The R&D Tax Incentive (RDTI) landscape has been particularly fluid over the last few years. As such, CharterNet has launched a quarterly update covering key topics relating to the RDTI to ensure claimants have the most up to date information. This covers areas such as changes to legislation, R&D related news, case studies, and think pieces.
Important update – Extension for R&D Application Process
As many claimants with a 30 June income year would be aware, the traditional deadline for the lodgement of the R&D Application (April 30) is fast approaching. However, as the deadline in 2022 falls on a Saturday, and the following business day is a public holiday in Queensland and the Northern Territory, this deadline has been extended to Tuesday, May 3 2022.
While this represents a small amount of breathing room, claimants should still be seeking to submit their application form as soon as possible to ensure that they are not met with inevitably increasing delays in processing as the deadline approaches. Key steps to ensuring a smooth lodgement include opening discussions with your R&D advisors as soon as practicable, and ensuring that you are able to access the R&D customer portal. Instructions on how to log into the portal and begin your R&D claim can be found here.
If you are looking for an R&D advisor to assist with your claim for the FY21 period, please contact Sameer Kassam at email@example.com.
R&D News – Guidance finalised for “at-risk” expenditure
In recent months the ATO has finalised their review of provisions in the RDTI which prevent R&D claimants from notionally deducting expenditure that is not ‘at risk,’ and as a result, have released TR 2021/5.
What do the ‘at risk’ provisions mean?
In essence, ‘at risk’ provisions prevent companies from using funds from outside sources to conduct R&D activities, but claim the benefit for the expenses. This means that where companies incur expenses, but have contracts that will reimburse them, or are provided with up-front funds to conduct activities, these expenses will not be able to be claimed.
What does the Ruling mean?
The Ruling has clarified how the ‘at risk’ rules are to be applied in the R&D context, and clearly states that the ‘at risk’ provisions are not restricted solely to expenditure, but can take effect where any form of consideration (including non-monetary) offsets the risk for the R&D entity. Furthermore, it is not necessary for consideration to have been provided for the provisions to take effect, only that the R&D entity can “reasonably expect” to receive consideration for the R&D. Finally, the “regardless of risk” test is outlined, where if consideration is granted regardless of whether or not R&D activities are successful, it is likely to fall into the category of expenditure not at risk.
The key question R&D entities should ask when determining if their expenditure is at risk is “Disregarding the outcomes of the R&D activities (whatever those outcomes may or may not be), can it be objectively concluded that I have received or could reasonably be expected to receive consideration?”
For example, if a food manufacturer (R&D entity) were to be contracted by a commercial brand to develop a new recipe which was to meet targeted specifications, and the commercial partner was to agree to reimburse the R&D entity for all expenses incurred in the development of the recipe, it is likely that the R&D expenditure will be seen as not at risk. However, if the R&D entity is only paid upon the delivery of a recipe that meets specifications, then the expenses incurred to develop that recipe to the point of sale may be eligible to be claimed under the RDTI. This is because there is a significant risk of failure in recipe development, and it cannot be reasonably expected for consideration to be granted. A comprehensive list of examples of the application of the provisions can be found within the ruling.
JobKeeper and the ‘at risk’ provisions
Importantly, there has been a secondary ruling which clearly states that Jobkeeper payments to employees cannot be claimed for the purposes of the RDTI, as it is captured by the ‘at risk’ provisions. Per the ruling, Jobkeeper is received as a result of an employer incurring wage expenditure. JobKeeper payments were receivable regardless of the results of any R&D activities on which the wage (or other) expenditure is incurred. There are no eligibility criteria that would link the receipt of JobKeeper payments in any way to the results of the R&D activities that an entity may be conducting. Therefore, to the extent R&D entities received the JobKeeper payment for paid employees undertaking R&D activities, they are not at risk for the wage expenditure and cannot get a notional deduction.
Focus area – Overseas Findings
A key aspect of the RDTI is that in normal conditions, expenditure can only be claimed to the extent it is incurred in Australia. However, a key exception to this principle is where R&D entities have lodged and received a positive advance overseas finding application. Any application of this nature must be lodged before the end of the financial year in which the R&D activity was conducted (activities conducted during FY22 must have a finding lodged before 30 June 2022).
To be eligible to apply for an overseas finding, an overseas R&D activity must meet the following requirements:
- There must be a significant scientific link to one or more core R&D activities conducted (or to be conducted in the future) solely in Australia. To demonstrate the significant scientific link, the R&D entity must be able to show that the Australian core activities are unable to be completed without the overseas activity being conducted;
- The activity is unable to be conducted in Australia for one of the following reasons:
- conducting the activity requires access to a facility, expertise, or equipment not available in Australia;
- conducting the activity in Australia would contravene a law relating to quarantine;
- conducting the activity requires access to a population (of living things) not available in Australia; or
- conducting the activity requires access to a geographical or geological feature not available in Australia.
As these factors largely relate to physical access to equipment or people, it is rare that an application for an overseas finding relating to software will be successful; and
- Total expenditure on overseas activities does not exceed total expenditure on Australian activities. This condition applies to expenditure over the life of a project, not just the financial year in which the application is lodged. However, there must be clear evidence (budgets etc.) that the future expenditure overseas will be less than Australian expenditure.
As the end of the financial year is approaching, now is a good time for R&D entities who believe that they have a case for an overseas finding to contact their R&D advisor and begin the process.
New RDTI Software development sector guide
The Federal Government has released its long-awaited Software development sector guide for the R&D Tax Incentive.
It can be accessed here.
If you have any questions, please contact your CharterNet team member.