Research and development tax incentive - feedstock adjustments
Research and development tax incentive - feedstock adjustments
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The research and development (R&D) tax incentive provides a targeted tax offset to encourage certain companies (R&D entities) to conduct R&D activities that benefit Australia.
It provides generous benefits for companies performing eligible R&D activities and has the following two core components:
- a 45% refundable tax offset for eligible entities with an aggregated turnover of less than $20 million - unless they are controlled by tax exempt entities
- a 40% non-refundable tax offset for all other eligible entities.
The tax incentive replaces the R&D tax concession and is jointly administered by Innovation Australia (assisted by AusIndustry) and us.
The R&D tax incentive has feedstock rules consistent with the previous R&D tax concession. However, under the incentive, the feedstock adjustment works by increasing your assessable income, rather than by reducing the deductions or offset you can claim.
The feedstock rules effectively adjust the R&D tax incentive benefit you receive for your expenditure on certain 'inputs', reflecting the value of the related 'outputs'.
A feedstock adjustment is an amount you include in your assessable income. It applies when you obtain an R&D tax incentive offset for your feedstock expenditure incurred on R&D activities, where those activities produce either of the following:
- marketable products
- products you apply to your own use.
The feedstock adjustment applies to expenditure on the following:
- goods or materials (feedstock inputs) that are transformed or processed during R&D activities in producing one or more tangible products (feedstock outputs)
- energy that is input directly into that transformation or processing.
The feedstock provisions apply to both core and supporting R&D activities that transform or process feedstock inputs. The provisions are not confined to mass production activities.
Where a feedstock adjustment is triggered, you must include an amount in your assessable income. This may be in the current or in a future income year, depending on when the output is sold or applied.
The feedstock adjustment is intended to recover some or all of the 'incentive' component of the R&D tax incentive offset you receive for your feedstock expenditure - that is, the amount you receive above the general tax deduction that would otherwise be available.
The feedstock adjustment works by including in your assessable income one-third of the lesser of the relevant feedstock expenditure or feedstock revenue.
A feedstock adjustment will not be triggered, unless you have claimed the R&D tax incentive for one or more of the following:
- expenditure on acquiring or producing feedstock inputs (including the decline in value of depreciating assets)
- expenditure on energy inputs directly into the processing or transformation of the feedstock inputs.
The feedstock adjustment is triggered in the year in which you do one of the following:
- sell, or otherwise supply to someone else, the feedstock output, or a marketable product derived from it
- apply that output or product to your own use.
The feedstock adjustment also applies where an affiliate or an entity connected with you supplies or uses the marketable product as if you had done so.
The feedstock adjustment can be triggered during the income year in which you claimed the R&D incentive, or a future income year.
Where the feedstock output is immediately sold or applied, the feedstock revenue will be its market value at that point. Where further expenditures are incurred on the feedstock output between the R&D activity and the point of sale or application to own use, then the feedstock revenue will be a proportion of the value of the marketable product that is sold or applied.
Feedstock revenue is calculated as follows:
Market value of the marketable product
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X
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Cost of producing feedstock output
Cost of producing marketable product
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To calculate the feedstock adjustment to include in your assessable income in the trigger year, first work out the lesser of the following two amounts, then divide that amount by three:
- expenditure in acquiring or producing feedstock inputs and energy inputs for which you have claimed the incentive, to the extent that it is reasonably attributable to the production of the relevant feedstock output (feedstock expenditure)
- feedstock revenue.
Each feedstock output can only lead to one feedstock adjustment.
Where you have triggered a feedstock adjustment for an output you applied to your own use and you later sell it (with or without further transformation), the sale will not trigger another feedstock adjustment.
If you use a feedstock output yourself on a recurring basis, only the first use can trigger the feedstock adjustment.
Where a feedstock output from one R&D activity is used as a feedstock input for a later R&D activity, no feedstock adjustment will apply to it at that stage. The feedstock adjustment will only apply to the feedstock output from the final R&D activity in the chain.
However, there may be a feedstock adjustment for any by-products that are produced as feedstock outputs before the final R&D activity. The relevant feedstock expenditure would be the amount of any feedstock expenditure that is reasonably attributable to the by-product.
If the by-product is used as a feedstock input for a later R&D activity, it will not attract a feedstock adjustment.
Several feedstock inputs can be processed to create a single feedstock output and vice versa.
Where you produce multiple feedstock outputs from an R&D activity, a feedstock adjustment will apply to each of them. The relevant feedstock expenditure for each of those outputs is the amount of feedstock expenditure reasonably attributable to the production of each of them.
This means where your R&D activity produces multiple feedstock outputs that are:
- substantially identical, those outputs can be treated as a single feedstock output for practical purposes
- similar items of variable quality, you can treat the faulty items separately from the successful ones.
Example 1
Landscape Supplies Pty Ltd (Landscape Supplies) trials an experimental granite crushing process to produce marketable granite sand, which they sell for $9,000.
The notional deductions they can claim for the related R&D activities are $22,000, which includes $10,000 in feedstock expenditure.
As the granite sand is sold immediately, the feedstock revenue is $9,000. This means the Landscape Supplies will calculate their feedstock adjustment amount as follows:
1/3 x lesser of $10,000 (feedstock expenditure) or $9,000 (feedstock revenue)
= 1/3 x $9,000
= $3,000
Therefore, in addition to the $9,000 they received from the sale, Landscape Supplies' must include a feedstock adjustment of $3,000 in their assessable income. This will increase the amount of income tax they are liable to pay by $900 - that is, 30% x $3,000.
Example 2
Landscape Supplies needs to conduct further processing of the granite sand to sell it to the market. The feedstock expenditure remains at $10,000; however, at the end of the R&D activities, the granite sand costs $12,000, which increases to $15,000 by the time it is delivered for sale. This granite sand is then sold for $20,000, which is the market value of that marketable product.
The feedstock revenue for the feedstock output is $16,000 - that is:
$20,000
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X
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$12,000
$15,000
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The feedstock adjustment
= 1/3 x lesser of $10,000 (feedstock expenditure) or $16,000 (feedstock revenue)
= $3,333
This will increase the amount of income tax they are liable to pay by $999.90 - that is, 30% x $3,333.
For more information about the eligibility of R&D activities, contact AusIndustry by:
For more information about eligible entities and amounts you can claim:
Last Modified: Tuesday, 4 December 2012
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