By Dr Rita Choueiri and Berrin Daricili (William Buck)

In the Issue

This is the first of a three-part series introducing the Research & Development (R&D) Tax Incentive program, what it means and how it may apply to you. This issue will cover what the program is designed for, the benefits of claiming it, and discuss the entities that are allowed to access it. Part two of the series will focus on what types of projects can potentially qualify for a tax offset under the R&D Tax Incentive (i.e. eligible ‘R&D activities’) and part three will discuss the types of expenditures that can be claimed, before concluding with a summary of the application process.

What is the Research & Development Tax Incentive?

The R&D Tax Incentive is an Australian Government program which seeks to stimulate innovation and competition in the Australian economy by offsetting the costs and risks that might otherwise disincentivise businesses from undertaking R&D to create new or improved products, processes and services. This tax incentive is industry agnostic and is available to companies of all sizes engaging in R&D activities in the form of a cash refund or an offset against a company’s tax payable to the ATO.

The R&D Tax Incentive is a self-assessment program jointly administered by the Australian Taxation Office (ATO) and AusIndustry (on behalf of Innovation and Science Australia) in accordance with Division 355 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) and Part III of the Industry Research and Development Act 1986 (Cth). AusIndustry oversees the eligibility and registration of R&D activities while the ATO manages the rules for eligible entities and expenditure.

What are the tax benefits?

The current tax benefits that can be accessed through the program are a 43.5% refundable R&D tax offset for companies with a grouped or aggregated turnover of under $20 million, and a 38.5% non- refundable R&D tax offset for companies with a grouped or aggregated turnover of above $20 million. Although there is no claimable ceiling, the tax offset is reduced to the company tax rate for deductions in excess of $100 million. Thus, as illustrated in the table below, small businesses in a tax loss position and an aggregated turnover of less than $20 million stand to benefit the greatest from this program as they may be eligible to receive the tax offset as a cash refund (see scenario 1 for companies with an aggregated turnover >$20M), giving them the much-needed cash flow to remain financially viable and competitive in today’s market. Refer to the table below for examples of benefits available for companies under different tax and aggregated turnover scenarios (these examples are based on an eligible R&D spend of $1M).

Summary of R&D Tax Incentive Benefit (Year Ended June 2019)

Aggregated Turnover	R&D Expenditure	Tax Rate	R&D Tax Offset Rate	Scenario 1 (Tax loss position)	Scenario 2 (Tax payable position)
< $20M	$1M	27.5%	43.5%	$435,000 cash refund	$160,000 tax offset
$20M – $50M	$1M	27.5%	38.5%	$110,000 tax offset*	$110,000 tax offset
> $50M	$1M	30%	38.5%	$85,000 tax offset*	$85,000 tax offset

*The non-refundable benefit can be carried forward and used in future income years

What are the requirements to claim the R&D Tax Incentive?

Three main requirements must be satisfied for businesses to access the R&D Tax Incentive:

1. they must be eligible ‘R&D entities’ (discussed in this issue)
2. they must be conducting eligible ‘R&D activities’ (to be discussed in part 2 of the series)
3. they must be incurring eligible ‘R&D expenditure’ (to be discussed in part 3 of the series).

‘R&D entities’ – which businesses are eligible?

Under the ITAA 1997, eligible ‘R&D entities’ are companies that are either:

1. incorporated under Australian law
2. incorporated under foreign law but are an Australian resident for income purposes, or
3. incorporated under foreign law and a resident of a country which Australia has a double tax agreement.

In other words, companies that are liable to pay income tax in Australia will be eligible R&D entities, unless they are deemed to be exempt entities (for instance, Commonwealth entities that do not pay tax and entities whose ordinary and statutory income are exempt from income tax cannot access the R&D Tax Incentive). Individuals and partnerships are therefore not eligible R&D entities; trusts are also ineligible, unless they are public trading trusts with corporate trustees.

It is also important to note that eligible R&D entities must ‘effectively own’ the know-how, intellectual property or other similar results arising from the R&D activities, have appropriate control over the day- to-day management and overall direction of the R&D activities, and must bear the financial burden of carrying out the R&D activities in order to rightfully obtain an R&D tax offset for those activities.

For further information on this topic, please contact:

Dr Rita Choueiri Director, R&D Incentives William Buck williambuck.com Ph: (03) 8823 6840 E: rita.choueiri@williambuck.com

Berrin Daricili Manager, R&D Incentives William Buck williambuck.com Ph: (03) 8823 6846 E: berrin.daricili@williambuck.com

Disclaimer: The content of this Bulletin is general information only. It is not legal advice. The statements and opinions are the expression of the author, not Law Central, and have not been checked for their accuracy, completeness or changes in the law. Law Central recommends you seek professional advice before taking any action based on the content of this Bulletin.

Related documents:

• Company Constitution Update
• Build a Company (ELodgement)
• Confidentiality Agreement (Non Disclosure)

Related webinars:

• Webinar - Accessing Company & Trust Documents In Family Law
• Webinar Recording - Avoiding Business Disputes
• Webinar Recording - Companies - Things You Should Know, But Probably Don’t!

by John Wojtowicz (Director - Law Central Legal)

As our main Bulletin story does not contain any Gold and Platinum content this week, gold and platinum members can read on for a bonus case summary dealing with the issue of whether a single member company can pass a special resolution to amend their company constitution?

Disclaimer: The content of this Bulletin is general information only. It is not legal advice. Law Central recommends you seek professional advice before taking any action based on the content of this Bulletin.

Related documents:

• Company Constitution Update
• Build a Company (ELodgement)
• Confidentiality Agreement (Non Disclosure)

Related webinars:

• Webinar - Accessing Company & Trust Documents In Family Law
• Webinar Recording - Avoiding Business Disputes
• Webinar Recording - Companies - Things You Should Know, But Probably Don’t!