Guide to the R & D Tax Concession - Part C
C1 Overview of R & D tax concession
This document has been archived. It is current only to 30 June 2011.
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 written 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.
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
Australia's tax system works on self-assessment. This means that you must show all your assessable income and claim only deductions and offsets to which you are entitled on your annual income tax return. The essence of self-assessment is that the details put on your tax return are usually accepted without query prior to an assessment issuing. However, though we may initially accept your tax return, we can later ask you to provide the records and information you used to complete your tax return.
You are responsible for proving the claims you have made in your company tax return and research and development tax concession schedule and your company records will be critical in substantiating your claims. When you sign your return you are taking responsibility for the claims you are making. We assume that you have completed your tax return in good faith. If you are aware that your return is incorrect, you must contact the Tax Office as soon as possible to correct the error.
The Innovation Segment follows the service standards set out in our taxpayers' charter. For example:
If you request a private ruling or write to us about a matter:
We will give you a ruling within 28 days of receiving all necessary information from you. If required, we will request further information within 14 days.
If we cannot meet the 28 day standard, for example, because of the complexity of the matter, we will discuss another arrangement within 14 days of receipt of the information and agree a reply date.
Full details of the charter are available on our website www.ato.gov.au
The government announced in the 2009-10 Budget that it will replace the existing R & D Tax Concession with a new R & D Tax Credit. The R & D Tax Credit is intended to come into effect from 1 July 2010.
On 18 December 2009 the Treasury released The New Research and Development Tax Incentive - Exposure Draft Legislation and Explanatory Materials which stated that:
The new R & D tax incentive provides eligible entities with a tax offset for expenditure on eligible R & D activities and for the decline in value of depreciating assets used for eligible R & D activities. The new R & D tax incentive replaces the existing R & D Tax Concession for all income years commencing on or after 1 July 2010.
An interim measure, prior to the introduction of the proposed The New Research and Development Tax Incentive, increases the expenditure cap for eligibility to the R & D tax offset for the 2009-10 financial year from $1 million to $2 million. ( Tax Laws Amendment (2009 Measures No. 4) Act 2009 ).
Information on the Government's announcement of the R & D Tax Credit is available at the Minister for Innovation, Industry, Science & Research's website www.minister.innovation.gov.au .
Information on the Government's Innovation Agenda, Powering Ideas - An Innovative Agenda for the 21st Century , is available at the Department's website www.innovation.gov.au .
Providing advice is central to the role of the Tax Office. We offer you help and support in the self assessment system for lodging tax returns and assessing income tax liability. We provide many forms of written advice about the laws administered by the Commissioner. These different forms provide different levels of protection in terms of penalties, interest or primary liability, depending on the extent to which the advice relates to your specific circumstances. Law Administration Practice Statement PS LA 2008/3 Provision of advice and guidance by the Tax Office sets out in detail the different forms of advice that the Tax Office provides, the circumstances in which such advice can be provided and the extent to which you can rely on it.
The key forms of advice that are relevant in this context are:
- public taxation rulings which issued prior to 1 July 1992
- public taxation rulings which issued after 1 July 1992 (including product rulings and class rulings)
- private rulings under Part IVAA of the Taxation Administration Act 1953 , and
- written general advice.
These rulings are represented by the numbering series prefixed with IT. . They provide considerable guidance but are not legally binding on the Commissioner. However, the Tax Office will stand by what is said in these rulings and not depart from them unless:
- there have been legislative changes since the ruling issued
- a Tribunal or Court decision has affected the interpretation of the law since the ruling issued, or
- for other reasons, the approach adopted in the ruling is no longer considered appropriate.
The Tax Office has released four taxation rulings of particular relevance to the R & D tax concession.
Taxation Ruling IT 2442 - Concession for eligible research and development expenditure
This ruling was issued on 13 August 1987 and provides general information. This ruling was withdrawn on 6 August 2008.
Taxation Ruling IT 2451 - Investor funding of research and development activities
This ruling was issued on 26 November 1987 and discusses general issues relating to investment in R & D projects and collaborative arrangements. In particular it covers the issue of 'on own behalf'. This ruling was withdrawn on 6 August 2008.
