r&d tax incentives key warning signs - business systems...• a body corporate incorporated...

© 2015 Grant Thornton Australia Ltd. All rights reserved.

R&D Tax Incentives

Key warning signs

Andrew Hodge

Andre Lakomy

July 2015


Part 1: R&D Tax Incentives

1. Introduction to the R&D Tax Incentive

2. Types of eligible R&D entities

3. R&D activities

4. R&D expenditure and the ATO R&D Schedule

5. Administration of the R&D Incentive

6. Claim process and deadlines


1. Introduction to the R&D Tax Incentive:

Offset rates available

• NB: The R&D offset rates are expected to decrease by 1.5% each for

income years commencing 1 July 2014. Legislation was passed by the

House of Representatives is currently before the Senate (to be debated

when Parliament resumes).

• Expenditure now capped at $100million



Share of registrations* by States and Territories

(Income year 2013/14)

(Source: Department of Industry and Science, TaRDIS as at 28

February 2015)

(* including some which are grouped for tax purposes)



Share of registrations by Industry Sector

(Income year 2013/14)

(Source: Department of Industry and Science,

TaRDIS as at 28 February 2015)

(* including some which are grouped for tax

purposes)


2: Types of eligible R&D entities

• A body corporate incorporated under Australian law (Commonwealth, State or Territory law)

• A body corporate incorporated under a foreign law that is an Australian

resident for income tax purposes

• Includes a body corporate acting in its capacity as trustee of a public

trading trust.

• A body corporate incorporated under a foreign law that:

• Is a resident of a foreign company that has a double tax

agreement in force with Australia and the agreement

includes a definition of permanent establish

• Carries on business through a permanent

establishment in Australia

• Can be a Partnership if each Partner is an eligible entity

• Deemed R&D entities (National Tax Equivalence Regime)


2: Types of eligible R&D entities

Ineligible R&D entities

• Trusts

• Sole traders

• Individuals

• Unincorporated associations

• Body Corporate acting as a Trustee (unless for a public trading trust)

• Exempt entities

• Corporate Limited Partnerships cannot be R&D entities.


3: R&D Activities

• Research: Can be Pure or Applied

Research

• Development: How to apply or further develop

new knowledge into a new or improved product,

process, device, material or service


3: R&D Activities (Core R&D Activities)


3: R&D Activities

Excluded activities

• Market research, market testing or market development, or

sales promotion (including consumer surveys)

• Prospecting, exploring or drilling for minerals or petroleum for

the purposes of one or more of the following:

• discovering deposits

• determining more precisely the location of deposits

• determining the size or quality of deposits

• Management studies or efficiency surveys

• Research in social sciences, arts or humanities

• Commercial, legal and administrative aspects of patenting,

licensing or other activities


3: R&D Activities

Excluded activities

• Commercial, legal and administrative aspects of patenting,

licensing or other activities

• Activities associated with complying with statutory requirements

or standards, including one or more of the following:

• maintaining national standards

• calibrating secondary standards

• routine testing and analysis of materials, components,

products, processes, soils, atmospheres and other things

• Any activity related to the reproduction of a commercial product

or process: • by a physical examination of an existing system

• from plans, blueprints, detailed specifications or publicly

available information

• Developing, modifying or customising computer software for the

dominant purpose of use by any of the following entities for their

internal administration (including the internal administration

of their business functions)


3: R&D Activities

Examples and discussion


4: R&D Expenditure

Types of expenditure

• Salary & Wages (including on costs)

• Associate expenditure

• Contract expenditure (where the expenditure is conducted

on behalf of the R&D entity).

• Direct expenditure including consumables, travel and

accommodation

• Certain eligible overheads including rent,

electricity, administration and other day to day

business costs which may support R&D activity or

personnel

• Decline in value


4: R&D Expenditure

Excluded Expenditure

• Building expenditure

• Expenditure included in the cost of a tangible depreciating asset

as per Div 40.

