With all of the publicity that has been circulating recently regarding the R&D Tax Incentive Program, we thought it was time to debunk some of the issues being raised. There have been a lot of R&D tax advisors emerging in recent years, and we’ve seen some practices that should not be endorsed. Some of the myths of the R&D Tax Incentive that have been ‘doing the rounds’ recently are:
Eligibility of your activities is determined by whether your activities meet the eligibility requirements. If your activities involve developing software, it does not mean that they cannot be claimed. In fact, software claims make up a significant portion of where the total funds from the R&D tax incentive are distributed each year.
You still need to closely review the activities that you are seeking to register as not all software development activities meet the eligibility criteria for inclusion. AusIndustry have released guidance regarding the treatment of software R&D, and your advisor should be applying how that guidance is being followed when preparing your claim.
The R&D tax program is administered as a self-assessment regime. It is up to you to determine whether your activities qualify, as well as the size of your claim. Many claimants use advisors to assist in their R&D claim process.
Once you register your eligible activities annually by lodging a form with AusIndustry within 10 months of your financial year end, AusIndustry then issue the claim with a Registration Number. However, this does not mean that your claim is approved. Both AusIndustry and the ATO still have the ability to review your claim, approve it or end your claim being disallowed. Preparing your claim by including detailed information to assist AusIndustry to form the view that your activities qualify, will significantly reduce the risk of audit.
In Australia it is up to you to prove that your R&D activities took place, and how much expenditure you incurred. The onus is on the tax payer to substantiate the claim. To have evidence of what happened, you need supporting documentation.
What documentation you have will vary depending on your circumstances such as the size of the claim, the subject of your activities, and the level of the maturity of your company. However it must be detailed and evidence the activities done that have been included in the claim. There is no one size fits all but you must be able to evidence the claims that you make and provide it to the regulators if they request to see it.
This is a common complaint from privately owned businesses. Put simply, if you intend on distributing every dollar of profit every year, then your franking credits will be less because you will pay less tax by making an R&D tax claim.
However, if you have been in business for a number of years, it is likely that you will have excess franking credits in your account, as you may have accrued them when the corporate tax rate was 30% and it is now 27.5%. This means that R&D tax claims would be one of the few ways to use the difference.
Most businesses in their early stages are not generating profits, which means that the cash flow provided by an R&D tax refund is a major source of funding for R&D.
The key with franking credits is for your R&D tax advisor to work closely with your tax planner, who is usually your accountant. Once your accountant understands how R&D tax fits with tax planning, an R&D tax claim based on eligible R&D activities can help boost the funds you have available to reinvest in your R&D.