How to apply for the R&D tax credit
- 18 March, 2014 09:00
Businesses are coming up to an April deadline to apply for tax credits on research and development activity in the previous financial year. ICT companies whose financial year ends in June must lodge applications for the R&D tax incentive by 30 April 2014.
Big and small companies alike can apply for R&D tax credits, but the incentive scheme is of particular benefit to Australia’s burgeoning tech startup scene, according to KPMG partner Kristina Kipper.
“It allows [startups] to reinvest in R&D or go to the next phase of commercialising their products,” Kipper told Techworld Australia.
“It’s money on the table that you’re already spending, so you don’t really need to do anything over and above. It really is worth looking at.”
What is the R&D Tax credit?
Australia’s R&D tax incentive scheme, as modified in July 2011, provides the highest benefits to startups and small businesses, said Kipper.
Larger companies (with group turnover of $20 million or more) get an R&D tax offset of 40 per cent. This translates into 10 per cent in actual tax savings because the company must forgo their standard tax deduction of 30 per cent.
Smaller companies (less than $20 million) receive a 45 per cent tax offset, resulting in actual savings of 15 per cent.
If the company does not actually have any turnover and pays no taxes—common for startups—the company can instead get a cash refund of 45 cents for every dollar spent on R&D.
How to get the credit
To get the credit, companies must register the year’s R&D activity with AusIndustry within 10 months of the June financial year-end.
The April deadline is “sudden death”, said Kipper. “You can’t really get an extension beyond two weeks. You can’t ask for forgiveness afterwards, unless there are exceptional circumstances.”
Companies seeking to apply for the credit should keep careful accounts of their R&D spending, said Kipper. “The really big emphasis now is on documentary evidence.”
A critical question for companies to determine is whether their R&D activities are eligible for the tax credit, she said.
To qualify, the company must show:
- Spending went to the development of new knowledge, such as new technology, products or processes.
- The company faced technical uncertainties about whether it would achieve what it set out to do.
- The business conducted experimental activities, including a process of testing and modification of the thing being developed.
Excluded, however, is software developed for internal business administration.
“Just because it’s internal doesn’t mean it doesn’t qualify,” said Kipper. “If you’re actually doing something that will help develop your other products, then it’s part and parcel and would be classified as a supporting activity or could be core R&D in its own right.”
Examples of what’s not eligible include payroll systems or another type of ERP, she said.
The July 2011 changes removed a requirement that the software being developed had to be sold to two or more non-associates, Kipper noted. That had precluded the ability to claim R&D on a bespoke product developed for one customer.
However, a potential complicating factor for software developers is the question of whether it’s the developer’s or the client’s money being spent on R&D, Kipper said. “Naturally, the government is not envisaging for both companies to claim it.”
“It all centres around what are you actually providing and under what conditions.”
It should be assessed on a case-to-case basis, she said. If the client is spending their own money and essentially just hiring manpower from your business, tax authorities are likely to deem that is the client conducting R&D, she said.
“You really look at who controls the activities, who’s got the financial risk and who owns the IP.”
The R&D tax scheme allows up to 50 per cent of R&D activity to take place offshore. However, to claim offshore R&D, the company must apply for an advanced finding by the end of the financial year—10 months before the deadline for domestic R&D spending.
Also, companies must demonstrate there was a “good reason” to conduct the R&D overseas, she said. “Purely saying it’s because it was cheaper does not cut it.”
Acceptable reasons might include a need to access expertise or facilities that could only be found overseas, she said.
The future of the R&D tax credit
With the current R&D tax incentive scheme only in its second year, some uncertainty remains.
“The main thing to look out for from here is really how are the rules being administered and what’s really the interpretation of all these new words that have been inserted into the legislation,” Kipper said.
“That really doesn’t come to light until we have a couple years of reviews and maybe litigation sometime down the track.”
KPMG does not anticipate major changes to the R&D tax scheme in the near term, said Kipper.
The only looming change, currently before the Senate, would prevent companies with a turnover of more than $20 billion from accessing the R&D tax credit, said Kipper. But this will mostly affect the big banks and mining companies, she said.
The Coalition government has recently dropped a proposed tax reform that would have provided quarterly rather than annual payments under the R&D tax scheme.
While the measure was wanted by the startup community, Kipper said she does not expect the government will revive it in the near future.
“I think the government realised that it would be very difficult to administer and set the rules,” she said.
“The many hurdles that were proposed in the draft would have meant that only some of the companies in a refund position would have actually qualified for the quarterly payments.”
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