Multinational Companies have Global R&D Opportunities
Looking for incentives for growth outside the borders of the United States? Have operations in Australia?
It may be time to look at the Research & Development (“R&D”) tax incentive program the Australian Tax Office (“ATO”) offers. The ATO designed this tax incentive program to encourage smaller companies to engage in R&D activities that they may not have otherwise performed.
Tax Benefit
Companies that are engaged in R&D may be eligible for:
- A refundable credit of 45% of R&D expenses for qualified companies with aggregated annual revenues less than $20 million, so long as they are not controlled by income tax exempt entities, or
- A non-refundable credit of 40% of R&D expenses for companies with aggregated annual revenues greater than $20 million for all other qualified companies (this credit can be carryforward to future income years).
Eligibility
You are able to claim the R&D tax offset if you are any of the following:
- Incorporated under Australian law, or
- Incorporated outside of Australia but
- an Australian resident for income tax purposes, or
- you are both a) a resident of a country with which Australia has a double tax agreement that includes a definition of ‘permanent establishment’; and b) carrying on business in Australia through a permanent establishment as defined in the double tax agreement.
You are not eligible if you are either: an individual, a corporate limited partnership, an exempt entity (where your entire income is exempt from income tax), or a trust (with the exception of a public trading trust with a corporate trustee).
Consolidated groups
There are special rules to consider if you are a member of a consolidated group or a multiple entry consolidated (“MEC”) group. If you are the head company of a consolidated group or MEC group, your subsidiary members are treated as part of you (the head company) for as long as they remain part of the consolidated or MEC group for income tax purposes. Therefore, the R&D tax incentive applies to your consolidated group or MEC group as if it is a single entity conducting all R&D activities within the group. This means only the head company of the group should register for, and claim, the tax incentive for these R&D activities.
Eligible Activities
Your eligibility to claim the R&D tax offset will also depend on where you are conducting your R&D activities (typically Australia, but there are some exceptions – see section 28D of the Industry Research and Development Act 1986) and, importantly, what those activities are. These R&D activities must be classified as either core or supporting.
- Core R&D activities are “experimental activities, whose outcome cannot be known or determined in advance on the basis of current knowledge, information or experience, but can only be determined by applying a systematic progression” that are “conducted for the purpose of generating new knowledge”.
- Supporting R&D activities are “directly related to core R&D activities or, for certain activities, has been undertaken for the dominant purpose of supporting core R&D activities”.
Eligible notional deductions
You may be entitled to an R&D tax offset if your total notional deductions for an income year are at least $20,000.
Some examples of notional deductions would be:
- Expenditure incurred on R&D activities, including expenditure on overseas activities covered by an advance finding from Innovation Australia, amounts paid to associates and expenditure to an Research Service Provider (“RSP”)
- The decline in value of assets used for conducting R&D activities (including R&D partnership assets)
- Balancing adjustments for assets used only for conducting R&D activities (including R&D partnership assets)
- Expenditure in relation to goods and materials transformed or processed during R&D activities to produce marketable products (feedstock expenditure)
If you have any questions, please contact a member of Withum’s Tax Services Group at [email protected]. More information can be found at www.ato.gov.au
To ensure compliance with U.S. Treasury rules, unless expressly stated otherwise, any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.
