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Over the course of another dynamic year, we have seen a number of developments related to the Research and Development Tax Incentive (R&DTI) including the commencement of the new R&D Tax offset rates from 1 July 2021 and the finalisation of the Temporary Full Expensing measures.
Furthermore, planning of a new Patent Box regime has seen legislation introduced into Parliament on 10 February 2022.
First and foremost, we’ll discuss upcoming R&DTI lodgement deadlines for companies seeking to claim the R&D Tax offset.
Upcoming R&DTI Lodgement Deadlines
If your company undertook eligible R&D activities and incurred eligible expenditure on R&D during the income year 30 June 2021 (1 July 2020 to 30 June 2022), the lodgement deadline of 30 April 2022 is less than 3 months away and it will come around quickly.
The AusIndustry Online Customer Portal is now used to prepare and complete your lodgement for which you will need a myGovID. The move to the online customer portal is new from 5 July 2021 and does require a number of steps, so it is best to begin the process early on.
Lodgements for Advance and Overseas Findings with AusIndustry are due on 30 June 2022 for the 2022 financial year (1 July 2021 to 30 June 2022). Again, with just under 5 months to go to the end of the income year, this deadline should also be considered with urgency for companies that intend to claim the R&D Tax Incentive and lodge Advance Findings for the 2022 income year.
R&D Tax Offset Rate
Effective for income years commencing 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.
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) from 1 July 2021 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 R&D offset rate is now based on the corporate tax rate plus an R&D premium dependant on the R&D intensity, that being the proportion of the entity’s R&D expenditure to total expenses in 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% of the entity’s total expenses; and
- 16.5% Premium for R&D expenditure greater than 2% of the entity’s expenses.
Claimants now also benefit from the cap on eligible R&D expenditure being increased from $100M to $150M, where expenditure above $150m is not included in the intensity calculation numerator.
While this new mechanism for the non-refundable space may create some complexity for claimants, for some companies with a large portion of their total expenditure related to R&D activities, it may offer a significantly more generous incentive than the existing 38.5% non-refundable offset.
Assets and Temporary Full Expensing
Introduced as an economic stimulus measure in response to COVID-19, the ATO recently finalised the guidance on Temporary Full Expensing (‘TFE’) through Law Companion Ruling LCR 2021/3.
Eligible businesses can deduct the full cost of eligible tangible depreciating assets, including second-hand assets, where they are first used or installed ready for taxable use between 7:30pm 6 October 2020 and 30 June 2023. Noting that there are some exclusions where assets are not eligible for TFE and some exclusions for second-hand assets, for those eligible there is no threshold to the cost of an asset.
This can provide an avenue for companies to include accelerated deductions through the R&DTI, where a company purchases tangible depreciating assets and uses them for an R&D purpose.
The relevant tax depreciation amounts are claimable once the asset is held and being used in an eligible R&D activity for an R&D purpose, irrespective of whether that asset is used over the course of undertaking several years of R&D.
Other Small Business Entity (SBE) rules also need to be considered; however, it is possible for an SBE to choose to not use the SBE rules for an income year. Tangible depreciating assets such as laptops or servers that are being entirely used in R&D activities should be considered in preparing R&D claims.
Not Ensuring You Are Eligible Can Be Expensive!
A recent case in the Administrative Appeals Tribunal has highlighted the need for entities wishing to claim the R&DTI to ensure they are entitled to do so.
In XQDX v Federal Commissioner of Taxation [2021] AATA 4070, the AAT held that the taxpayer could not claim an R&DTI offset as the claimed expenditure had been incurred in its capacity as trustee of a trust and not in its own right.
The taxpayer had argued that relevant expenditure had been incurred by the taxpayer as the trust was reimbursed through a loan account. However, the AAT held that the contingencies in relation to repayment of the loan account meant that the taxpayer had not properly incurred the expenditure resulting in the taxpayer both having to refund the offsets received ($1,173,143.70) and pay shortfall penalties ($293,285.90).
R&DTI and ‘Expenditure not at Risk’ (including JobKeeper)
The ATO’s previous determinations on the impact of JobKeeper payments on claiming salary costs incurred on R&D activities (TD 2020/D1 and TD 2021/9) have recently been finalised in a tax ruling (TR 2021/5) on the ‘at risk’ rule.
The ruling covers eleven specific examples and solidifies the position expressed in the previous determinations on ‘expenditure not at risk’, including its impact on JobKeeper payments.
Introduction of Patent-Box Legislation into Parliament
The Treasury Laws Amendment (Tax Concession for Australian Medical Innovations) Bill 2022 has been tabled into federal parliament on 10 February 2022.
In the 2021 Federal Budget, the Australian Government announced plans to introduce Australia’s first Patent Box regime to incentivise innovation and commercialisation in the medical and biotechnology sectors. To be enacted as Div 357 of the ITAA 1997, the Patent Box regime will offer companies a reduced corporate tax rate of 17% on income derived from certain biotech and medical technology patents, granted or issued after 11 May 2021 and for income years from 1 July 2022.
To encourage Australian-based innovation and commercialisation, the patents must be owned by an Australian company and the associated R&D with the patent be carried out in Australia.
Relying on the establishment of a nexus between R&D conducted in Australia and the concessional tax rate both simplifies the compliance process for claimants and satisfies Australia’s commitment to the OECD’s Base Erosion and Profit Shifting Project Action 5.
The draft legislation offers the concessional tax rate to holders of patents granted in Australia, USA, or Europe (patent granted under the European Patent Convention (EPC); the UK has continued to be a member of the EPC after Brexit) if they cover goods that are also “included in a part of the Australian Register of Therapeutic Goods.” This avoids the potentially prohibitive costs to taxpayers of having to establish eligibility using patent classification codes but also means that a taxpayer cannot claim the concessional tax rate until the Therapeutic Goods Administration (TGA) has approved a patented good for marketing in Australia. The recent experiences of Australian manufacturers of COVID-19 Rapid Antigen Tests highlight the potential flaws with this approach.
While the Patent Box is a positive step for Australian manufacturers of therapeutic goods, offering the concessional tax rate to all Australian manufacturers who develop patentable goods, regardless of the technology sector they operate in, would have a significantly greater economic benefit for us all.
Read our latest article on the Patent Box >>
HAVE A QUESTION ABOUT R&D TAX OFFSETS OR NEED ASSISTANCE LODGING AN APPLICATION?
RSM has significant experience assisting companies across all industries to assess R&D tax eligibility. For more information, please get in touch with your nearest RSM Office.
