Considerations for EOFY and your R&D tax incentive claim

Tax Insights

As another end of financial year (EOFY) approaches, RSM’s National Research and Development Tax Incentive (RDTI) team provides a summary of considerations for your R&D tax incentive claim for 2022 and what you need to know when the 2023 financial year gets underway.Summary of considerations in respect to your R&D Tax Incentive claim for 2022

EOFY Checklist

  • Is your company undertaking R&D activities overseas that may qualify for an Overseas Finding Application?

Your company has until 30 June 2022 to lodge an application with AusIndustry.This deadline also applies to Advanced Finding Applications, should your company seek certainty on the eligibility of R&D activities being undertaken.

  • Is your company incurring R&D expenditure to associates?

If you haven’t already, now is the time to examine any associate relationships and ensure payment of any outstanding amounts incurred to associates prior to 30 June 2022.

  • Has your company kept and maintained contemporaneous documentation and records to evidence the R&D activities being undertaken and the R&D expenditure incurred?

This is a requirement for claimants of the RDTI. Your company should review these documents, including timesheets, to ensure there is a record of all R&D activities and expenditures incurred.

R&D Tax Offset Rate

Effective for income years that commenced after 1 July 2021, the R&D tax offset rate is now based on the company’s corporate tax rate plus the addition of an R&D premium.

When your RDTI claims are prepared for any financial year ending on or after 30 June 2022, the new R&D tax offset rules apply.

For companies that have an aggregated turnover below $20m, the entitlement continues to be a refundable R&D tax offset, where the offset rate is calculated as the corporate tax rate plus an 18.5% premium.

Noting that the corporate tax rate for these companies (assuming they are base rate entities) is 25%, an R&D Tax offset rate of 43.5% is the same as that under the previous legislation.

For companies with an aggregated turnover of $20m or more accessing the non-refundable R&D tax offset, the rate is now based on the corporate tax rate plus an R&D premium dependent on the R&D intensity. That being, the proportion of the entity’s R&D expenditure to total expenses for the income year.

A two-tiered system now operates for the R&D premium:

  • 8.5% premium for R&D expenditure up to and including 2% intensity; and
  • 16.5% premium for R&D expenditure greater than 2% intensity.

RDTI Determination for Clinical Trials

AusIndustry has released its first R&D Tax Incentive Determination concerning clinical trials in Australia. It is intended to streamline R&D Registration, and Advance and Overseas Findings applications, for the biotechnology sector deeming certain types of clinical trials meet requirements for being Core R&D activities.

The Industry Research and Development (clinical trials, phase 0, I, II, III, pre-market pilot stage, pre-market pivotal stage, for an unapproved therapeutic good) Determination 2022 came into effect 1 April 2022 and recognises the AusIndustry has released its first R&D Tax Incentive Determinationfollowing trials for an unapproved therapeutic good as Core R&D activities (notified or approved pursuant to application regulations):

  • Phase 0, Phase I, Phase II, and Phase III clinical trials;
  • Pre-market pilot stage clinical trials; and
  • Pre-market pivotal stage clinical trials.

It should be noted there are certain trials that are not covered by the determination where these do not involve an unknown outcome or relate to commercialisation activities.

The determination is a positive move by AusIndustry, offering a simplified registration process for Core R&D activities covered by the determination.

For claimants in the Biotechnology sector undertaking qualifying clinical trials, you should analyse its applicability to your 2022 AusIndustry Registration of R&D activities.

Refreshed AusIndustry Software Development Guidance

AusIndustry has recently released its updated guidance for ‘Software-related activities and the Research and Development (R&D) Tax Incentive – A guide to help you assess whether your software-related R&D is eligible for the R&D Tax Incentive’.

Discernable updates to the refreshed guidance include:

  • Acknowledging that methodologies such as Agile, Waterfall, and Rapid, as well as system testing, data testing, and digital transformation activities can be used in the systematic progression of work to undertake Core R&D activities.
  • A case study has been provided to assist claimants in explaining eligibility requirements for software development activities, noting that this does fall short of the available content limits within the R&D application. Where possible, claimants should optimise the available content real estate in the R&D application.
  • Examples of evidence and documentation that can be used to support R&D eligibility.
  • Additional detail on ‘unknown outcomes’ and assessment of this by a competent professional, the latter not explicit in the RDTI legislation.
  • Guidance in respect to the internal business exclusion, as well as the dominant purpose test.

While it is a step forward in providing clarity to companies undertaking software development R&D activities, claimants should continue to maintain robust contemporaneous documentation to substantiate their R&D, and ensure diligent processes to identify qualifying R&D from business as usual development.

Need some guidance with the R&D Tax Incentive?

For further information, please contact the RSM R&D team

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