Contract expenditure you incur to an RSP
An RSP is an organisation that is registered by Innovation Australia under section 29A of the IR&D Act as an RSP. It has appropriate scientific or technical expertise and resources to perform research and development on behalf of companies.
Expenditure on R&D activities you incur to an RSP, where that RSP isn't an associate of the R&D entity, is not subject to the $20,000 notional deduction threshold (if the services on those activities are in a research field for which the RSP is registered under the IR&D Act). This means that you can claim an R&D tax offset for this type of expenditure, regardless of the amount you have incurred.
While it is possible for an RSP to perform R&D services through an agent the RSP will not be considered to perform such services where it does not choose the agent, supervise performance of the services and take responsibility to the R&D entity for the agent's performance of the services. In such a case the payments would not be expenditure to an RSP and will be subject to the $20,000 notional deduction threshold.
You are not limited to contracting out your R&D activities to an RSP. You may contract out some, or all, of your R&D activities to any person, company or other body, but if you do so, and this other entity is not an RSP, the expenditure incurred will be subject to the $20,000 expenditure threshold (see also the section on Expenditure you incur under contract to other parties).
Some RSPs have been established to carry out activities, including R&D activities that are solely related to particular industries. Where a levy is imposed on industry members as a means of raising the funds to support its various activities, the levy payments incurred by members who are R&D entities may qualify for a notional deduction to the extent that the moneys are expended on R&D activities (as defined in section 355-20External Link of the ITAA 1997) for the members.
It is up to you (in consultation with the RSP) to determine the extent to which your payments have been expended on R&D activities. This may include asking your RSP for a breakdown of R&D and non-R&D activities (and related expenditure) to assist you in your determination.
In some instances, an RSP's R&D activities are also supported by government grants. Because those grants are received by the RSP and not the member companies, Subdivision 355-GExternal Link of the ITAA 1997 would not ordinarily apply to impose an extra income tax on the portion of the recoupment (which includes a grant) that relates to notional deductions claimed by the member.
A key issue for R&D entities who make voluntary contributions or levy payments is the requirement that the R&D activities must be conducted for itself. As R&D activities funded from voluntary contributions or levy payments are invariably contracted to another party, you must show that you:
- bear the financial risk associated with the R&D
- have control over the R&D projects/activities
- effectively own the project results.
Consider whether or not you receive the major benefit from your expenditure to an RSP. Further information on determining who receives the major benefit from the R&D activities is available from Research and development tax incentive - for whom are the R&D activities conducted?
End of attention
In addition, the voluntary contributions or levies may only be notionally deducted under the R&D tax incentive to the extent that they relate to expenditure on eligible R&D activities. Where the voluntary contribution or levy is wholly for R&D activities as defined in the legislation, this may not be an issue. However, levies frequently support other activities, such as marketing, best practice projects and quality assurance. Where this occurs, the eligible expenditure must be apportioned.
Eligible companies may seek a private ruling from us to clarify their tax position. Your RSP may also apply for a class ruling from us to provide certainty for its members.