• Interest

• Core technology

• Expenditure deemed not at risk

• Amounts not otherwise deductible for tax (entertainment, fines

etc)

• Mark-ups between connected entities

• Deemed market value for transactions between

associates


4: R&D Expenditure

The ATO R&D Schedule

Label D = Accounting

expenditure

Part A: Notional R&D

deductions

• Foreign owned R&D

shown separately


4: R&D Expenditure


Part B: Feedstock adjustment

– Additional assessable income

• Part C: Clawback of grant

funding (10% tax)

• 5% permanent difference for

45% refundable offset

• Part D: Associate

expenditure. Must be paid in

the income year or carry

forward and notionally

deduct when paid.


4: R&D Expenditure


Part E: R&D Offset Calculation

• Exempt entity ownership (greater than

50% means only the non-refundable offset

is available)

• Aggregated turnover less than $20million

for 45% refundable / greater than

$20million for 40%

• Aggregated turnover is a defined term.

Consider connected and affiliated entities

• Cash out refundable offset when tax

payable has been reduced to nil

• Non-refundable offset can be carried

forward


4: R&D Expenditure

Interaction with other tax offsets

• R&D Expenditure is notionally deducted and is only calculated for the

purposes of determine the R&D offset amount.

• Interaction with other offsets (Refer to ITAA 1997 s63.10 Priority rules): • Foreign Income Tax Offsets

• Non-refundable R&D Tax Offset (any excess can be carried forward subject to

COT/SBT)

• Refundable R&D Tax Offset (any excess can be refunded when tax payable is nil)

• Franking Deficit Tax Offset.

• Where there are multiple carry forward R&D offsets,

apply in the order in which they arose (FIFO).

• Recent ATOID 2015/6 – clarifies that the head entity can

access excess carry fwd offsets held by a joining entity

at the time it joins. Need to satisfy COT/SBT after that time.


5: Administration of the R&D Incentive


6: R&D Claim Process and Deadlines

R&D Application Form

• Describes each R&D Project and activity for each financial year

• How does your R&D meet the eligibility requirements?

• Must be lodged within 10 months of financial year

R&D in the Tax Return

• Calculate expenditure related to each registered activity

• Amendment to tax return must be lodged within 4 years


Part 2: Key warning signs


Key Warning Signs

• Lack of clear strategic direction

• Consecutive losses – lack of turnaround strategy

• Lack of budgeting/forecasting

• Lack of cash flow management

• Loss of major customers/contracts

• Loss of key management

• Loss of major suppliers

• Reduced sales

• Increased working capital

• Payment plans with suppliers/ATO

• Non-lodgement /payment of BAS, non-payment of super

• Break-down of relationship with lender


Health Check Process


Informal Restructure – Project M

FAS involvement initiated by the accountant concerned about company's ongoing viability

Overview

• Family owned/run business' (operating since 2000)

• Operating in the infrastructure sector

• Turnover: $7m FY14; $35m in FY15

• Cash flow problems:

• Rapid growth

• Dispute about progress payments

• Poor financial management

GT assistance

• Prepared 3 way financial model to assess funding requirements

• Assisting management negotiate payment plans with suppliers and ATO

• Sourced finance facility to stabilise the business

• Managing M&A process

Key takeaway

• Get in early

• Professional assistance to develop realistic cash flows and understand

funding requirements


Informal Restructure – Project A

FAS involvement initiated by the accountant concerned about company's ongoing viability

Overview

• Family owned/run business' (operating since 1990)

• Wholesaler

• Turnover: $170m FY14; $90m in FY15 (changed business model)

• Cash flow problems:

• Implemented new warehousing system

• Injection of capex created cash flow problems

• Cumbersome internal reporting / forecasting taking up CFO time and energy

• Consecutive losses of c. $3 million

GT assistance

• Reviewed 3 way financial model to assess funding requirements

• Provided value added improvements to model

• Assisted management negotiate payment plans with suppliers

• Identified short-term cash flow funding needs and appropriate financing facilities

Key takeaway

• Get in early

• Professional assistance to develop realistic cash flows and understand

funding requirements

r&d tax incentives key warning signs - business systems...• a body corporate incorporated...

Documents