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R&D Incentive Tax Crackdown For Software Claims

December 4th, 2018

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

May 9th, 2018

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 / CC BY

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

March 28th, 2018

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

January 30th, 2018

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

May 10th, 2017


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

June 29th, 2016

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

June 24th, 2016

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.

Is Financing Innovation a Major Factor of Success?

June 10th, 2016

Undeniably, we live in the so-called “digital age”. Innovation has formed an important role in our modern society and has been touted as the blueprint for success by the Turnbull government. It plays a key role in medical and environmental improvements, and by its commercialisation, the digital industry also has the potential material economic impact. Thus, it is crucial to fully understand innovation’s drivers and processes – from both a socio-economic and a business perspective. Within this scope, adequacy financing the major players of this industry, the predominantly young and highly-innovative companies, is a major factor of success.

Furthermore, empirical evidence shows that start-up firms play a vital role in the advancement of the digital industry, mainly due to their function of serving as a technology transfer mechanism to bring research from the academia to the marketplace. In fact, according to PWC, the Australian tech start-up sector has the potential to contribute $109 billion, or 4% of GDP, to the Australian economy and 540,000 jobs by 2033. Irrefutably, it is widely recognized that high-tech start-ups are a major source of new innovations and the very nature of innovation is that it involves, research, experimentation and development. Thus, leveraging the outputs of high- tech research and development (R&D) is key in the creation of a successful Australian start-up ecosystem.

However, access to finance remains a key bottleneck for SMEs that are undertaking research and development. As a result, majority of the governments around the world incentivise start-ups to undertake R&D activities through tax breaks.  This is because it is recognised that R&D often coincides with innovation and productivity, which essentially drives nations forward by solving problems and creating opportunities.In Australia, the government provides a lucrative incentive to companies undertaking R&D work in the form of the R&D Tax Incentive.

To elaborate, the incentive helps by offsetting some of the costs of performing R&D. For instance, if your business turns over less than $20 million in revenue and you are in a tax loss position, then up to 43.5% of your eligible R&D expenditure with be refunded by the Government in the form of annual cash rebates. This means real working capital for a project and cash flow for a business, so the focus can be on developing a product without the pressure of needing funding.

As noted above, the refundable component applies to businesses making a loss, which many tech start-ups originally will be. Most importantly, these companies receive it back as cash – which is exactly what a start-up needs to help get its business off the ground. Nonetheless, the benefit also comes in the form of tax credits for businesses making a profit.

On the whole, the R&D tax incentive is designed to encourage investment by Australian businesses in R&D, and it works. Knowing those companies will receive this money back at the end of the year allows them to invest more in R&D than they would otherwise. Without continued R&D, firms risk losing both reputation and competitive positioning in the market, and could gradually decline through failure to invest in new products, technologies, and processes.

Contact AusGrant today if you would like more information on the R&D Tax Incentive and what this could mean for your business.

CSIRO’s New Report Pushes Further for Innovation & R&D in Australia

May 27th, 2016

Australia’s colonial and federal past, its geographical segregation, huge land mass and a small population have vastly influenced the country’s industries, technologies and research institutions. This resource-rich history led to what is more frequently known as the ‘mining boom’. In light of this, Australian industrial research and development (R&D) in the second half of the nineteenth and early twentieth centuries was largely focused on the agriculture and mining industries.

With the mining sector set to slow down in 2016, Australia is now endeavouring to improve resources, technology and innovation. To that end, the CSIRO has recently released a report that creates an all-encompassing road map of global outcomes for the next 15 years.

Publicised this week, the report titled Australia 2030: Navigating our Uncertain Future, outlines four probable scenarios constructed on pre-existing modelling, scientific data and an array of notorious global trends.

Essentially, the report is a blanket of opportunities when it comes to the future of geopolitics, global weather, resource allocation, population shifts, trade, biosecurity, health, emerging technologies and industry developments by the year 2030.

