To incentivise innovation activities onshore, the Federal Government’s Research and Development Tax Incentive (RDTI), Australia’s flagship innovation program, is available to support businesses across all industries undertake research and development (R&D) activities.
While the ATO advises that close to 12,000 companies access the RDTI annually, from our experience, many in RE&C sector may not be accessing the savings available despite undertaking eligible R&D in Australia. This is generally because companies are unsure whether the RDTI can apply to their activities – or that if it does, the administrative effort involved in pulling together a robust claim may not get the required payoff.
The purpose of this update is to address some of the uncertainty in the sector and share guidelines around the RDTI program to ensure that businesses in the RE&C industry aren’t missing out on tax incentives they’re eligible for – and could be crucial to their innovative development.
RDTI tax offset
The RDTI has different levels of support depending on a company’s aggregated turnover (grouping rules apply). Where turnover is below $20m, offsets are refundable and equal to the company’s corporate tax rate plus an 18.5 per cent premium on eligible expenditure. In some instances, this may result in a cash refund from the ATO.
Alternatively, if turnover is greater than $20m, the offset is non-refundable but can be carried forward to offset future income tax obligations. The offset rate is equal to the company’s corporate tax rate plus 8.5 per cent, but may be up to 16.5 per cent depending on the R&D intensity (spend) for the income year. The higher rate is available to companies that achieve an R&D intensity of greater than 2 per cent of their total expenses.
Common eligibility assumptions
From our experience in this sector, the following issues often lead to uncertainty and misconceptions around the ability to make a claim under the RDTI program:
- The Building Exemption: Under the RDTI legislation, companies cannot claim expenditure to acquire or construct a building. This means any costs that get physically incorporated into a building, part of a building or extension, or an alteration or improvement to a building, are ineligible for R&D tax purposes.
- R&D Expenditure at Risk: To claim RDTI, the costs incurred must be at risk to the R&D entity. The ATO has released additional guidance regarding whether R&D expenditure is at risk in its Taxation Ruling 2021/5. A common example is the different types and terms of construction contracts where some may specifically channel financial risk away from a company (e.g. reimbursement or cost-plus contract arrangements).
- On Own Behalf: When contracting out R&D activities, companies also need to consider the ‘On Own Behalf’ rule which takes into consideration which entity bears the financial risk, which entity controls the R&D activities and which entity has beneficial ownership of the results of the R&D activities.
Those that operate in this industry are inherent problem solvers each and every day. For that reason, it is worth ensuring that the appropriate consideration is given to the activities occurring onsite and within the offices that support the projects to capture any innovation being developed.
Despite the above key exclusions, there still remains a significant opportunity for RE&C companies to access the RDTI program and , there are many other activities that should server as triggers to consider whether the RDTI provisions could apply, including:
- Innovating with new types of materials, existing materials used in new ways, new construction techniques
- Developing new prototypes that are not incorporated into a physical building
- Innovating to increase site efficiency (e.g. design for manufacture and assembly) or construction sustainability
- Developing software to automate processes, including RegTech and PropTech solutions
- Working in conjunction with a Cooperative Research Centre (CRC), for instance Building 4.0 CRC.
On the contract side, there are commercial examples of contractual relationships where a company may still retain the financial risk. While there has been increased scrutiny on these form of contracts during the recent period of high profile collapses of construction groups, lump sum or design and construct contracts still exist. However, it’s important to analyse each contract based on its specific scenario and in the context of the broader RDTI legislative provisions to determine R&D eligibility of expenditure on uncertain outcomes.
Put simply, there are many avenues of innovation within the RE&C sector and much of it is occurring on a daily basis. So it’s worth giving thought to whether you’re passing up the opportunity to access key government support programs like the RDTI to help leverage your innovation.
Importance of good governance
We commonly see the issue of companies that have historically claimed R&D, not having appropriate R&D governance documentation in place. This is an important means of demonstrating that you have an effective, robust tax risk management and governance framework in place, which you apply in practice. In their recent review activity, the ATO have demonstrated that appropriate Tax Governance is high on their priority list and any tax incentives claimed will need to form part of that.
Establishing the right governance and documentation processes can give comfort around the robustness of any claims when it comes time for the ATO review.
For expert advice regarding R&D eligibility, or assistance in preparing your R&D Tax Claim or R&D and Tax governance frameworks, our national specialist team is here to help.