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Potential R&D Tax Changes To Apply Retrospectively for FY20

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.

AusIndustry Announce Lodgement Concession on Advance and Overseas Finding Applications

Companies seeking to claim overseas expenditure, or seeking an advance determination on eligibility of a project must lodge a finding Application period to the end of the financial year in which the activity is first conducted (i.e. 30 June for activities in FY20).

During a finding process, AusIndustry provides a binding determination of eligibility, and an enormous amount of work must be put into such applications, including the collation of a vast amount of supporting evidence.

There is no provision with the relevant legislation and guidelines allowing for extensions to be granted for finding applications, and specifically, Part 3 of the IR&D Decision Making Principals do not apply to Advance and Overseas Findings.

This means that such findings must be submitted by 30 June.

AusIndustry have however announced this week that due to the COVID-19 disruptions they will accept a ‘provisional’ Advance or Overseas Finding application for the YE 30 June 2020, containing a lower amount of information and supporting evidence than would normally be required.

The minimum details required in a provisional Advance or Overseas Finding application are:

  • Company contact details;
  • Descriptive name/title of claimed R&D activities.

Companies submitting a provisional Advance or Overseas Finding application, must then submit the balance of information and supporting evidence by 30 September 2020.

Companies will not be able to claim any overseas R&D Expenditure in FY20 until such time as AusIndustry receive all relevant information for the finding application, complete their assessment, and issue a positive finding.

More information is available here.

COVID-19 Update

Our thoughts are with those who are directly impacted by the Coronavirus crisis.

The government has announced a wide variety of stimulus measures to assist business cope with the Coronavirus situation.

The stimulus offered is from multiple levels of government and for multiple purposes.

A summary of the measures is available here.

AusGrant has taken measures to protect our staff and clients, and will be fully functional throughout this crisis to support the needs of our stakeholders.

The deadline for R&D Applications is specified in the INDUSTRY RESEARCH AND DEVELOPMENT ACT 1986 as 10 months after the end of an income year. The statutory deadline for companies to register R&D activities conducted during the year ended 30 June 2019 (i.e. last financial year) is therefore 30 April 2020.

AusIndustry have recently announced that:

  • If a company’s R&D application for the YE 30 June 2019 income year cannot be made by the application deadline (30 April 2020) due to the effects of the COVID-19 pandemic, AusIndustry will allow the application to be made by 30 September 2020, without needing to request an extension;
  • If a company’s R&D application for the YE 30 June 2019 is unable to be lodged by 30 September 2020, the company may request a formal extension of time;
  • A company’s registration number is still required when lodging the R&D Schedule with the ATO;

This means that if a company seeks to derive their tax benefit arising from their claim for YE 30 June 2019 (by way of a cash refund or a reduction in balance of tax liability) in the immediate term, they must still first register the R&D Activities with AusIndustry, and would not be able to defer registration until September.

Where it is possible to do so, we would still recommend that companies still aim to lodge the R&D Applications for the YE 30 June 2019 ASAP, so as to not defer any R&D Tax benefit that may be accrued to the company for this period.

R&D Incentive Tax Crackdown For Software Claims

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

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.

Proposed Changes To R&D Tax Incentive Announced In Budget

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

Queensland Business Cops $4.25 Million Fine for Incorrect R&D Claims

International Indigenous Football Foundation Australia, now in liquidation, was fined over $4 million for encouraging eight of its clients to apply for the R&D tax incentive, in which they were ineligible. The Federal Court found the company to have breached promoter penalty laws and action was taken against 10 claims that amounted to over $3 million in R&D tax refunds.

The ATO is working to recover the money and the eight companies have also been penalised in addition to repaying the money claimed.

Be wary of who you approach to assist with your R&D claim. With tax law, the company will also be penalised, even if they are using an adviser. R&D claims are being heavily scrutinised and fraudulent claims have resulted in jail time. Will Day, the ATO Deputy Commissioner, has stated that misuse of the R&D tax incentive is a top priority for the Serious Financial Crime Taskforce.

The R&D tax incentive application is complicated and many businesses are not sure which parts of their project are eligible to claim. The eligibility criteria is not simply black and white. For instance, the creation of new knowledge must involve new knowledge that can be applied on a global scale as opposed to being location specific. Another common example includes software companies using existing code and APIs to develop a custom solution, rather than developing their own. It is recommended that businesses look for an established R&D specialist to assist with their claim, rather than try to understand everything and claim themselves.

Ausgrant are R&D tax incentive experts and take a conservative approach. We will advise the client of any activities we deem to be ineligible. Contact us for a free assessment. There is minimal risk to you, as you only pay for our services after you have received your refund.

New ISA Report Clarifies R&D Tax Incentive Recommendations

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.

No Change to the R&D Tax Incentive in 2017 Federal Budget

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Last night the federal budget was announced and the proposed cuts to the R&D Tax Incentive, proposed in a report by Bill Ferris, Alan Finkel, and John Fraser, did not go ahead.

The biotech industry has been particularly concerned about the recommendations, which included a $2 million cap on rebates for companies making less than $20 million a year. This was feared to potentially impact clinical trials and biomedical research commercialisation, particularly for smaller companies. AusBiotech CEO Glenn Cross has said the changes would “severely damage Australia’s burgeoning medical technologies and pharmaceutical sector.”

