[Insert DD Month YYYY]
[Insert Client Name]
[Insert Client Position]
[Insert Company Name]
[Insert Company Address]
[Suburb State Post Code]
Dear [Insert Client Name]
Re:
THE R&D INCENTIVE SCHEME
Key changes to the R&D Tax Incentive are outlined below. The incentives will only apply to the first
$100 million of eligible R&D expenditure in an income year.
The key features of the current R&D incentive include:
1. Companies with a group turnover less than $20 million
Companies with a group turnover less than $20 million are entitled to a refundable tax offset
equal to 45% of their R&D deductions.
Even companies in a tax loss position for an income year are still entitled to receive a
refundable tax offset (i.e. a cash rebate in return in that year).
However, legislation was introduced on 27 May 2015 to reduce the rate. If passed, the
legislation reduces the R&D refundable tax offset by 1.5% to 43.5% from 1 July 2014. This is
to align the tax offset with the corporate tax rate reduction of 1.5% to 28.5% which is
proposed to apply, one year after the R&D tax offset reduction on 1 July 2015.
2. Companies with a group turnover of $20 million or more
Companies that are not eligible for the 45% tax offset have been entitled to a non-refundable
tax offset equal to 40% of the R&D deductions. Any unutilised tax offset is able to be carried
forward to future income years and will maintain its non-refundability status.
Similar to the reduction in the tax offset noted in point 1 above, the R&D non-refundable offset
will also be reduced by 1.5% to 38.5% from 1 July 2014.
3. Permanent establishment of foreign companies
In addition to Australian resident companies and public trading trusts with a corporate trustee,
Australian branches of foreign companies operating in Australia are also eligible for the R&D
tax credit.
4. Outsourced R&D activities
Companies are also entitled to a tax offset for certain R&D expenditure incurred to a research
service provider, or as a monetary contribution to a cooperative research centre.
5. R&D activities
Eligible R&D activities continue to be categorised as either core or supporting R&D activities.
The definition of core R&D activities closely focuses on the requirement for an experiment to
be conducted using the “scientific method” in order to address a “significant knowledge gap”.
This means that in order for a taxpayer to qualify for the R&D credit the R&D must be
focussed on the pursuit of new information (to solve a problem, develop a new product or
improve a process) and the taxpayer needs to undertake experiments to discover that
knowledge.
In addition, production activities (or any activities excluded from being a core R&D activity)
must be undertaken for the dominant purpose of supporting core R&D activities in order to
qualify as supporting R&D activities.
6. Advanced Finding
Under the R&D incentive, applicants can obtain an advance finding of whether their activities
are eligible R&D activities, by submitting a completed Application for Advance Findings form.
The advance finding is applied for prior to the registration of activities, and will determine
whether an activity is a core R&D activity, a supporting R&D activity or neither of the two. The
finding will bind Innovation Australia to register activities that the finding has determined as
eligible and (if favourable) also binds the ATO to treat the activities as R&D activities when
making a decision whether expenditure is eligible R&D expenditure.
Applications are due before the end of the income year in which the R&D activity was
conducted or commenced, and will apply to that income year and the next two income years.
7. Overseas R&D
Applicants can now obtain a R&D incentive where parts of the R&D activities are conducted
overseas, subject to the following conditions being met:
 the company receiving an advance finding that the activity is an eligible activity
 the overseas activity must have a significant scientific link to one or more core R&D
activities conducted in Australia
 the overseas activity cannot be conducted solely in Australia because conducting it
requires access to a facility, expertise or equipment not available in Australia, would
contravene a law relating to quarantine, requires access to a population (of living things)
not available in Australia and requires access to a geographical or geological feature not
available in Australia
 the total amount to be spent in all income years on the overseas activities is less than the
total amount to be spent on R&D in Australia.
8. Computer Software
In-house software development is excluded from being a core R&D activity if it is developed
for the purpose of the internal administration of business functions.
9. Feedstock Adjustment
The feedstock adjustment operates to ‘claw back’ 10% of the incentive component of the R&D
tax offset that is enjoyed on the recouped feedstock expenditure (i.e. feedstock output
revenue less related feedstock input costs).
This will mean that companies that are eligible for the 40% (or 38.5%) offset will lose all of the
R&D tax benefit on the input feedstock expenditure to the extent that there is offsetting /
related revenue from feedstock output. However, companies that are eligible for the 45% (or
43.5%) offset will retain approximately 4% of the R&D tax benefit to the extent that the
feedstock adjustment applies.
The feedstock adjustment will require companies to include an additional amount in their
assessable income during the income year in which the feedstock output is sold or otherwise
supplied to another entity (or applied for their own use 1). This additional amount is broadly
1
A feedstock adjustment will not arise if the use is for the purpose of transforming that product for supply.
equivalent to one third of the feedstock input costs 2 or the feedstock output revenue3
depending on whether there is net feedstock expenditure (i.e. after recouping feedstock
output revenue).
In light of the revised R&D tax incentive, we recommend that all existing R&D claimants should review
their systems and processes to ensure that all eligible R&D activities are identified, tracked and
documented properly.
For non-claimants of the R&D tax incentive, we would be pleased to arrange a meeting to discuss any
of the above changes or any other tax planning issues. Please do not hesitate to contact me on [insert
telephone number of partner].
Yours faithfully
[Insert name of Partner]
2
3
Where net feedstock expenditure is negative, i.e. a profit is made on feedstock inputs.
Where net feedstock expenditure is greater than zero.