Are you taking advantage of the R&D tax incentives this year?

Naida Beltrame

With the final quarter of the 2021 financial year just around the corner and key Research & Development (R&D) lodgement deadlines quickly approaching, it’s a good time to refresh your understanding of the R&D tax incentive program to support your R&D planning.

R&D Tax Incentive Developments

R&D reforms introduced as part of the 2020-21 Federal Budget will apply for income years commencing on or after 1 July 2021. Most significantly, The Treasury Laws Amendment (A Tax Plan for the COVID-19 Economic Recovery) Act 2020 will change the way R&D offset rates apply.

Companies with less than $20 million turnover will be able to access an R&D premium rate of 18.5%, with effectively a maximum refundable offset of 43.5%.

Companies with turnover of $20 million or more will have a variable R&D premium rate of:

  • 8.5% for expenditure where up to 2% of total company expenditure is R&D expenditure;
  • A higher R&D premium of 16.5% applicable to expenditure greater than 2% of total expenditure.

Other changes include the uniform clawback rule that changes the way adjustments are made in relation to recoupment amounts and feedstock. In addition, the R&D expenditure threshold increased from $100 million to $150 million.

To help your organisation assess its eligibility for Research & Development (R&D) tax incentives, download this checklist and select the responses that most align with your current situation.

Software R&D: Two new legal precedents

Two decisions made by the Administrative Appeals Tribunal (AAT) recently have provided insight into what is expected of software R&D applications and the importance of contemporaneous documentation.

In the matter of Royal Wins Pty Ltd v Innovation and Science Australia[1], the taxpayer’s activities integrating gaming algorithms to develop a gaming platform were not found to be core or supporting R&D activities and documentary evidence failed to demonstrate:

  • How the technical knowledge gap could only be resolved through experimentation, not with existing knowledge;
  • That its hypothesis was defined before the experimental process took place; and
  • The technical gap was resolved through an experimental systematic progression of work.

An attempt to construct a hypothesis subsequent to the activities being undertaken does not meet core R&D activity definitions: it must be a proposition to be either proved or disproved with the conduct of an experiment identified prior to the work being undertaken.

Similarly, in in the matter of CAMALIC Pty Ltd (formerly Effective Governance (Australia) Pty Ltd) v Innovation and Science Australia[2] the taxpayer positioned the output of an improved machine learning algorithm was the new knowledge generated through their experimental activities. The AAT determined the functional improvement of a pre-existing machine learning algorithm did not meet the necessary criteria for new knowledge generation.

Additionally, the claimant was unable to provide contemporaneous documentation to prove the hypothesis was defined prior to the start of the experimentation process or documentation that provided evidence of the systematic progression of work required when performing an eligible experiment.

Both cases highlight the importance of establishing good R&D governance and recordkeeping processes that capture relevant, contemporaneous records supporting R&D claims as part of a company’s overall project management.

Register to learn more about R&D tax incentives

Join me at 1pm AEDT on Thursday 11 March for a one-hour webinar to learn more about the complex criteria and reporting requirements of the Australian Government business incentive program for R&D.

As the 2020 application lodgement deadline on 30 April 2021 draws near, this is an event your business can’t afford to miss.