To claim eligible R&D expenses incurred from associated parties (by reason of family or business ownership connections) a R&D entity must have “paid” such expenses by the 30th of June 2016. If for any reason these expenses are not paid by the 30th June, the R&D entity may either:
· claim the expenses as a standard deduction in the year they are incurred (foregoing the benefits under the R&D Tax Incentive); or
· after registering the eligible activities and expenses with AusIndustry, defer claiming the expenses until the following year when they are actually paid.
Please note that the income tax law meaning of the word “paid” also includes constructive payments.
In a significant decision handed down by the Full Federal Court of Australia, the blurred line between an R&D expense being “incurred” or not in the context of related party transactions has sharpened. The upshot of the decision handed down in Commissioner of Taxation v Desalination Technology Pty Limited  FCAFC is that invoices merely debited to “come and go” loan accounts may not be enough to qualify expenditure as eligible to claim.
The court ruled out the particular arrangement in this case due to the “contingencies” attached to the loan account: namely that the R&D claimant was only obliged to pay when they were in a position to do so and when they felt it was prudent to do so.
The lesson learnt? Have in place a definite commitment to your obligations by ensuring that R&D expenses owed to related entities are “paid” prior to the end of the financial year.
Mark ups between associated parties
If expenditure is incurred by an R&D entity on goods and services provided by an associated entity which forms part of a consolidated group for tax purposes, the R&D benefit can only be claimed at the actual cost incurred by the associated entity without any mark-up. If the associated entity is not consolidated with the R&D entity for tax purposes then any ‘mark-up’ or handling costs charged may be eligible to claim if the mark-up reflects an arm’s length price.
R&D Start-up owners – taking a salary is the better option
If you were not intending taking a salary this year to keep costs low whilst you kick off your R&D start-up business, think again, as this is probably not in your best interest. By doing so, not only undervalues the intellectual property you are developing in your company but it also negates your ability to claim a 45% reimbursement of costs under the R&D Tax Incentive.
If you are spending most of your time undertaking eligible R&D activities you should consider paying yourself an annual salary by paying PAYG tax and the associated superannuation guarantee levy related to any salaries paid by the end of June each year.
As the ATO puts no limitation on what you decide to do with the net portion of your salary you may decide to loan it back to your company, by doing so the benefit would be the differential between the personal tax rate paid on the salary plus super versus the 45% tax offset earned by the company. The IP being developed by you should also be valued to assist in substantiating your business valuation when it comes time to raise capital.
Please note that Directors fees, franked dividends and trust distributions are not eligible expenses under the R&D Tax Incentive
Applications for Advance Findings must be lodged by June 30th
If an R&D entity requires a legally binding ruling to ensure that its 2016 financial year R&D activities are eligible, it must seek approval by lodging an Advance finding application by the 30th of June 2016. A positive Advance Finding can be sought covering the current income year where an application is made and the subsequent two consecutive claim years. For consolidated groups, it is the head company of the group that must apply for the Advance finding on behalf of their subsidiary, if the subsidiary is the one conducting the R&D activities.
Please note that an advance finding is not a pre-condition of registration, companies are still be required to register their R&D activities within 10 months after the end of each income year that the activities were conducted.
Applications for Overseas Findings must be lodged by June 30th
If an R&D entity wishes to claim costs related to overseas R&D activities that occurred in the 2015-2016 financial year, it must seek approval to do so by lodging an Overseas/ Advanced Finding application by the 30th of June 2016. To be eligible to claim overseas R&D costs, the overseas R&D activities:
· must have a significant scientific link to the Australian based core R&D activities;
· are unable to be conducted in Australia; and
· their related costs must be less than the R&D costs incurred in Australia
If you would like to discuss these matters, please contact: Gerry Frittmann – Managing Director at TCF Services firstname.lastname@example.org or the relevant consultant you deal with at TCF Services
Mob: 0413 647 664
NSW Head Office
Tel: (02) 8219 4900
PO Box 111, Rosebery NSW 1445
Tel: (03) 9629 7772