Although the government was to respond to the report by early 2017, there is still a possibility that the cap will go ahead in the next budget, once the new Minister for Industry, Innovation and Science has settled in.

The budget disclosed that 15,750 entities had registered to claim the R&D tax incentive in the 2016-17 FY, which amounted to $19.2 billion of R&D expenditure. Changes to business included a $7 million increase in the Business Research and Innovation Initiative and a $100 million advanced manufacturing fund to help companies diversify.

However, the start-up community feels that the budget lacked funding for entrepreneurs, despite the government’s National Innovation and Science Agenda. Nazar Musa, CEO of Medical Channel, said that “Any focus on start-ups would have supported tech entrepreneurs, or at least slowed down potential talent leaving Australia and going to the States or Europe. Now, without any further government support, this talent may not come back.”

Furthermore, Tony Wu from Weploy commented that “If we want to create businesses of global scale, global reach and solve global problems, we need to create much stronger policies to support this. This budget shows how much tech is talked about but not properly backed up. We need more action, and action means cash.”

Since its introduction in 2011, the R&D Tax Incentive has brought more R&D investment to Australia, which has strengthened industries and created skilled jobs. To see whether your company qualifies for the R&D Tax Incentive, contact Ausgrant for a free assessment.

Claiming the R&D Tax Incentive for International Activities

GlobeThe R&D Tax Incentive is one of the most effective methods of support for research in Australia and provides companies with up to 43.5 cents back for every eligible dollar – even in cases where start-up firms aren’t yet paying tax. Start-ups can indeed qualify for the incentive too. In essence, any firm developing or improving products, processes or software, for example, may be eligible.

However, one of the key features of the R&D Tax Incentive is that activities usually concern only R&D activities conducted in Australia. Despite this, in particular circumstances, companies can claim the incentive for activities undertaken overseas.

It is important to note that whilst companies may be able to claim overseas activities, this is typically only reserved to support companies that can prove they could not have conducted the R&D locally.  In addition, the deadline for these applications is different – firms must apply within the same financial year as the activities were undertaken.

To elaborate, overseas R&D is classified by the location of where the R&D activity was undertaken. For instance, in software development, this usually means where the developer is sitting in the world when they undertake R&D. This means that even if an Australian company employs the developer and they are a resident for tax purposes, the R&D would still be overseas-based if they happened to be overseas at the time that they created it. This is a region that you need to be particularly cautious of when employing development contractors who may employ overseas developers or outsource development overseas.

In cases where a company wants to claim notional deductions for overseas R&D activities, then they must pass a positive ‘Advanced Overseas Finding’ by AusIndustry.  To provide context, an Advanced Finding is a binding decision from Innovation Australia about the eligibility of a company’s activities under the R&D Tax Incentive. It operates similar to a private ruling request and has the intention to provide certainty for companies. Similarly, an Overseas Finding is a binding decision that relates to overseas activities and expenditure. There are specific rules surrounding the inclusion of overseas expenditure within a company’s Australian R&D Tax Claim. Notably, June year end companies intending to claim overseas costs in the current year’s R&D claim must submit the activities relating to those costs through an Advanced Finding by 30 June.

As can be seen from above, the many rules and regulations adjoining overseas R&D activities may be perplexing for some. Therefore, a company may wish to seek external assistance to help identify their R&D eligible activities and avoid inaccurate judgements. If you think your company may be eligible, have a chat to our R&D tax specialists who will be able to answer any further questions or help you make your claim. The earlier you get the ball running and submit your application, the sooner your company will receive their refund.

Key EOFY Implications for the R&D Tax Incentive

Over the last twelve months there has been substantial activity in respect to the research and development (R&D) tax incentive with various announcements broadcasted by AusIndustry and the Australian Tax Office (ATO), as well as the release of the National Innovation and Science Agenda (NISA).  We’ve moved from a mining-led economy to one which is increasingly driven by technology and innovation. Consequently, this has led to an increased focus on the R&D tax incentive.

In light of this, to keep you informed with the developments regarding the R&D tax incentive, we’ve provided important information regarding the R&D Tax Incentive and the End Of Financial Year (“EOFY”) which falls on 30 June.

The following R&D tax claim information will apply to companies that:

  • have recently submitted a 2015 R&D claim; and
  • intend to submit a 2016 R&D Claim.

Payment of R&D Expenditure to Associates

  • Companies intending to submit a 2016 R&D Claim must pay any R&D expenditure incurred to associate entities before year end (i.e. 30 June).
  • Where a company incurs R&D expenditure from associates that is not paid by the end of the financial year, the company is able to carry forward the amount and claim as R&D expenditure in subsequent years when the item is paid.

Increased Compliance Activity

  • AusIndustry will likely start compliance activity for FY15 applications that were lodged around the April 30 deadline. If you are concerned about an Audit, see our blog on the topic, which clarifies what to expect.

Claiming Overseas Expenditure 

  • Companies intending to claim overseas activity costs in their FY16 R&D Tax Incentive claim must seek approval to claim these costs by lodging an Overseas Finding Application before the end of the financial year.

If you have any further questions on the R&D tax incentive, please do not hesitate to contact one of AusGrant today.