R&D

R&D Unwound – Q3 FY23

14
Mar

The R&D Tax Incentive (R&DTI) landscape has been particularly fluid over the last few years. As such, CharterNet Rothsay has launched a quarterly update covering key topics relating to the R&DTI to ensure claimants have the most up-to-date information. This covers areas such as changes to legislation, R&DTI-related news, case studies, and more.

This edition includes: 

  • Increase in R&DTI cashback for non-base rate refundable entities
  • Administrative Appeals Tribunal (AAT) – News
  • Important reminder – 30 April 2023 lodgement deadline
  • Important reminder – Overseas findings are due soon for 30 June Year End Companies

Increase in R&DTI cashback for non-base rate refundable entities

A key interaction has arisen between the new refundable R&DTI rate with the base rate entity legislation. The base rate entity legislation, which applies to companies with aggregated annual turnover less than $50 million AUD, allows certain small to medium-sized entities to access a lower corporate tax rate of 25%, rather than the standard 30%. The new refundable R&DTI rate is an 18.5% premium above a company’s corporate tax rate, for companies with an aggregated annual turnover of less than $20 million AUD.

A common assumption is that a company with an aggregated turnover of less than $20 million AUD, must also be a base rate entity that is eligible for the 25% corporate tax rate. Where this is the case, the 18.5% premium on the 25% corporate tax rate would mean the company would be eligible for an R&DTI offset rate of 43.5%.

However, as mentioned, this may not always be the case. Specifically, if entities with an annual aggregated turnover of less than $20 million AUD do not satisfy the passive income threshold test, they would retain the 30% corporate tax rate as they do not qualify as a “base-rate entity”.

The passive income threshold test is applied annually and is only satisfied if no more than 80% of the company’s assessable income is made up of “base rate entity passive income”. If passive income comprises more than 80% of a company’s assessable income, that company will no longer be classified as a base-rate entity. Broadly, base-rate entity passive income includes:

  • Net capital gains;
  • Rent and royalties;
  • Interest income;
  • Non-share dividends;
  • Gains on qualifying securities;
  • Corporate distributions other than non-portfolio dividends, and franking credits attached to these distributions; and
  • Income from partnerships and trust distributions derived from the above sources.

In the case where a company has an annual aggregated turnover of less than $20 million AUD, but passive income comprises more than 80% of its turnover, it will be classified as a non-base rate entity and will, therefore, have a corporate tax rate of 30%. This means that the maximum benefit from the R&DTI claim will be 48.5% of eligible R&D expenditure, rather than 43.5% for base rate entities. As a result, pre-revenue R&DTI entities may benefit from an increased cash refund position. However, it should be noted that companies with no income will still be classified as base-rate entities.

Administrative Appeals Tribunal (AAT) – News

At the end of 2022, the Federal Government announced that the AAT will cease operations in 2023 after more than 50 years of operation. However, there has still been time for some positive news to emerge from the AAT regarding the matter of the R&DTI claims for Moreton Resources in the case of Moreton Resources Ltd and Industry Innovation and Science Australia Taxation [2022].

Case Summary

In 2006, Moreton proposed to develop an underground coal gasification (UCG) facility near Kingaroy in Queensland. Moreton registered core R&D activities for the R&DTI in 2010. These activities involved the design, development, and operation of an experimental UCG pilot plant (pilot plant) to test the viability of UCG technology. This plant was not in commercial operation, and Moreton was not undertaking any commercial activities as part of their pilot plant.

In March 2010, the pilot plant failed, causing underground water contamination. The Queensland government ordered Moreton to shut the plant down under an Environmental Protection Order (EPO).  In July 2011, the Queensland government amended the order to limit Moreton’s activities at the site to decommissioning, rehabilitation, care, and maintenance. Moreton registered R&D activities in 2012, 2013 and 2014 that related to environmental monitoring, remediation, and project management.

Outcome

In 2019, the Federal Court of Australia sent this matter back to the AAT after Moreton successfully appealed the AAT’s original discussion that none of the claimed activities were eligible R&D activities. On 21 September 2022, the AAT found that, barring three activities, Moreton’s activities in the 2012, 2013, and 2014 years supported the core R&D activities conducted and registered for the R&DTI in 2010.

In handing down its decision, the AAT offered some additional commentary on the meaning of ‘directly related’ in the definition of supporting R&D activities in the legislation. Specifically, it was stated that a close and direct relationship is required between the related supporting R&D activities and the carrying on of a core R&D activity. Furthermore, to determine whether the relationship is satisfactory, a holistic assessment of all the circumstances of a case is required. Importantly, the decision goes on to say that close proximity in time and/or location are not determinative criteria, just simply indicators to be taken into account.

Important reminder – 30 April 2023 lodgement deadline

As many claimants with a 30 June year end would be aware, the traditional deadline for the lodgement of the R&D Application (April 30) is fast approaching. However, as the deadline in 2023 falls on a Sunday, and the following business day is a public holiday in Queensland and the Northern Territory, this deadline has been extended to Tuesday, 2nd of May 2023.

While this represents a small amount of breathing room, claimants should still be seeking to submit their application form as soon as possible to ensure that they are not met with inevitably increasing delays in processing as the deadline approaches. Key steps to ensuring a smooth lodgement include opening discussions with your R&D advisors as soon as practicable and ensuring that you are able to access the R&D customer portal. Instructions on how to log into the portal and begin your R&D claim can be found here.

If you are looking for an R&D advisor to assist with your claim for the FY22 period, please contact Sameer Kassam at sameer.kassam@chartered.net.au.

Important reminder – Overseas findings are due soon for 30 June Year End Companies

A key aspect of the RDTI is that in normal conditions, expenditure can only be claimed to the extent it is incurred in Australia. However, a key exception to this principle is where R&D entities have lodged and received a positive advance overseas finding application. Any application of this nature must be lodged before the end of the financial year in which the R&D activity was conducted (activities conducted for June year-end companies for FY23 must have a finding lodged before 30 June 2023).

To be eligible to apply for an overseas finding, an overseas R&D activity must meet the following requirements:

  • There must be a significant scientific link to one or more core R&D activities conducted (or to be conducted in the future) solely in Australia. To demonstrate the significant scientific link, the R&D entity must be able to show that the Australian core activities are unable to be completed without the overseas activity being conducted;
  • The activity is unable to be conducted in Australia for one of the following reasons:
    • conducting the activity requires access to a facility, expertise, or equipment not available in Australia;
    • conducting the activity in Australia would contravene a law relating to quarantine;
    • conducting the activity requires access to a population (of living things) not available in Australia; or
    • conducting the activity requires access to a geographical or geological feature not available in Australia.

As these factors largely relate to physical access to equipment or people, it is rare that an application for an overseas finding relating to a software R&D project will be successful; and

  • Total expenditure on overseas activities must not exceed total expenditure on Australian activities. This condition applies to expenditure over the life of a project, not just the financial year in which the application is lodged. However, there must be clear evidence (budgets etc.) that any future expenditure overseas will be less than Australian expenditure.

As the end of the financial year is approaching for June year-end companies, now is a good time for R&D entities who believe that they have a case for an overseas finding to contact their R&D advisor and begin the process.

If you are looking for an R&D advisor to assist with an overseas finding for the FY23 period, please contact Sameer Kassam at sameer.kassam@chartered.net.au.