Taxation Ruling IT 2552 and addendum - Research and development (R & D) - costing of expenditure
This ruling was issued on 17 August 1989 and provides detailed guidance on the calculation of expenditure incurred on eligible research and development. This ruling was withdrawn on 6 August 2008.
Appendix A - R & D conducted within the Administration Division
Appendix B - General accounts
Appendix C - R & D conducted by a separate cost centre
Appendix D - Factory rate
Appendix E - Common questions and answers
As a result of legislative changes some of the guidance contained in the above withdrawn rulings is no longer current.
Material which is current is now included in Part C of this Guide. The withdrawal of the rulings does not mean that the views expressed in them have changed.
The rulings continue to apply to arrangements that commenced before the withdrawal except for those parts of the rulings superseded by legislative change prior to the withdrawal. The withdrawn rulings do not apply to arrangements carried out after the withdrawal.
Where a public ruling issues on a matter and is less favourable than previous administrative practice, the new ruling applies only in relation to schemes that started after the publication date of the ruling (section 358-10 of Schedule 1 to the Taxation Administration Act 1953 ).
Taxation Ruling IT 2635 and addendum - Risk provisions and syndicated R & D
This ruling was issued on 9 May 1991 and discusses the following issues:
- syndication structures
- the fundamental element of risk
- guaranteed returns
- recoupments and grants
- forgiven debt
- limited-recourse or non-recourse debt
- early termination
- application of the general anti-avoidance provisions (Part IVA of the ITAA 1936)
- special accounts
- core technology
- management fees
- deduction rate for finance costs.
These rulings set out the Commissioner's considered view on the way in which a tax law applies to a person or a class of persons in relation to an arrangement or class of arrangements that commenced on or after 1 July 1992. These rulings are represented by the numbering series TR YYYY/XX (for example TR 2001/1 ). A public ruling is binding on the Commissioner if it applies to a person and the person relies on the ruling by acting (or omitting to act) in accordance with the ruling. However, the Commissioner may apply a relevant provision in a way that it would apply if a person had not relied on a ruling if doing so would produce a more favourable result for that person. No time limit applies to prevent this. Refer to sections 357-60 to 357-70 of Schedule 1 to the Taxation Administration Act 1953 .
The Commissioner has established a public rulings panel, which includes eminent tax experts, to ensure the quality of public rulings.
At the Tax Office we also release draft taxation rulings, which represent our preliminary, though considered views. They are generally issued before a final taxation ruling. Taxpayers and practitioners must not rely on these draft rulings. Only final taxation rulings represent authoritative statements by the Tax Office.
The Tax Office has released the following taxation rulings of particular relevance to the R & D tax concession. Extracts from these rulings have been included in this Guide and are identified as follows:
Taxation Ruling TR 2002/1 : R & D plant expenditure
This ruling was issued in January 2002 and discusses the treatment of expenditure on plant (acquired or commenced to be constructed) prior to midday 29 January 2001 ('pre-29 January 2001 plant').
Note: although this ruling applies to 'pre-29 January plant' many of the concepts discussed in the ruling continue to be relevant in determining the application of the asset depreciation rules to plant/depreciating assets acquired or constructed under contracts entered into after 29 January 2001 and used in carrying on R & D activities. See for example, paragraphs 24 - 28 and 81 - 86 of TR 2002/1 - What is a prototype and can it be an item of plant?
Taxation Ruling TR 2002/6 : Income tax: simplified tax system: eligibility - grouping rules (*STS affiliate, control of non fixed trusts)
This ruling deals with aspects of the former simplified tax system (STS) grouping rules (in particular, the 'affiliate' test) contained in subdivision 328-F of the ITAA 1997 (repealed by the Tax Laws Amendment (Small Business) Act 2007). However, this ruling provides useful guidance in relation to the R & D grouping rules.
Taxation Ruling TR 2002/11 : Income tax: simplified tax system eligibility - STS average turnover
This ruling considers the definition of STS average turnover contained in subdivision 328-F of the ITAA 1997 (repealed by the Tax Laws Amendment (Small Business) Act 2007). Although this definition has been repealed, this ruling provides useful guidance in relation to 'R & D group turnover'.
These rulings are public rulings.
Product rulings enable the Commissioner to rule publicly on the availability of claimed tax benefits from an arrangement in which a number of persons individually enter into substantially the same transactions with a common entity or group of entities.
