Is my company eligible to claim the R&D Tax Incentive?
To be eligible to claim the 43.5% refundable tax offset, your company (or company group) must have an annual turnover of less than $20 million and annual R&D expenditure of at least $20,000.
In addition, the company must be:
- incorporated in Australia, or
- incorporated in another country but be an Australian resident for tax purposes, or
- incorporated in a country with which Australia has a double tax agreement and undertake R&D activities through a permanent establishment in Australia.
Trusts are generally not eligible – except if they are a public trading trust with a corporation acting as a trustee. Companies that are exempt from tax are also not eligible.
What is Aggregated Group Turnover?
Aggregated group turnover is the sum of the annual turnover for all of the following:
- the Australian subsidiary
- any entity connected with the R&D entity in Australia or overseas or any affiliated entity in Australia or overseas.
Any dealings between these entities are excluded and annual turnover is the total ordinary income derived in the income year in the ordinary course of carrying on its business activities. This would include sales revenue or license fee revenue but does not include capital raised.
What is meant by Grouped?
An R&D Tax Incentive (RDTI) applicant’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.
Entities are connected or grouped if either of the following applies:
- either entity controls the other entity
- both entities are controlled by the same third entity.
Broadly, an entity controls another entity if either of the following applies to it, 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.
This includes entities outside Australia.
How does the Tax Refund work when I am not profitable and not paying tax?
The RDTI works as a refundable tax credit or non-refundable tax credit depending on your annual aggregated group turnover.
For eligible companies that have an annual aggregated group turnover of less that AUD $20 million, the potential benefit is a refundable tax credit of up 43.5%
So, when your company has a profit, you pay tax on the profits. When you have a loss, you obviously do not pay tax but instead carry forward and accumulate losses into future years and offset these against future profits. When all the losses are soaked up by profits, you pay tax.
With the RDTI, if you have losses you can ‘cash out’ these losses at the rate of 43.5% of your eligible R&D expenditure rather than carry them forward into a future year.
The size of the refundable benefit is a consequence of the size of the R&D expenditure and the size of the losses. To claim the full 43.5% as a tax refund the tax losses MUST be at least the size of the R&D expenditure.
When there is a small profit and a large R&D expenditure a considerable refund can still result.
If the overseas parent is funding the subsidiary to pay for the R&D in Australia, how is a loss generated?
The Australian subsidiary needs to be funded by either loans or equity/capital. Capital is preferred although neither loans nor capital provided to the Australian entity is treated as taxable income.
So, funds come into Australia to pay for R&D services undertaken in Australia. Where these expenses are deductible expenses, such as clinical trial cots, and there is no income to offset these expenses a loss is generated.
Can the overseas parent pay the expenses on behalf of the Australian subsidiary direct?
Initially yes, however the Australian subsidiary MUST reimburse the parent by means of constructive payment before then end of the claim year to receive tangible benefit. If constructive reimbursement between associate entities is not made in the year of the RDTI claim, then the benefit will be accumulated and carried forward until associate payments are made.
What’s the minimum R&D spend to be able to claim?
To claim the tax incentive, your total R&D spend for the income year must be at least AUD $20,000. There are some minor exceptions to this.
Is there a limit to the amount of benefit I can claim?
A company group can claim up to AUD $100 million of eligible R&D expenditure per annum.
Can R&D activities conducted outside Australia be included in a claim?
Yes, although to claim expenditure on R&D activities conducted outside Australia you must first obtain a ruling called an Advanced/Overseas Finding.
The process of obtaining an overseas finding is quite onerous but certainly worthwhile when activities conducted outside Australia that have a direct scientific link to Australian clinical trials and cannot be undertaken in Australia for reasons such as legislation, lack of Australian capability, or lack of access to a population of living things. This process could be applied to some preclinical work, such as toxicology studies or even some clinical studies conducted in parallel with Australian studies.
