Leveraging the R&D Tax Incentive for your Innovation

THE POWER OF BEING UNDERSTOOD

AUDIT | TAX | CONSULTING

Stephen Carroll Director, R&D Tax

RSM PRESENTS R&D TAX

1. Criteria

2. Claim

3. Core Activities

4. Costs

5. Compliance

CRITERIA - CONSIDERATIONS

Considerations or where does IP ownership reside in your corporate structure…

Eligible Entity

• Structure important – consider R&D grouping, ownership, connected entities and affiliates.

• Eligible entities - an eligible R&D entity must be a company either:

➢

incorporated in Australia

➢ incorporated in another country but be an Australian resident for tax purposes, or ➢ incorporated in a country with which Australia has a double tax agreement, and undertakes R&D activities through a permanent establishment in Australia.

*Trusts are generally not eligible unless they are a public trading trust with a corporate trustee. Sole traders and tax exempt entities are also not eligible.

CRITERIA – THE BENEFIT

If your grouped turnover is less that $20m, you can claim:

43.5% per $1 spent

Potential refundable benefit in a tax loss position

43.5% Refundable R&D Tax Credit

Up to 16c per $1 spent

Potential benefit in a tax payable position

If your grouped turnover is $20m or more, you can claim:

8.5c per $1 spent

Potential benefit to reduce tax payable or carry forward as tax offset

38.5% Non-refundable R&D Tax Credit

CLAIM – DUAL AGENCY ADMINISTRATION

Lodge R&D Application Form

Assesses the technical/scientific eligibility of R&D activities

Calculate R&D Expenditure and lodge R&D Tax Schedule with Income Tax Return

Assesses whether taxation rules have been met, and whether the R&D expenditure is incurred on the registered activities.

CLAIM

How do I claim?

• Retrospective claim (deadline within 10 months of income year end)

• Registration of R&D Projects and activities – The R&D Application Form

• R&D Expenditure – include in the Company Income Tax Return (R&D ATO schedule)

Documentation / evidence for technical and financial support – must be maintained throughout the undertaking of the R&D activities (contemporaneous documentation, including your IP documentation)

*Don’t forget R&D Tax Debt Funding considerations in your time frames.

CLAIM – WHAT IS AN ELIGIBLE R&D ACTIVITY?

An eligible R&D project must contain at least one “core” R&D activity which is an experimental activity:

Hypothesis Hypothesis

• Where the outcome cannot be known or determined in advance; • is conducted for the purpose of generating new knowledge; and • can only be determined by a systematic progression of work that is based on principles of established science and proceeds from:

Experiment

Observation and Evaluation

Logical Conclusions

CLAIM – KNOWLEDGE

New • What new technical knowledge needs to be developed in order to achieve the project objective • How is it different from current knowledge • Identify specific new/improved materials, products, devices, processes or services – be very specific! Unknowns • Explain how the outcome of this project could not have been known or determined in advance on the basis of current knowledge, information or experience . • What available knowledge (internal and external) can be used to start this project. • What investigations have been done to determine the knowledge gaps.

CLAIM – HYPOTHESIS

A hypothesis is specific and is about the technical and scientific "idea" that will be developed and tested to generate the technical aim.

The hypothesis should be expressed as a relationship between variables which can be proven or disproven.

e.g. Compression Algorithm v1 will compress a 12-megapixel image without exceeding the limits of the low-power processor.

In some cases there is a high level hypothesis with a number of specific sub-hypotheses that are required to create the total result.

Be careful not to mix a technical objective with a hypothesis .

e.g. I hypothesise that we can develop a new technical solution to xyz. This is not a hypothesis.

CLAIM – EXPERIMENT

A systematic progression of work based on principles of established science.

The experiment is what you do to test the hypothesis .

To note: A test does not automatically make it R&D.

A study does not automatically make it R&D.

CORE ACTIVITIES - EXCLUDED

Excluded core activities

market research

•

• prospecting, exploring or drilling for minerals or petroleum • management studies or efficiency surveys • research in social sciences, arts or humanities • activities associated with complying with statutory requirements or standards • commercial, legal and administrative aspects of patenting, licensing or other activities • any activity related to the reproduction of a commercial product or process • computer software for internal administration

Activities that are excluded from being core R&D activities may still qualify as supporting R&D activities if they are directly related to core R&D activities and undertaken for the dominant purpose of supporting core R&D activities.

COSTS

Eligible R&D expenditure

Specific examples of R&D expenditure: • wages and salaries • items directly related to the R&D activities • contract expenditure • decline in value on plant and equipment used in R&D activities • other expenditure directly related to R&D activities • a proportion of expenditure that indirectly supports the R&D activities (e.g. office overheads, rent, training etc.) • Up to 50% of a project may be carried out overseas, if necessary subject to an Overseas/Advance Finding

COST CONSIDERATIONS

• Who’s R&D is it? IP agreements in place between parties e.g. contractor to R&D Entity • Understand the “tax” position of the costs, such as sweat equity versus salary • Associates must be PAID if you want to include their R&D costs in the claim • Is a Prototype an asset that must be depreciated? • If you are selling R&D “outputs” do you need to apply feedstock provisions to reduce the net benefit of the R&D claim • If you have a grant you must consider the R&D Tax impact through Clawback • Are you “guaranteed” to receive consideration for incurring R&D costs

COMPLIANCE

Records (evidence not reasons)

Per Activity (NOT project)

•

All Core & Support Activity Criteria IP records overlap with R&D Tax

•

•

• Timesheets – differentiate across R&D and non-R&D • Contractor invoices are specific for R&D tasks • Allocation of depreciating assets between R&D activities and non-R&D tasks • Direct costs, such as travel, can be specifically coded to R&D activities at an invoice level

CONCLUSION

• Is R&D record keeping being updated regularly enough • Is external validation required • Do you need to improve time recording practices – particularly for senior team members • Do IP agreements need to be revisited • Will any shareholding changes occur that could change group turnover • If you intend to sell the results of the R&D, will this cause a tax consideration • Are external media releases appropriately considering R&D • Do you need to update accounting practices to better track R&D costs • Have you considered R&D Tax debt funding options

QUESTIONS AND ANSWERS

DISCLAIMER

These notes are intended to be a guide only. You should not act solely on the basis of the information contained in these notes, because most of the material is generalised and laws can apply differently to different people and circumstances. In addition, laws change frequently and there may have been changes since these notes were written. Therefore, RSM Australia Pty Ltd and the authors expressly disclaim any and all liability to any person, whether an attendee or not, for the consequences of anything done or omitted to be done by any such person relying on part or the whole of the contents of these notes. None of the comments contained in these presentation notes are intended to be advice, whether legal, financial or professional. Do not act on the information contained in the presentation notes without first obtaining specific advice regarding your particular circumstances from an appropriately qualified and skilled professional.