To encourage companies to engage in more research and development activities that will benefit the country, the Australian government provides a tax offset (or rebates) to companies on payable taxes. This tax offset is known as R&D Tax incentive.
In addition to encouraging companies to engage in R&D activities, with the R&D tax incentive, the government also aims to:
- Enhance productivity and encourage competitiveness to boost Australian economy
- Offer more predictable and less complex support to companies
- Push smaller establishments to engage in R&D by improving their incentive
Eligibility criteria for R&D tax incentive
As per the R&D tax incentive legislation, to be eligible for the incentive program, the company must have spent at least $20,000 as national deductions on accounts of R&D expenditure. Along with that, there are certain other eligibility criteria that have to be fulfilled by the entity to be eligible for the tax offset. These criteria are as follows.
- The entity cannot be an individual or a corporate limited partnership
- The company should be incorporated under the laws of the land
- The company can also be incorporated under foreign law, but it has to be a resident of Australia for income purposes
- The company can also be incorporated under foreign law, but it has to be a resident of a country that is into a double tax agreement with Australia, or carrying on business in Australia by means of permanent establishment as outlined and defined in the double tax agreement.
- The R&D activities that are to be carried out to be eligible for the tax offset should
- Have a minimum of one core activity
- Have multiple supporting activities for every core activity
- meets the lawful definition of core and supporting activities
- be based on principles of established science
- seek an answer for something in technical or scientific field, which is not known to mankind
Process to apply for the tax offset
You can apply for the tax offset in your annual income tax return. However, if you want to apply for the tax offset as per the R&D tax incentive legislation, you will have to have your company registered for the R&D tax incentive. In addition to getting registered for the incentive program, it is also your duty to ensure that
The R&D activities have been carried out in your company complying with the norms as laid down by the R&D tax incentive legislation.
Expenses on R&D activities are only included in the claim as expenditure. Other business expenses shall not be a part of this claim
Your claims are backed by relevant support documents to prove the expenses and activities that has been carried out
Apply for the R&D incentive within deadlines
If there has been a mistake committed by the applicant while filing the income tax return, the law has the provision to amend the same. The amendments are to be made within a certain time limit, which is a couple of years for small business entities and four years for other businesses. The amendment request has to be put up in writing by the applicant.
If you need any advice or assistance regarding the amendments of on the various processes of how to claim the R&D tax incentive, you may want to get in touch with experts such as Femia Accountants who have the expertise and experience to help you with the required information.
What R&D Tax Incentives can you claim?
The AusIndustry R&D Tax Incentive application holds a significant importance in the context of trade and commerce in Australia. This tax incentive extends a targeted tax rebate for encouraging entities for conducting research and development activities that will benefit Australia on a large scale.
What you can claim
For R&D expenditure up to $100 million a year, companies can claim:
For income years from 1 July 2016:
- a 43.5% refundable tax offset for companies if they have an annual turnover of less than $20 million. This tax offset is available to companies that are not controlled by tax exempt entities.
- a non-refundable 38.5% tax offset for all other eligible companies. Unused non-refundable offset amounts may be able to be carried forward to future income years.
For income years before 1 July 2016:
- the refundable offset rate is 45%.
- the non-refundable offset rate is 40%.
Additional benefits include:
- the option to gain certainty about the eligibility of your R&D activities through an Advance Finding
- some overseas R&D activities are claimable (certain conditions apply).
If your company’s R&D expenditure is more than $100 million in a year, amounts claimed above $100 million may attract a non-refundable offset at the company tax rate.
Eligibility criteria to claim
- You need to be an R &D entity
- You should have conducted such R&D activities that meet the objective of the program
- You should hold a registration with AUSINDUSTRY
- Receive the major advantages from the R&D activities that are registered.
Key points that you should be aware of
If you are qualifying as a research & development identity and you want to claim the tax benefit, you require considering the following points:
- You should register your research & development endeavours every year
- You should be registered for GST
The AusIndustry R&D Application comes as a great support for many Australian companies as it provides them with a financial boost to conduct research and development activities at a much wider scale. To get help with applying for your R&D Tax application, contact Femia Accountants today.
