The R&D Tax Incentive (R&DTI) landscape has been particularly fluid over the last few years. As such, CharterNet 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.
ATO Focus Area – Associate Payments
There are many types of expenditure which may be claimable under the R&DTI. Broadly speaking, in order to be claimable, expenditure needs to be incurred in relation to the conduct of R&D activities which have been registered with AusIndustry. This includes any expenditure which is incurred to associates.
An associate is any individual or entity that has a majority voting interest in, or that can sufficiently influence, the R&D claimant. This may include directors, shareholders, or family members. Unlike other categories of expenses, amounts incurred to associates must be physically paid in order to be claimed. For example, if you incur $50,000 to an associate for their assistance in conducting R&D activities, the $50,000 can only be claimed under the R&DTI in the financial year where it is physically paid. Any unpaid amounts may be carried forward to be claimed in a future financial year, once they have been physically paid.
Recently, the Australian Taxation Office (ATO) have clarified their position on how they define “paid” in the context of associate R&D expenditure. In the ATO’s view, there are two situations where associate expenditure will be considered to be paid:
- Where money has been transferred from the R&D claimant to the associate entity, evidenced by bank statements; and
- Where a pre-existing liability is offset in the R&D claimant entity in lieu of payment (i.e., a constructive payment).
A number of different approaches used to ‘pay’ associate R&D expenditure, which may have previously been considered acceptable, have now been highlighted by the ATO as areas of concern. These include:
- The creation of a new liability, which is then offset in the R&D claimant entity in lieu of payment; and
- The circular movement of funds between the associate and the R&D claimant (i.e., where the associate lends the R&D claimant the funds to facilitate payment and repeats this process in a cyclical manner until the entire amount is “paid”).
This clarification from the ATO has highlighted the need to treat payments to associates as arm’s length transactions, similar to how any payment to an unrelated third-party would be treated.
AusIndustry Focus Area – Outcome Unknown
In order to be eligible for the R&DTI, you must be able to demonstrate that your Core R&D Activity is an activity from which the outcome cannot be known or determined in advance. Over the last few months, this key aspect of the R&DTI has been a specific focus area of AusIndustry when reviewing R&D Applications.
How do I determine whether the outcome is unknown?
There are two ways to determine whether the outcome for your activity is unknown prior to the testing being conducted. These include the following:
- Assess that a competent professional in your field of research, could not know the outcome, or determine the outcome of the Core R&D Activity. In essence, this means that the competent professional cannot know or determine the outcome of the Core Activity based on any knowledge, information, or experience that is publicly available or reasonably accessible worldwide; and
- That the information on how to achieve your hypothesis is not reasonably accessible or not available. This can include situations where the know-how on how to get from A to B is commercially sensitive and held by a competitor, such as a trade secret. As a result, you then have to conduct your own experiments to figure out how to achieve your hypothesised goal.
Who is a competent professional?
A competent professional can include an individual who:
- Has knowledge or experience in your field/industry;
- Has qualifications or can otherwise act with a reasonable level of skill;
- Keeps up-to-date with developments in that industry; and
- Has access to knowledge and resources around the world. This can include internet searches, relevant industry journals, and access to other competent professionals in the field.
It is also important to note that the competent professional can be an independent third-party, or an internal staff member who meets the above criteria.
How do I prove that the information is not available/accessible?
There are many documents you may already have on hand that show that the knowledge/Intellectual Property (IP) you seek to generate does not exist or that you cannot access the know-how on how to achieve the end results. For example, these documents may consist of the following:
- Reviews of scientific, technical, or professional literature;
- Internet searches;
- Patent searches; and/or
- Advice from an expert or experts.
As with any other aspect of eligibility within the R&DTI, AusIndustry expects that you keep evidence of your enquires into the above.
Overseas Finding Reminder!
For entities with a financial year end of 31 December 2022, the due date for submitting R&D Overseas Finding Applications is approaching. These applications allow companies to claim overseas R&D activities and expenditure in certain circumstances where the R&D activities cannot be conducted within Australia.
The due date for Overseas Finding Applications for the above entities is 31 December 2022. If you would like to explore your eligibility, please reach out to your CharterNet R&D Advisor or Sameer Kassam at email@example.com.