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AusIndustry’s Guide to Interpretation was first published in January 2016, detailing the way that AusIndustry interprets the definition of “R&D activities” as defined in the legislation.

The Guide to Interpretation presents AusIndustry’s position on complex issues including assessing the purpose of R&D Activities and framing what is not considered a Core R&D Activity.

As part of the new R&D Tax Incentive programme Integrity Framework announced by AusIndustry in late 2019, it was noted that the department would re-develop R&D Tax Incentive program guidance to help businesses claim the incentive correctly.

Drafts of the refreshed Guide to Interpretation document have been published recently requesting feedback via an online survey.

In December 2019, the government re-introduced a bill to reform the R&D Tax Incentive. The media has reported this week that if the government is successful in passing proposed changes to the R&D Tax Incentive, they would seek that the law be enacted more than 12 months retrospectively: applying 1 July 2019 for the FY20 period.

The revelations arise from statements by ATO and ISA officials to the Senate Economics Legislation Committee during the hearings into the review of the proposed R&D Tax Incentive Reforms.

The bill has been uniformly condemned by Industry Groups and R&D Tax Professionals.

It was however thought that if the bill were to be passed as law, the changes would be more likely to apply for the FY21 period (rather than FY20 as proposed).

Given the widespread financial hardship business is currently facing, many companies have spent recent weeks compiling their FY20 R&D Claims to best ensure that they are able to lodge shortly after the opening of registrations on 1 July 2020. The prospect of a retrospective passing of the proposed R&D Tax Reforms for FY20 is alarming, and exposes companies to undue uncertainty and administrative burden in the event that company tax return amendments for previously assessed FY20 claims are required.

Reports have emerged in the media recently of software development companies that have been subject to adverse R&D Tax Compliance proceedings:

• Airtasker hit by R&D incentive tax crackdown that threatens tech firms

Whilst the benefits available under the R&D Tax Incentive are significant, these reports affirm the need to ensure R&D claims are completed with diligence, and in accordance with the current reporting expectations.

Recent publications from ATO and AusIndustry on software development activities have highlighted current regulatory compliance focuses, which include the need to:

• Detail the specific hypothesis, or central idea to be tested during each core R&D activity;
• Explain how software development activities generate new technical knowledge, and are not merely applying existing knowledge to a new commercial application;
• Explain why the outcome of the activities could not have been determined in advance based on existing knowledge;
• Detailing the process for conducting the experiments including observations and conclusions;
• Ensuring only core and supporting R&D activities within a project are registered, rather than registering all project a project’s activities;

Please get in touch with us if you require assistance with the documentation and assessment of your R&D Activities.

Changes were proposed to the R&D Tax Incentive in yesterday’s Budget, in response to recommendations proposed in the ‘2016 Review of the R&D Tax Incentive’.

If passed as law, the R&D Offset Rate will change, commencing for income years starting on or after 1 July 2018. For companies with a turnover of less than $20M AUD claiming the refundable offset, the R&D Offset rate will be calculated based based on a company’s tax rate plus 13.5 percent, with a maximum annual refund capped at $4 million. The cap does not apply to clinical trial spend, which has been a cause of concern for biotech companies.

R&D Offsets that cannot be refunded will be carried forward as non-refundable tax offsets in future income years.

For companies with a turnover greater than $20 million who claim the non-refundable offset, the R&D Offset rate will be calculated based on a company’s tax rate and their “R&D Intensity” (with intensity defined as R&D expenditure as proportion of total expenditure).

The R&D Offset rate for companies with 0-2% Intensity = Tax rate + 4%;

The R&D Offset rate for companies with 2-5% Intensity = Tax rate + 6.5%;

The R&D Offset rate for companies with 5-10% Intensity = Tax rate + 9%;

The R&D Offset rate for companies with 10%+ Intensity = Tax rate + 12.5%.

The current cap on claimable expenditure for large companies also increased from $100 million to $150 million per annum.

The Government will increase funding to AusIndustry and the ATO in order to increase compliance activity and improve the integrity of the incentive. Details on administrative changes are yet to be announced, which include:

• ATO to publicly disclose claimants and the amount of expenditure claimed;
• Limits on time extensions in which to complete R&D Registrations;
• Other changes are to be advised.

Photo by reynermedia on Foter.com / CC BY

Today, Innovation and Science Australia released their “Australia 2030: Prosperity Through Innovation” report. The report has clarified some recommendations made during the 2016 review of the R&D Tax Incentive program which have not yet been responded to. The reviewers were asked to find opportunities to improve the R&D Tax Incentive programme, where they found that it fell short of meeting its goal of additionality and spillovers.

The ISA report clarifies proposed cost control recommendations made during the R&D Tax Incentive review. It stated that the cap on refundable offsets is proposed to operate, whereby a cap of $4M per year would apply and a maximum cumulative refund of $40M per company should apply.

The suggested “intensity threshold” for large companies would apply so that all R&D expenditure is claimable once a trigger set at 1 percent of a company’s total R&D expenditure is reached. This means a company’s R&D expenditure would need to equal at least 1 percent of their total business expenditure in order to be eligible to claim.

The report has recommended increasing business R&D by better targeting the R&D Tax Incentive towards SMEs, as they rely so heavily on the incentive (54 percent of SME’s R&D decisions are influenced by the R&D Tax Incentive vs. 34 percent for larger companies). It also proposed concentrating on direct initiatives such as increasing funding for the Export Market Development Grant and reducing support for indirect measures like the R&D Tax Incentive. Compared with many other countries, Australia has a particularly high percentage of government funding going towards indirect rather than direct R&D incentives. In Israel, Germany and Sweden, government funding is entirely dedicated to direct funding.

Furthermore, the report suggested increasing the collaboration between industry and the research sector by introducing a collaboration premium of up to 20 percent in the R&D Tax Incentive, as discussed in the review. Collaboration is a recurring theme in the R&D conversation. While we have a strong research sector globally, successfully commercialising this research requires further work.

The full report is available here.