Frequenty asked questions: EOFY and the R&D Tax Incentive

As we edge closer to the EOFY, tech startups need to be thinking about preparing their R&D claims. In this article, we answer common questions about the process.

The Research and Development Tax Incentive (R&DTI) is the Australian Federal Government’s flagship incentive scheme, which offers tax benefits to businesses conducting innovative and experimental activities in the science and technology space.

In 2011, the incentive was reformed to become particularly beneficial for businesses with an annual turnover of less than $20 million, allowing them to claim their tax benefits back as cash rebates in certain instances – helping them increase their runway and stay afloat during those early stages.

With Australian SMEs still feeling the economic challenges of the bushfires and COVID-19, accessing cash is more important than ever, making this year’s R&DTI process a lifeline more than just an incentive.

If you’re a startup founder or SME owner looking to put in an R&D claim, here are the answers to some of the questions you might have in the lead up to the EOFY.

READ: 14 tax deductions not to be forgotten this EOFY

I’m a first-timer. How does the process work?

At a high level, assuming your business is an eligible entity that has conducted eligible R&D activities throughout the financial year and has incurred more than $20,000 of eligible costs on those activities, it’s likely to be entitled to receive a 43.5 cent rebate on every dollar spent on those activities.

An R&DTI application is made up of two stages:

1. Your application needs to be submitted to a government agency called AusIndustry. Here, the business outlines the various R&D activities conducted, together with general disclosure information.
2. Once submitted, the business needs to wait to see whether AusIndustry ‘registers’ the activities outlined. If it does, the business receives an individual code, to be placed on a separate submission called the ‘ATO R&D Tax Incentive Schedule’.

This schedule is an appendage to and submitted with the company’s income tax return, and the R&D rebate is paid out like any other tax refund that the business might be entitled to.

What are the key dates for application submissions?

In a non-coronavirus world, application dates are always uniform. AusIndustry opens submissions on the first day of the new financial year and closes them 10 months later. For most Australian businesses, that means 1 July to 30 April the following year.

But, in an bid to help businesses impacted by the bushfires and the pandemic, AusIndustry extended the application deadline for the 2019 financial year claims from 30 April 2020 to 30 September 2020.

This means between 1 July and 30 September 2020, a business that’s yet to have submitted its 2019 application will be able to do at the same time as their 2020 one.

Whether 2020 applications will be extended beyond 30 April 2021 is unknown, so make sure to get onto your 2020 claims through sooner rather than later.

Is there anything that must be done before EOFY?

For the most part, an R&DTI claim works on an ‘accrual’ basis, which means as long as an expense was incurred during the financial year, it can be claimed under the incentive. Actual payments on a ‘cash basis’ can be made after the financial year end.

The only exception to this rule is when it comes to ‘payments to associates’. When an associate of the company (for example, someone who owns 50 percent or more of the company’s shares) has contributed to the R&D activities and is entitled to payments as a result of their contribution, in order to claim those expenses, they need to be paid on a ‘cash’ basis before EOFY. If they are only paid after EOFY, the company will need to wait until its next tax return to receive the R&D tax offset on those specific expenses.

The ATO has some specific guidance on the definition of an ‘associate’, so if you believe that this might be relevant to your business, be sure to consult their website and seek professional advice before making a decision.

Additionally, businesses that are looking to apply to receive an ‘advanced finding’ on their R&D activities, must ensure that their advanced finding application is submitted before the EOFY.

Advanced findings are useful for those businesses who are looking to gain comfort about their activity’s eligibility in advance of claiming, and for those who are looking to apply to have their overseas R&D activities considered.

To give businesses some more time to get their ducks in a row this year, AusIndustry is allowing for a very basic, provisional advanced finding application to be submitted before EOFY, which will be accepted with the expectation the actual application is submitted before 30 September 2020.

Is the government still conducting R&D audits during COVID-19?

According to an article published by InnovationAus, audits are indeed still being conducted in the current climate, so it’s important not to fall into the trap of taking your R&D claim for granted.

Effort needs to be placed into ensuring that your application is as robust and defensible as possible. Make sure to track your progress and maintain contemporaneous records of all your activities, examples of which may include timesheets and purpose written status review documents.

Ultimately, the onus is on the taxpayer to substantiate every activity and expense being claimed. The expectation is that relevant and dated documentation will be able to be produced upon AusIndustry’s or the ATO’s request, and history has shown that failure to do so can result in repayments, and sometimes even penalties and interest.

There was talk about the value of the incentive changing. Is this still happening?

In what might be one of the only COVID-19 silver linings for startups, this proverbial can keeps getting kicked down the road.

Back in May 2018, the Coalition announced its intentions to skim $1.8 billion from the R&DTI, together with a series of other changes to the incentive and its value to SMEs.

But, due to a range of distractions and other priorities (including elections), the topic was only revisited in December 2019, with a view to finalise by 30 April 2020.

Due to COVID-19 and the bushfires though, this then got pushed back to 30 September, and then more recently to the end of the 2020 calendar year.

Whether the changes will ever materialise is still uncertain, as many startup activists have been working tirelessly to persuade the government out of them, claiming these proposed changes will be a harsh, and perhaps fatal blow for Australian innovation.

The information in this article is intended as general in nature and not to be accepted as professional advice. MYOB advises business owners consult with an accredited advisor before making any decisions. You can begin your search for a business advisor here.