1. R&D Tax Incentive Community of Practice
4 October 2017
Jointly presented by:

2. Presenters Department of Industry, Innovation & Science
Mark Johnson
Andrew Lewis
Manager - Business R&D Section
Manager - Integrity Assurance
Business Tax & Finance Branch
Business Equity & Incentives Branch
Portfolio Policy and Innovation Strategy Division
AusIndustry – Innovation Programmes Division
Department of the Treasury
Greg Derlacz
Senior Adviser -Small Business Entities and Industry Concessions Unit
Individuals and Indirect Tax Division
Revenue Group
Australian Taxation Office (ATO)
Brett Challans
Director - Innovations Tax
Engagement and Assurance Services
Private Groups & High Wealth Individuals

3. R&D Tax Incentive is a truly joint program
Legislated program
Income Tax Assessment Act 1997 (Cth) (ITAA 97) – Treasury / ATO
Industry Research and Development Act 1986 (Cth) (IR&D Act) – DIIS / AI
Jointly administered by the Department of Industry, Innovation and Science (AusIndustry) and ATO
ISA (AusIndustry) looks at eligibility of activities
ATO looks at eligibility of expenditure
Operates on a self-assessment basis
Entities register activities they determine are likely to be eligible
Entities must keep records to support self-assessment
Provides benefits in the form of R&D tax offsets for first $100m of R&D expenditure
43.5% refundable offset for claimants with up to $20 million turnover
38.5% non-refundable offset for all other eligible entities
Amount of R&D expenditure over $100m is still an offset at the company tax rate
The R&D Tax Incentive is the Australian Government’s flagship program to encourage and assist Australian companies to become more innovative, productive and competitive in the global market place. It does this by
simpler and stronger support
redistributing support to SMEs
providing cash up front to small firms (iv) targeting genuine R&D.
The R&D Tax Incentive is A TAX OFFSET FOR EXPENDITURE ON R&D ACTIVITIES. Companies self-assess their eligibility and claim their expenditure through the taxation system.
Important that companies UNDERSTAND THE PROGRAM REQUIREMENTS AND APPLY THEM WHEN DOING THEIR SELF ASSESSMENT. You and your tax advisor should be familiar with program guidance published by AusIndustry and the ATO as well as recently issued Taxpayer Alerts. The Taxpayer Alerts in particular highlight areas of concern where we are seeing businesses and their advisors improperly applying for the tax incentive where the activities and expenditure claimed don’t match with legislative requirements.

4. The context for the R&D Tax Incentive
Tax Incentives world wide
Most OECD countries have R&D tax incentives
Vary by design, level of support and how much in the ‘mix’ between direct and indirect support, with most countries favouring direct support.
Australian history
R&D Tax Concession first introduced in 1986
Various policy/program changes over its life
R&D Tax Incentive replaced the Concession for income years commencing on or after 1 July 2011
Cap on beneficial rates for R&D expenditure up to $100 million
Rates of assistance reduced by 1.5%

5. Roles in administering the R&D Tax Incentive
Department of Industry, Innovation & Science
Joint policy owner for R&D Tax Incentive, with an innovation and industry policy focus.
AusIndustry delivers the ‘eligible activities’ and ‘R&D registration’ component of the program under delegation of ISA.
Department of Treasury
Joint policy owner for the R&D Tax Incentive, with an innovation and tax system focus.
Innovation & Science Australia (ISA)
Jointly administers the program with the ATO and delegates administration functions to AusIndustry. Has primary responsibility for:
Registration of companies and R&D activities
Eligibility of R&D activities
Australian Taxation Office (ATO)
Jointly administers the program with ISA, has responsibility for:
Eligibility of entities for each type of offset (refundable or non-refundable).
Eligibility of R&D expenditure and whether ‘incurred’.
R&D schedule of the company tax return.

6. There are 3 steps an entity must complete to receive the benefit of the R&D Tax Incentive
Self-assess entity, activity and expenditure eligibility. Ensure records are kept.
Step 2
Registration Form
Register R&D activities with AusIndustry
Step 3
Income tax return
Lodge claim with ATO
Outcome
Receive tax
refund or offset

7. In the context of the R&D Tax Incentive, R&D is defined in terms of activities with very specific meanings
2/08/2018
Common Definition
Legislated Definition
A common understanding of ‘R&D’ often includes all aspects of developing new products and other business offerings regardless of whether there is any technical or scientific uncertainty, or whether experimental resolution is necessary.
The legislative definition of R&D activities relates only to experiments (core activities) in circumstances that meet the specified criteria. It also covers some activities (supporting activities) linked in specified ways to those experiments.
Some activities are excluded from being core R&D activities but may be supporting R&D activities
Market research / sales (including consumer surveys)
Prospecting, exploring or drilling for minerals or petroleum
Management studies or efficiency surveys
Research in social sciences, arts or humanities
Commercial, legal and administrative aspects of patenting and other activities
Complying with statutory requirements or standards
Reproduction of commercial product or process (reverse engineering)
Developing, modifying or customising software for the dominant purpose of internal administration (including the internal administration of business functions)

