In a move that is sure to cause headaches for companies claiming the R&D Tax incentive, the ATO published draft Taxation Determination TD 2020/D1 Income tax: notional deductions for research and development activities subsidised by JobKeeper payments on 27 July 2020 (TD 2020/D1); it is open for feedback until 24 August.
While the JobKeeper scheme was designed to relieve companies, particularly SMEs and startups, already facing economic pressures and under threat of losing employees, the taxation determination will act to prevent companies from accessing both JobKeeper and seeking additional Government support through the R&D tax incentive for the same expenditure.
Eligible entities that receive JobKeeper for employees who are also engaged in R&D activities will have their R&D expenditure amount incurred on salaries and wages reduced to the extent that it is being funded (consideration received or expected to be received) by the JobKeeper payments.
Conversely, for Directors and shareholders, the “at risk” R&D tax rules are not triggered by receiving JobKeeper payments as an eligible business participant. Therefore, an R&D tax offset is not denied through the “at risk” rules on any R&D expenditure being incurred to directors and shareholders. This is because a JobKeeper payment for an eligible business participant is not received as a direct or indirect result of incurring any R&D expenditure.
R&D tax claimants will need to consider this across both FY2020 and FY2021, with some having to amend already lodged tax returns for FY2020.
While opposition to the TD 2020/D1 argued that JobKeeper payments should not trigger the “at risk” rules as they are not “consideration for a taxable supply” the Commissioner did not agree with this view.
The outcome of TD 2020/D1 is likely to upset many companies that had not considered the potential interaction between JobKeeper and the R&D tax “at risk” rules. This is particularly so for companies that have already lodged an R&D claim for FY2020.
How does it work?
For paid employees receiving the JobKeeper payment who are wholly engaged in R&D activities, the amount of their salary expenditure that was incurred on R&D activities that is being funded by the JobKeeper payment cannot be included in the R&D claim.
Likewise, for an employee partially engaged in R&D activities, the eligible R&D expenditure that can be claimed is reduced to the extent that the R&D salary is funded by the JobKeeper payment received by the company.
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An expected outcome was that the Commissioner has determined that no extra income tax is payable under the R&D tax “clawback” rules.
The clawback rules generally apply where the company has received a grant and rather than reduce the grant amount received, it increases the income tax you are liable to pay. The interaction between grants and the R&D tax incentive is to prevent companies that obtain both the R&D tax incentive and a grant, from receiving a double benefit on the same expenditure.
While this is a great summary of the latest developments, the release of the TD 2020/D1 brings with it a plethora of nuances. In addition, the interaction between other COVID-19 related tax changes and the R&D tax incentive, such as instant write-offs and accelerated depreciation will have a positive impact on many R&D claimants.
HOW CAN RSM HELP?
If you require further information regarding how TD 2020/D1 will affect your company's circumstances contact your local RSM office.