8 September 2011
Nicola Purser
Partner, R&D Tax Incentives
(07) 3237 5648 nicola.purser@bdo.com.au
Ray Forrester
Senior Manager, R&D Tax Incentives
(07) 3237 5950 ray.forrester@bdo.com.au

R&D INCENTIVES
 Technological innovation is a major driver of economic growth
 Companies will not spend the optimal amount on R&D without government support as the returns do not justify that level of spending
 The social benefits of R&D spending exceed those accruing to the firm that is investing in R&D
 To influence R&D performers either to locate their activities within the country or at least to stop research jobs from leaving the country.
The New R&D Tax Incentive
Implications & impacts for your business

R&D INCENTIVES
 What is the rate of the concession or offset on an after-tax basis?
 Is all or a portion of the offset refundable?
 What types of activities qualify?
 Are there any territorial limits?
 Is the system volume based or incremental, or a mixture of both?
 What types of expenditures qualify?
 What is the lodgement deadline and how much substantiation is required?
 What is the likelihood of obtaining the offset once lodged and what is the audit process?
The New R&D Tax Incentive
Implications & impacts for your business

THE NEW R&D TAX INCENTIVE
 Applies for income years beginning on or after 1 July 2011
 Rules contained in a new Division 355 of the Income Tax Assessment Act 1997
 Repeals sections 73B to 73Z of the Income Tax Assessment Act 1936
 Administrative rules in a new Part III of the Industry Research and Development
Act 1986.
The New R&D Tax Incentive
Implications & impacts for your business

THE NEW R&D TAX INCENTIVE
 Calculation of tax benefit (deduction to tax offset)
 New definition of R&D activities
 Compliance and administration changes
 Other changes
 PEs of foreign corporations now eligible
 Adjustment to assessable income for feedstock expenditure
 Adjustment to assessable income for grant funding (clawback)
 Additional scope to claim R&D activities conducted overseas.
The New R&D Tax Incentive
Implications & impacts for your business

THE NEW R&D TAX INCENTIVE
R&D TAX CONCESSION
125% R&D tax concession (an additional tax deduction of 7.5 cents per dollar spent on R&D)
Refundable tax offset (37.5 cents per dollar for companies with turnover <$5 million and expenditure between $20,000 and
$2 million)
175% premium concession (an additional 15 cents per dollar spent on R&D above a company’s 3 year average)
The New R&D Tax Incentive
Implications & impacts for your business
NEW R&D TAX INCENTIVE
45% refundable tax offset for businesses with a turnover less than $20 million (a benefit of 15 cents per dollar spent on R&D at a
30% company tax rate)
40% non-refundable tax offset for all other eligible businesses (a benefit of 10 cents per dollar spent on R&D at a 30% company tax rate)

THE NEW R&D TAX INCENTIVE
R&D TAX CONCESSION
Income $25,000,000 Income
R&D deductions (100%) ($1,000,000)
NEW R&D TAX INCENTIVE
$25,000,000
R&D additional 25% ($250,000)
Other deductions
Taxable income
Tax payable at 30%
($20,750,000) Other deductions
$3,000,000 Taxable income
$900,000 Tax payable at 30%
Tax offset ($1m x 40% )
($20,750,000)
$4,250,000
$1,275,000
($400,000)
Net tax payable
Benefit ($250k x 30%)
$900,000 Net tax payable
$75,000 Benefit ($1m x 10% )
$875,000
$100,000
The New R&D Tax Incentive
Implications & impacts for your business

THE NEW R&D TAX INCENTIVE
R&D TAX CONCESSION
Income $5,000,000 Income
R&D deductions (100%) ($1,000,000)
NEW R&D TAX INCENTIVE
$5,000,000
R&D additional 25% ($250,000)
Other deductions
Tax loss
Tax payable at 30%
($5,750,000) Other deductions
($2,000,000) Tax loss
Nil Tax payable at 30%
Tax offset ($1m x 45% )
($5,750,000)
($750,000)
Nil
$450,000
Additional tax loss
Cash refund
($75,000) Permanent tax benefit
$450,000
$150,000
The New R&D Tax Incentive
Implications & impacts for your business

THE NEW R&D TAX INCENTIVE
R&D TAX CONCESSION
Core (SIE) R&D activities:
 Systematic, investigative and experimental (SIE)
 High levels of technical risk or innovation
 Acquiring new knowledge; or
 Creating new or improved materials, products, devices, processes or services
NEW R&D TAX INCENTIVE
Core R&D activities:
 Experimental activities
 Outcome cannot be determined in advance
 Based on principles of established science
 Generating new knowledge
(including new or improved materials, products, devices, processes or services)
The New R&D Tax Incentive
Implications & impacts for your business

