Companies that operate in the field of Information and Communication Technology (ICT) can take advantage of the R&D Tax Incentive to boost their cash-flow and development capabilities.
Depending on the company’s revenue levels, a 45% refundable or a 40% non-refundable tax offset would apply.
>From 1 January 2014, entities with an aggregated annual turnover of less than $20 million will be able to claim the 45% R&D refundable tax offset on a quarterly basis.
The key issue to determine is whether the projects undertaken by the company qualify as eligible R&D activities.
Eligible R&D Activities
According to the program rules, core R&D activities are those whose outcome cannot be known or determined in advance on the basis of current knowledge, information or experience, but can only be determined by applying a systematic progression of work that:
- is based on principles of established science; and
- proceeds from hypothesis to experiment, observation and evaluation, and leads to logical conclusions; and
- that are conducted for the purpose of generating new knowledge (including new knowledge in the form of new or improved materials, products, devices, processes or services).
Some activities that do not meet the above criteria can also be claimed if they support core R&D in a direct way.
R&D ICT Case Studies
AusIndustry, in conjunction with the ATO, have released guidance material for the ICT sector that includes case studies relating to the following type of developments:
– new algorithm to analyse large data sets;
– cloud computing in a manufacturing environment;
– software modules for hand consumer devices;
– mobile communications systems.
The details of the R&D case studies can be found on the AusIndustry website. This is not an exhaustive list and other projects that meet the criteria would also be eligible.
Costs that can be claimed as part of the R&D Tax Incentive claim for ICT projects can include:
– Salaries, on-costs and overheads;
– Australian based consultants, contractors and other researchers;
– Depreciation and lease of assets used in R&D.
In some limited cases, R&D activities conducted by the company overseas can be claimed as well; an Advanced Finding application needs to be lodged prior to undertaking the activity and the company needs to demonstrate that it is unable to conduct the activity locally.
Other questions to consider
Is the corporate structure appropriate?
Only incorporated entities are eligible to claim the R&D Tax Incentive. However, if a company is controlled by a non-eligible entity such as a trust, then it will only be able to claim the 40% non-refundable tax offset, even if the turnover is below $20 million. This means that the offset will be carried forward rather than cashed out immediately.
Are any payments made to associates?
For companies claiming the 45% refundable tax offset, payments to associates need to be made during the year of claim to be able to attract the offset. Otherwise, these expenses can be claimed when the payment is made in the later years.
What records are being kept?
Just like for any other tax matter, record keeping is crucial. For R&D Tax claims, it’s not just financial records, such as time sheets and invoices that matter. Applicants must also keep records of technical nature that can prove the nature of R&D work undertaken. These records may include minutes of meetings, trial logs, memos, patent searches, agreements, product specs, etc.
Who retains the IP?
Often the IP ownership can be a contentious issue, and it is recommended that records are maintained that can substantiate that the results of the R&D can be exploited by the applicant. Agreements with service providers and customers should be reviewed to ensure compliance with this requirement.
To apply for the R&D Tax Incentive, companies need to register with AusIndustry within ten months of the end of financial year. For companies with a financial year ending 31 December 2012 need to submit their application by 31 October 2013.
For companies with a financial year ending June 30, 2012, the applications will open July 1, 2013 and close April 30, 2014.