Class rulings enable the Commissioner to provide legally binding advice in response to a request from an entity seeking advice about the application of a tax law to a large number of persons in relation to a particular arrangement. This can obviate the need for a private ruling to be sought by or on behalf of every person who may be affected under the arrangement.
C1.5.4 Private rulings under Part 5-5 of the Taxation Administration Act 1953
You, your agent or your legal representative may apply for a private ruling on the way in which the Commissioner considers a relevant provision applies, or would apply, in relation to a specified scheme. These rulings differ from public rulings in that they are specific to a particular entity. Private rulings are legally binding on the Commissioner of Taxation. If the entity (rulee) chooses to rely on the ruling, we must apply the law in the way set out in the ruling (or in a way that is more favourable if we are satisfied that the ruling is incorrect and disadvantages the entity (rulee), and we are not prevented from doing so by a time limit imposed by the law). The protection is subject to two conditions: (1) the entity must supply all material facts to the Commissioner, and (2) the scheme entered into must reflect the scheme described in the private ruling. Entities who obtain and apply private rulings are protected against primary tax, shortfall penalty and interest should the ruling decision prove to be incorrect.
An ATO Interpretative Decision (ATO ID) is an edited and summarised version of a documented decision on an interpretative issue about the application of law administered by the Commissioner. ATO IDs may be based on decisions on interpretative issues arising from private rulings. In preparing an ATO ID we take care to ensure that we do not identify taxpayers, or disclose confidential information. These ATO IDs are available from the ATO legal database on the ATO website at www.ato.gov.au . Where appropriate, we refer to ATO IDs in this Guide.
See, Taxation Administration Act 1953, Schedule 1, Division 357
Taxation Ruling TR 2006/11 outlines the system of private rulings following the enactment of the Tax Laws Amendment (Improvements to Self Assessment) Act (No. 2) 2005. In respect of private rulings, that Act inserted new Divisions 357 (common rules) and 359 (private rulings) into Schedule 1 to the Taxation Administration Act 1953 (TAA) . You may object against a private ruling which applies to you if you are dissatisfied with it. However there are two instances where a private ruling may not be objected against:
- where an assessment has been made in respect of the year of income or accounting period covered by the private ruling. In this situation you can have the matter dealt with in the private ruling reviewed by lodging an objection against the relevant assessment or amended assessment; and
- where the private ruling relates to withholding tax or mining withholding tax that has become due and payable.
If the objection is disallowed to any extent you may have the objection decision considered by the Federal Court or the Administrative Appeals Tribunal.
An ATO interpretative decision (ATO ID) is an edited and summarised version of a decision on an interpretative issue about the application of law that is administered by the Commissioner. A current ATO ID sets out our viewpoint on an interpretative issue.
See, Practice Statement PS LA 2001/8 .
ATO IDs are publications approved in writing by the Commissioner and may explain a general administrative practice. Accordingly, they may provide a level of protection from shortfall penalties and interest to taxpayers who rely on them.
If you rely on a current ATO ID where your own circumstances are not materially different from those described in the ATO ID, but the ATO ID is later found to be incorrect, you will be liable for any underpaid tax, (or any over-claimed credit, grant or benefit), unless a time limit imposed by the law precludes the liability. However, you will be protected against any shortfall penalty that would otherwise be imposed. In addition, if you rely reasonably in good faith on an ATO ID, you will be protected against interest charges on the shortfall up until 21 days after the Commissioner notifies you of the shortfall.
If you want certainty about the application of a tax law to your specific circumstances you should request a private ruling.
ATO ID references have been included in this Guide and are identified as follows:
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)?
You can claim the R & D tax concession by completing the relevant boxes on your company tax return and Research and development tax concession schedule.
In 2002 the Tax Office introduced a Research and development tax concession schedule to assist companies to comply with the legislative and administrative requirements for claiming deductions for R & D expenditure in their income tax returns. Detailed instructions accompany the schedule.
The R & D schedule must be completed by eligible companies which:
- have registered their research and development activities with Innovation Australia (the Board), through AusIndustry, for the income year ended 30 June 2002 and subsequent years, and
- are making a claim in their income tax returns in respect of these activities under the research and development tax concession (sections 73B to 73Y of the ITAA 1936).
