Upcoming R&D tax deadlines

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Research and Development is a tricky area. Image - Stockphoto

With ANZAC day just around the corner, the deadline for lodging company registrations that detail R&D activities from last financial year 2020 (1 July 2019 – 30 June 2020) is now approaching. The final date for lodgement is 30 April 2021.

This also brings the industry closer to the first R&D incentive deadlines for financial year 2021, with lodgements of Advance and Overseas findings due on 30 June 2021. Both of these deadlines should be considered with urgency for companies that wish to claim the R&D tax incentive. 

Generally, you cannot claim any overseas R&D activities without a finding from AusIndustry. Although technology companies do not usually consider overseas findings, those that are unable to undertake their R&D activities in Australia (mainly due to a lack of technical capability or expertise) should consider it where relevant as it can provide substantial benefits.

Not all machine learning is eligible R&D

A few recent R&D tax cases have specifically dealt with software eligibility for R&D tax.  A recent example was “Camalic Pty Ltd and Innovation and Science Australia” (Camalic) which was a case in the Administrative Appeals Tribunal (AAT). 

The case clarified the AAT’s position on training versus building new or bespoke machine learning algorithms or new functionality. The AAT was not satisfied “that the claimed R&D activities were intended to generate a bespoke algorithm or new, previously unknowable, functionality in an existing algorithm.”  Therefore, the AAT decided that eligibility for R&D tax was not met because a core R&D activity had not been undertaken. 

Although specific to the Camalic case, the core R&D activity exclusions relating to management studies and social sciences were also considered to apply due to the nature of the activities undertaken. This should be considered by software and technology companies looking to claim the R&D tax incentive that could be subject to these exclusions.       

Software technology companies should also be aware of software exclusions that are detailed in the R&D tax legislation. The main exclusion is core R&D activities that relate to software development undertaken for the dominant purpose of use for internal administration.

New perks for the program

While the R&D tax eligibility criteria may be changing through new cases and deadlines approaching for lodgements, there are tax changes that may positively impact R&D claims. A temporary measure brought in due to COVID-19 allows entities to fully expense assets purchased after 6 October 2020 until 30 June 2022.

Where tangible depreciating assets are entirely used for a R&D purpose (for example, new laptops being used exclusively by developers for R&D activities), then full value of these assets is likely able to be included in R&D claims.  Companies should be aware of the requirements to substantiate the R&D purpose or use of the relevant tangible depreciating assets.

RSM has significant experience helping software companies to assess R&D tax eligibility, and can assist in discussing the implications of tax changes and recent cases.

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Simon Harcombe, Principal R&D Tax RSM Perth

Author – Simon Harcombe; Principal, RSM Research and Development.

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