R&D Tax Facts - September 2023
Our R&D Tax Facts quarterly update reviews some of the recent developments in the world of the R&D Tax Incentive (R&DTI) program.
Federal Court decision – company claiming overseas costs without an overseas finding
The recent Federal Court decision in T.D.S. Biz Pty Ltd v Commissioner of Taxation[2023] FCA 710, dismissed the taxpayer’s appeal from the AAT, finding in favour of the Commissioner of Taxation (CoT). The key facts of this case were that:
The applicant (TDS) submitted an R&D claim in 2018 for the design and development of an electric tricycle.
The CoT reviewed the claim and supporting documentation and identified three invoices totalling $1,613,462 relating to activities conducted in China (procurement and assembly of prototype parts) that were not covered by an overseas finding.
The CoT issued an amended notice of assessment which excluded the three invoices and issued a shortfall administrative penalty of 50% on the remaining amounts (~$350,000).
TDS submitted a successful variation request to AusIndustry, registering supporting activities including “design, development and fabrication and/or supply of components” for the 2018 year (the original application did not include any supporting activities)
The CoT disallowed an objection made by TDS and TDS appealed to the AAT.
The AAT affirmed the CoT’s decision on the basis that the supporting activity was conducted overseas and not covered by an overseas finding.
The AAT also affirmed the CoT’s decision to issue a penalty as TDS did not disclose in the application form or variation request that the activity to produce prototype parts was conducted outside of Australia.
Of interest to companies claiming the R&D Tax Incentive (R&DTI) is the clarification of the definition of what constitutes “supporting R&D activities”, with the Federal Court adopting a broad meaning (likely beneficial to most taxpayers) stating that supporting activities do not necessarily have to involve any actual research and development if other criteria are met as set out in the legislative provisions.
In this case, the Court determined that the acquisition of a good or service that is not off the shelf can constitute a supporting R&D activity requiring registration. This contrasts with the taxpayer’s argument it was merely purchasing overseas components for activities solely undertaken in Australia, and therefore, did not constitute an “activity” for the purpose of the R&DTI. The AAT’s finding of fact on this point was that the activities were much more than ‘mere supply’ and involved the ‘design, development and fabrication… for the assembly of the project’s prototypes.’
The case is an important reminder that:
When purchasing components from overseas for Australian R&D activities, a careful analysis and assessment should be made of the work that is being conducted overseas in producing those components, and whether an overseas finding is required.
When seeking to claim the costs of overseas R&D activities, companies must ensure their activities meet the requirements of the Industry Research and Development Act 1986 and that they have a positive outcome for an Overseas Finding Application lodged with AusIndustry.
BCA report recommends enhancements to the R&D Tax Incentive
The Business Council of Australia (BCA) released a new report “Seize the moment” in August 2023, which focuses on how productivity can be enhanced to improve the living standard of Australians. It recommends a number of shifts and policy levers to achieve this, including a recommendation that the R&DTI is enhanced by:
introducing a premium of up to 20 per cent to incentivise collaborations between industry and publicly funded research organisations and universities.
The report notes further that:
If Australia is serious about making things, growing new industries and becoming a productive, high-wage economy, we must ensure other settings including standards and regulatory approvals allow and encourage it. On average across 20 OECD countries, for example, more than 60 per cent of medicines become available to patients within six months. In Australia, it is just 22 per cent.
If we don’t fix these impediments it will cost Australians jobs and prosperity and impact lives and wellbeing.
The report is available here.
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 2022 need to be registered with AusIndustry by no later than Tuesday 31 October 2023. 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.
Tax time – ATO releases R&D tax guidance
The ATO released website guidance in August outlining key points about the R&DTI for taxpayers to consider before lodging their company tax return.
These points included:
review your eligibility
you can use the R&D calculator to help calculate your R&D tax incentive claim
the offset rates are different depending on your company’s aggregated turnover and R&D intensity
the R&D expenditure threshold increased to $150 million per year from income years starting on or after 1 July 2021
R&D activities conducted overseas must be covered by an Overseas Finding
there are general anti-avoidance rules in Part IVA to cancel the R&D tax offsets obtained in connection with a scheme
you must register each of your R&D activities with AusIndustry through the R&D Tax Incentive customer portal before you lodge your claim.