Essential Guide to the R&D Tax Incentive 2022
The Australian government supports businesses of all sizes through its many assistance programs. Among them is the Research and Development (R&D) tax incentive, implemented since the 1980s. R&D is crucial in the country’s innovation. This tax incentive is one of the major drivers, encouraging firms to undertake research and development projects for which they may not have sufficient funds.
This guide aims to help you through the R&DTI as straightforwardly as possible. That way, you will understand the scheme better and get the best possible outcome for your business.
What is the R&D Tax Incentive?
The Research and Development Tax Incentive (R&DTI) has helped Australian businesses fund innovation. Its purpose is to lower the costs that companies often have to pay for when researching and pursuing technological innovation. The scheme focuses on local businesses with new technology in mind for every sector. The goal is to motivate more companies to work with Australian-based research and development, which can eventually create more financial opportunities for the future.
In 2017, more than 13,000 businesses in the following sectors received the most significant share:
- Technical or scientific
- Information technology
R&DTI delivers cash savings for various sectors, not just the ones mentioned above, amounting to $3 billion. According to the government, the purpose of the incentive is to:
- Boost competitiveness and increase productivity in the Australian economy
- Encourage industries to tackle new research and development activities
- Provide a means of obtaining support from the government specifically for innovative ventures
- Offer an outlet for small and new businesses, including those that require help in recouping losses and costs relevant to their development endeavours
The R&D tax incentive is administered by the Australian Taxation Office (ATO), alongside AusIndustry, on behalf of Innovation and Science Australia. AusIndustry checks and assesses your R&D registration when you register them. It’s also the organisation that ensures R&D activities comply with the law. If AusIndustry approves your R&D application, the ATO will then disburse the cash benefit into your tax return. This government agency may also reassess whether or not your company is eligible for the tax incentive you’re claiming.
Who Is R&DTI For?
You want to take a closer look at the tax incentive scheme if you operate under Australian or foreign law. You’re required to conduct at least one eligible R&D activity, which should cost more than $20,000. Suppose the total cost of your research and development venture did not meet the minimum amount. In that case, you are still allowed to claim the tax offset. However, it would be best if you used a registered Research Service Provider (RSP) to help you conduct your R&D.
It’s important to remember that there are guidelines to follow in determining which R&D activities are eligible and which are not. The government separates the definition of an R&D project and activity in which:
- An R&D project consists of several steps that you need to take for a specific task to be successful.
- Each step in the R&D project is an R&D activity. These activities can have one or more actions that should be completed to reach a specific goal or outcome.
Your R&D activities can be several, and the scheme can support them all. However, each should meet the requirements defined under the Income Tax Assessment Act 1997 Section 355.25.
You must operate as a company and not as a trust or partnership. Sole traders are not eligible for the incentive.
What Can You Gain from the R&D Tax Incentive Program?
From 1 July 2021, the main benefit given to the organisation is a tax offset, which is equivalent to 18.5% + the tax rate of the business. This offset applies to entities with an annual aggregate turnover of less than $20 million. An exception to the rule applies to tax-exempt organisations.
If your company earns $20 million or more annually, you can still receive an R&D tax offset. The rate will depend on your corporate tax rate, along with an incremental premium. Please note that the premium increments vary based on the percentage of your R&D expenditure as part of your overall business cost for the year. One of the two premium increments may apply to your entity:
- If your R&D intensity is up to two per cent, you can receive a tax offset equivalent to your business tax rate and an 8.5% premium.
- If your R&D is over two per cent, you will receive a tax offset equal to your tax rate plus a 16.5% premium.
Beginning 1 July 2021, any R&D eligible expenditure that’s more than $150 million per income year will receive a tax offset based on the company tax rate. Before that, businesses with less than $20 million in annual turnover were provided with a 43.5% refundable tax offset. A 38.5% non-refundable tax offset was granted to companies with a yearly turnover of at least $20 million. If you had any R&D activity before the new rates were enacted, your tax offset would be calculated using your company tax rate if your eligible expenditure was more than $100 million.
The Application Process
To qualify for the R&D tax incentive program, you must first assess your own business. Applications are accepted annually. Here are the steps to follow:
Step 1: Check whether your firm is eligible for the incentive.
Step 2: Determine if your R&D activity/activities are eligible.
Step 3: Self-assess if your R&D expenditure meets the requirements as stated above.
Step 4: Maintain records and provide evidence to strengthen your application. These documents are also crucial when claiming the offset.
Optional: This step is not mandatory unless you plan to conduct your R&D activities in another country. If so, you should apply for an Overseas Finding for you to claim the tax offset. You also have the option to apply for an Advance Finding. Although this application step is not mandatory, it can give you the assurance you may require in checking whether your activities are eligible. After the application for Overseas or Advance Finding, you should still register your R&D activities on the application page.
Step 5: You are required to continue your self-assessment and maintain records as you conduct your research and development activity.
Step 6: Register for the tax incentive program through this portal. Remember to register within 10 months at the succeeding income year when you have completed your R&D activity.
The application process needs to be renewed and approved each year that you have new eligible R&D. You will be given an R&DTI number when AusIndustry has received your application, which will be reviewed thoroughly. This is to ensure the registered activities comply with the legislation.
What are the Eligible R&D Activities?
There are two classifications of R&D activities:
- Core R&D Activities are considered experimental or whose outcomes are unknown before the activity begins. They are activities that a competent professional has no answer to and cannot know in advance. Core R&D outcomes can only be determined through a systematic progression of work based on established scientific principles. There should be a hypothesis to give basis to the experiment and lead to a logical conclusion. You’re required to have at least one core R&D activity to qualify for a tax offset.
- Supporting R&D Activities are based directly and support the core R&D activities. You’re required to show how the supporting activity relates to the core R&D activity for it to be approved. It’s essential to record the relationship between activities and have proper explanations regarding the connection.
Anything that’s not under core and supporting R&D activities will be eligible. For example, market research, sales promotion, and routine tests of components, materials, or products are not accepted. You cannot claim a tax offset for activities whose goal is to reproduce a commercial product or service based on an already existing system or plan. Ineligible activities also include drilling for petroleum and minerals, efficiency studies, and legal actions relating to licencing and patents.
How to Claim Your Tax Offset
Claiming is easy. Make sure that you have your registration number or the number you received upon applying for the tax incentive. Enter this number into the R&D schedule of the company’s income tax return, and you’re good to go.
If you would like to discuss matters regarding R&D eligibility and your R&D documentation, please reach out to our experts.