R&D Unwound

Written by Ascentium Content Team | 14 March 2024

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

Important reminders for 30 June 2023 year-end companies
Ascentium Australia Spotlight – R&D Financing
Australian Taxation Office – Taxpayer Alert

Important reminders for 30 June 2023 year-end companies

30 April 2024 lodgement deadline

As many claimants with a 30 June income year would be aware, the deadline for the lodgement of their R&D Application (30 April 2024) is fast approaching. Claimants should seek to submit their R&D application form as soon as possible to ensure that they are not met with inevitably increasing delays in processing as the deadline approaches. Key steps to ensuring a smooth lodgement include opening discussions with your R&D advisors as soon as practicable and ensuring that you are able to access the R&D customer portal. Instructions on how to login to the portal and begin your R&D claim can be found here.

R&D Overseas Findings

For entities with a financial year end of 30 June 2024, 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 30 June 2024.

If you would like to explore your eligibility and assistance with the above, please reach out to your Ascentium Australia R&D Advisor or Sameer Kassam at sameer.kassam@incorpadvisory.au.

Ascentium Australia Spotlight – R&D Financing

We understand that in the current financial climate, cash flow is critical for business now more than ever. As such, we wanted to share details about one of the services we offer, being R&D financing. Through one of our lending partners, an R&D financing application allows you to access a portion of your R&D offset prior to the End of Financial Year R&D claim. The R&D financing process can be completed on a quarterly basis, or as needed throughout the year. In many instances, we see clients utilising this to increase their spend on their R&D activities, subsequently increasing their R&D offset whilst accelerating their business and R&D project growth.

If you would like more information on the above and the impact that this could have on your R&D Claim, please reach out to your Ascentium Australia R&D Advisor or Sameer Kassam at sameer.kassam@incorpadvisory.au.

Australian Taxation Office – Taxpayer Alert

Taxpayer Alert 2023/5 Overview

In December 2023, the ATO released a new taxpayer alert to raise awareness regarding a current area of concern. Specifically, TA 2023/5 speaks about the concerns surrounding R&D activities conducted overseas for foreign related entities. As part of this, this tax alert addresses arrangements where a foreign entity sets up an Australian subsidiary, which then conducts R&D activities overseas, for the sole purpose of claiming the R&DTI. In this regard, the ATO’s main concern is that there are instances where an R&D entity purported that the R&D activities were conducted for its own benefit, and rather the activities were actually conducted wholly, or to a significant extent, for a foreign entity that is connected with, or is an affiliate of, the R&D entity.

Areas of Concern to the ATO

Areas of concern to the ATO are characterised by the foreign entity:

Owning pre-existing intellectual property (IP);
Creating an Australian-incorporated entity as an R&D entity;
Licensing the R&D entity to use and develop its existing IP;
Securing primary rights to exploit any developed IP, know-how, or other results from the R&D entity’s overseas activities, upon creation of that IP; and
Providing funds to the R&D entity to conduct its R&D activities.

In the above arrangements, the Australian R&D entity:

May not have a physical presence in Australia;
May have one or more foreign-resident directors that are consistent with that of (or are appointed by) the foreign related entity;
Has an Australian-based resident director who acts in accordance with the directions and wishes of the foreign related entity or its controllers;
Has minimal employees with the technical capability to design, conduct or supervise any R&D activities being conducted;
In the absence of either original and future committed funding from the foreign related entity or refundable tax offset under the R&DTI, lacks the economic capacity to either conduct the R&D activities or commercially exploit the developed IP; and
May have been incorporated shortly before the end of the relevant income year in which the R&DTI is first claimed.

Conclusion

As highlighted above, it is evident that the ATO is concerned that R&D entities may not qualify for an R&D tax offset under Division 355 of the ITAA 1997 for expenditure incurred by them on R&D activities conducted overseas as the R&D activities may not have been conducted for the Australian R&D entity, but rather conducted to a significant extent for the foreign entity (irrespective of an Overseas Finding being obtained).

Alternatively, R&D entities may not qualify for the R&DTI in the following cases:

Where the R&D entity is an Australian resident and the R&D activities are conducted for that R&D entity’s own benefit, but the R&D activities are wholly funded by a connected/affiliated foreign entity with no expectation of repayment (i.e. the funds are not provided via a loan with commercial repayment terms), then the R&D entity might not qualify for an R&D tax offset as the expenditure incurred by them might not be considered ‘at risk’; or
Where the conditions for entitlement to an R&D tax offset are satisfied, if viewed objectively that one or more parties to the arrangement has entered into or carried out the arrangement for the purpose of obtaining either a refundable or non-refundable tax offset, the general anti-avoidance provisions in Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) may apply to cancel that tax offset.

Future trends

In addition to the above taxpayer alert, the ATO announced via its recent findings report on the Top 1,000 income tax and GST assurance programs, that R&D expenditure has, on average, had lower assurance ratings than other areas reviewed. This suggests that the ATO’s focus on R&D expenditure is likely to continue into the future.