4 easy steps to R&D refunds

‍

‍

The Australian government administers research and development refunds and tax offsets with help from two of its government branches - The Australian taxation office and Department of industry, science, energy and resources.

You may be eligible for a 43.5% refund on certain expenses or a 38.5% non-refundable tax offset if you are a larger business.

Follow these steps if they align with your business plan to ensure you are eligible for your refund.

1. Operate through Pty Ltd company structure.

R&D refunds are only available to 'R&D entities' which must be private companies registered in Australia, although in some cases foreign companies operating in Australia through permanent establishments may also be considered.

2. Spend money on the right activities.

Money must be spent on activities which are considered core R&D activities, which are basically experimental activities systematically conducted in a scientific manner for the purposes of generating new knowledge (ITAA97, s. 355-25).

Activities that support the above are also considered. You can view more on core and supporting R&D activity classifications HERE

3. Spend at least $20,000.

Unless R&D expenses incurred are done so through a registered research service provider the R&D expenses will have to be at least $20,000 in order for the entity to be eligible for the incentive.

4. Register with the Department of Industry, Science, Energy and Resources.

Registration must occur each financial year within 10 months after the end of the tax year and before the company tax return is lodged for the year. You can register HERE

Calculation of your R&D refund

The research and development offset will be calculated differently depending on the size of your company:

Below $20m aggregated turnover = Taxable refund of 43.5% on eligible expenditure

Over $20m of aggregated turnover = Non refundable tax offset of 38.5% to credit against current and future tax bills.

Tax consequences of your R&D refund

Notional deductions considered eligible for the R&D tax incentive will not be allowed to be deducted under section 8-1 of ITAA97. This means that for the purposes of your tax return the eligible expenses will have to be 'added back' therefore increasing taxable net earnings.

Example: If you had $1m of sales, $700k of eligible R&D expenses and $500k of other expenses that would leave your company with a net loss of $200k before R&D was considered.

However if your $700k was approved as eligible expenditure you would get your 43.5% refundable tax offset on it but your company's profitability for tax purposes will also increase by $700k i.e. from negative $200k to positive $500k.

This means that there is a high chance that a percentage of your refund will be snapped up by the current tax liability unless your company is in a heavy loss position.

Need help with your R&D tax incentive?

Contact CTK Accounting HERE

CTK Accounting - Certified Practicing Accountant, Registered tax agent and professional bookkeeping services in Wollongong, North Wollongong, Corrimal and throughout The Illawarra.

‍