While we rejoice in a world moving into recovery mode, in preparation for the 2023 financial year, it’s important for organisations with innovation ambitions to reflect on key announcements related to the R&D Tax Incentive and consider grant programs you can – or should – consider.
Changes to the R&D Tax Incentive
The start of the 2023 financial year will see the changes introduced in the Treasury Laws Amendment (A Tax Plan for the COVID-19 Economic Recovery) Bill 2020 and announced in the October 2020 budget come to life as companies prepare their R&D claims for the 2022 financial year. The changes link the R&D tax offset rate to the R&D entities’ corporate tax rate.
In addition, the changes introduce a tiered R&D intensity calculation for companies with an aggregated turnover greater than $20m, providing additional incentives for larger companies.
The table below outlines the R&D tax offset rates effective for income years starting on or after 1 July 2021:
Expenditure at Risk Ruling
The Commissioner published Taxation Ruling TR 2021/5 to help companies determine whether expenditure incurred on R&D is ‘at risk’. The ‘at risk’ rule applies to deny notional R&D deductions for expenditure incurred where consideration will be received irrespective of the results of the activities. The ruling provides further clarity of the definition of ‘consideration’ to include both monetary and non-monetary benefits. It also provides a range of examples where the ‘at risk’ rule may be triggered.
Clinical Trial Determination
AusIndustry released the R&DTI Determination for Clinical Trials to simplify the registration of R&D activities and Advance and Overseas Finding applications for the biotechnology sector. Broadly, if the clinical trials satisfy the criteria set out in the Determination, those activities are eligible core R&D activities under the R&DTI. The goal of the Determination is to reduce the compliance and administrative burden of registering R&D activities that fall under this Determination, as well as providing certainty to claimants.
Appointment of New Minister for Industry and Science
Ed Husic has been appointed as Australia’s new Minister for Industry and Science. In his first address as Minister, he pledged to fix Australia’s brain drain and research translation problems as part of a pandemic recovery, flagging billions in strategic investment for emerging and medical technologies to transform Australia into a country of ‘makers’ not ‘takers’. He also showed his aim to create an environment to foster local technology innovation, including software-based start-ups.
Guidance and Cases
AusIndustry released updated Software Development Guidance. The release comes after several years of claimants seeking further guidance on the eligibility of software R&D activities. This guidance is supplementary to the previously released R&DTI Guide to Interpretation. Key updates include:
- Greater clarity on the types of eligible and ineligible R&D activities commonly seen within the software development industry;
- Additional examples of supporting evidence and record keeping; and,
- Inclusion of a case study that provides additional guidance of R&D Application Form responses.
The following decisions have been handed down by the AAT and Federal Court related to R&D:
- XQDX and Commissioner of Taxation (Taxation)  AATA 4070 (5 November 2021). The AAT concluded that the expenditure had not been ‘incurred’ by the Applicant and rather, was ‘incurred’ by the trust. Further, the AAT reduced the shortfall penalty from 25% to 15% payable by the Applicant. Read more.
- Ultimate Vision Inventions Pty Ltd v Innovation and Science Australia  FCA 606 (24 May 2022). The Federal Court of Australia dismissed the appeal and held that there was no error in the previous decision made by the AAT. Read more.
Dual Agency Administration Model Review
The Federal Government commissioned a report on the dual agency administration of the R&DTI by the ATO and Industry Innovation and Science Australia. Published in March 2022, the report concluded that the dual agency administration model of the R&DTI program should be maintained and provided a number of recommendations and observations to improve the model. Read more on the recommendations and observations here.
Changes to the Export Market Development Grants (EMDG) Program
The EMDG program supports Australian businesses with turnover of less than $20 million with their export marketing activities by providing three tiers of support, with a maximum annual grant of $150,000 available for up to 8 years.
The 2023 EMDG program opens on 6 July 2022 and will be open for 6 weeks, closing on 17 August 2022. Read more about the program and eligibility criteria here.
Looking ahead to the 2023 financial year
As we enter the 2023 financial year, key items to keep an eye out for include:
- The new Government’s interim 2022-23 Federal Budget on 25 October 2022. As an insight into the priorities of the upcoming Budget Labor emphasised the need for cheap, reliable and clean energy, and greater sovereign manufacturing in reply to the Morrison 2022-23 Federal Budget. Further, Labor proposed a $15b National Reconstruction Fund, partnering with the private sector and superannuation funds, to invest in modern manufacturing, innovation and technology projects. Read more.
- What the future holds for the patent box regime for the medical and biotechnology sectors, and the digital games tax offset announced in previous budgets but not enacted.
- Additional guidance published on the ATO website to assist companies with the changes applicable to FY22 This includes the introduction of tiered R&D intensity calculations and changes to the calculation of feedstock and clawback adjustments.
- Significant updates to the ATO website in relation to the R&DTI to improve the functionality for claimants.
- Additional R&DTI Determinations released by the ATO in relation to specific legislative provisions.
- The continued emphasis of AusIndustry and the ATO on the importance of evidence and record keeping to substantiate R&DTI claims.