Research and Development (R&D) Incentive. Do you qualify?

1. Take Advantage of the R&D Incentive

If you run a company that is investing in Research and Development (R&D), and would love to receive the Federal Government’s R&D Tax Incentive to fund your project, here are a few key areas you should focus on in the lead up to end of financial year.

 

2. Conducting Activities Overseas?

Any activity undertaken overseas is ineligible for the R&D Tax Incentive. However, companies can ask for approval from AusIndustry for certain overseas activities. An application for approval must be submitted before the end of the financial year. This application is referred to as an Overseas Finding application. For a successful Overseas Finding application, you will need to demonstrate the following:

 

Requirement 1: That the activities could not be undertaken in Australia for a technical (rather than a commercial) reason. This means that either the expertise, critical resource or technology does not exist in Australia. Not just because it is cheaper doing the work overseas. Some examples would be:

1. Needing specialist software development skills that are critically low or non-existent in Australia
2. Needing access to technology that does not exist in Australia
3. Needing certain number of patients for a particular drug trial

 

Requirement 2: Costs of the overseas activities are less than 50% of the total project costs.

 

Requirement 3: For overseas activities undertaken in 2017, you will need to lodge an application by 30 June 2017 (assuming you have a 30 June financial year end). An Overseas Finding covers the activities for 3 years initially and then potentially the life of the project assuming the facts have not changed.

 

3. Payments to Associates: Pay these by 30 June

Payments to associates is a tricky area that a lot of small companies are affected by. It’s also an area of focus for the ATO, so it is important to get this right.

This rule comes into play when you have costs incurred to an associate. For this category of cost, the cost needs to be both incurred and paid within the year for it to be eligible. Some potential associates would include Managing Director/CEO, significant shareholders and companies that have the same shareholders. This is an area you should definitely speak to your advisor about before year end.

 

4. Document your R & D Activity All Year-Round

Documenting your R&D should be a year-round activity. However, towards the end of the year, you should review your records and update if needed. Record keeping is heavily emphasised by both AusIndustry and the ATO. Good R&D record keeping should include the following:

• Documents of all the experiments and results undertaken
• Source documents (such as versions of code and algorithms)
• Any preliminary research undertaken to find off-the-shelf solutions (literature searches, search engine results, postings on discussion forums etc)
• Time records for time spent on R&D by key staff.

If you ever get reviewed, you will be expected to be able to provide these records as evidence of your R&D activities.

 

5. Activity Confirmation by the AusIndustry

An Advance Finding is when you apply to AusIndustry to get confirmation that the activities that will be undertaken are eligible R&D activities. This application is submitted in advance of the activities being undertaken which gives a company certainty. Some scenarios where this is useful would be where

• a company is looking to borrow against a future R&D benefit, the company (or the lender) might want certainty
• companies needing certainty in planning future cash flow and project funding in general
• potential investors wanting certainty (if the benefit generated from an R&D claim is critical to the business).

It’s important to remember that you don’t have to apply for an Advance Finding. It is a choice to give you certainty if you need it.

 

6. The 2017 Budget Update

The R&D tax incentive encourages companies to engage in R&D benefiting Australia, by providing a tax offset for eligible R&D activities. It has two core components:

 

Component 1: A refundable tax offset for certain eligible entities whose aggregrate turnover is less than $20 million.

Component 2: A non-refundable tax offset for all other eligible entities.

 

No news is good news as the 2017 budget did not have any changes to the R&D Tax Incentive. However, there are changes from last year’s budget that will come into play this year

 

7. 2016 Budget Changes that are implemented for the 2017 year:

Change 1: Rate of benefit reduced to 43.5% from 45% for component 1

Change 2: Rate of benefit reduced to 38.5% from 40% for component 2

 

8. I need assistance. Where do I start?

Early planning is key to getting the most out of your R&D Tax claims. Call us on 1300 222 353 or email us at info@consolid8.com.au if you would like to talk to us about R&D Tax Incentive.