Replacing the research and development tax concession, the Government introduced the research and development (R&D) tax incentive in 2011 with the aim of boosting competitiveness and improving productivity across the Australian economy through encouraging industry to conduct research and development activity that they may have been holding off on. The R&D tax incentive provides a refundable tax offset for eligible entities who have an aggregated turnover of less than $20 million, and a non-refundable tax offset for all other eligible entities.

Is your company an eligible entity? While there are other inclusions, R&D entities are essentially corporations that have been incorporated under Australian law, or incorporated overseas but are an Australian resident for income purposes. If you are a corporate limited partnership or an entity whose income is exempt from income tax, you are not an eligible entity.

Have you carried out eligible R&D expenditure? AusIndustry and the ATO have expressly excluded certain types of expenditure from being eligible for recoupment. Such exclusions include expenditure not considered to be at risk; expenditure on acquiring core technology and expenditure incurred by companies to acquire or construct a building. If you have carried out such expenditures, you need to consider them under the normal deduction provisions of income tax law.

There are a number of expenses that you can claim as part of your R&D expenditure, you just have to show that there is a direct link between such expenses and the R&D activity. This means that you may be able to claim for the cost of administration, insurance, rent, cleaning and power associated with an R&D activity, just to name a few.

If you are an R&D entity and you have incurred notional deductions of $20,000 or more on eligible R&D activities, chances are you are eligible to claim the R&D tax incentive. However, before you can claim the incentive, you must register your R&D activities with AusIndustry. This registration needs to take place within 10 months of the end of your company’s income year, and it must be done prior to claiming the R&D tax offset in your company’s income tax return.

If your total notional deductions are less than $20,000 you can still claim the tax offset for expenditure incurred as a monetary contribution under the Cooperative Research Centre program or expenditure incurred to a research service provider in certain circumstances.

To actually claim the benefits of this incentive, you need to keep and be able to produce business and specific R&D records. These records need to clearly show the amounts of any R&D activities you have carried out, and how any expense relates to such activities. As it is imperative that you can prove the circumstances under which you were expecting to receive funds in the instance you are trying to show you were carrying out an R&D activity at risk, ensure that you hang on to all relevant contractual agreements.

If you have taken advantage of this government incentive and received a recoupment in the income year that relates to R&D expenditure for which you have claimed the tax offset, you will need to make a clawback adjustment. While the term itself suggests that it may decrease the grant or offset you have received from the government, it won’t. The clawback adjustment will merely increase the income tax you are liable to pay on the grant or reimbursement you have received.

If your R&D activities produce a marketable product, you may need to make a feedstock adjustment. Similar to the clawback adjustment, this adjustment will affect your assessable income.

If you wish to register your R&D activities for the 2012-2013 income year, applications must be lodged with AusIndustry by 30 April 2014. As the R&D tax incentive is self-assessing, you need to be certain of your ability to withstand future audits, as penalties and the repayment of benefits can attach to improper claims.

If you are unsure whether your business is eligible for the R&D tax incentive, or if you would like assistance in registering and making a claim, please contact the experienced accountants and tax agents here at The Quinn Group. Call 1300 747 667 to book an appointment or submit an online enquiry on here.