Most eligible companies don’t claim the R&D cash refund.
The Australian Federal Government R&D Tax Incentive is a program that aims to encourage businesses to invest in research and development activities. The program can provide cash back to companies that undertake R&D activities, making it easier for them to invest in innovation and growth. The program is open to a wide range of companies and is geared toward small and medium-sized enterprises (SMEs).
Although the process of claiming the R&D Tax Incentive is relatively straightforward, over 70% of eligible companies in Australia never claim the benefit. Either because their owners or management staff don’t think they are eligible, or simply because they don’t think that some of their activities can be labelled as R&D.
So, what sort of activities can be included as R&D expenses?
R&D expenditure can be classified into the following categories:
- Salary and wages – this include salary and wages plus oncosts (superannuation, worker’s compensation and payroll tax) that are paid to employees to conduct R&D activities.
- Associate expenditure – this relates to salary/payments made to the owners or directors of the business. The key requirement for Associate expenditure is that it must be incurred and paid in the financial year that it is being claimed.
- Contractor costs – this relates to third-party contractors that are hired to conduct the R&D activities on behalf of the company that will be claiming the R&D Tax Incentive.
- Direct costs – amounts directly related to conducting R&D activities, such as travel and consumables that were incurred directly as a result of conducting the R&D activities.
- Overheads – overheads such as rent can be apportioned to the R&D claim. The portion of rent that can be included should be based on a reasonable apportionment methodology.
- Feedstock expenditure – this covers raw materials and energy used in trial runs for R&D activities.
- Decline in value of R&D assets – Companies can claim the depreciation of tangible assets used in conducting R&D activities.
- Balancing adjustment of R&D assets – Similar to the above point, companies can claim the cost of assets written-off when used for conducting R&D activities.
- Cooperative Research Contributions – CRC payments made can be included in the R&D claim.
- Overseas expenditure – A company can potentially apply for an Advance Overseas Finding. If successful, then a company can claim its overseas R&D costs as part of its Australian R&D Tax Incentive claim. Please note, applying for an Overseas Finding is a separate process altogether from the annual R&D Tax Incentive claim.
When calculating the R&D expenditure it is important to keep in mind the following:
- The expenditure must relate to R&D activities in Australia.
- R&D activities can include core R&D activities (i.e. design, development and testing) as well as supporting R&D activities (background research, project management, etc.). Both core and supporting R&D activities attract the same rate of R&D offset.
- R&D claimants should keep on file documentation (e.g. contractor invoices, diary notes, etc.) that can be used to substantiate the R&D expenditure incurred: and
- To claim the R&D Tax Incentive the total expenditure for a given financial year must be greater than $20,000.
The level of R&D offset that can claimed is as follows:
- a refundable tax offset equal to the entity’s company tax rate plus an 18.5% premium for eligible entities with an aggregated turnover of less than $20 million per annum, provided they are not controlled by income tax-exempt entities.
- a non-refundable tax offset for all other eligible entities equal to the entity’s company tax rate plus a two-tiered premium determined on the notional R&D expenditure as a proportion of total expenditure for the income year. The new rates will be the company tax rate plus
- 8.5% for R&D expenditure up to 2% of total expenditure
- 16.5% for R&D expenditure above 2% of total expenditure.
Once a company is registered for the program, they can then claim the R&D Tax Incentive by providing evidence of their R&D activities and costs in their annual tax return. The ATO will then review the claim and provide a refund or credit for the eligible R&D expenditure. It’s worth noting that the companies need to have a proper record keeping of the R&D activities and costs, as the ATO may conduct reviews and audits to ensure that claims are valid.
If your expenses meet the definition of R&D as set out by the legislation, then you should be claiming it as soon as possible.
As your business is very likely to be eligible for the R&D Tax Incentive, we have answered some of those questions in this article. Check them out. If your expenses meet the definition of R&D as set out by the legislation, then you should be claiming it as soon as possible. Call 1300 656 141 or email Alan Baghdasarayan to find out more about R&D Tax Incentive.