The R & D schedule must be lodged with the Tax Office at the same time as the company tax return, or the relevant amendment request, in which the research and development tax concession claim is made. An automated Excel version of the R & D schedule is available and can assist with calculating a claim for the R & D tax concession. The Excel version of the R & D schedule is available from the ATO website at www.ato.gov.au/randd .
For the 2003 and subsequent years, selected software packages now facilitate ELS (electronic lodgement system) lodgement of the R & D schedule with the company tax return.
For the 2004 and subsequent years, the R & D schedule must be lodged electronically with the Tax Office at the same time as the company tax return.
If you have requested an amendment
If your company has made a request for an amendment that includes changes to its R & D claim, you must complete an R & D schedule showing the amended figures. Send this schedule, with a letter requesting the amendment to:
Australian Taxation Office
GPO Box 5056
Sydney NSW 2001
Companies should substantiate their claims for the R & D Tax Concession. It is open to a company however, to demonstrate to the Commissioner that their basis for calculating an R & D deduction or tax offset produces, as far as practicable, accurate claims consistent with the law and its interpretation. A claim for R & D expenditure which cannot be substantiated by reference to reliable source documents cannot be allowed.
Companies intending to claim the R & D Tax Concession should maintain adequate contemporaneous records which substantiate the carrying on of the claimed R & D activities and the incurring of expenditure in relation to those activities. The types of records that are relevant are those records normally maintained to support tax expenditure claims and those that monitor the technical progress of the research and development.
Record keeping for tax purposes
Under tax law records must be kept:
- that specify and explain all transactions. This includes any documents that are relevant for the purpose of working out the company's tax liabilities. Companies should make records of transactions as soon as they occur or as soon as possible afterwards
- relating to all taxes for which this company is liable. This may include income tax, goods and services tax, pay as you go taxes, capital gains tax, and fringe benefits tax
- relating to any election, choice, determination or calculation made under a tax law, including the basis on which any were made.
These records must generally be kept for a minimum of five years. However, as the Commissioner for Taxation can amend assessments at any time to increase the liability of a taxpayer for the purposes of the R & D tax concession companies may want to keep their research and development records for longer.
How should records be kept?
Companies must keep all relevant tax records in English or in a form readily accessible and easily convertible into English. Records can be kept in any way that enables companies to meet their tax obligations and receive entitlements, whether this is on paper or in electronic form.
Penalties are imposed for not keeping proper records
The tax law imposes a penalty if proper records are not kept. The penalty amount is currently $2,200. Penalties may be remitted (partially or fully) if companies are trying to do the right thing. However, if no attempt is made to keep records or they are deliberately destroyed, companies will be unlikely to receive any remission of the penalty.
If proper records are not kept, even after the Tax Office has provided advice about record keeping and given the company an opportunity to improve their record keeping behaviour, the Tax Office will apply penalties as set out in the following table.
Record keeping behaviour
Genuine attempt made to improve record keeping practices
Some effort made but tax liability still not readily ascertainable
Very little effort made to improve record keeping practices
No effort made to improve record keeping practices
Serious cases of non-compliance can be referred to the Director of Public Prosecution which may result in a fine of up to $10,000.
See Practice Statement PS LA 2005/2
Records for the R & D tax concession
A company will also need to be able to show that time has been spent on the research and development activities, in respect of which it is claiming an R & D deduction or tax offset.
A company's ordinary business records must be sufficient to verify the amount of the expenditure incurred on R & D activities, the nature of activities which are claimed to be R & D activities and the relationship of the expenditure to the activities. A company will also need to retain documentation such as reports detailing R & D activities carried on and details of whether the R & D activities were carried on by staff or contracted to another person and the nature of any such an arrangements.
