$100,000

Company Expenditure

$43,500

Savings with R&D Tax Incentive

$27,500

Savings without R&D Tax Incentive

Who is the R&D Tax Incentive Program for?

The R&D Tax Incentive is a broad-based entitlement program. It is open to firms of all sizes, in all sectors, who are conducting eligible R&D.

The incentive is sector agnostic. Any industry may be eligible, assuming that eligible R&D activities are being conducted. Some examples of eligible sectors and industries are:

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  • Manufacturing

  • Orange-1

     Food & Beverage

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    Mining

  • Git#3-1

    IT & Software 

  • Diagnostics-1

    Health & Medical

  • Compass (1)

    Tourism 

  • Shoes-1

    Fashion

What Type Of Entity Can Claim The R&D Tax Incentive?

In order to claim the Research and Development Tax Incentive an entity needs to be:

  • An incorporated Australian Entity
  • Non-tax exempt corporation
R&D Claims

Who Regulates the R&D Tax Incentive?

There are 2 regulators that regulate the R&D tax incentive.

Australian Government Business

  • Compliance work regarding governance over the eligibility of research and development (R&D) activities
  • The actual R&D that occurred

The Australian Tax Office (ATO)

  • Compliance work regarding the R&D tax offsets allowable over the R&D activities from a financial point of view
  • The $ value regarding the R&D that occurred

What are the regulations surrounding the R&D Tax Incentive?

The R&D Tax Incentive is governed by Section 355 of the Income Tax Assessment Act 1997.
There is also guidance material published by the ATO and AusIndustry as well as several taxpayer alerts that specifically relate to the R&D Tax Incentive that help elaborate on the regulatory requirements.

How is eligibility assessed when applying for the R&D Tax Incentive?

The key to assessing an R&D Tax Incentive claim is to first identify any activities that meet the definition of a core activity (Core R&D activities are defined in section 355.25 of the ITAA 1997)
You must conduct, or plan to conduct, at least one eligible core R&D activity to register for the R&D Tax Incentive.

For an activity to be eligible it needs to meet three criteria.

It does not matter what the area of research is, the same three criteria apply:

  1. You need to show that you conduct your core R&D activity for the purpose of generating new knowledge. To be an eligible core R&D activity for the program, one of your substantial purposes to conduct that activity needs to be to generate new knowledge. This includes new knowledge in the form of a new or improved material, product, device, process or service.
  2. You must show how outcomes of your registered core R&D activity could not be known or determined in advance on the basis of existing knowledge, information or experience.
  3. You must show that you conduct or plan to conduct a systematic progression of work, which proceeds from hypothesis to experiments, observation and evaluation and leads to logical conclusions. Your systematic progression of work must be based on principles of established science.

From an expenditure point of view, you would then need to go through the expenses incurred in the financial year and determine which ones directly relate to the R&D activities you have identified. Generally this is driven by staff or contractor time and associated costs.

Finally you would need to look at other surrounding issues such as aggregate turnover, expenditure at risk and payments to associates.

What is a Core R&D activity?

You must conduct, or plan to conduct, at least one eligible core R&D activity to register for the R&D Tax Incentive. Core R&D activities are defined in section 355.25 of the ITAA 1997:

Core R&D activities are experimental activities:
  • whose 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:
    • is based on principles of established science; and
    • proceeds from hypothesis to experiment, observation and evaluation, and leads to logical conclusions; and
  • that are conducted for the purpose of generating new knowledge (including new knowledge in the form of new or improved materials, products, devices, processes or services)

Can supporting activities be claimed?

Yes, activities that are directly related to core R&D activities can be claimed. They must meet section 355.30(1) of the ITAA 1997. Your supporting R&D activity must have a direct and immediate relationship to one or more core R&D activities.

What is the benefit?

The benefit needs to be separated into 2 categories

Companies with < $20 Million in aggregate turnover
companies with > $20 Million in aggregate turnover

R&D Tax Incentive benefit

Turnover Benifit Loss Making Profit making
< $20 million turnover 43.50% cash-refundable non-refundable
> $20 million turnover 38.50% non-refundable non-refundable

How is the R&D Tax Incentive benefit calculated

As a starting point, we will discuss the benefit for a company with < $20M in aggregate turnover.

