Guide to the R & D Tax Concession - Part C
C4 R & D tax offset for small companies (refundable tax offset)
| This document has been archived. It is current only to 30 June 2011. |
Disclaimer
ATO position
The Tax Office is responsible for providing you with this Guide to the R & D tax concession. The Guide offers a commentary on all expenditure issues, taxation rulings, the tax offset, the incremental concession, on own behalf issues, Tax Office record keeping requirements, self assessment and clawback issues. The paragraph below outlines the current status of this Guide.
The information contained in this Guide, as it relates to the matters listed above, consists of guidance, as referred to in Law Administration Practice Statement PS LA 2008/3 Provision of advice and guidance by the Tax Office. That is, the Guide contains information of a general nature about the operation of the law. As such, it is not binding on the Commissioner of Taxation. If you want to be certain about how this guidance applies to your individual circumstances, you should ask for a private ruling or, if applicable, obtain administratively binding advice from the Commissioner. However, if you follow information contained in this written guidance and, in doing so, make an honest mistake, you will be protected from any penalty on underpaid tax. Furthermore, if something in the written guidance is misleading or incorrect and you make an honest mistake as a result, you will be protected from any penalty and any interest on underpaid tax. You will, however, remain liable for the primary tax payable.
Copyright
Commonwealth of Australia 2009
This work is copyright. Apart from any use as permitted under the Copyright Act 1968, no part may be reproduced by any process without prior written permission from the Commonwealth. Requests and inquiries concerning reproduction and rights should be addressed to the Commonwealth Copyright Administration, Attorney-General's Department, 3-5 National Circuit, Barton ACT 2600 or posted at http://www.ag.gov.au/cca
The Government has enhanced the R & D tax concession by providing small companies, particularly those in tax loss, with a refundable tax offset, equivalent to the value of the R & D tax concession. The Government recognises the importance of supporting innovative, small companies, particularly those in tax loss who cannot gain immediate benefit from the R & D tax concession when claimed as a deduction.
This initiative will foster the growth of these companies by providing them with timely support and can increase the cash flow of such companies when they most need it - during their initial growth phase. Companies that currently carry forward their R & D-related tax losses can now realise these losses as a cash equivalent payment once their income tax return for the relevant year is processed.
Key features of the R & D tax offset are as follows:
- the offset is available to companies with an annual turnover of less than $5 million who spend up to $2 million (or $1 million for years of income starting before 1 July 2009) per year on R & D (both of these tests are subject to grouping rules)
- the offset is paid at the rate of 30 cents for each dollar of deduction that would have otherwise been claimable. Where expenditure is eligible for 125% deduction, this is equivalent to a benefit of 37.5 cents per dollar of eligible R & D expenditure, and 52.5 cents per dollar of any expenditure eligible for the 175% premium concession
- the refund will be offset against any other Commonwealth tax liabilities owed by the company, including GST, FBT and withholding taxes
- a refund of the Offset does not generate a franking debit in the company's franking account (see Part C-13 - Offset and franking accounts).
For further information see: ATO Interpretative Decision ATO ID 2004/345 Research and development Tax Offset and Franking Accounts: companies in loss Does a refund of a research and development tax offset generate a franking debit under section 205-30 of the Income Tax Assessment Act 1997 (ITAA 1997)? |
ATO Interpretative Decision ATO ID 2004/346 Research and development Tax Offset and Franking Accounts: taxable companies Does a refund of a research and development tax offset generate a franking debit under section 205-30 of the Income Tax Assessment Act 1997 (ITAA 1997)? |
C4-1 Timing
Companies can claim the R & D tax offset for expenditure incurred in their first income year commencing after 30 June 2001, and in later income years. The Tax Office administers the R & D tax offset and makes payment after the company lodges its annual income tax return.
An eligible company can choose the R & D tax offset either in its return of income, or by notice in writing to the Commissioner. If choosing the second option, an eligible company may make the choice within the following timeframes:
- if the relevant year of income commenced prior to 21 June 2007, then the choice must be made by notice in writing given to the Commissioner before the end of the period that the Commissioner could amend an assessment made on 21 June 2007; or
- if the relevant year of income commenced on or after 21 June 2007, then the choice must be made by notice in writing given to the Commissioner before the end of the period that the Commissioner could amend an assessment for the company for the tax offset year.
