Are you missing out on the R&D tax break?

Many Australian businesses may not be aware of a Government tax incentive designed to help them develop new and innovative products or processes.

The research and development (R&D) tax incentive scheme was introduced by the federal government in 2011 which provides a tax offset for businesses that undertake certain R&D activities. For eligible entities with an aggregated turnover of less than $20 million, the scheme provides a refundable 43.5% tax offset for costs incurred in relation to these types of R&D activities. For all other eligible entities, the offset is 38.5% and non-refundable.

Eligible entities must register their R&D activities with AusIndustry within 10 months of the end of their income year. This means for businesses with a standard 30 June income year, the R&D activities must be registered by 30 April of the following year.

Who is eligible?

Generally, to be eligible for the R&D tax incentive, you must be an R&D entity engaging in eligible activities and have notional R&D deductions of at least $20,000.

An R&D entity is either a corporation that is incorporated under an Australian law or, in some circumstances, a foreign corporation. Special rules apply to tax consolidated groups and R&D partnerships.

Businesses must have carried out at least one ‘core activity’ during the year in order to make a claim. A core activity is an experimental activity whose outcome cannot be known or determined in advance on the basis of current knowledge and the activity is undertaken to generate new knowledge in the form of new or improved materials, devices, products or processes.

If you register for the R&D Tax Incentive, you must keep contemporaneous documentation demonstrating the work undertaken – i.e. documentation in existence at the time the R&D activities were conducted. This documentation can include testing results, progress reports, lab records, employee timesheets and contractor invoices.

What are the benefits?

For business with an aggregated turnover of less than $20 million, a refundable tax offset of 43.5% is available for costs incurred in conducting certain eligible activities.

The table below illustrates the benefit of the scheme to a company with a taxable income of $100,000 that has incurred $90,000 of costs that are eligible for the R&D tax incentive.

In this example, by registering for the R&D tax incentive, the company is able to reduce its tax liability by $14,400.

  No claim is made Claim is made
  Accounting profit   $100,000   $100,000
  Add back of R&D expenditure   0   $90,000
  Taxable Income   $100,000   $190,000
  Tax payable   $27,500   $52,250
  R&D tax credit   $0   $(39,150)
  Net Tax Payable   $27,500   $13,100

To find out more about the R&D tax incentive and whether you are eligible, contact your William Buck advisor or visit The R&D Tax Incentive Snapshot for further information.