A company should maintain documentation to support the apportionment of expenditure between research and development activities and other activities. It is the company's responsibility to satisfy the Tax Office of the accuracy of the method used to allocate expenditure between R & D and non-R & D activities. For example, to calculate salary expenditure that is deductible under subsection 73B(14) of the ITAA 1936, the most accurate methods of allocating time are to maintain timesheets or job cards. The more a company strays from this, the greater is the onus on the company to show that the allocation of time is accurate. The company must be able to satisfy an auditor of the accuracy of the system used, whether it is timesheets, job cards or another method. Substantiation of time spent on eligible R & D activities is required in respect of those R & D employees who carry out the R & D project (that is the researchers and technicians). These employees may need to demonstrate the time spent on R & D activities, as well as on non-R & D activities. No timesheets need to be retained for R & D substantiation purposes in respect of employees not engaged in carrying out R & D activities, even if a portion of their salaries may be allocated to R & D as a component of other expenditure.
If R & D is undertaken by a contractor, we would expect that invoices contain certain details. In addition to the invoice containing the date, ABN of the contractor and other information required to be included on a tax invoices for GST purposes, if applicable (as specified in section 29-70 of the A New Tax System (Goods and Services Tax) Act 1999 and Regulation 29-70.01 of A New Tax System (Goods and Services Tax) Regulations) 1999, we would also expect that invoices should contain the following details for R & D substantiation purposes:
- Sufficient detail to ascertain the amount of eligible R & D expenditure
- A description of the activities performed by the contractor in order to link the fee with a particular R & D project (or this information may be provided in the contract of performance or in the research report prepared by the contractor).
Documentation should also be sufficient to enable a determination to be made of whether the particular activities undertaken by a company, or by some other person on its behalf, are qualifying R & D activities for the purpose of section 73B of the ITAA 1936. That determination would, in appropriate cases, be made by the Board as a result of a request made by the Commissioner under subsection 73B(34) of the ITAA 1936.
A company can be denied deductions if it fails to register with the Board. The Tax Office will ask for evidence of registration. The Tax Office may also ask detailed questions about a research and development activity. For example:
- which activity is claimed to be research and development?
- who identified the activity as research and development, and was that person qualified?
- were other inquiries made before the person decided that the activity was research and development?
- what professional advice was obtained?
- what was done to verify that the activity was innovative? Were checks made to ensure that the innovation or product was not available elsewhere?
- were the Board guidelines on eligibility referred to?
- are there technical risks involved in the activity?
- how is the activity being managed?
- is there a dedicated research and development department?
- are separate cost centres keeping account of research and development expenditure?
If the records can answer such questions, then they are likely to be adequate.
For more information about what types of records taxpayers need to keep in relation to income tax and other taxes, refer to Taxation Ruling TR 96/7 Income tax: record keeping - section 262A - general principles and Taxation Ruling TR 2005/9 Income tax: record keeping - electronic records.
From 1 July 1999, some eligible companies may have acquired goods or services in circumstances where they have an entitlement under the GST Act, to claim a credit in relation to the GST imposed in relation to that acquisition. This credit is known as an 'input tax credit'. An eligible company that is not registered under the GST Act will have no entitlement to claim any input tax credit.
However, where a company is entitled to claim input tax credits, Division 27 of the ITAA 1997, provides that when calculating an income tax deduction (including R & D deductions), the amount equal to the input tax credit is excluded. Therefore, an eligible company whose R & D expenditure includes any input tax credits they are entitled to claim, will exclude these amounts when calculating their income tax deduction.
Wingding Pty Ltd intends to claim the R & D tax concession for the 2001-02 year of income and has incurred the following expenditure:
Research and development expenditure: $33,000 (includes $3,000 GST)
If Wingding is registered for GST:
Since Wingding is entitled to claim an input tax credit for the GST, it must exclude GST when claiming a deduction. Therefore its total expenditure for the calculation of the R & D tax concession is exclusive of GST:
Less input tax credit
Additional R & D tax concession component ($30,000 x 25%)
R & D deduction
If Wingding is not registered for GST:
Since Wingding is not entitled to claim an input tax credit for the GST it will include GST when claiming a deduction and, therefore, its total expenditure for the calculation of the R & D tax concession is inclusive of GST:
Expenditure (includes GST $3,000)
Additional R & D tax concession component (33,000 x 25%)
R & D deduction
Grants and GST
The Tax Office has released a public ruling ( GSTR 2000/11 ) which details the application of GST to grants of financial assistance. The ruling applies to grants made by the private and public sectors and details the circumstances when GST will apply to grants. This will depend on whether the grant represents consideration with a relevant connection to a taxable supply.