Information on where to send the notice and what should be included is available on the Tax Office website at www.ato.gov.au .
Generally, the period in which the Commissioner can amend an assessment of a company which is an STS taxpayer is two years after the day on which notice of the assessment is given to the company. For other companies the period of review is generally four years after the day on which notice of the assessment was given.
Note: Applicants must be registered with Innovation Australia (the Board) before a claim is made by the company in its income tax return lodged with the Commissioner of Taxation.
C4-2 Eligibility
To be eligible for the R & D tax offset, a company must comply with each of the following:
- the aggregate R & D amount as defined under subsection 73B(1) of the ITAA 1936 for the year must exceed $20,000
- for years of income commencing after 21 June 2007, either the aggregate R & D amount must exceed $20,000, or the company must have incurred an amount of contracted expenditure as defined under subsection 73B(1) of the ITAA 1936 (see Part C-2 , page X - Contracted Expenditure)
- for years of income commencing on or after 1 July 2009, the aggregate R & D amount of the company and of persons with which it is grouped must not exceed $2 million
- for years of income beginning between 1 June 2001 and 30 June 2009, the aggregate R & D amount of the company and of persons with which it is grouped must not exceed $1 million
- the R & D group turnover must be less than $5 million
- the level of exempt entity (see below for the meaning of 'exempt entity') ownership of the company must be below 25%, such that where:
- an exempt entity;
- the affiliates of an exempt entity;
- an exempt entity together with its affiliates;
- 2 or more exempt entities; or
- 2 or more exempt entities together with their affiliates;
own or have the right to acquire at least 25% of the voting power, or 25% of the rights to distributions from the company, this eligibility requirement will not be met
- the amounts on which the calculation of the offset is based must, but for the choice to claim the offset, be otherwise deductible
ITAA 1936 section 73J
Exempt Entity
The definition of 'exempt entity' has recently been amended. The new definition will affect some companies' eligibility for the R & D tax offset. Transitional provisions ensure that the amendment does not apply retrospectively to deny tax offsets already claimed by R & D companies. R & D companies will not be affected by the new definition of 'exempt entity' until the first income year starting after 21 June 2007.
- for income years starting prior to 21 June 2007, the definition of 'exempt entity' generally includes those entities exempt from income tax because of Division 50 of the ITAA 1997
- for income years starting on or after 21 June 2007, the definition of 'exempt entity' is defined in subsection 995-1 of the ITAA 1997, and generally includes entities whose income is exempt from income tax under any Commonwealth law, and all untaxable Commonwealth entities
ITAA 1997 subsection 995-1
Note: For years of income commencing before 30 June 2007, an eligible company can only choose a tax offset instead of a deduction under sections 73B , 73BA , 73BH or 73Y of the ITAA 1936 for a year of income and not for other deductions available under the R & D tax concession. For example, an eligible company cannot choose a tax offset for any balancing adjustment deduction that is available under section 73BF of the ITAA 1936.
For years of income commencing after 30 June 2007, an eligible company can only choose a tax offset instead of a deduction under sections 73B (except subsection 73B(14C) ), 73BA , 73BH or 73QA for that year. For example, an eligible company cannot choose a tax offset instead of a deduction for expenditure on foreign owned R & D available under subsection 73B(14C) , or instead of the extra deduction for increase in expenditure on foreign owned R & D available under section 73QB of the ITAA 1936.
ITAA 1936 subsection 73I(1) For further information see: ATO Interpretative Decision ATO ID 2003/660 Research and development Tax Offset: Exempt entities and affiliates with at least 25% of the voting rights or rights to distribution of income or capital in the company. Is a company eligible under section 73J of the Income Tax Assessment Act 1936 (ITAA 1936) to choose a research and development tax offset when two or more exempt entities, together with their affiliates, at any time during the tax offset year, own interests in the company carrying between them at least 25% of voting rights or rights to a distribution of income or capital? |
Where an exempt entity is the registered (legal) owner of interests in the company which carry the right to greater than 25% of the voting power and/or right to receive greater than 25% of distributions by the company, but the beneficial owner of those shares is a tax-paying entity, the exempt entity rule may not be breached.
