In an effort to boost the spirit of innovation in Australian businesses, the government’s Research and Development (R&D) tax incentive offers businesses a way to get back some of their R&D spend. Broad-based without being industry-specific, businesses can use the tax offset to influence on the scope and timing of their R&D expenditure levels. The current tax offset arrangement replaced the previous R&D concession and applies to financial years beginning on or after July 1, 2011.

The incentive has two core components. Businesses carrying out R&D may be eligible for:

• a 45% refundable tax offset (equivalent to a 150% deduction) for eligible entities with an aggregated annual turnover of less than $20 million, provided they are not controlled by income tax exempt entities, or
• a 40% non-refundable tax offset (equivalent to 133% deduction) for all other eligible entities (entities may be able to carry forward unused offset amounts to future income years).

But some business owners may be confused about what the R&D tax incentive entails. The Tax Office believes that uncertainty exists regarding who is eligible for the incentive, whether they should apply for the R&D incentive or R&D concession, and what amount is taken into account when determining the offset.

A few points to remember are:

• Certain businesses may have a substituted accounting period (SAP) to provide financial statements to overseas parent companies with different accounting periods. This allows a business to prepare only one financial statement that can simultaneously be used to prepare both their income tax return as well as report their results to their overseas parent company.
• If your 2011-12 tax return is for a SAP beginning before July 1, 2011, you are unable to claim the R&D tax incentive in your 2011-12 tax return. However, if you have conducted R&D activities before July 1, 2011 and meet the eligibility requirements for the R&D tax concession, you can claim the R&D tax concession for that year.
• Businesses can only obtain the R&D tax incentive for expenditure they incur to an associate when they pay the amount. If you incur an amount of expenditure to an associate and pay the amount in the same year, you can take this amount into account when working out your R&D tax offset in that year. Of course, this is provided you meet all other eligibility requirements for the R&D tax incentive.

To help you with your R&D queries, the Tax Office has compiled a list of answers to the most frequently asked questions.

Can I claim the R&D tax incentive if my income year begins before July 1, 2011 but ends after July 1, 2011?

No. The start date for the R&D tax incentive is determined by when your income year begins, not when it ends. If your income year begins before July 1, 2011, you cannot claim the R&D tax incentive until your first year of income beginning on or after July 1, 2011.

I have an early-balancing December substituted accounting period with an income year from January 1, 2011 to December 31, 2011. Can I claim the R&D tax concession from January 1, 2011 to June 30, 2011 and the R&D tax incentive from July 1, 2011 to December 31, 2011?

No. The R&D tax incentive only applies to income years beginning on or after July 1, 2011. If eligible, you will be able to claim the R&D tax concession for your 2011-12 income year and claim the R&D tax incentive for your 2012-13 income year.

I’m unable to claim the R&D tax incentive in my 2011-12 income tax return as my 2011-12 income year begins before July 1, 2011. How do I claim the R&D tax concession for the 2011-12 income year?

Early balancers are unable to lodge their 2011-12 R&D tax concession claim electronically so you must lodge paper versions of both the ‘Research and development tax concession schedule 2011’ and ‘Company tax return 2011’, clearly marking them ‘2012’ by crossing out 2011 at the top of these forms and writing 2012. Make sure you use paper versions of both – if not, delays may occur.

I have issued a cheque to my associate, but it was not presented by June 30, 2012. Can I claim a notional R&D deduction for this amount?

“Paid” in relation to the R&D tax incentive includes constructive payments – that is a payment made but not yet reflected in the records of the payee. A personal cheque is taken to be paid when it is received by the recipient, provided it is promptly presented and not refused. It is assumed it is presented promptly if it is presented within a few business days. If payment is made by cheque, payment will not be recorded by the Tax Office until the cheque is cleared.

Can a journal entry be considered payment?

Using a journal entry will not, on its own, constitute payment. A journal entry will only constitute payment if there are mutual liabilities between the two parties and if there is a binding agreement between those parties to set off the liabilities.

My business is a subsidiary in a consolidated group for a full income year, and I contract another member of that group to undertake R&D activities for me. Does the amount under this contract need to be paid prior to claiming a notional deduction amount?

No. The claimant company in this scenario would be the head entity of your group. Provided that the amounts were incurred, and meet all other eligibility criteria for the R&D tax incentive, all amounts incurred by a member of a consolidated group are taken to have been incurred by the head company. Therefore, amounts incurred to other subsidiaries within a consolidated group are not required to be paid prior to being claimed under the R&D tax incentive.

As the questions above illustrate, eligibility requirements for the R&D tax incentive are varied and complex. Consult this office to find out if your business is eligible to access the offset and how to go about it.