Over the course of another dynamic year, we have seen a number of developments related to the Research and Development Tax Incentive (R&DTI) including finalisation of temporary full expensing and “at risk” rulings. With five months to go until the end of the financial year, it may be worth your company considering these for tax and cash flow planning purposes.
First and foremost, let’s not forget some upcoming R&DTI lodgement deadlines for companies seeking to claim the R&D tax offset.
Upcoming RDTI Lodgement Deadlines
Companies that undertook eligible R&D activities and incurred R&D expenditure in the 30 June 2021 income year have until 30 April 2022 to lodge their R&D application with AusIndustry. Don’t forget to use the AusIndustry online customer portal to prepare and complete your lodgement for which you will need a myGovID. The move to the online customer portal is new for the 2021 income year and does require a number of steps, so it is best to begin the process early this year.
Did your company undertake R&D overseas? If your company intends to claim the overseas R&D expenditure incurred during the 2022 income year (ended 30 June), you have until 30 June 2022 to lodge an overseas finding application with AusIndustry. Although technology companies often do not usually consider lodging overseas findings, those that are unable to undertake their R&D activities in Australia (mainly due to a lack of access to a facility, expertise or equipment) should consider it where relevant as it can provide substantial benefits.
Assets and Temporary Full Expensing
Introduced as an economic stimulus measure in response to Covid-19, the ATO recently finalised the guidance on temporary full expensing (‘TFE’) through Law Companion Ruling LCR 2021/3. Eligible businesses can deduct the full cost of eligible tangible depreciating assets, including second-hand assets, where they are first used or installed ready for taxable use between 7.30pm 6 October 2020 and 30 June 2022 (with a proposal to extend this to 30 June 2023). Noting that there are some exclusions where assets are not eligible for TFE and some exclusions for second-hand assets, for those eligible there is no threshold to the cost of an asset.
This can provide an avenue for companies to include accelerated deductions through the R&DTI, where a company purchases tangible depreciating assets and uses them for an R&D purpose. The relevant tax depreciation amounts are claimable once the asset is held and being used in an eligible R&D activity for a R&D purpose, irrespective of whether that asset is used over the course of undertaking several years of R&D. Other small business entity (SBE) rules also need to be considered; however, it is possible for an SBE to choose to not use the SBE rules for an income year. Tangible depreciating assets such as laptops or servers that are being entirely used in R&D activities should be considered in preparing R&D claims.
“At Risk” Rules
The ATO also finalised Taxation Ruling TR 2021/5, the “at risk” rule. An integrity measure under the R&DTI, if your company is being paid to do the R&D on behalf of another party, regardless of the outcomes of the R&D, this ruling may be applicable. This result is that the company undertaking the R&D may not be eligible to claim a notional R&D deduction for the amount of expenditure subject to the “at risk” rule.
These rules also need to be applied for any JobKeeper amounts received during the 2021 income year and the related salaries of personnel conducting R&D activities. Ruling TD 2021/9 relating to Jobkeeper and the RDTI has also been finalised by the ATO and must be considered in R&D expenditure calculations.
It’s not the R&DTI but let’s talk about the Digital Games Tax Offset
While we have your attention and what we are sure has been welcome news to those in games development, the Australian Government is introducing the digital games tax offset (DGTO), a tax incentive for video game development. As part of Australia’s digital economy strategy, the tax offset will be available from 1 July 2022 and will provide a 30% refundable tax offset for Australian companies (and foreign companies that have a permanent establishment in Australia) where they spend at least $500,000 and up to $20 million annually on qualifying Australian games expenditure. This is a significant refundable tax offset, and it is understood will function similarly to the RDTI.
This is an exciting prospect for video game developers, and we anticipate more information will be released from the federal government in due course.
Are there any Tax Offsets to Attract Investors?
Although often not immediately considered by many technology companies, the Early-Stage Innovation Company (ESIC) status is still available where eligibility can be met by both the company and investors and can provide significant benefits. Benefits are available in both the form of a non-refundable carry forward tax offset and modified capital gains treatment on qualifying shares. As ESIC status results in tax benefits generally startups will consider ESIC and the RDTI at the same time.
If you would like more information or are unsure of your business eligibility to claim the R&D Tax Incentive, ESIC, or the DGTO, check out our site.
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Author – Simon Harcombe; Principal, RSM Research and Development.
Simon is a Principal in RSM’s R&D Tax division providing specialist R&D tax incentive consulting services. With a career spanning over 15 years, Simon has provided tax advice to a range of industries across Australia including technology and biotechnology, from startups to multinational clients.
RSM is a sponsor of Startup News.