We need to consider 3 scenarios:
01.

A loss making entity
refundable cash back benefit

02.

A profit making entity
non refundable tax saving benefit

03.

Small profit making entity - a mixture of tax saving and cash back benefit

1. Loss Making Entity

Unicorn To Be Pty Ltd embarks on building their product. They have incurred $400,000 in total expenses of which $250,000 were eligible R&D expenses.

In our example Unicorn To Be will receive $108,750 back in cash via using the R&D
Tax Incentive.

Unicorn to be Pty Ltd - R&D benefit example

Rate Amount
Revenue -
Expenses 400,000
(Loss) (400,000)
Tax 27.50% -
Add Back R&D Expenses 250,000
Loss after R&D expenses addback (150,000)
Tax after R&D expenses addback 27.50% -
R&D Offset 43.50% 108,750
R&D Refundable cash back benefit 108,750
R&D Refundable cash back benefit 108,750
Summary
The refund not using the R&D Tax Incentive -
The refund using the R&D Tax Incentive 108,750
R&D Refundable cash back benefit 108,750

In this example Unicorn To Be Pty Ltd doesn't have any revenue. However the main point to look out for is the fact that the entity is in a loss. If Unicorn To Be had revenue but still had losses the calculation would look very similar.

2. Profit Making Entity

Go-Kart Mechanics Pty Ltd makes aerodynamic innovative go-kart parts. They have $1,000,000 in revenue and $700,000 in expenses. Of the $700,000 expenses, $500,000 are eligible R&D expenses.

In our example Go-Kart Mechanics will be saving $80,000 in tax through using the R&D Tax Incentive.

Go-Kart Mechanics Pty Ltd - R&D benefit example

Rate Amount
Revenue 1,000,000
Expenses 700,000
Profit 300,000
Tax 27.50%
Add Back R&D Expenses 500,000
Profit after R&D expenses addback 800,000
Tax after R&D expenses addback 27.50% (220,000)
R&D Offset 43.50% 217,500
Tax Payable after R&D offset (2,500)
R&D tax saving benefit 80,000
Summary
Tax payable not using R&D Tax Incentive (82,500)
Tax payable using R&D Tax Incentive (2,500)
R&D tax saving benefit 80,000

3. Small Profit Making Entity

Eye Shade Pty Ltd makes longer lasting eye shadow makeup. They have $400,000 in revenue and $350,000 in expenses. Of the $350,000 expenses, $200,000 are eligible R&D expenses.

Eye Shade will make $32,000 in R&D benefit split between a tax saving benefit of $13,750 and a cash back benefit of $18,250.

Eye Shade Pty Ltd - R&D benefit example

Rate Amount
Revenue 400,000
Expenses 350,000
Profit 50,000
Tax 27.50% (13,750)
Add Back R&D Expenses 200,000
Profit after R&D expenses addback 250,000
Tax after R&D expenses addback 27.50% (68,750)
R&D Offset 43.50% 87,000
R&D refundable cash back benefit 18,250
Total R&D benefit 32,000
Summary
Tax payable not using R&D Tax Incentive (13,750)
Tax payable using R&D Tax Incentive -
R&D Tax Saving Benefit 13,750
Tax refund not using the R&D Tax Incentive -
Tax refund using the R&D Tax Incentive 18,250
R&D Refundable cash back benefit 18,250
Total R&D benefit 32,000

Should the R&D entity have an aggregate turnover of above $20 Million then the following would apply:

  • Only a non refundable benefit is available (not the refundable cash back benefit)
  • The R&D rate reduces to 38.5% from the regular 43.5%

How Long Does It Take To Receive The R&D Tax Incentive Benefit?

Estimated timeframe to receive R&D incentive benefit From start of work from returns submission
Refundable Cash Back Benefit 2.5 months 4 - 6 weeks
Non Refundable Tax Saving Benefit 2 months Upon submission

How does the R&D Tax Incentive submission process work?

  • Step 01 Eligibility assessment

    To ensure the company meets the eligibility and that the possible benefit of a claim outweighs the required effort.

  • Step 04 Receive Tax Offset

    The net benefit will vary depending on the size of the claim and on the company's profit/loss. 

  • Step 02 Registration form

    A submission is made to Ausindustry to formally register the claim. 

