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Removal of the R&D tax concession
When considering how the R&D provisions apply to your circumstances, remember that for income years starting on or after 1 July 2011 you no longer use the R&D tax concession. You need to consider the new R&D tax incentive. The concession and the new incentive apply differently. For further information, including fact sheets and a calculator, refer to Research and development tax incentive - home.
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Introduction
We jointly administer the research and development (R&D) tax concession with AusIndustry. It is an Australian Government initiative to increase the amount of R&D being conducted in Australia.
The R&D tax concession allows companies to claim a tax deduction in their income tax return of up to 125% of eligible expenditure on R&D activities. However, as an added incentive, for income years that started after 30 June 2001 and before 30 June 2007, an additional deduction was available for companies who increased their level of R&D expenditure above their average expenditure over the previous three years. This was called the incremental tax concession (175% premium).
For years of income that start after 30 June 2007, the 175% premium has been extended to companies who incur expenditure on behalf of a grouped foreign company that is greater than their average expenditure over the previous three years.
As a result, the 175% premium has been divided into two separate deductions:
- the extra deduction for increase in expenditure on Australian owned R&D (175% Australian premium)
- the extra deduction for increase in expenditure on foreign owned R&D (175% International premium).
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For more information about these deductions, refer to:
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To claim the 175% premium for income years that started after 30 June 2001 and before 30 June 2007, a company must have:
- had a three-year claim history of registering their R&D activities with Innovation Australia
- been eligible to claim the 125% R&D tax concession
- increased their incremental expenditure for the income year above the average level for the previous three years.
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An exception to the three-year claim history applies if a company meets the following conditions:
- it is in a group
- there are other companies in that group that meet the three-year claim history during their group membership period.
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The company, or its company group members, must be eligible to claim deductions in each of the immediate three prior years to have a three-year claim history.
A company can also have a claim history for a particular year of income if it has not registered with Innovation Australia (the Board) for that year but it, or one of its group members, has received a start grant or commercial ready grant for that year of income.
Generally, the company works out the amount that will be subject to the additional 50% deduction by subtracting its average incremental expenditure over the past three years from its current year incremental expenditure. The amount may be adjusted where the expenditure in any of the two previous years (the year before the current year and the year before that) has fallen below 80% of the previous year's expenditure.
Incremental expenditure includes:
- salary expenditure
- contract expenditure to a registered research agency
- other expenditure incurred directly in respect of R&D activities
- eligible feedstock expenditure.
Expenditure that is not R&D expenditure is not incremental expenditure. Items in this excluded category include:
- decline in value of depreciating assets
- core technology expenditure
- interest expenditure
- residual feedstock expenditure.
Incremental expenditure also excludes total group mark up amounts, expenditure on hiring or leasing plant, and expenditure that is 'in substance' for the acquisition of plant and not for the receipt of services. For example, expenditure is in substance for the acquisition of plant where even though it is labelled as for the lease of the item of plant, the lessee has the same economic and commercial rights over the plant as they would had they acquired it.
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For a definition of incremental expenditure, refer to subsection 73P(2) of the ITAA 1936.
For a definition of R&D expenditure, refer to subsection 73B(1) of the ITAA 1936.
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Where there are several members in a group, these calculations are done on a group basis. The grouping rules are the same as those used for the R&D tax offset. Special rules apply to work out the amount each of the companies in the group can claim.
Some companies finish their income year after 30 June. For example, if a company's income year finished on 31 December 2001, they would be eligible to begin claiming for eligible expenditure incurred for R&D activities from 1 January 2002.
However, no matter when their income year ends, they must still have a three-year claim history.
The deduction year for the purposes of the calculations will be a 12-month period ending on the last day of the period for which the company will lodge its tax return. This is the case even where the company's tax return for the income year is for a period greater or less than 12 months.
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All companies must keep detailed records of all eligible expenditure when lodging their claims.
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For more information:
Last Modified: Monday, 20 August 2012