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.
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