R&D Unwound – Q4 FY23

The R&D Tax Incentive (R&DTI) landscape has been particularly fluid over the last few years. As such, CharterNet Rothsay aims to provide 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: 

• June Year-End Companies – Associate Payments
• Temporary Full Expensing Provision Ending
• ATO Focus Area – Apportionment Methodologies
• Clinical Trial Determinations
• Important Reminder – June Year-End Companies – R&D Overseas Findings

June Year-End Companies – Associate Payments

There are many types of expenditure that 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 that have been registered with AusIndustry. This includes any expenditure which is incurred by 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. As such, companies with a financial year end of 30 June 2023 must ensure that all associate amounts are physically paid by the end of the year for these amounts to be claimable in their 2023 R&DTI application.

Temporary Full Expensing Provision Ending

Temporary Full Expensing (TFE) was brought in during the COVID-19 period to support businesses and encourage investment in business assets. As part of this provision, a business can claim an immediate deduction for the business portion of the cost of an asset in the year it is first used, or once it is installed and ready for use for a taxable purpose. If the asset is eligible for the TFE measure and the asset was used when undertaking R&D activities, then you may be entitled to an R&D notional deduction for the proportion of the asset that was used for R&D. This allows for a business to realise the R&D benefit upfront, rather than through the year-on-year depreciation amounts.

It is important to note that TFE only applies to assets that an R&D entity first acquires and installs until30 June 2023. However, after 30 June 2023, companies will still be able to depreciate assets under the previous accelerated depreciation rules, such as the instant asset write-off, which will have a temporary one-year increase to a $20,000 threshold. Unfortunately, assets that are depreciated under the instant asset write-off will not be eligible to be claimed under the R&DTI.

ATO Focus Area – Apportionment Methodologies

Over the last few months, the ATO has raised concerns regarding apportionment methodologies used by businesses to claim R&D-related costs, such as rent, electricity, decline in value etc. The appropriate basis for apportionment needs to be determined for each expenditure type based on the type of activity conducted, how the activity is conducted, and the type of expenditure incurred. If the expenditure is incurred over a period of use (e.g. utilities, software subscriptions etc.), an apportionment rate based on the time spent by employees on R&D activities over total company employee hours may be more appropriate than the dollar value of R&D salary over total company salary.

Further to this, expenses such as rates, land taxes, and lease costs, may be best apportioned on a basis that reflects the area of use. It is also important to note that businesses that wish to claim these costs as part of their R&D claim should have on-hand documentation to substantiate the R&D apportionment percentages. Documentation can include R&D diaries, timesheets, logbooks, and progress reports.

Clinical Trial Determinations

As the Industry Research and Development (Clinical Trials) Determination 2022 came into effect on 1 April 2022, we thought we could provide an update on the use and benefit of utilising it. As a refresher, this determination offers certainty that phase 0, I, II III, pre-market pilot stage and/or pre-market pivotal stage clinical trials for unapproved therapeutic goods are core R&D activities.

According to AusIndustry, the determination has received a very positive response from companies and stakeholders as it decreases the application time for certain clinical trials and enhances the ability to engage in cutting-edge R&D with certainty that the activities meet eligibility requirements. Similarly, reduced complexity has streamlined assessments and reduced processing times for program administrators. In one instance, a company that relied on the clinical trials determination for 35 core R&D activities had their application processed in only fifteen minutes!

Important Reminder – June Year-End Companies – R&D Overseas Findings

As the Industry Research and Development (Clinical Trials) Determination 2022 came into effect on 1 April 2022, we thought we could provide an update on the use and benefit of utilising it. As a refresher, this determination offers certainty that phase 0, I, II III, pre-market pilot stage and/or pre-market pivotal stage clinical trials for unapproved therapeutic goods are core R&D activities.

A key aspect of the R&DTI is that under 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 R&D overseas finding application. This type of application allows R&D entities to claim costs for R&D activities conducted overseas, if the activities could not have been conducted in Australia. 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).

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.