  • Step 03 income tax return

    Tax schedule is prepared. The company's accountant needs to include the schedule in the company's annual tax return. 

  • Should the R&D entity have an aggregate turnover of
    above $20 Million then the following would apply:
    Only a non refundable benefit is available
    (not the refundable cash back benefit)

Common R&D Tax Incentive Questions

 

When are the submission deadlines?

The deadline for the R&D tax incentive is typically 10 months after the year end of your R&D entity.

The deadline is regarding the submission to AusIndustry which comprises the registration of your R&D activities.

Year end deadline
30-Jun 30-Apr
31-Dec 31-Oct

Which expenses may be eligible?

When assessing eligible expenses for a R&D Tax Incentive application, a company needs to first understand their eligible R&D activities. Once these are understood then a company essentially applies monetary value to the activities.

However here is a quick list of expenses that do generally come up as eligible R&D expenses.

  • R&D staff salaries and wages
  • R&D contractor fees
  • Industrial design
  • Software development
  • Formula formulation
  • Prototype creation
  • Product testing
  • Manufacturing line automation
  • Engineering costs
  • Lab costs and testing
  • Patent new knowledge costs
  • R&D machinery
  • R&D rent
  • R&D overheads
  • R&D utilities
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How important is record keeping?

Record keeping is essential to preparing and supporting an R&D Tax Incentive claim.

AusIndustry and the ATO expect you to keep records to support your self-assessment that your activities meet the legal requirements for you to register them as core or supporting R&D activities. 

If you are subject to a compliance review they will ask you to provide these records. 

Your systems and processes that identify, evaluate and record your eligible R&D activities will be evidence to support the information in your application.

They will expect to see records that show how you:

  • conduct your core R&D activity to generate new knowledge
  • cannot know or determine the outcome of your core R&D activity using existing knowledge, information or experience
  • can know or determine the outcome of your core R&D only by applying a systematic progression of work based on principles of established science
  • conduct your activities within a systematic progression of work - hypothesis, experiment, observation and evaluation, leading to logical conclusions
  • conduct supporting R&D activities that directly relate to at least one core R&D activity and, in some cases, for the dominant purpose of supporting a core R&D activity

They will also want to see evidence to support how you have calculated the expenses incurred on R&D activities and how those expenses directly relate to the specific activities you have registered in your application.

Common R&D Tax Incentive Questions We Receive:

Can a claim be done without a consultant?
+
Is the R&D Credit Refundable?
+
Is Overseas Development Claimable?
+
Are marketing expenses claimable?
+
Can patent costs be claimed under the R&D Grant?
+
Things to look out for in your R&D Tax Incentive Submission:
  • Clearly understand which are eligible R&D Activities
    • Both Core and Supporting
  • Don't claim Business As Usual (BAU) expenses
  • Keeping good R&D records is essential
    • Software will help in a huge way when it comes to record keeping
  • A trust can not submit a R&D claim
  • R&D done overseas is not claimable unless you have an advanced / overseas finding
  • Connected / Affiliated entities must be paid for any R&D invoices before year end
  • Associated persons that were involved in R&D must be paid before year end
    • E.g. Directors and or Shareholders
  • Superannuation must be paid before year end in order to be claimed
  • Depreciation on Pooled Assets is not claimable under the R&D Tax Incentive
  • Be able to clearly demonstrate a methodology of claiming staff and contractor R&D time
  • Software is not automatically R&D

What is the Rimon Advisory Difference?

The Rimon Team have intuitively, through many years of working with our clients, developed our 4 pillars of service.

We live and breathe these 4 values:

  • Compliance.

    • Our Focus is to maximise your compliance level
    • We specialise in the R&D Tax Incentive and Export Market Development Grant
    • Our Financial and Technical team are the best in business
  • Your Time.

    • Let us to the R&D TI heavy lifting while you use that time to run your business
    • We are a complete service - we don't dump work on you
    • Accurate and efficient work is a daily occurrence at Rimon

  • Individuality.

    • Your business has its own secret sauce
    • We make it our business to understand Your secret sauce
    • We then deliver our service tailored to you
  • Enjoyment.

    • Life is a journey - enjoy the ride
    • Working together needs to be fun!
    • We are just as excited to work with you