Where a separate beneficial owner of the interests can be identified, and it is that owner who enjoys all of the rights carried by those interests to the exclusion of the legal owner, then subsection 73J(2) of the ITAA 1936 will not operate to exclude a company from eligibility for the R & D Tax Offset on the basis of the interests held by the legal owner.
For example, where:
- an exempt entity holds shares in the company on trust for an individual who is not an exempt entity; and
- under the terms of the trust, the individual is beneficially entitled to all the income and capital distributions by the company and entitled to have the voting power in the company exercised as they direct; and
- the exempt entity, although the legal owner of the shares, cannot enjoy the benefits of them in any way, or dispose of them for its own benefit.
Then the company will not be prevented by subsection 73J(2) of the ITAA 1936 from choosing the R & D Tax Offset if it is otherwise eligible to do so.
An entity will not legally own interests for the purposes of subsection 73J(2) of the ITAA 1936, where the entity has not met the Corporations Act 2001 requirements for membership of a company.
For further information see: ATO Interpretative Decision ATO ID 2003/895 Research and development tax offset: Exempt entity registered holder of shares but tax paying entity beneficial owner. Is an eligible company able to choose the research and development tax offset under section 73I of the Income Tax Assessment Act 1936 (ITAA 1936), where an exempt entity is the registered holder of all the shares in the company, but those shares are beneficially owned by an individual who is not an exempt entity?
ATO Interpretative Decision ATO ID 2005/23 Research and development: Legal ownership of interests in a company by an exempt entity. Does an exempt entity legally own interests in a company within the meaning of subsection 73J(2) of the Income Tax Assessment Act 1936 (ITAA 1936), where the Corporations Act 2001 requirements for membership of a company have not been met? |
In order for an eligible company to claim the R & D tax offset, a company must choose to do so in its income tax return for that year, or by notice in writing to the Commissioner within the relevant amendment timeframes. Once a company has so chosen, the full amount of its entitlements under the R & D provisions will be granted as a refundable tax offset. If a company makes the choice for the refundable tax offset there is no entitlement to R & D deductions in that year.
ITAA 1936 section 73I
C4-3 Definition of the R & D group turnover for purpose of the R & D tax offset
The definition of R & D group turnover for the R & D tax offset draws on the definition of turnover used for the former simplified tax system (STS) for small companies. Both of these utilise the concept of 'value of the supplies', a term defined in the GST Act. A company's R & D group turnover for an income year is the sum of the value of supplies made in the ordinary course of business:
- in the year of income by the company, and
- by other persons (including non-resident companies) grouped with the company for that year of income.
This sum is then reduced by:
- the value of the supplies the company made in the year of income to persons grouped with it while they were grouped with it, and
- the value of the supplies persons grouped with the company made in the year of income to the company while the company was grouped with them, and
- the value of the supplies another person made in the year of income to a third person while the other person and the third person were grouped with the company.
The value of the supplies a taxpayer makes during an income year is the sum of the values of the supplies in relation to taxable supplies and for other supplies the prices of the supplies, the taxpayer made during the course of the year in the ordinary course of carrying on a business or in the course of carrying on R & D activities, and is calculated exclusive of GST payable on supplies.
Section 9-75 of the GST Act explains the method of working out the value of a supply. Basically it depends upon whether or not the supply is a taxable supply.
If the supply is a taxable supply (that is, one on which GST is payable), its value is worked out as 10/11 th of the price of the supply (this effectively excludes the GST amount from the calculation).
If the supply is not a taxable supply, the price of all the non-taxable supplies made during the year in the ordinary course of carrying on a business is added to the value of all taxable supplies. The price of the supply is generally the amount of money a person pays for the supply. Supplies that are not taxable include those that are GST-free and input taxed for the purposes of the GST Act.
