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 reminder – Overseas findings due soon!
A key aspect of the RDTI is that under normal circumstances, expenditure can only be claimed in relation to R&D activities conducted within Australia. However, a key exception to this principle is where R&D entities have lodged and received a positive advance overseas finding application. This will allow an R&D entity to claim expenditure in relation to R&D activities conducted overseas. Any application of this nature must be lodged before the end of the financial year in which the overseas 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 biosecurity law;
- 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 R&D activities 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.
If you are looking for an R&D advisor to assist with an overseas finding for the FY22 period, please contact Sameer Kassam at firstname.lastname@example.org.
R&D News – Guidance finalised for software claims
For a significant period of time, software R&D, despite being the focus of a large percentage of R&D claims, has suffered from a lack of clarity in terms of areas of eligibility. This has led to a number of large software companies having claims rejected by AusIndustry, despite believing that they had met all of the eligibility criteria. To address this issue, AusIndustry has released guidance relating to software-related activities and the RDTI, which can be found here. There are three key areas that have software specific guidance, and these are covered below.
Systematic Progression of Work
A significant section of the new guidance outlines a number of activities that may be considered core experiments to test a hypothesis for software R&D. These include:
- Requirements testing;
- Data mapping and data migration testing;
- Testing the efficiency of different algorithms that are already known to work;
- Testing websites in operation by measuring the number of hits;
- Routine computer and software maintenance;
- Beta testing; and
While it should be noted that in order to be claimed these activities must be undertaken as a part of a systematic progression of work within a core R&D activity, this represents a significant divergence from previous advice given from AusIndustry. Activities such as debugging and routine maintenance have historically been regarded as activities that are supporting at best, and as such advisers have largely recommended avoiding including these activities in R&D Applications. By recognising that these activities do have a place within a systematic progression of work necessary to achieve R&D hypotheses, we are hopeful that this aspect of the R&D guidance represents a more holistic understanding of software R&D by the regulators.
Software Activity Exclusions
This section of the guidance clarifies and expands upon s 355-25(2)(h) of the Income Tax Assessment Act 1997, which states that activities undertaken for the purpose of internal administration by the R&D entity or any of its affiliates cannot be claimed as a core R&D activity. This might include (but is not limited to) the development or modification of:
- Business applications such as payroll/accounting;
- Management information systems; and
- Enterprise resource planning systems.
While these activities cannot be claimed as core R&D activities, if they are directly related to, or undertaken for the dominant purpose of supporting core R&D activities, then they may be claimable as supporting R&D activities.
Claiming and Evidence
This section of the guidance is specifically relevant to software R&D activities to the extent that it discusses the “core technology” provisions that relate to expenses that can be claimed. In essence, the cost of a software that you have either purchased or licensed for the purpose of developing further beyond its original capabilities cannot be claimed. For example, if a software has been licensed and the source code will be further developed to increase its capabilities, the cost of the license cannot be claimed as an R&D expense. However, where software is purchased or licensed to be used to assist with an experiment rather than be developed as part of an experiment itself (for example, licensing Amazon Web Services as part of an experiment to host the algorithms for testing purposes), this expense may be eligible to be claimed.
Overall, the software guidance is overwhelmingly positive for claimants, providing clarity on a range of issues that have previously been unclear or prohibitive to the successful lodgement of R&D Applications.
RDTI Determination – clinical trials
Effective as of April 1, the Federal Government has released a determination relating to clinical trials and the RDTI. This determination is targeted toward pharmaceutical or life sciences claimants who are developing new medicines or treatments. In essence, the determination states that clinical trials which are in phases 0, 1, 2 or 3, pre-market pilot stage, or pre-market pivotal stage are core R&D activities for the purposes of the RDTI.
While this marks an expanded definition of core R&D activities within the clinical trials context, there are some notable exclusions. Outside of traditional exclusions, as outlined in subsection 355-25(2) of the Income Tax Assessment Act 1997, the following are excluded from being claimed as core R&D activities under the determination:
- clinical trials of generic products;
- clinical trials of biosimilar medicines (versions of already registered biological medicines);
- pre-clinical trial activities or projects;
- phase IV clinical trials;
- market and post-market stage clinical trials; and
- activities outside of regulatory requirements, applicable approvals, etc which are in force at the time of trials.
While these activities are not covered by the determination, they may still be eligible as either core or supporting R&D activities as long as they meet the usual eligibility requirements for the RDTI.
What does this mean for claimants? Where previously there has been some contention regarding which phases of trials meet the requirements of “Core R&D Activities” (where traditionally only phase 2 and 3 trials are almost certain to be approved as such), the determination has provided an expanded definition for the industry. This allows claimants to register more core R&D activities, and potentially begin the RDTI process earlier than has previously been available. However, claimants should be aware that all activities which are registered as a core must still meet the stringent requirements of being undertaken for the purpose of generating new knowledge, having an outcome that cannot be determined in advance, and following a systematic progression of work.
Digital Games Tax Offset and interactions with the RDTI
The government has recently announced that a Digital Games Tax Offset (DGTO) will be available for game development companies, starting from the financial year commencing 1 July 2022. This offset will allow for a 30% refundable offset of eligible costs between $500,000 and $20 million. While only the company which is primarily responsible for the development of the game is eligible to claim the expenses, if another company takes ownership during development, then that company will be able to claim all eligible expenditure to that date. Expenditure can be claimed when a game is completed, ported to a new platform, or an existing version is further developed.
Importantly, expenses that have already been claimed as a part of the RDTI cannot be claimed under the DGTO. Similarly, expenditure on games with elements of gambling, which have been refused classification, or on games primarily for promotional/advertising purposes cannot be claimed.
Further information is anticipated to be released in the coming months as to how the DGTO can be claimed, and further guidelines regarding eligible expenditure.