How Does The R&D Tax Incentive Work?

As a small business owner, you could be rewarded for engaging in research and development (R&D) projects or initiatives. If you are unaware of the federal government’s R&D Tax Incentive scheme, you could be missing out on some key financial benefits for your company.

The application process can be quite lengthy and complicated. LawPath recommends consulting an experienced taxation lawyer to help assess your eligibility for the incentive, as well as applying for it.

So what is the R&D Tax Incentive scheme exactly? How can it help you as a business owner?

What is the R&D Tax Incentive?

The incentive is part of a federal government scheme to encourage and reward companies who invest in active R&D (research and development). It replaces the former R&D Tax Concession scheme as of 1 July 2011.

Essentially, your company may be entitled to a tax refund for R&D activities commencing from 1 July 2011. Companies with less than $20M in revenue, may be granted up to 43.5% refund on R&D expenses. For other eligible companies, a 38.5% non-refundable tax offset is also available.

Some Requirements

The Australian Tax Office and AusIndustry are the key joint authorities managing the R&D Tax Incentive. To ensure that you are eligible for the scheme, you must ensure that your business meets the following requirements:

1. Registered R&D Activities

Firstly, you must register your company’s R&D activities with AusIndustry. The deadline for registering is 10 months after the end of a company’s income year.

To ensure that your business meets AusIndustry’s criteria, you must prove that the relevant R&D activities are legally defined. Supporting documents to evidence these activities should also be provided during this process. Your records should contain information as to expense apportionment and incursion from R&D activities. Documents should also show that your company has received the major benefits of these activities.

2. Be An R&D Entity

What does this mean? To be an R&D entity, your company must be incorporated under Australian law or incorporated under foreign law but be an Australian resident for income tax purposes.

Individual entities under partnerships may also each apply separately for the R&D Tax Incentive.

3. R&D Expenditure Threshold

Your entity must meet a $20, 000 R&D expenditure threshold, unless you use the services of an RSP (Research Service Provider).

RSPs provide expertise and resources to perform R&D on behalf of other companies. Working with an RSP can simplify the process of applying for the incentive scheme. A list of registered RSPs can be found on the AusIndustry website.

4. Calculate Your Aggregate Turnover

This is an important stage in your application and it may be worth seeking professional help to complete.

If your business is affiliated with another entity, their annual turnover may be added on top of your annual turnover.

For example, fees for services provided will be included in this overall calculation but GST charged on transactions and amounts borrowed for the business are not.

The form for completing your company’s tax return can be found here.

Submission

When you have ensured that you have met the above criteria and objectives to the best of your abilities with AusIndustry, you must then complete the ATO’s Research and Development Incentive Schedule.

It is recommended that you use the ATO’s R&D tax incentive calculator to determine the amount you are entitled to.

Making incorrect claims while lodging can result in penalties, so it is extremely important to ensure that information supplied across the entire process is correct.

Amending Your Application or Registration Details

If you wish to alter your application following submission, or contest an eligibility outcome made by AusIndustry, this can be done within some specified time limits.

Amendments to your tax return must generally be made in two years for small businesses and four years for other taxpayers.

Typically, objections must be lodged at least 60 days from receipt of the ATO’s decision. For income tax assessment objections, these should again be lodged in two years for small businesses and four years for other taxpayers.

Final Note

Ultimately, R&D is an important component for any business to ensure continued improvement and competitiveness. To help sustain your company’s growth and productivity, the new R&D Tax Incentive scheme may assist you.

For further guidance on the process and your eligibility for the scheme, LawPath’s experienced tax lawyers can help you with your questions.

Want to learn more? Contact a LawPath consultant on 1800LAWPATH to learn more about applying for the R&D Tax Incentive, obtain a fixed-fee quote from our network of 600+ expert lawyers and have your legal questions answered.

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