Note : there are special rules relating to gambling supplies in the GST Act.
Exclusions from R & D group turnover
R & D group turnover does not include:
- a supply that constitutes an insurance recovery;
- things that do not constitute the making of a supply; and
- where the R & D group member is an individual, income which that individual receives from passive investments or as salary or wages (i.e. amounts which do not arise in the ordinary course of business or in the course of carrying on research and development activities).
Substituted Accounting Periods
The 'R & D group turnover' is calculated for the 'tax offset year' under section 73K of the ITAA 1936. The 'tax offset year' is the year of income for which the company wants to determine its eligibility for the R & D Tax Offset. Therefore the 'R & D group turnover' is calculated for the 12-month period representing the year of income of the eligible company.
Where a company is lodging a return of income for a period of greater or less than 12 months because of a transitional period, 'R & D group turnover' must be calculated for the 12-month period ending on the last day of the period for which the company is lodging its return of income. For example, if the return of income of the company for the 2003-04 income year is for the period from 1 July 2003 to 31 December 2003, the company must work out its 'R & D group turnover' for the 12-month period 1 January 2003 to 31 December 2003.
Where supplies are made for a period spanning more than one income year, or consideration is payable over more than one income year.
Where supplies are made for a period spanning more than one income year, the amount included in the calculation of the company's 'R & D group turnover' for the income year, is the value of the supplies made in the relevant period. That is, the amount included in 'R & D group turnover' is the value of that part of the supplies actually made within the relevant income year, and not the total consideration pre-paid in the income year. The company's 'R & D group turnover' will include this amount even where the entity has not yet been paid for the supplies.
To determine what part of the total consideration, or the total market value of all supplies, represents the value of that part of the supplies actually made in the relevant income year, an apportionment may be made based on sensible commercial grounds and, once made, only that part of the consideration (or market value) representing the value of supplies actually provided in the relevant year of income will be included in 'R & D group turnover' for that income year (see the example in paragraph 40 of Taxation Ruling TR 93/12 ).
Loans
Subsection 73K(3) of the ITAA 1936 provides that, when working out the value of supplies made by a person for the purposes of calculating 'R & D group turnover', to the extent that the supply is a loan, you disregard any repayment of principal, and any obligation to repay principal.
However, you must include in your 'R & D group turnover' all amounts of interest received or receivable by the company in the relevant income year on all outstanding loans, regardless of when those loans were written. That is, the 'value of supplies' made by the company includes the interest accrued on all outstanding loans for the relevant year, irrespective of when the loans were entered into.
Supplies made by a trustee company grouped with the eligible company.
Where the relevant person for the purposes of section 73L of the ITAA 1936, controls the company in its capacity as trustee, the 'value of supplies' made by that person is based only on those supplies made as trustee of the relevant trust estate, and not, for example, on supplies made by that person in some other capacity.
