R&D Tax Facts – October 2022
Our R&D Tax Facts quarterly program update reviews some of the recent developments in the world of the R&D Tax Incentive (R&DTI) program.
September R&DTI State Reference Group meeting
We attended the R&DTI State Reference Group meeting in September, jointly hosted by AusIndustry and the ATO. The meetings are a good source of insights into how the program is operating and what the regulators are focussed on from a compliance perspective. Here are some highlights:
AusIndustry compliance insights – the importance of Unknown Outcome
AusIndustry emphasised the importance of articulating the Unknown Outcomes associated with an R&D activity. They view this as a central requirement and recommended that applicants be very clear in explaining the steps taken to establish the existing knowledge relevant to their activities.
ATO compliance insights – new guidance on its way
ATO R&DTI web content is being updated with improved search functions, layout and enhanced guidance on record keeping, the nexus between registered R&D activities and R&D expenditure, and feedstock and clawback adjustments
The ATO reaffirmed that payments to associates and allocation of overheads remain key focus areas in compliance.
Clinical Trials Determination – an easier way to register clinical trials
A new, easier way for businesses to register clinical trials as R&D activities has been introduced and 50 companies have utilised the new process so far
AusIndustry is seeking input and suggestions for other R&DTI determinations that could be introduced (email: rdti.engagement@industry.gov.au)
Overseas and Advance Findings – making things easier
There is a push within AusIndustry to encourage more businesses to use the Findings process. AusIndustry is trying to make the process much faster and more appealing by targeting a 90-day turnaround (compared to averaging 150-200 days in past).
A meeting summary is available online if you want to know more.
Recent case law – the importance of documentation
A recent AAT decision handed down in July 2022 (Absolute Vision Technologies Pty Limited and Innovation and Science Australia (Taxation) [2022] AATA 2319) has found that a company’s software development activities were not eligible for the R&DTI.
The taxpayer company was a software vendor engaged in developing a real time freight or manufacturing scheduling system. It had registered R&D activities for a number of years under the R&DTI. However, on review, Innovation and Science Australia (ISA) found that the claimed activities were neither core nor supporting activities and therefore ineligible for registration.
The AAT affirmed ISA’s decision noting that “overall, there is such a dearth of relevant or probative evidence that it renders AVT’s activities incapable of assessment as to whether the activities engaged in by AVT are “core activities””.
There have been few decisions by the courts and AAT on R&D software eligibility, and this case provides a useful reminder to companies of the importance of contemporaneous record keeping that clearly documents the experimental process and evaluation of unknown outcomes.
AusIndustry released new guidance around software-related activities and the R&DTI in April 2022, available here.
Temporary Full Expensing – interaction with the R&D program
Temporary Full Expensing (TFE), introduced as part of the Federal Government’s Covid economic stimulus measures, allows eligible businesses to claim an immediate deduction for the cost of an asset in the year it is first installed and ready for use.
In some circumstances, a company may be able to claim the tax write-off amount as a notional R&D deduction to the extent of the asset’s R&D use. This can provide a significant “uplift” on R&D asset expenditure. The ATO have published guidance in the form of a Law Companion Ruling (LCR 2021/3), confirming the interaction between TFE and the R&DTI.
Importantly, the 2023 income year is the final year that Temporary Full Expensing will be available for eligible companies.
Upcoming R&D tax deadline for December year end companies
A reminder of an important, upcoming R&DTI deadline for businesses with a 31 December year end.
Eligible R&D activities undertaken between 1 January and 31 December 2021 need to be registered with AusIndustry by no later than Monday 31 October 2022. Registration of R&D activities is the first, vital step to access the generous R&D tax benefits via your annual tax return.
The R&DTI can be challenging to navigate given the complexity associated with identifying eligible R&D activities, calculating the costs that can be claimed, and compiling evidence and documentation. We provide comprehensive and transparent assistance with all aspects of the R&D Tax claim process. Our team will be happy to help you assess whether your activities are eligible and to ensure you meet all eligibility requirements.