Politicians tell us that innovation is important for the country.
Indeed, innovation is very important. Most innovation projects commence with some initial Research and Development (R&D). Unfortunately, there are instances where an inventor or a product developer has started their R&D process without any real planning on how to maximise their income tax position.
The rules on R&D allow retrospective registration. This is one of the few programs that allows a retrospective registration in Australia. Businesses with a taxation year ending 30th June 2015 have until 30th April 2016 or the date of lodgement of the company’s income tax return (whichever is earlier) for the registration of the R&D project with AusIndustry.
The R&D tax incentives are available only for companies that have undertaken R&D projects that involve a minimum expenditure of $20,000 in the financial year.
Some people are confused and believe that the $20,000 is per project. It’s not. It’s the accumulative amount that has been spent on R&D by the company during the financial year.
There is some confusion about various aspects of R&D, including:
- You can have as many R&D projects as you like on which to base the R&D tax rebate claim.
- The R&D project doesn’t have to be successfully converted into commercial success. In fact, that’s the whole idea that, when the project commences, the inventor has no idea as to whether the project is going to be successful.
- You can claim the wages of the management personnel who have worked on the project, subject to them actually being paid. The applicant may be required to produce a PAYG tax certificate to prove that he/she has been paid wages/salaries from which PAYG tax has been deducted.
- It’s preferable to write out a plan at the very beginning of the project, which identifies what the assumptions are and what the inventor is trying to develop. This plan should include notes on the developer’s research into known R&D projects or products that are in a similar space to the intended project. This will enable the applicant to be able to satisfy any enquiry by the ATO as to what research was done to ascertain whether a similar R&D project had been undertaken or a product similar to what the inventor was planning to produce has already been developed.
- Records should be kept of the time spent by individual personnel, both employees and contractors in the project, including records of the work that has been undertaken and the results achieved from each phase.
- The company should be diligent to ensure confidentiality agreements and assignment of intellectual property agreements have been signed by employees and contractors working on the project. An internal system should be established to ensure these documents are appropriately filed so that they’re available in the future, if required.
- It’s a good idea to receive professional advice from a patent attorney at an early stage of the project so that appropriate strategies can be adopted which will contribute towards a successful patent application being lodged at a later date.
There are two components of eligible R&D expenditure. These are:
Core R&D Activities
Core R&D activities are experimental activities, whereby the outcome cannot be known or determined in advance on the basis of current knowledge, information or experience, but can only be determined by applying a systematic progression of work that’s based on principles of established science and proceeds from hypothesis to experiment, observation and evaluation and leads to logical conclusions.
The R&D activity should be conducted for the purpose of generating new knowledge (including new knowledge in the form of new or improved materials, products, processes or services).
It’s important that the following items have been undertaken:
- An experiment was carried out – if the outcome could have been determined in advance, then that expenditure is not eligible R&D.
- The applicant will need to be able to state that the R&D activities employed appropriate scientific methods.
- The research needs to be able to support the notion that the research was for the generation of new knowledge.
R&D doesn’t include the following items:
- market research
- market testing
- market development or sales promotion including customer surveys
- prospecting, employing or drilling for minerals or petroleum
- management studies
- researching social science, arts or humanities
Supporting R&D Activities
Supporting R&D activities include an activity that is directly related to a core R&D activity and has been undertaken for the dominant purpose of supporting core R&D activity.
The supporting R&D activities must be directly related to the main thrust of the R&D project.
There’s no individual limit for the amount that can be claimed for R&D rebate. The rebate that’s available depends on the turnover of the applicant company.
Companies with turnover of under $20M
The rebate is 43.5% refundable tax offset.
There’s an opportunity to receive a cash refund of the R&D rebate within 30 days of lodging the company’s income tax return, if the company is trading at a loss. If the company’s public officer has indicated in their company’s income tax return that it wishes to receive a tax refund relative to R&D rebate expenditure, the amount of the rebate is calculated and the amount calculated at 43.5% is paid by the ATO to the applicant’s bank account.
Companies with turnover of over $20M
The rebate is 38.5% non-refundable tax offset
ESS BIZGRANTS is a cloud-based technology available to subscribers 24/7, which enables subscribers to identify grants and incentives for which businesses might be eligible.
Once the company has completed the R&D process, consideration could be given to submitting an Accelerating Commercialisation grant application. This grant has funding available for individuals or companies that have developed new products or services and wish to obtain assistance to commercialise those activities.
A grant of up to $1M, on a 50% basis, is available for the successful applicant.
You’re invited to sign up for a no-obligation two-week trial of ESS BIZGRANTS, whereby you will be given the opportunity to test the system. Click here to try ESS BIZGRANTS for free, or visit www.essbizgrants.com.au.
For Accountants and ESS BIZGRANTS have negotiated a 10% discount for all For Accountants’ members who subscribe to ESS BIZGRANTS. To obtain this discount, please quote ESS3FORA when completing the ESS BIZGRANTS’ subscription form.