This is a question we get asked all the time. Whilst the Research & Development (R&D) Tax Incentive claim process can seem quite complicated, the benefits of doing it properly are well worth the effort.
Want to see how you might benefit from claiming the incentive this year? Here’s what you need to know about the R&D tax incentive.
What is the R&D tax incentive?
The R&D Tax Incentive provides eligible entities with a tax offset for expenditure on eligible R&D activities and for the decline in value of depreciating assets used for eligible R&D activities.
Who is eligible for the tax incentive?
Entitlement to the R&D Tax Incentive broadly requires that:
- You are an eligible R&D entity, which is basically limited to companies resident in Australia for tax purposes;
- You undertake experimental activities applying a systematic progression of work for the purpose of generating new knowledge;
- You incur at least $20,000 on those core R&D activities and supporting activities;
- You have registered your R&D activities with AusIndustry; and
- You claim the R&D Tax Incentive expenditure in your tax return.
How could I benefit from the R&D tax incentive?
Companies with a turnover of less than $20 million:
A 43.5% refundable tax offset, which means if a company’s tax liability is zero, they are entitled to a cash refund of 43.5 cents for every dollar spent on eligible expenses. However, the eligible expenses are removed from the company’s income statement for corporations tax purposes and if the company’s income exceeds its non-eligible expenses then it will be required to pay corporations tax on such profit. The R&D Tax Incentive will offset against such corporations’ tax and the company will only be entitled to a cash refund if and to the extent that the R&D Tax Incentive exceeds the corporations’ tax due.
EXAMPLE – If the company is in a profit position, the benefit will be in the form of a reduction in tax liability and any unused offset amount will be refundable.
- Company Income: $100,000 Eligible R&D
- Expenditure: $50,000
- Non-Eligible Expenditure: $80,000
- Corporations Tax (26% FY21): $100,000 – $80,000 = $20,000 x 26% = $5,20043.5%
- Tax Offset: $21,750
- R&D Tax Incentive refund: $21,750 – $5,200 = $16,550
Companies with a turnover of more than $20 million:
A 38.5% non-refundable tax offset, which means that the company can only claim the R&D Tax Incentive as an offset against tax liability incurred in that or future tax years. Although not refundable and at a lower rate, companies of this size generally spend more on eligible R&D activities and can significantly reduce their tax liability
What are the challenges involved in applying for the R&D tax incentive?
The reality in many cases is that the claim is not easy, because identifying eligible expenditure involves a detailed and complex analysis of a company’s activities along with the application of the R&D Tax Incentive rules. There can also be challenges in collating the necessary documentation to support a claim.
But there is light at the end of the tunnel: Clearpoint Ventures can help you manage and track your core and supporting R&D activities, making sure you remain compliant.
Need assistance with managing and tracking your R&D activities? Book a time to chat with us here.