Easy Guide to R&D Tax Incentives
This article is designed to provide you with a helpful overview of the Research & Development process in Australia, and how you can make the most of existing tax incentives to claim associated expenditures.
Research & Development:
A Quick Overview
Research & Development (R&D) is conducted to develop new or improved materials, products, devices, processes, or services. In Australia, the R&D industry is governed by the Department of Industry, Science, Energy and Resources (AusIndustry) in conjunction with the Australian Taxation Office (ATO).
Most Australian activities and costs that have a direct link to the Research & Development activity can be claimed. Some exceptions do exist, such as accounting and legal fees, interest and core technology purchases.
The Research & Development Tax Incentive Expenditure (RDTI) is claimable on core R&D activities, along with expenditure on supporting activities that are directly related to the R&D project.
The R&D Process
In Australia, R&D projects must be registered with AusIndustry no more than 10 months from the end of the income year. The R&D process is self-assessed, and the following must apply to reach the minimum eligibility criteria:
The R&D process must be registered by a Company.
The core R&D activity must be eligible.
Any supporting activity must directly relate to the core activity.
The expenditure must be eligible; and
The company must provide supporting evidence.
While a company can register for R&D on their own, we recommend working with a specialist firm to ensure the accuracy and compliance of the registration.
The Research and Development Tax Incentive (RDTI)
Companies are entitled to the RDTI for their expenditure on eligible R&D projects and costs, however these incentives differ based on the company’s turnover.
Companies with an annual aggregated group turnover of under AUD $20 million may be eligible to receive a refund of 43.5% on their R&D expenditure.
For companies turning over more than AUD $20 million, the RDTI is capped at 38.5%, and it cannot be paid out. Rather, this RDTI reduces the company’s payable tax.
Eligible Expenditure
As stated above, expenditure on core R&D activities is claimable for the purpose of the RDTI as well as expenditure on supporting activities directly related to the R&D project.
Whilst there are some exceptions as outlined above, almost any Australian activity and cost with a direct link to the R&D activity can be claimed.
The RDTI and Software Development
Despite the RDTI not catering to particular industries, certain sectors or types of work are more likely to meet the minimum eligibility requirements than others. One of these is software development, which is typically likely to satisfy the RDTI because of its methodology.
The systematic progression of work is essential for work in the software development sector to be eligible for the RDTI. Documentation of this progression of work is essential, and may include the activities listed below:
System testing;
Testing the efficiency of algorithms;
Data mapping;
Requirements testing;
Data manipulation, and more
This demonstrates the importance of the process in claiming the RDTI, as opposed to the type of work being undertaken.
Software Development Exclusions
Some activities are excluded from being categorised as core activities in software development work. For example, the development, modification, or customisation of computer software used for internal purposes is an excluded activity.
Getting Started
Do you think your organisation may be entitled to claim eligible RDTI expenditures?
Or, are you looking at securing funding to pursue new or additional R&D activities?
While most activities and costs that have a direct link to the R&D project can be claimed, the process of registering your R&D activity can be complex. So too can securing funding.
We recommend partnering with a trusted professional to streamline the process and ensure you meet the eligibility criteria, as well as making sure any claim you put forth is accurate and compliant.
Our experienced team at TurnKey Management can help you get started in both these areas.
Reach out via the contact form below for an obligation-free meeting to explore your options today.
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