Research and development tax incentive – grouping for aggregated turnover purposes
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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 43.5% refundable tax offset for eligible entities with an aggregated turnover of less than $20 million - unless they are controlled by tax exempt entities
- a 38.5% non-refundable tax offset for all other eligible entities.
The rate of the R&D tax offset is reduced to the company tax rate (currently 30%) for that portion of an entity’s notional R&D deductions that exceeds $100 million for an income year. This change applies to assessments for income years starting on or after 1 July 2014 and before 1 July 2024.
The tax incentive replaces the R&D tax concession and is jointly administered by Innovation Australia (assisted by AusIndustry) and us.
You use the following grouping rules to work out whether your entity is:
- an R&D entity that meets the aggregated turnover threshold to qualify for the refundable tax offset, as this is calculated on a 'group' basis
- controlled by one or more exempt entities, again to see if it qualifies for the refundable tax offset.
The rate of tax offset and whether it is refundable depends primarily on an R&D entity's 'aggregated turnover'.
An R&D entity's aggregated turnover is the sum of the annual turnovers of the R&D entity and any entity with which it is either connected or affiliated, ignoring any dealings between those entities.
Your entity is connected with another entity if either of the following applies:
- either entity controls the other entity
- both entities are controlled by the same third entity.
Broadly, your entity controls another entity if either of the following applies to your entity, its affiliates or both:
- they own or have the right to acquire the ownership of interests in the other entity that carry between them the right to receive at least 40% of any distribution of
- net income of the partnership if the other entity is a partnership
- if the other entity is a company, they own or have the right to acquire the ownership of interests in the company with at least 40% of the voting power in the company.
We can decide that your entity does not control another entity, where your control percentage is at least 40%, but less than 50%. Refer to subsection 328-125(6)External Link of the Income Tax Assessment Act 1997 (ITAA 1997).
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Different rules apply for a discretionary trust.
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For detailed information about the meaning of 'connected with' and 'control', refer to section 328-125External Link of the ITAA 1997.
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If your entity directly controls a second entity, and the second entity controls (whether directly or indirectly) a third entity, then your entity is taken to control the third entity.
There are some exceptions to this rule - refer to subsection 328-125(8)External Link of the ITAA 1997.
An individual or company is an affiliate of your entity if, in relation to the affairs of their business, they act, or could reasonably be expected to act, in either of the following ways:
- in accordance with your entity's directions or wishes
- in concert with your entity.
Two or more entities in partnership are not each other's affiliates just because one partner acts or could reasonably be expected to act in concert with the other in relation to the affairs of the partnership business.
To work out the aggregated turnover of each of the above entities, you would need to consider the following:
- Matthew Pty Ltd
- directly controls (and is therefore connected with) Flinders Pty Ltd and King Pty Ltd
- indirectly controls (and is therefore connected with) Bass Pty Ltd, through both Flinders Pty Ltd and King Pty Ltd.
- Flinders Pty Ltd and King Pty Ltd
- are each controlled by (and are therefore connected with) Matthew Pty Ltd
- are each controlled by the same entity (and are therefore connected with each other)
- each directly control (and are therefore connected with) Bass Pty Ltd.
- Bass Pty Ltd
- is directly controlled by (and is therefore connected with) Flinders Pty Ltd and King Pty Ltd
- is indirectly controlled by (and is therefore connected with) Matthew Pty Ltd.
In summary, to work out the aggregated turnover of any of the four companies, the annual turnover of all four companies must be included in the calculation (excluding any dealings between them).
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Exempt entity control
To work out whether one or more exempt entities control your R&D entity, you must apply the connected entity rules, but adopt 50% as the control percentage, instead of 40%.
For more information about the eligibility of R&D activities, contact AusIndustry by:
For more information about eligible entities and amounts you can claim:
Information about how the grouping rules work to determine which tax offset you may be entitled to under the research and development tax incentive. NAT 73999-10.2011.