What is the Government’s R&D 43.5% Tax offset?
The R&D Tax Incentive Program is part of the Australian government’s drive to push more companies to get involved in research and development efforts by giving them set tax offset rates. The offset for R&D programs used to be 45% for those with group turnover amounting to less than $20 million, while a 40% rate is imposed on companies with a turnover of more than $20 million. These rates apply when the corporate tax rate used to be 30% flat.
Last September 2016, the revised R&D Tax Incentive Program has been approved as part of the Budget Savings (Omnibus) Act 2016, reducing the offset rate by 1.5% for eligible entities. The 1.5% offset reduction means companies with a turnover of more than $20 million will now get 43.5% tax offset, while companies with a turnover below the said amount will enjoy a 38.5% offset rate. This new rate will allow the government to save billions of dollars in budget savings.
The new rate applies to income year beginning on or after July 2016.
Only entities delving in R&D are eligible for offset claims. A business is considered a valid R&D entity if it satisfies any of the following conditions:
- It’s incorporated under Australian laws
- The company is incorporated under foreign laws but resides in Australia, paying income tax and other mandatory charges
- It’s incorporated under foreign laws but said foreign country implements a double tax agreement with Australia and the company is operating as a ‘permanent establishment’ as defined in the said agreement.
Those who are not eligible for R&D tax offset are the following:
- Corporate limited partnerships
- Entity wholly exempted from paying income taxes
- A trust that’s not a public trading trust with matching corporate trustee
There are also special conditions needed to be factored in if the R&D entity is part of a consolidated group or is in partnership with another entity for R&D purposes. The ATO website details the eligibility for these special cases.
How to claim the tax offset?
Companies who want to avail this incentive should undergo self-assessment procedures. You should check if the activities you’re doing can be considered as R&D undertakings and then register it in AusIndustry. The amount of tax offset the business expects to claim should also be computed by the company.
The ATO has listed 6 steps to guide you in doing self-assessment and in lodging claims:
1) Check your company’s qualifications.
Verify if your company can be considered an R&D entity and has been carrying out valid R&D activities. If you pass these initial requirements, register your activities with AusIndustry and work out the qualification of your notional deductions. You can’t file for R&D tax offset if you fail to positively answer all of these preliminary conditions.
2) Determine if your company is working with or under exempt entities.
The exempt entity’s presence affects the type of tax offset you’re eligible to claim.
3) Compute your annual turnover.
4) Determine the tax offset you can apply for depending on the results of your assessment from the previous steps.
5) Calculate your expected tax offset.
If your computed turnover turns out to be less than $20 million, you can apply the 43.5% refundable offset rate. Otherwise, apply the 38.5% non-refundable rate.
There are examples provided by the ATO which you can use as a guide in your computation.
6) Lodge your claim.
Make sure to keep accurate records of your undertakings not only because this is considered good practice in conducting R&D activities but also for instances wherein the ATO may require you to submit evidences of your claim as part of their compliance procedure. If the whole process is too much of a trouble, you can get help from R&D consultants in compiling necessary documents and making filing for claims easier.
Claims should be lodged within 10 months after the company’s income year ends. For example, if your company’s income period falls on July 2015 to June 2016, you must register your application by April 2017. Similarly, companies with income period of January 2016 to December 2016 should lodge their claims by October 2017. Lodging for incentive claims is an annual activity and should be considered by your company in planning its annual corporate schedule.
What happens next?
After registering your claims in AusIndustry, they’ll provide a registration number which you need to include upon filing the income tax return of your company. You then need to supply the necessary information for your R&D Tax Incentive Schedule.