For further information see: ATO Interpretative Decision ATO ID 2003/343 Research and development tax offset: 'R & D group turnover' - licence fees payable over more than one year of income. What amount is included by the company in calculating the amount of R & D group turnover for the purposes of determining the company's entitlement to the research and development (R & D) tax offset under section 73J of the Income Tax Assessment Act 1936 (ITAA 1936), where a licence fee under an agreement is payable over four years of income? |
ATO Interpretative Decision ATO ID 2003/989 Research and development tax offset: Eligibility where a group member company has a substituted accounting period. If an eligible company is grouped with another company that has a different accounting period, is it the eligible company's tax offset year that is used when determining the group aggregate research and development amount and the R & D group turnover amount, and not the year of income of the group member? |
ATO Interpretative Decision ATO ID 2004/701 Research and development: 'R & D group turnover' - value of supplies made in the year of income - contract for provision of services. What amounts are included in the 'value of supplies' under paragraph 73K(1)(b) of the definition of R & D group turnover, in the Income Tax Assessment Act 1936 (ITAA 1936), for a year of income, for a company that has entered into an agreement for the provision of services over a number of years of income, where no precise portion of the consideration expressly relates to services provided in a specific year of income? |
ATO Interpretative Decision ATO ID 2004/702 Research and development: 'R & D group turnover' - value of supplies made in the year of income - interest payments. In calculating the value of supplies under paragraph 73K(1)(b) of the definition of R & D group turnover, in the Income Tax Assessment Act 1936 (ITAA 1936), for a company that conducts business as a lender, are amounts of interest in respect of loans that were settled in a prior year of income, as well as interest in respect of loans that were settled in the current year of income, included? |
ATO Interpretative Decision ATO ID 2004/703 Research and development: 'R & D group turnover' - supplies made in the course of carrying on business. In calculating the value of supplies under paragraph 73K(1)(b) of the Income Tax Assessment Act 1936 (ITAA 1936) of the definition of R & D group turnover, for a company that has carried on a business of acting as a lender in providing mortgage loans, is the amount received for the assignment of its loan portfolio a supply made in the course of carrying on a business in the terms of the definition of value of supplies in sub-section 73H(2) of the ITAA 1936? |
ATO Interpretative Decision ATO ID 2005/86 Research and development tax offset: 'R & D group turnover' where ownership of interests in an eligible company by an entity in capacity as trustee. Where an eligible company is controlled by a person in a capacity as trustee, is the 'value of supplies' made by this person, as defined by subsection 73H(2) of the Income Tax Assessment Act 1936 (ITAA 1936), based only on those supplies made by it as trustee? |
C4-4 Grouping rules for the R & D tax offset
The threshold percentage for control for the offset is set at greater than 50%.
A person's turnover will be grouped with that of another person at a time in a year if, at that time:
- either person controls the other
- both entities are controlled by the same third person (directly or indirectly), or
- the entities are affiliates of each other.
The grouping rules are designed to ensure that companies that are part of a large group do not gain access to the tax offset.
Note : Where a group of 100% owned entities become members of a consolidated group, the head company will need to consider whether there are any 'less than 100% owned' entities with which it is required to be grouped for the purposes of the R & D grouping provisions.
C4.4.1 Who is an affiliate?
A person is your 'affiliate' if, in relation to the affairs of their business, or their research and development expenditure, they act, or could reasonably be expected to act:
- in accordance with your directions or wishes, or
- in concert with you.
Two or more persons in partnership are not each other's affiliates merely 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.
ITAA 1936 section 73M
For more information on the types of circumstances in which persons are considered by the ATO to be affiliates, refer also to Taxation Ruling TR 2002/6 : Income tax: simplified tax system: eligibility - grouping rules (*STS affiliate, control of non fixed trusts).
C4.4.2 Control of a company
Broadly, these rules operate so that a company is considered to control another company if:
- it legally or beneficially owns interests in the other company that carry the right to receive more than 50% of any distribution of capital or income, or
- it owns interests in the other company that carry the right to exercise more than 50% of the voting power in that other company.
ITAA 1936 section 73L
C4.4.3 Control of other entities
Special control rules apply where the controlled entity is a non-fixed trust, or a partnership, and if the controlling entity is a partnership.
To provide an indication of their breadth, certain of these rules, including the indirect control rule, are illustrated in the examples below in the section on indirect control of a person.
C4.4.4 Indirect control of a person
The control tests are designed to look through business structures that include interposed entities. However, only controlled persons are taken into account in tracing interests. The indirect control rule has been adopted to avoid complex tracing requirements for a person. If a person directly controls a second person, and the second person controls (whether directly or indirectly) a third person, the first person is also taken to control the third person.
ITAA 1936 section 73L
Example 4.1: Company group (percentages show voting power)
Mathew P/L controls Flinders P/L and King P/L. These two subsidiary companies would be grouped together to work out the R & D group turnover of Mathew P/L, as they are both controlled by it. Bass P/L will also be grouped for this purpose with Mathew P/L (indirect control by Mathew P/L through Flinders P/L).
To work out the R & D group turnover of either Flinders P/L or King P/L these companies will be grouped with Mathew P/L (the company that controls them both), and with each other (both are controlled by the same third entity - Mathew P/L). Bass P/L would also be grouped with both (Bass is directly controlled by Flinders and both it and King are controlled by the same third entity - Mathew P/L).