There are four conditions to be met for a finding to be made that activities conducted outside Australia are eligible under the R&D Tax Incentive.
- The activities must be covered by an advance finding stating that the activities are eligible.
- The activities must have a significant scientific link to one or more ‘Australian core activities’ registered or reasonably likely to be conducted and registered.
- The activities must be unable to be conducted within Australia because of one or more of the reasons listed below:
- conducting the activity requires access to a facility, expertise or equipment not available in Australia;
- conducting the activity in Australia would contravene a law relating to quarantine;
- conducting the activity requires access to a population (of living things) not available in Australia; or
- conducting the activity requires access to a geographical or geological feature not available in Australia.
4. Expenditure on activities conducted overseas must not exceed expenditure on certain Australian activities.
Does the intellectual property (IP) generated from the R&D in Australia need to be held in Australia?
No, the IP can be owned by the overseas parent company, without impacting the eligibility of the RDTI.
The applicant company needs to be aware of its international tax obligations and transfer pricing issues, especially when the IP is held offshore by the parent.
It is an eligibility criterion that a formal, binding agreement is structured and executed between the parent and subsidiary that makes clear the relationship between the parties and the mechanisms by which the Australian entity has the prospect of generating future income commensurate with the risk it is undertaking through the R&D program. This varies depending on the IP ownership status.
Again, this is a complex area of the RDTI and would warrant further future discussion and involve your Foreign based legal and tax advisors.
What type of expenditure can I claim?
Eligible R&D expenditure is expended ON eligible R&D activities and for R&D conducted in Australia through subsidiaries of foreign corporations, the typical areas of expenditure include: Australian CRO costs, clinical trial materials, Australian representation/project management costs, clinical trial insurance and TGA fees.
Essentially any Australian activity and cost that has direct nexus to the R&D activity can be claimed. There are some exceptions, such as accounting fees, legal fees, interest, core technology purchases.
What services do you provide?
The Bentleys team is a thought leader in the establishment of compliant structures and low cost processes that enable non-Australian groups to benefit from R&D Incentives through local entities and subsidiaries.
Bentleys presents an established track record with non-Australian owned and controlled Biotech/MedTech companies operating through subsidiaries in Australia and have supported over $100 million in R&D investments in this sector.
More generally, Bentleys possesses a national footprint with the experience of over 1,000 R&D Tax registrations, supporting over a billion dollars in R&D and innovation investments.
Our value proposition is underpinned by technical knowledge, depth of service, track record and price.
Bentleys delivers a full service, including Australian resident director services, creating a key point of differentiation.
Our ‘one stop shop’ of services includes:
- Company incorporation and registrations (ABN, TFN, GST)
- Intercompany agreement development
- Transfer pricing evaluations, structure and advice
- Australian resident director and public officer services
- TGA (Therapeutic Goods Administration) support
- R&D Tax Incentive registration development
- Virtual CFO, full service accounting, tax services, audit and compliance
- Advanced and overseas finding development
- R&D Tax schedule development
- Compliance support (technical and Tax Office audit).
How much are your fees?
We have been managing transactions and partnerships of this nature for many years and have developed a competency and model that is competitive with any provider in Australia.
A typical fee arrangement is detailed below
- Set up (once off) AUD $3,000 + GST
- Australian resident director and public officer services: AUD $10,000 + GST per annum
- R&D Tax registration and associated compliance: AUD $10,000 + GST per annum
- Tax and accounting: AUD $10,000 + GST per annum
We do not charge monthly fees and we do not charge a percentage based fee structure as neither represent value to you. We also do not charge fees, other than the set up fee, when no R&D work is being undertaken in Australia.
What do I need to do to start?
You MUST have an eligible entity to claim the R&D Incentive and you cannot generally claim R&D expenditure prior to the date of incorporation of the Australian subsidiary because you cannot register R&D activities that took place before the date of incorporation.
Contact us today for an obligation free discussion regarding your eligibility for the R&D Tax Incentive in Australia.