BUSINESS TAX FACTSHEET
Small business often need to innovate to survive and yet claims by SMEs for R&D represent just 10% of all claims made each year. In many cases, small businesses are completing R&D work without recognising that they are doing so.
R&D is traditionally seen as being something of a scientific endeavour, hence the moniker of "the scientist syndrome". The reality, however, is that where a business seeks to innovate, test or trial processes and there is an inherent risk that they may fail, then that work is likely to be considered to be research and development.
The R&D Tax Incentive program is the Australian Government's principle measure to enhance and increase the amount of research and development undertaken by Australian businesses.
As a self-assessment program that is designed to encourage companies to actively engage in R&D, it provides small business with a generous 45% refundable tax offset (equivalent to a 150% deduction) to businesses with a turnover below $20 million as well as a 40% tax offset, equivalent to a 133% deduction is available to all other eligible entities.
The R&D Tax Incentive works by providing eligible small businesses with a 45% refundable tax offset for expenditure on activities it deems as R&D activities as mentioned above. The decline in value of depreciating assets used for eligible R&D activities is also available able to form part of the claim.
The purpose of the scheme is to help small business be more competitive and improve productivity across the Australian economy by encouraging industry to conduct R&D as well as to ensure that R&D support is more predictable and less complex.
The R&D Tax Incentive program requires self-assessment of R&D activity, however to be eligible for any of the offsets, companies must register their activities with AusIndustry within ten months of the end of their income year. They are then able to claim expenses related to the R&D in their tax return.
If you are developing new products or product variations that can be commercialised to add value to your business, be it in your factory, office or warehouse, you may qualify for R&D concessions and grants. There are two types of activity: Core and Support R&D.
Core R&D activities are those that are explicitly defined by legislation as systematic, experimental activities where the outcome is unknown and based on principles of established science. These are usually undertaken to generate new knowledge such as new or improved materials, products, devices, processes or services.
Supporting R&D activities are not part of the experimental activities but do directly support them. A "dominant purpose" test applies to support activities that are primarily commercial in nature.
The test for supporting R&D activities is tighter than previous definitions and companies that currently claim R&D tax offsets will need to ensure that their activities still qualify.
It's important that businesses considering making a claim understand the difference between core and support activity as well as ensuring compliance with the documentation and eligibility requirements.
Registration of activities alone does not automatically define those activities as eligible under the program and AusIndustry routinely examines registration information to ensure that it complies.
Being 'compliance ready' is really about having the appropriate systems and processes in place to identify, evaluate and record eligible R&D activity.
Any company that registers for the scheme is required to keep adequate records that substantiate their activities if they are reviewed by AusIndustry. In particular, SMEs are required to maintain financial and non financial records that accurately document and demonstrate expenditure on R&D activities.
If you're a first-time participant in the scheme, it's prudent to get set up from the outset with the help of your accountant, tax agent or an advisory firm that is familiar with the registration process and eligibility.
AusIndustry has identified five key principles it considers to be appropriate for record keeping, which have been formulated from their experience of working with compliance assurance activities. Adhering to these principles properly will stand you in good stead should your expenditure be questioned or reviewed by the ATO and AusIndustry.
The primary issues that arise for R&D claims are associated with record keeping, the eligibility of certain activities, how they are classified and the documentation of appropriate expenditure.
As is the case for any tax benefit, it is the responsibility of the business to ensure that adequate financial records accurately demonstrate expenditure on R&D activities.
It's also important to understand that registration of R&D activities does not automatically mean they are eligible under the R&D Tax Incentive scheme.
Businesses must judge whether an activity is closely connected to their R&D experiments forms a part of the core activity or should be classified as supporting R&D activity.
The scope of registered R&D activities is something that will always require subjective judgements. What is important is that businesses ensure that the activity can be substantiated and is properly document both in the record keeping associated with R&D activities as a whole and that any expenditure is also properly documented.
5 Principles for R&D record keeping
One of the key considerations small business owners should understand about the R&D scheme is how to maximise your offset. Working with your accountant and planning your R&D expenditure can yield a better outcome. Planning your expenditure also ensures that your expenditure is properly documented.
Recent changes announced by the Government have focused on re-prioritising support for small and medium sized businesses, as well as introducing the ability for small businesses to opt-in to receive quarterly credits. The move to quarterly credits is intended to help SMEs to access benefits of the offset sooner in an income year, rather than waiting for their tax returns to be assessed.
Businesses with aggregate turn over of less than $20 million can claim a 45% refundable tax offset, provided they meet eligibility criteria. Businesses with aggregate turnover of more than $20 million can access a 40% non-refundable offset. Quarterly credits will apply from 1 January 2014.
AusIndustry has a section on its website dedicated to what the R&D Tax Incentive scheme is about, however our experience is maximising your R&D investment requires considerable planning.
If you require help to access the R&D Tax Incentive scheme or review whether your activity is in fact eligible, please contact us on 02 9957 4033 or via email.
Download PDF Version: Making the Most of R&D
Last updated September 2013. This factsheet is provided for information purposes only and is correct at the time of publishing. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.