8. Supporting R&D Activities are activities that are related to the conduct of core R&D activities
Project
Core Activity
Supporting Activity
Supporting activities must:
have a direct, close and relatively immediate relationship to the core R&D activity.
meet the dominant purpose test (for certain activities).
below/refer then to the Interpretation Guide (p.17)
Supporting activities:
Are directly related to a core activity. This means the activity must have a direct, close and relatively immediate relationship with a core activity. Supporting activities may include literature searches, prototype production, producing test equipment, or scaled production runs.
BakingStuff example:
Initial Research into the introduction of microencapsulation technology to a wet mix
Baking of the sample loaves for the transportation tests
Supporting Activities are:
Directly related = direct, close and relatively immediate relationship to a core activity.
Some undertaken for the dominant purpose of supporting core R&D activities
Dominant purpose = ruling, prevailing or most influential purpose
Applies to activities caught under one of the core R&D exclusions and to activities that are directly related to producing goods or services
Refer workshop attendees to page 18 the R&D Tax Incentive: A guide to interpretation for more information about Supporting Activities.

9. Expenditure incurred on R&D activities may be eligible for the R&D Tax Incentive
Expenditure is the ATO’s responsibility
Specific rules for certain expenditure
s Expenditure that cannot be notionally deducted
s Expenditure incurred while not at arm’s length
s Expenditure not at risk
s Reducing deductions to reflect mark-ups within groups
s355-G Clawback of R&D recoupments
s355-H Feedstock adjustments
For more information about expenditure, contact the ATO or refer to their website at
An eligible R&D entity may claim expenditure for eligible R&D activities. These are referred to as 'notional deductions'.
There are specific rules:
In the case of feedstock expenditure, there is an adjustment formula for feedstock by which extra tax is paid on revenue earned from the sale of feedstock used R&D activities. The effect is that if you sell it for more than it cost you to produce it, you will lose all the concessional benefit. If you sell it for less than the cost value, you will be able to retain the benefit on the lost value.
The feedstock adjustment is intended to ‘claw back’ the incentive component of the R&D Tax Offset that is enjoyed on the recouped feedstock expenditure. The intended net outcome is that the R&D incentive is effectively enjoyed on feedstock expenditure to the extent that it is not offset by feedstock revenue. The feedstock adjustment is done by including an amount in assessable income for the income year in which the adjustment is triggered.
The Company must have records that demonstrate the expenditure was incurred; and must be able to link the expenditure to activities.
Companies must have incurred notional deductions for an income year of at least $20,000 to claim a tax offset. However, this threshold does not apply to:
expenditure incurred to a Research Service Provider (RSP), provided the RSP is not an associate; or
monetary contributions made under the CRC program.

10. The Integrity Assurance Framework outlines our approach to maintaining program integrity
The Program covers ALMOST 20 BILLION IN EXPENDITURE annually with
OVER 13,500 CLAIMANTS nationally.
GOVERNMENT HAS MEASURES TO MAINTAIN INTEGRITY OF THE SCHEME
These include:
Guidance and education offerings such as todays information session, our website and all of our printed guidance materials
Awareness raising communications including our R&D Tax Bulletin which I encourage you all to subscribe to
Findings which as I mentioned are determinations about eligible activities
Lastly we also conduct reviews of application to ensure companies are claiming eligible activities

11. AusIndustry and the ATO work together to address compliance concerns
PRIORITY
COMPLIANCE AREAS
Software development
Mining and mining support
Building and construction
Agriculture, forestry & fishing
KEY
BEHAVIOURAL RISKS
Tax agents, consultants, promoters
Ordinary business activities
Fraud
Other emerging behavioural risks
COMPLIANCE
FORMS
Stakeholder engagement: workshops, visits, communication
Level 1: educational letters
Level 2: risk reviews
Level 3: statutory findings
Level 4: litigation/forensic audits
The taxpayer alerts that have been issued jointly by the ATO and AusIndustry have a strong compliance focus and are targeted at companies and advisors that are registering for and claiming the program for activities and expenditure that do not meet the eligibility requirements, and where tax advisors are providing advice that is not consistent with the legislation.

12. Policy rationale and roles
Innovation a driver of long-term economic growth
Encourage R&D that might not otherwise be conducted (‘additionality’) and benefits wider economy (‘spillovers’)
The Treasurer and the Minister for Industry, Innovation and Science have joint policy responsibility for the R&DTI.
Treasury provide advice to the Treasurer and support his interest in the program.
DIIS policy (Business R&D section) advise the Industry Minister.

13. Questions

14. Need more information?
For information on eligible entities and amounts you can claim:
Visit |
Call |
For information on registration and eligibility of R&D activities:
Visit |
Call | |