – 17 financial year. Based on their gathered data, this is mainly due to the presumed difficulty in accessing the R&D benefits.
If you’re a small business owner who could possibly benefit from the incentive but aren’t sure if you meet the eligibility requirements or how to register and apply, don’t fret!
We’ve gathered all the information you need to know and created the ultimate guide to the R&D tax incentive.
What Is the R&D Tax Incentive Program?
The R&D tax incentive, administered by the ATO and AusIndustry, is a rebate offered to companies who develop new products and services. It allows you to claim:
- a 43.5% refundable tax offset if you meet the eligibility requirements and turnover less than $20 million; or
- a 38.5% non-refundable tax offset for all other eligible entities.
The R&D tax incentive program aims to enhance productivity and increase company competitiveness across the economy by:
- encouraging various industries to run research and development programs to fuel innovation;
- improving the R&D incentive for smaller business entities; and
- providing businesses with government support.
How To Assess Eligibility
Under the R&D tax incentive program, you are required to self-assess whether you are eligible to register your R&D activities and claim the incentive.
To be eligible to claim the R&D tax incentive, you must determine whether or not you meet the following criteria:
- you must be the business owner of a company (not a trust, partnership or sole trader) that is subject to paying income tax in Australia;
- you are required to perform at least one core R&D activity;
- you must spend at least $20,000 on achieving your R&D objectives.
Core R&D activities are defined as experimental activities that are conducted to generate knowledge and:
“where the outcome can only be determined by applying a precise order of work based on science – this requires forming a hypothesis, proceeding with an experiment and developing logical conclusions based on various observations and evaluations.”
The Australian Government’s business website offers various helpful fact sheet documents that can help you better understand the eligibility of the R&D activities.
Lastly, record keeping is an essential part of managing your R&D tax claim. You should always keep a record of:
- what activities you conducted;
- the expenses you incurred; and
- the assets used in achieving those activities.
How Does the R&D Tax Offset Work?
If you own a company with an annual turnover of less than $20 million and it spends at least $20,000 on R&D, then instead of claiming the general tax deduction rate for business expenses, you can claim an increased rate of 43.5%.
Moreover, if the tax offset exceeds your company’s tax liability, then the balance will be paid to you in cash.
A tax offset means that you’ll pay less tax on your business’s taxable income.
Lucinda owns a software development company that specialises in developing affordable and easy-to-use software for a point of sale systems in restaurants. Based on the sales of her basic system, she turns over $450,000 in income.
To continue developing her software, she spends $245,000 on contractors.
She also spent $75,000 on admin costs and marketing fees.
|Software Development Company||Tax Calculations|
|minus deductible expenses (non-R&D)||($75,000)|
|Taxable income||= $375,000|
|Tax Liability: $375,000 x 27.5% (tax rate)||$103,125|
|Eligible R&D expenditure||$245,000|
|x R&D tax incentive rate||43.5%|
|Refundable Tax Offset||$106,575|
$106,575 – $103,125
Due to the R&D Tax Incentive, Lucinda’s refundable tax offset exceeds her tax liability, so she won’t have to pay income tax, and she receives cashback.
If, however, you own a company with an annual turnover of more than $20 million and spends at least $20,000 on R&D activities, you can claim a 38.5% tax deduction. For larger entities, the tax offset is non-refundable, but it can serve to reduce future tax liability.
How Do You Register/Apply for the R&D Tax Incentive?
After self-assessment, if you believe that you pass the eligibility test, you must register your company with AusIndustry for each year that you wish to claim the R&D tax incentive.
Registration involves completing online registration smart form within ten months of the end of your company’s income year.
The registration form requires you to disclose:
- technical information about the R&D activities; and
- financial information around the R&D expenses.
Following the completion of your registration with AusIndustry, you submit your claim for the tax offset by completing an R&D tax incentive schedule. This is then lodged with the ATO as part of the company’s income tax return.
What Kind of Work Isn’t Eligible for the R&D Tax Incentive?
In terms of the Income Assessment Act, you can’t claim an R&D Tax Incentive for the following activities:
- market research, testing or development;
- prospecting, exploring or drilling for minerals;
- management studies or efficiency surveys;
- commercial, legal and administrative aspects of patenting;
- activities associated with complying with statutory requirements or standards such as maintaining national standards;
- any activity related to the reproduction of a commercial product or process; and
- developing, modifying or customising computer software that is primarily used by its developers (including entities connected to or an affiliate of the developers)
The Australian Government offers an R&D tax incentive that allows companies to claim back up to 43.5% of the costs related to research and development. This is to encourage innovation across the country’s economy.
If you qualify, you may be able to offset some of the cost of your eligible R&D activities. Depending on your company’s annual turnover, this may be refundable or non-refundable.
You can register with the AusIndustry and submit your R&D tax incentive schedule when you lodge your company’s annual income tax return with the ATO.
As there is a range of matters you need to consider before applying for the incentive, you may find it beneficial to get some advice from an R&D specialist or your accountant.
At Box Advisory Service, our team of dedicated registered tax experts and accountants support all our clients from start to finish of the incentive claim, including determining your eligibility and submitting your R&D tax incentive schedule. We can also assist if your claim is subject to an audit.
To find out how we can help you make your R&D tax incentive simple and easy, book in a free consultation today.
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Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to contractors and small businesses. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal or tax advice. You should, where necessary, seek a second professional opinion for any legal or tax issues raised in your business affairs.