15th December, 2020
AusIndustry has released a refreshed version of its R&D Tax Incentive ‘Guide to Interpretation’, clarifying the key issues SMEs face when applying for the incentive.
The Research and Development (R&D) Tax Incentive is a scheme relied upon by countless SMEs working in the science and technology sector. It offers valuable tax offsets on eligible R&D expenditure, and in some instances, pays those offsets out as a cash rebate.
As useful as the incentive can be for early stage tech businesses, many have been dissuaded from applying for it due to its perceived complexity – a lot of which has stemmed from a lack of clear guidance.
The section of tax legislation that deals with the incentive (section 355 of the Income Tax Assessment Act 1997) is filled with tax heavy jargon, and elements of the Government’s interpretation material has often been difficult to adapt to a diverse range of research and development activities.
Now, a new and improved version of AusIndustry’s ‘Guide to Interpretation’ has just been released addressing the key challenges businesses experience when attempting to self-assess the eligibility of their R&D activities.
While the R&D Tax Incentive is a self-assessment process, AusIndustry and the Australian Taxation Office run reviews and audits on claims from time to time. If they decide to disallow a claim, the applicant has the option to take the relevant agency to the Administrative Appeals Tribunal (AAT) and have its case heard there.
As with all matters relating to case law, the way the judges interpret the R&D legislation during these hearings can have major impacts on the way it is viewed for future cases.
The issues is many businesses claiming the incentive aren’t necessarily up to date with the recent R&D court cases and the changes they have brought to the table.
In this refreshed guide, AusIndustry has addressed this knowledge gap amongst applicants by including recent key R&D AAT cases, leveling the playing field for all applicants.
AusIndustry’s upgraded guidance takes the form of an interactive and easy to use document with a tool bar of hyperlinks on the header of each page allowing for seamless navigation.
The structure of the document closely follows the relevant legislation, using clear, succinct terminology written in plain English.
From a design perspective, the guide’s aesthetics have been given a makeover, with higher quality images and useful infographics used throughout.
The tax law outlines a series of criteria that an activity needs to meet in order to be considered eligible for the incentive.
One of those criterion is that the activity follows a systematic journey from hypothesis to experiment, subsequently resulting in observation, evaluation, and ultimately leading to a logical conclusion.
Defining the term ‘hypothesis’ for the purpose of interpreting this section of tax law has been challenging for many applicants over the years.
In the 2016 version of AusIndustry’s guidance, the Government interpreted the term ‘hypothesis’ as being ‘expressed by a causal relationship between variables’. But since the original definition appeared to only be relevant in very specific cases, it has been the source of much contention.
The lack of clarity surrounding the meaning of ‘hypothesis’ made justifying the narrative for R&D projects difficult for a wide range of businesses.
To offer applicants clarity and comfort when attempting to apply this term within their own R&D projects, AusIndustry has used its renewed guidance document to broadcast its updated interpretation of ‘hypothesis’, referring to it as “an idea or proposed explanation for how you could achieve a particular result and why that result may or may not be achievable”.
The legislation also requires for an R&D activity to be conducted for the purpose of generating ‘new knowledge’ in order for it to be deemed eligible.
In its original guidance document, AusIndustry defined ‘new knowledge’ as knowledge that was not publicly available at the time the R&D activities were conducted.
This definition appeared to imply that to meet this requirement, the outcome of the project needed to produce a new understanding of a certain subject – essentially limiting the scope of R&D activities to research based projects and excluding development-seeking initiatives.
The refreshed guide extends the Government’s interpretation of the term ‘new knowledge’ to include knowledge that takes the form of a “new or improved material, product, device, process or service.”
By updating its guidance based on recent case law, clarifying its position on the way it interprets key terms and giving the document itself a face lift, the Government is hoping to instill a new sense of confidence among those looking to access this particular tax incentive.