Research and development tax incentive


9th June, 2021

R&D Tax Incentive: Prepare your application ahead of EOFY

With EOFY around the corner, here’s what startup founders and business owners should keep in mind if they intend to submit a Research & Development Tax Incentive application.

Now that EOFY is only a few weeks away, tech businesses are starting to think about preparing their R&D Tax Incentive applications.

As a quick refresher, the R&D Tax Incentive offers tech businesses that are conducting research and development activities that meet a series of criteria a tax offset up to 43.5 percent on eligible expenses.

For small businesses, this tax offset is refundable, which means that if the company is running at a loss, the offset is paid out in cash.

If the company is profitable, the offset generally results in a reduction in the business’s tax bill.

What many people don’t know is that despite only being able to claim the R&D Tax Incentive after financial year end, there are a number of things that can be done during the financial year itself that can increase their company’s tax benefit and increase the claim’s defensibility.

Watch out for ‘payments to associates’

Generally speaking, the R&D Tax Incentive works on an ‘accounting’ basis (as opposed to a ‘cash’ basis). This means that as long as the business has ‘incurred’ the relevant expense, even if it didn’t actually make the payment during the relevant financial year, it can be included in the company’s R&D claim.

An exception to this rule is when payments are made to ‘associates’ of the applicant entity.

While a complete definition of the term associates can be found in the relevant tax law and the within the ATO’s guidance material, it essentially refers to an entity that owns 50 percent or more of the applicant entity’s shares.

If an R&D expense was incurred to such an entity, it must also be paid during the financial year if it is to be included in the company’s R&D claim.

Of the various expenses that are eligible under the R&D Tax Incentive legislation, salaries and contractor expenses are two of the more common ones that small businesses tend to include in their claims. And often, the business owners are either drawing a salary or being paid as contractors as well.

If the business owner is considered an ‘associate’ of the entity, then it is important that all expenses incurred in engaging their services for the R&D activities are paid before EOFY if they are to be claimed.

Don’t forget supporting documentation

In its ‘Guide to Interpretation’ document for the R&D Tax Incentive, the Government outlines the importance of maintaining ‘contemporaneous’ records of the R&D work being conducted throughout the entire financial year.

READ: R&D Tax Incentive ‘Guide to Interpretation’ gets a makeover

More specifically, the Government expects that the business will create records “before or around” the period during which the R&D activities are conducted and refers to documents that are created post this period as “non-contemporaneous”.

These records can take the form of business case documents, Gantt charts, project plans, and any other document that evidences the work conducted.

Preparing such documents before EOFY will mean that your evidence avoids falling into the ‘non-contemporaneous’ category, thus increasing its robustness.

It goes without saying that keeping records to evidence your R&D work all year round will likely be viewed more favourably than documents prepared at the EOFY. So, if you intend on conducting R&D activities during the 2022 financial year, once 1 July arrives best practice would be to begin preparing such supporting documentation right away.

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Special rules relating to JobKeeper payments

Many business tend to run their own ‘back of the envelope’ calculations prior to EOFY in an attempt to factor their R&D rebate into their cashflow projections.

This time round, it’s important to keep in mind that the ATO has released guidance relating to JobKeeper payments, stating that in most circumstances, salary amounts relating to R&D activities need to be reduced by their corresponding JobKeeper payments to the extent they were paid for R&D work.

The reason for this is due to the ‘expenditure at risk’ rule in the R&D tax legislation, which stipulates that R&D expenses which are expected to be paid for by another party cannot be included in an R&D claim.
So to avoid forecasting more than what you’re actually entitled to, make sure to keep the JobKeeper guidance in mind when calculating your potential R&D cash rebate.

This information is general only and not to be considered as tax advice. For information specific to your situation, MYOB recommends consulting with a specialist advisor. You can start your search for an accountant or bookkeeper near you, here.