What you should Know about R&D Tax Incentive
As part of our series on the latest software guidance, we provide answers to the common questions the government receives on the R&D Tax Incentive.
When do you apply for R&D Tax?
You must apply to register your R&D activities within 10 months after the end of the income year in which your eligible activities occurred. After you’ve registered these activities, you can file a claim for the expenses you incurred through the ATO.
What expenses can I claim?
The ATO is in charge of determining what expenses are allowable under the scheme. The following information will give you a rough notion of what these are. Though what you can claim will still be determined by your unique circumstances, the following are some of the prevalent expenses associated with software-related R&D:
- Salary, wages, and contractor fees
- Overhead spending
- Services and Equipment
What are examples of expenses that I cannot claim?
- The cost of technology that you have purchased or licensed to further develop is not an allowable R&D Tax expense. However, expenses incurred in further developing technology may still be claimable.
- R&D expenses that your organisation does not have to take a risk on, for example, expenses on activities to fulfil a contract where payment is made regardless of the outcome.Another example is an R&D expenditure that would be reimbursed under a financing arrangement irrespective of the results of the relevant R&D activity. This webpage from ATO contains a wealth of information on ineligible expenditure under the R&D Tax Incentive.
You may still be eligible to deduct these amounts from your assessable income if you evaluate them under the normal deduction provisions of the income tax law.
Claiming R&D activities that are terminated early
You do not need to complete a task or activity to claim it as an R&D activity. Even if you’re still in the process of completing an activity, or if you have postponed or scrapped the development of a particular activity, there is still a possibility of claiming it. Moreover, your activity does not have to have a successful outcome; even failed activities can still qualify. In the end, we only aim to ensure that the processes involved in developing the activity meet the key R&D criteria of having an “outcome unknown” and that they are undertaken for the purpose of “generating new knowledge”. Terminating eligible R&D activities pre-completion merely reflects the fact that research and development activities are risky and may not always lead to success.
If you terminate a core R&D project before having claimed a related supporting R&D activity, the supporting activity may be eligible if you can show with records that you intended to complete the core R&D activity. The supporting R&D activity may not be eligible if this intention is not clear.
Claiming R&D activities that are conducted overseas
The R&D Tax Incentive encourages you to conduct qualified R&D activities within Australia. However, it may also fund eligible R&D activities you do overseas if the following conditions are met:
- Your overseas activity must be a valid R&D activity. The R&D Tax Incentive – Guide to Interpretation is the first guide we suggest you read to know what constitutes a valid R&D activity.
- A significant scientific link to an Australian core R&D activity is required.
- The expenses of overseas R&D activities must be lower than those of equivalent R&D activities conducted entirely in Australia.
- If applying for an overseas R&D activity, then there must be a valid reason why said activity cannot take place in Australia or its overseas territories.
Some of the reasons for applying for overseas R&D work may include the need to access skills not available in Australia. However, you must be able to demonstrate that you conducted a reasonable Australia-wide search and/or advertising campaign to prove that this is the case. You also need to provide evidence in the form of independent advice from research firms, industry associations, or other relevant organisations or individuals addressing the lack of available expertise and advertising campaign records.
To claim the R&D Tax Incentive for overseas research and development, you must apply for an “Overseas Finding” before the end of the income year in which the activities were performed. If you don’t have a favourable Overseas Finding, you’ll need to show that the work was done in Australia and wasn’t subcontracted or executed elsewhere and that it otherwise fits the criteria for a qualifying R&D activity.
While you may have completed the requirements for an Overseas Finding, you must still meet the other requirements for claiming R&D expenditure. An application form also needs to be submitted each year in addition to the Advanced Overseas Finding. Supporting R&D activities carried out in Australia cannot be claimed if the principal R&D activity was carried out elsewhere.
We encourage all companies interested in AusIndustry’s R&D Tax Incentive program to read the Software-related activities and the Research and Development (R&D) Tax Incentive guide that can be found on AusIndustry’s website below:
We will continue to provide our insights on the new software sector guide.
For any questions, feel free to contact us.