All expenditure that has been incurred to associated persons/parties, needs to have been paid by financial year end in order to claim the expenses as an R&D notional deduction in the same financial year the expense was incurred.
Who is considered an associate? – the ATO broadly defines an associate: “associates are those entities that, by reason of family or business connections, might appropriately be regarded as being associates of a particular entity”.
What to do if payments to associates were not paid by year end?
If a payment to an associate was not made by financial year end, the entity can either claim the incurred expenditure as a normal deduction under the normal income tax provisions or claim a notional R&D deduction in the financial year the expenditure was paid.
Example
R&D entity ‘XYZ Pty Ltd’ are submitting an R&D claim for Financial year 2020 (1 July 2019 – 30 June 2020. Their sole shareholder and Director ‘Mr A’ pays himself a gross salary of $10,000/month. All employee salaries are paid monthly at the end of each month. Due to technical issues with the company’s payroll software, payments for the month of June 2020 were only paid in the first week of July 2020 Mr A spends 50% of his time in Financial Year 2020 working on R&D activities and the other 50% working on sales, marketing, and investor relations.
Important figures to note – Associate: Mr A
Gross Salary: 120,000 (10,000 monthly x 12 months)
R&D%: 50%
R&D Salary: 60,000 (50% x Gross Salary)
Gross salary paid by 30 June 2020: 110,000 (10,000 monthly x 11 months)
R&D salary paid by 30 June 2020: 55,000 (Gross salary paid by 30 June 2019 x R&D%)
Gross salary unpaid in financial year: 10,000 (1-month salary)
R&D salary unpaid in financial year 5,000 (1-month salary x R&D%)
Option 1: Claim the unpaid R&D in the year it will be paid
- Register Mr A’s 60,000 R&D salary in the application form to AusIndustry
- In Financial Year 2020’s R&D tax schedule, the 5,000 is NOT claimed as a notional R&D deduction and instead carried forward to be claimed in the financial year it was actually paid
- In Financial Year 2020’s company tax return, the 5,000 unpaid R&D is ‘added back’ as a non-deductible expense
Option 1 Conclusion: If you decide to claim the unpaid R&D in future years, you cannot claim it as a general deduction in the year the expense was incurred.
Option 2: Claim the unpaid R&D amount as a normal deduction in Financial Year2020
- Register Mr A’s 60,000 R&D salary in the application form to AusIndustry
- In Financial Year 2020’s R&D claim, the 5,000 is NOT claimed as a notional R&D deduction and will NOT be claimed in future years.
- Claim the 5,000 as a s8-1 general deduction in Financial Year 2020’s tax return
Option 2 Conclusion: If you decide to not claim the unpaid R&D expenditure incurred to associates in future years, then you can claim the expense as a general deduction in the year it was incurred.
Companies that are utilizing the R&D tax incentive should do a review of all associates at financial year end and ensure that payments made to such persons were made before the company’s financial year ended. Please be particularly aware of superannuation payments as these payments are often made post year end.
If payments were not made prior to year end then the advice in this article should be considered and it is recommended that a professional be consulted.
For some more info on the RDTI click below
Steven Bome is a manager at Rimon Advisory and forms part of their expert R&D division
Steven has many years experience working with innovative R&D companies