To work out its R & D group turnover Bass P/L would also be grouped with Flinders P/L and King P/L (with the former because it is controlled directly by that entity, and with the latter, because it and King P/L are both controlled by the same third entity - Mathew P/L, even though Bass P/L is only indirectly controlled by Mathew P/L). Bass P/L will also be grouped for this purpose with Mathew P/L (indirect control by Mathew P/L through Flinders P/L).
In summary, to work out the R & D group turnover of any of the four companies in this group, all the other three companies will be grouped with it.
Example 4.2: Small company group including a non-fixed trust
James controls Norfolk P/L and also the trustee of the Japines Non-fixed trust (and hence this trust). To work out the R & D group turnover of either Norfolk P/L or the trust both are grouped together (both are controlled by the same third entity, James). Pines P/L would also be grouped with Norfolk P/L, and vice versa (Pines is controlled by Norfolk).
Pines P/L is also indirectly controlled by James, through his control of Norfolk P/L. Therefore, to work out the R & D group turnover of either Pines P/L or the trust, both will be grouped together (both are also controlled by the same third entity, James).
In summary, to work out the R & D group turnover of any of the two companies or the trust in this group, all three of these entities are grouped together. Where James has no turnover in his own right, then obviously there is no need to group him with these entities.
C4-5 Grouped expenditure
One of the tests of eligibility for the R & D tax offset is that the company's aggregate research and development amount must be more than $20,000 but not more currently on a group basis than $2,000,000 (see C4-2 Eligibility below), or, for years of income commencing after 21 June 2007, that the company has incurred an amount of contracted expenditure as defined under subsection 73B(1) , for the year of income. The calculation of the group aggregate research and development amount includes all aggregate research and development amounts of the company seeking to claim the tax offset for that income year and other entities grouped with it in that year of income.
The group 'aggregate research and development amount' must be calculated for the 'tax offset year'. The 'tax offset year' is the year of income for which the company wants to determine its eligibility for the R & D Tax Offset. Therefore the group 'aggregate research and development amount' is calculated for the 12-month period representing the year of income of the eligible company.
Where a company is lodging a return of income for a period of greater or less than 12 months because of a transitional period, their group 'aggregate research and development amount' must be calculated for the 12-month period ending on the last day of the period for which the company is lodging its return of income. For example, if the return of income of the company for the 2003-04 income year is for the period from 1 July 2003 to 31 December 2003, the company must work out its group 'aggregate research and development amount' for the 12-month period 1 January 2003 to 31 December 2003.
For further information see: ATO Interpretative Decision ATO ID 2003/989 Research and development tax offset: eligibility where a group member company has a substituted accounting period. If an eligible company is grouped with another company that has a different accounting period, is it the eligible company's tax offset year that is used when determining the group aggregate research and development amount and the R & D group turnover amount, and not the year of income of the group member? |
C4-6 Calculations
The following table sets out the tax positions of two companies, and the impact of eligibility for the offset on their circumstances. Each company is assumed to be in tax-loss, and has eligible R & D expenses of $100,000 and is not eligible to receive the 175% premium R & D tax concession in this particular income year:
Company A | Company B | |||||
Company tax return label | Offset not chosen (a) | Offset chosen (b) | Offset not chosen (a) | Offset chosen (b) | ||
Item 6 Label S | Total Income | $100,000 | $100,000 | $0 | $0 | |
Item 6 Expenses (various) |
less expenses - R & D expenses - Other expenses |
- $100,000 - $50,000 |
- $100,000 - $50,000 |
- $100,000 - $50,000 |
- $100,000 - $50,000 | |
Item 6 Label T | Total profit or loss | ($50,000) | ($50,000) | ($150,000) | ($150,000) | |
Item 7 Label D |
add Accounting expenditure in item 6 subject to R & D tax concession | $100,000 | $100,000 | $100,000 | $100,000 | |
Item 7 - 'Add' | Subtotal | $50,000 | $50,000 | ($50,000) | ($50,000) | |
Item 7 Label L |
less R & D tax concession - not including Label M | -$125,000 | -$125,000 | -$125,000 | -$125,000 | |
Item 7 - 'Less' | Subtraction items subtotal | ($75,000) | ($75,000) | ($175,000) | ($175,000) | |
Item 7 Label Y |
Add R & D tax offset if chosen | Nil | $125,000 | Nil | $125,000 | |
Item 7 Label T | Taxable income or loss | ($75,000) | $50,000 | ($175,000) | ($50,000) | |
Calculation Statement Label B | Gross tax (at 30%) | Nil | $15,000 | Nil | Nil | |
Calculation Statement Label U |
Less R & D tax offset (30% of Item 7, Label Y) | Nil | -$37,500 | Nil | -$37,500 | |
Calculation Statement Label S | Total amount of tax payable or refundable (c) | Nil | $22,500 (refundable) | Nil | $37,500 (refundable) | |
(a) 125% eligible R & D expenditure deducted from gross assessable income.