In regards to research and development (R&D), the reports describes that technological innovation, driven by research and development (R&D) investment, contributes around 50 percent of GDP growth in developed countries. As the report words it, “this is the ‘innovation imperative’.” In a progressively interrelated and rapidly fluctuating world, Australia risks being left behind if it fails to innovate, build innovation capacity and invest in R&D.

To put in context, the report highlights that there is a significant innovation gap in Australia. The 2015 Global Innovation Index ranked Australia 10th in the world for innovation inputs but 72nd for innovation efficiency. Furthermore, Australia ranked last in the OECD for research-business collaboration, and our relative rankings for STEM education are in decline.

Overall, to build our future in Australia, we must understand the impending challenges and leverage our research sector to transform those challenges into opportunities. As Australia barrels towards an election on July 2, major parties have been announcing excerpts of their policies as time passes. Thus, whether or not the suggestions outlined in the report will be observed in future policy is yet to be known.

However, in the interim, one currently available tool for accelerating productivity and cash flow is the research and development (R&D) tax incentive. In effect, more than $18 billion of R&D expenditure was registered for 2013-2014 nationally according to the Australian Taxation Office. Nonetheless, the incentive is actually rather undersubscribed and is claimed by only 13, 600 companies per annum. This is particularly surprising as approximately 2 million entities could be eligible for the incentive. If you think you may be eligible, contact one of our specialist R&D Tax consultants to find out more about the scheme.

The Future of Research and Innovation in Australia

May 18th, 2016

A federal election approaches and, with it, a window of opportunity for propitious conversations about potential future directions for Australia as a polity, a society, a culture, an economy. Most recently, public jargon has been littered with references to innovation, digital disruption and collaboration. Conversations have predominantly been led by Malcom Turnbull and the release of the Innovation Statement in December 2015. However, the Australian Parliament’s Trade and Investment Growth Committee have also just released a report exploring Australia’s innovative future.

The report, titled Inquiry into Australia’s Future in Research and Innovation, investigated how the research and innovation sector can better assist in conquering Australia’s key economic challenges. The fundamental points relating to the research and development (R&D) tax incentive explored in the report have been discussed below.

To begin with, a key concern emphasised in the report is the collaboration between universities and business. In reaction to this apprehension, the committee recommends that the Department of Education and Training review overseas models of university-business collaboration and consider which strategies could be introduced in Australia. The report revealed that several university bodies reinforced adapting the R&D tax incentive scheme to embolden greater cooperation between businesses and universities.

Nonetheless, the report noted positive growth in regards to research spending. In specific, the report outlines in 2015–16, the Australian Government spent $9.7 billion on science, research and innovation. Of this, the R&D tax incentive measures amounted to $3.2 billion. Professor Roy Green stated that the R&D tax concession had ‘increased from about 15 percent to about 30 percent’ of the overall research and innovation spend.

Furthermore, Australia’s gross spending (government, business and university spending combined) on R&D, equates to 33.5 billion and 2.12 per cent of Australia’s GDP. While Australia’s spending is above the OECD average of 2.02 per cent, countries with strong international reputations for innovation spend a minimum of 3 per cent of GDP on R&D per annum. Independently, Australian business spent $18.8 billion on R&D in 2013-14, which amounted to 1.19 per cent of Australia’s GDP. In the same period, Australia’s higher education sector spent $9.6 billion on R&D, which amounted to 0.63 per cent of Australia’s GDP. As a percentage of GDP, Australia’s R&D spending by business and the higher education sector ranked 15th and 8th, respectively, amongst the OECD countries surveyed.

Thus, as noted above research and development occurs in universities and in businesses – but there remains little connection between the two. Cultivating a partnership between businesses and universities is important and could certainly help bridge the gap between research and proven technology. University and corporate partnerships, driven through tax breaks or other integrated models, could ensure investment in research and innovation in Australia does not get left behind in a competitive international market. Nevertheless, the increased spending on research outlined in the report, as well as the release of the $1.1 billion National Innovation and Science Agenda, indicates that Australia is observing an improved focus on innovation.

If you’ve invested in Research and Development(R&D), contact us today to see if your eligible for the government’s R&D Tax Incentive.