THE NEW R&D TAX INCENTIVE
 ‘Exclusions list’ certain activities continue to be excluded from being core
 market research, testing or development, or sales promotion
 prospecting, exploring or drilling for minerals or petroleum
 commercial, legal and administrative aspects of patenting/licensing
 management studies, efficiency surveys
 complying with statutory requirements/standards
 reproduction of commercial product/process
 research in social sciences, arts or humanities
 in-house software development for the dominant purpose of internal business administration.
The New R&D Tax Incentive
Implications & impacts for your business

THE NEW R&D TAX INCENTIVE
R&D TAX CONCESSION
Supporting R&D activities:
NEW R&D TAX INCENTIVE
Supporting R&D activities :
 a purpose directly related to core
R&D
 directly related to core R&D
Production activities: Production activities:
 Can be supporting R&D activities
Exclusions list:
 Can qualify as supporting R&D activities
 Can be supporting R&D activities
 Only if undertaken for dominant purpose of supporting core R&D
Exclusions list:
 Can be supporting R&D activities
 Only if undertaken for dominant purpose of supporting core R&D
The New R&D Tax Incentive
Implications & impacts for your business

THE NEW R&D TAX INCENTIVE
Deep Cycle Batteries Pty Ltd
 Deep Cycle Batteries Pty Ltd (‘DCB’) is a manufacturer of automotive lead-acid batteries in Australia
 Experimenting with recycled lead for use in battery manufacturing
 Significant technical concern that use of recycled lead will impact on production throughput objectives
 Production trial required to resolve technical uncertainty.
The New R&D Tax Incentive
Implications & impacts for your business

THE NEW R&D TAX INCENTIVE
• Lead grid plates are cast from lead alloy
Plate
Formation
Battery
Assembly
• Plates, lead oxide paste and separators are assembled in a polypropylene case
• Batteries are filled with electrolyte and plastic covers are attached
Acid Filling
Battery
Charging
• Batteries are placed in water baths on charging tables and charged
Supporting Supporting
$240k trial expenditure
The New R&D Tax Incentive
Implications & impacts for your business
Supporting Core
$40k trial expenditure

THE NEW R&D TAX INCENTIVE
 Key question: How does DCB satisfy dominant purpose test if production activities ultimately result in saleable products?
 Factors that may support dominant purpose position include:
 Additional monitoring, record keeping and output inspections
 The extent of potential disruption to normal production activities
 The risk that production outcomes will be compromised
 Other points of differentiation between the trial production run and normal operational activities
 Documentation likely to be key in maintaining all trial costs as eligible R&D
 Technical objectives and scope of trial
 Documentation of trial risks
 Recording of trial results and conclusions.
The New R&D Tax Incentive
Implications & impacts for your business

THE NEW R&D TAX INCENTIVE
 Advance findings
 An R&D entity can request a finding about the nature of activities (ie core or supporting) before it is possible to register the activities (or before undertaking the activities)
 Advance finding is binding on the Commissioner
 May be appropriate for large projects where certainty around eligibility is important (eg where incentive has significant impact on financial modelling)
 R&D plans and record keeping
 No longer statutory requirement for an R&D project plan
 However, similar documentation still required to support activities eligibility
The New R&D Tax Incentive
Implications & impacts for your business

THE NEW R&D TAX INCENTIVE
 R&D application form
 No change to lodgement deadline (10 months after tax year end)
 More onerous ‘self-assessment’ registration regime
 Separate out core and supporting R&D activities in the R&D application form and identify costs attributed to each
 Project versus activity costing?
 Pressure on AusIndustry to reduce compliance burden.
 Quarterly payments
 Potential for quarterly payments for SMEs from 2014.
The New R&D Tax Incentive
Implications & impacts for your business

WHERE TO FROM HERE?
 For those that have a 30 June year end – it applies now
 We have Law. You don’t have to wait for Government’s interpretation
 Good chance to finally do what the Government’s wanting you to do and look at R&D strategically
 Opportunities for those with substituted accounting periods (e.g. 175% premium concession)
The New R&D Tax Incentive
Implications & impacts for your business

WHERE TO FROM HERE?
 AusIndustry half-day briefing - 20 Sept in Brisbane
 "R&D Tax Incentive Guidance Discussion Paper" - late October 2011
 Ask us
 Meeting with key AusIndustry personnel
 Meeting with Sophie Mirabella, Shadow Minster for Industry, Innovation and
Science.
The New R&D Tax Incentive
Implications & impacts for your business

Nicola Purser
Partner, R&D Tax Incentives
(07) 3237 5648 nicola.purser@bdo.com.au
Ray Forrester
Senior Manager, R&D Tax Incentives
(07) 3237 5950 ray.forrester@bdo.com.au