(b) 30 cents per dollar of eligible R & D claim is offset against a company's Commonwealth tax liability. This provides a form of assistance, which is like a direct subsidy to the firm.
(c) Assumes no other tax liabilities.
The level of the offset available to eligible companies is 30% of their entitlement to deductions under the research and development tax concession provisions. The effective percentage of expenditure, which the offset represents, will therefore vary according to the rate of concession. For example, where a company is eligible for:
- a deduction at the rate of 100% under the R & D tax concession provisions, the offset effectively represents a cash benefit of 30 cents in the dollar. This would apply to residual feedstock expenditure, R & D interest expenditure, core technology expenditure, any expenditure that is denied concessional entitlement due to the operation of sections 73C , 73CA and 73B(14AB) -(14AD) of the ITAA 1936
- a deduction at the rate of 125% under the R & D tax concession the offset effectively represents a cash benefit of 37.5 cents for each dollar of expenditure. This can apply to eligible R & D expenditure such as wages and salaries, contract payments, and other expenditure. Similarly, deductions for the decline in value of depreciating assets may also attract an effective 37.5% offset. So if a company has eligible expenditure of $200,000 in a year of income, the offset could be $75,000
- the incremental concession, the offset effectively represents a cash benefit of 52.5 cents in the dollar for that portion of the expenditure eligible for the 175% rate.
C4-7 Clawback of grant funding or recouped expenditure
Where a company receives a grant or recoupment from the government, such as a commercial ready grant, for their R & D expenditure, prior to or during the claim year, the clawback provisions should be taken into account in calculating the deductions. As the amount of any deduction available may be reduced by the application of the clawback provisions the amount which is eligible to be cashed out as an R & D tax offset may also be reduced.
Where clawback applies deductions are claimed at the rate of 100% instead of 125%. Consequently, the application of the clawback provisions does not prevent a company from being eligible for the R & D tax offset so long as the eligibility criteria contained in section 73J of the ITAA 1936 have been met.
Note: A grant or recoupment received by an eligible company in connection with it undertaking R & D activities will generally be assessable income. Specifically, any amount which an eligible company receives, or is entitled to receive, which is:
- in respect of the results of an any of the R & D activities the company has incurred expenditure on; or
- attributable to the company having incurred that expenditure;
is assessable income under subsection 73B(27A) of the ITAA 1936. If not assessable under subsection 73B(27A) of the ITAA1936, an amount received as a recoupment for a loss or outgoing deducted under sections 73B , 73BA or 73BH of the ITAA 1936, is an assessable recoupment under section 20-20 of the ITAA 1997.
The total amount of a grant or recoupment should be included in your tax return
|
Example 4.3
Company A incurred $100,000 of research and development expenditure in relation to Project B and is eligible to claim the R & D tax offset. In the same year of income, Company A also received, or became entitled to receive, a commercial ready grant of $20,000 in respect of Project B. This is the only income the company receives in that year. Company A's initial clawback amount is 2*$20,000 = $40,000.
