With the end of the 2018-19 financial year fast approaching, there are a number of things worth noting and actioning from a research and development (R&D) perspective.
For companies with a June tax year end, it is time to ensure relevant overseas finding applications for claims applicable for 30 June 2019 are lodged, and also to ensure that any amounts incurred to an
associate for eligible R&D are ‘paid’ prior to the end of the income year.
This TaxTalk Alert includes the release of additional taxpayer guidance by the Australian Taxation Office (ATO) and Innovation and Science Australia (AusIndustry) on the R&D Tax Incentive program.
For companies with a 30 June year end
Overseas R&D activities
A company can only claim expenditure on R&D activities carried out overseas if those activities are registered and are covered by a finding that meets the following conditions:
- The overseas activity has a significant scientific link to ‘Australian core activities’.
- The overseas activity cannot be conducted within Australia for a reason listed in the
- The expenditure on the overseas activity and certain other overseas activities is less than the expenditure on the related core R&D activities and supporting R&D activities conducted in Australia.
The overseas finding application must be lodged prior to the end of the first year to which it will apply.
Accordingly, for activities carried out in the current income year, an application must be lodged by 30 June 2019.
Payments to associates
Provided the relevant eligibility requirements are met, a claimant may include expenditure incurred to an ‘associate’ in their R&D claim. However, this expenditure can only be claimed when the expenditure is
‘paid’ before the end of the income year.
For this purpose, an ‘associate’ includes shareholders and directors of the company, and can include other related legal entities (such as trusts).
Where an amount is not ‘paid’ until a later income year, a claimant will either forgo the notional R&D deduction altogether and claim a normal tax deduction on an incurred basis, or defer the claim for the notional R&D deduction until the year in which payment is made. The term ‘paid’ takes its general meaning under income tax law and includes constructive payment.
Therefore, claimants who are seeking to include an amount incurred to an associate as part of their R&D
claim for the current tax year must ensure these amounts are paid prior to 30 June 2019.
Further R&D Tax Incentive program guidance
AusIndustry have continued to release guidance materials to assist taxpayers to self-assess the eligibility of activities under the R&D Tax Incentive program, and to register those activities. In the guidance released in February 2019, AusIndustry has sought to clarify the eligibility of software development activities under the R&D Tax Incentive program and to set out common errors made by taxpayers when claiming the R&D Tax Incentive for software development activities. These guidance publications are available as follows:
ATO update on AusIndustry Registration Numbers
The ATO has recently advised that the AusIndustry issued Registration Numbers that are included on the Notice of Registration must be included on the Tax Incentive Schedule (TIS) when a company is claiming R&D Expenditure, else the company’s Income Tax Return (ITR) will be deemed incomplete and returned.
To avoid this outcome, plan for the timely completion and lodgment of the Application for Registration of R&D Activities and ensure sufficient time is allowed for the processing and the receipt of the Notice of Registration from AusIndustry. Alternatively, once the Notice of Registration is received from AusIndustry, an application for the Request of Amended Assessment of the company’s ITR will need to be made to include the claim for R&D expenditure.
Companies with a 30 June 2019 year end that undertake R&D activities need to ensure that they:
- Lodge overseas finding applications before 30 June
- Pay any R&D amounts incurred to an associate prior to 30 June
In addition, companies should also ensure that the Application for Registration of R&D Activities is prepared and lodged in a timely manner to ensure receipt of Registration Number prior to the lodgment of the company’s ITR.
A more active compliance focus by AusIndustry and the ATO also means that, more than ever, correctly navigating the R&D Tax Incentive rules is critical.
If you would like to discuss any of these matters further or how these changes will impact on your business, please contact your PwC R&D contact.