Internationally, the OECD describes R&D as “creative work undertaken on a systematic basis….to increase the stock of knowledge, including….man, culture and society, and….to devise new applications.” R&D may also include enhancements to existing products or services right up until any activity ceases to be experimental.

It may be of interest to understand something of the size of our national R&D sector. In Australia a reliable source of R&D data may be found in the Australian Bureau of Statistics year book, the 2012 edition of which issued last week. This analysis captures gross expenditure by business, government, higher education and private, with particular focus on business R&D.

Ten years ago Australian R&D spending was less than $14billion (business <$7billion) whereas in 2012 activity is generally thought to have exceeded $35billion (business >$21billion). Manufacturing and mining companies are by far the biggest spenders, with financial and scientific services each coming next but with only about half the spending of the first two.

Technically, expenditure in the R&D sector falls into one of four categories: namely, pure basic research, strategic basic research, applied research or experimental development. Eundo assists clients to navigate their way through these technicalities and then will identify, collate and quantify eligible expenditure so that a compliant and robust R&D tax incentive is claimed.

An important practical aspect for making a claim under the new R&D tax incentive regime is to appreciate the documentation and substantiation requirements administered by AusIndustry and the ATO. To assist, AusIndustry is now issuing guidelines to provide SME’s and their advisers with more clarity.

There are many precedents for Federal Government agencies interpreting the legislative intent, but equally no surprises when that interpretation is felt by some to be onerous or strict, even perhaps nullifying reform aspirations.

A general comment here is that, unlike the superseded R&D concession, legislation for the new incentive regime makes no stipulation about the form and content of documentation. Whereas the new incentive offers a more generous benefit than that previously available, the documentation requirements initially appear stringent with therefore greater risk that an application for registration or a subsequent claim may, after self-assessment, be contested on review.

Helpfully, AusIndustry’s principles for compliance readiness are:-

1. That internal systems allow R&D documentation to occur as part of overall planning.
2. That R&D activities are identified as they occur.
3. That methodology for project evaluation is documented.
4. That both technical and accounting staff co-ordinate their R&D responsibilities.
5. That R&D activity and expenditure absolutely linked.

The imperative for R&D compliance, like never before, is to totally manage your activity throughout the financial year. The concept of having your tax agent prepare R&D documentation six months after year-end is less likely to succeed. Eundo assists clients to plan, monitor, record, document and calculate an R&D claim in real time; that is, act before R&D starts rather than after the financial year has ended!

Of interest to clients with offshore operations is what Governments in other countries offer by way of incentive to undertake R&D activities. Many Australian companies have significant foreign subsidiaries, particularly in the Asia-Pacific region, which may be eligible for taxation or funding relief in their host country rather than in Australia. Claimants who satisfy both residency and activity criteria outside of Australia might then benefit from R&D expenditure incurred in those jurisdictions.

While technical compliance obviously differs between countries, the principal tax incentives available around the Asia-Pacific region should be noted since it may influence how a multinational corporate group is structured.

Compared to Australia’s 40% or 45% (depending on turnover level) tax offset, the highlights of some chosen countries’ R&D incentives are:-

• Hong Kong, 100% immediate tax deduction.
• New Zealand, 100% immediate tax deduction.
• Philippines, 100% immediate tax deduction plus potential tax holiday for registered entities.
• China, 150% superdeduction plus potential corporate tax rate reduction to 15%.
• Malaysia, 200% tax deduction when in-house.
• Thailand, 200% tax deduction for expenditure to approved researchers.
• Singapore, up to 400% tax deduction.
• Indonesia, no direct incentive.
• Vietnam, lower or even zero tax rate, conditional.
• Taiwan, 15% of expenditure becomes tax credit but subject to limit.
• South Korea, conditional 20% or 30% tax credit.
• Japan, 40% tax credit.

Eundo assists clients to navigate every stage of their R&D claim with all services performed by highly qualified and registered tax practitioners.

Consecutive Federal Governments have for years espoused the importance of innovation in our economy so that opportunities in investment and employment continue to arise in a meaningful way. No longer is creativity a term confined to the arts or cultural sectors, but now also belongs with commercialisation of research or extending existing capabilities.

Expenditure on research and development is integral to this creativity, but it is also interesting to reflect upon the downstream consequences of this activity. One objective for a buoyant economy is to maximise export trade, and here we consider Australia’s performance in recent years.

Whereas statistical data clearly demonstrates that Australia’s economy is dominated by service industries, it could be considered a paradox that more than 80% of our export trade in most recent years is from goods, particularly commodities from our mining sector. Perhaps not surprisingly then, more than half the dollar value of all exported goods have come from literally a few hundred exporters while more than two-thirds of that same value emerge from just Western Australia and Queensland.

This domination of export trade by the mining sector is considered by many to be cyclical and feeds the Government’s desire for a more resilient economy characterised by both diversity and steady growth. Consequently, R&D initiatives such as funding or tax incentives become key planks in Government policy and Eundo’s stands ready to assist clients achieve excellent results from these programs.

Our previous commentaries on the Federal Government’s new Research & Development tax incentive program have focused on some of the technical or compliance aspects of making a claim. Issues such as registration of activities, legal structure and types of expenditure are of course all vital to eventual success. But how does this occur in practice?

The essence of any R&D assignment includes a comprehensive review with key people about the activity and costs, robust documentation and a clear trail of how the claim has been quantified. This process not only informs a client about the merit of their claim before it is submitted to the ATO, but will also underpin any substantiation work should it be required down the way. At Eundo there exists a wealth of experience with the now-discontinued R&D tax concession that gives us the confidence to professionally attend to any claim under the new R&D system which has operated from 1 July 2011.

A tax practitioner registered with the ATO will work closely with every client to identify the obvious, direct R&D costs, but also a myriad of internal expenditure such as on personnel, capital, travel and other overheads. This process is essential to capture the full breadth of a legitimate claim and to deliver the financial benefit that the R&D legislation intends.

Some R&D tax claims can appear to be a lot of work, but Eundo’s position is that the benefit of a substantially increased tax incentive and perhaps even a cash refund should not be underestimated!

“Businesses that innovate are twice as likely to boost their productivity and more than twice as likely to put on staff”, so said Federal Minister for Industry & Innovation Mr Greg Combet. Where the Australian government’s aspiration is to boost the economy through its new Research & Development tax incentive program, businesses can also experience tangible benefits if they undertake R&D activities and satisfy the income tax requirements.

So, just how does a complying business get a benefit under the R&D tax incentive program? Firstly, the legislation stipulates a two-tier approach; that is for companies with annual turnover either more than $20million (grouped), or alternatively less than $20million (grouped).

Simply put, where annual turnover exceeds $20million, a company will get a 40% non-refundable tax offset. For turnover less than $20million, the tax offset increases to 45% refundable. These offsets provide either a 10c or 15c premium tax benefit over the standard 30% company tax rate.

Significantly for smaller or start-up companies eligible for the 45% tax incentive, R&D expenditure can be partly converted into an income tax refund upon lodgement of the annual return. Since R&D entities, like other taxpayers, enjoy the privilege of self-assessment, every claimant can determine what activities and expenditures are eligible for the tax incentive. Of course, the ATO may subsequently require a taxpayer to substantiate their claim. It is in this context that Eundo helps companies prior to lodgement of the tax return to document full particulars of a claim. This work is performed by an experienced tax professional who is a registered agent with the ATO.