R&D Tax Incentive Applications
R&D relief/credit is a type of Corporate Tax ( CT ) incentive that can reduce your enterprise’s tax bill. This tax relief can only be claimed if your business is liable for Corporate Tax or CT.
That said, here is a quick primer on how to go about claiming R&D tax credit for your company.
For starters, when should one claim for R&D tax credit?
You have to make any claim for this type of tax incentive in your annual CT return or – in some cases – the amended return. The acceptable time limit within which you can make your claim is usually two years after the elapse of the relevant corporate tax accounting period.
Improving Your Chances of A Successful Application
To boost your chances of being awarded R&D tax credits, it is advisable to take into account the following pointers
- Explain sufficiently to the Australian tax authorities why the organisation or company considers their projects or operations to be R&D.
- Provide a conclusive summary of all the cost incurred on the projects billed as R & D and how any figures filed in the returns were computed.
It is worth noting that while the above pointers are not a legal obligation, they are can significantly improve the chances of your organisation qualifying for Corporate Tax R&D credit.
The Impact of R&D Tax Credit
If you opt for just tax relief, instead of payable credits, you will only be able to reduce your organisation or company’s profit bracket that is taxable under CT for the specified accounting period. After this, the ATO will take care of the next part which is offering a relief to you.
However, should you choose to give up the enhanced relief in return for the receipt of tax credits, the ATO will make a payment to your nominated bank account at the end of the tax returns period after they have received your usual tax returns. The same applies to if you had made a claim to carry back a monetary loss to be effectively set off against the profits of a past accounting period.
Claiming for R&D Tax Credits can be a lengthy exercise in numbers, and that’s why its better to contact Femia Accountants to help you apply for it successfully.
How to claim R&D Tax Incentives
Only eligible companies are allowed to make Research & Development tax claims. This tax credits claims are made for the last two accounting periods. They are only based on the Research & Development expenditure.
The R&D tax incentive is a provision by the Australian government to reward companies that contribute to growth of the company. This allows companies to claim up to 45% of their total expenditure on eligible activities. Making the claim individually could be time consuming and risky. Often it’s always preferred to assign professionals the task.
Two main pieces of legislation are administered for this tax incentive. This legislations are:
- Division 355 of the income tax assessment act 1997
- Part iii of the industry research and development act 1986
Under the Research & Development tax incentive, the amount to be claimed is called the notional deduction. This notional deduction is arrived at after calculating the total amount of your national R&D deductions to determine the amount of R&D tax offset you can claim. This is done by multiplying the total notional R&D deduction amount by either 43.5% or 38.5% depending on the Research and Development offset an individual is eligible for. This amount is claimed as an offset in the company’s tax return.
The research and development entity is entitled to notional deductions for expenditure on the R&D activities during the income year, a balancing adjustments for depreciating assets used only for the research and development activities within the organisation and the decline in value of depreciating assets used for the research and development activities during the revenue year within the organisation.
This notional deduction amount cannot be deducted as a general deduction during calculation of the taxable income. This is because of it being a procedure during the process of working out the amount of the tax offset that the entity may be entitled to instead of the deduction amount. This amounts are not treated as a deduction when calculating an entity’s taxable income, but are only treated as a deduction when applying:
- A provision that prevents some or all of the amount being deducted,
- A provision that includes an amount in assessable income because the amount has been deducted,
- Other provisions that refer to the entitlement to the tax offset under the research and development provisions.
Accounting for R&D tax credits falls in the profit and loss account as an expenditure. It simply reduces the tax payable meaning there’s no double entry for it. It needs to be disclosed in the tax note as an item affecting the current year charge. It’s an “above the line” tax credit and does not adjust the current year tax charge in the profit and loss account. The book entry is to Credit the profit and loss account and to debit the tax liability at it reduces the cash payable.
In summary, the claims process is as such: Check that an entity meets the eligibility requirements, confirming if the entity is controlled by any exempt entity, then calculating the aggregated turnover, confirming the tax offset to claim, and finally calculating the tax offset and lastly lodging the claim. With Femia Accountants, you can be confident that your application will be prepared smoothly and ensure that it will be successfully accepted.
Contact our office today on 9316 4500 or book a time to meet with us.