The clawback calculation applies:
| Company expenditure | $100,000 | |
| Less Initial clawback amount | ($ 40,000) | |
| Expenditure eligible at 125% under the tax concession | $ 60,000 | |
| The balance of $40,000 ($100,000 - $60,000) is eligible to be claimed under the R & D tax concession at 100%. | ||
| The following offset calculation applies | ||
| Total income | $ 20,000 | |
| Less R & D expenses | $60,000 @ 125% | |
| $40,000 @ 100% | ($115,000) | |
| Taxable profit/loss | ( $95,000) | |
| Offset chosen in tax return R & D deduction forgone | $115,000 | |
| Taxable Income/Loss | $20,000 | |
| Tax on taxable income | ($20,000 @30%) | $ 6,000 |
| R & D Tax Offset | ($115,000 x 30%) | $34,500 |
| Net tax refund due | $28,000 | |
Grant or recoupment received subsequent to the claim year
Should the grant or a recoupment be received subsequent to the claim year, the clawback provisions require that the deductions available in the claim year be reduced by amendment. Where these deductions were cashed out under the offset, that part of the deductions which is no longer allowable as a result of clawback applying will need to be repaid.
For further information on the application of clawback please refer to Part C8 - Interaction with other government assistance.
Note: there are special rules in relation to grants or recoupments attributable to incremental expenditure incurred by a company on Australian owned R & D, and to expenditure on foreign owned R & D. For further information, please refer to Part C8-6 Clawback and the 175% Australian Premium and C8-7 Clawback and the 175% International Premium.
C4-8 Offset against other tax liabilities
The R & D tax offset is subject to the refundable tax offset rules. The offset directly reduces tax payable by a company. This includes income taxes, GST, FBT and withholding taxes. Where the amount of the offset exceeds the amount of tax that the company would otherwise have had to pay, then the excess is refundable.
C4-9 Offset and Franking Accounts
A refund of the R & D tax offset does not generate a franking debit under section 205-30 of the ITAA 1997. One circumstance in which a franking debit will arise is where there is a refund of income tax. An amount refunded to a company in the form of the R & D tax offset is not a return of an amount paid or applied by the company to satisfy its liability to income tax. There is no amount that has been returned to the company because the R & D tax offset arises from the operation of the law, and not from a payment made by the company in satisfaction of an income tax liability.
Example 4.4
During the income year, Shropshire Pty Ltd paid PAYG instalments totalling $20,000. The company was eligible to choose, and did choose, the R & D tax offset in its return of income. Shropshire Pty Ltd's taxable income for the income year is $100,000 and the company tax rate is 30%. The amount the company could have deducted under section 73B of the ITAA 1936 was $160,000. The company's R & D tax offset for the income year is $48,000.
Under section 4-10 of the ITAA 1997, Shropshire Pty Ltd will work out its income tax liability as follows:
Step 1 | (work out taxable income) | $100,000 | |
Step 2 | (work out basic income tax liability) | $30,000 | (company tax rate x $100,000) |
Step 3 | (work out tax offsets for the income year) | $48,000 | (R & D Tax Offset) |
Step 4 | (income tax liability for the year) | 0 | (but $18,000 refundable due to Division 67) |
The company has no liability to tax and will receive a refund of $18,000 generated by the R & D Tax Offset. In addition, the company will also have refunded to it the amount of $20,000 it paid in PAYG installments. The $20,000 representing a refund of PAYG installments paid to satisfy the entity's previous liability to income tax will generate a franking debit equal to that amount. The amount of $18,000 generated by the refundable R & D tax offset is not a refund of income tax and so will not generate a franking debit under item 2 of the table in section 205-30 of the ITAA 1997.
C4-10 Objecting in relation to the R & D Tax Offset
The Commissioner can now give a written notice specifying the amount of the R & D tax offset allowable to an R & D company. If the company is dissatisfied with the specified amount, it can object to it in the normal manner.
ITAA 1936 subsection 73IA
This change is retrospective and applies to years of income commencing on or after 1 July 2001. Information on lodging objections is available from the Tax Office website, www.ato.gov.au .