The RDTI Is Being Audited and You Can Have Your Say

Have your say on the effectiveness of the Research and Development Tax Incentive Scheme (RDTI) by writing in to the Australian National Audit Office (ANAO) here. Contributions are open for submission up until 31st May 2021.

The request for public contributions from the ANAO comes after unpopular changes to the RDTI were rolled back in October 2020, yet still, confusion remained over what software research was actually eligible under the scheme. 

Calls have been made for a whole separate software-focused RDTI scheme to be created, from tech leaders, who, in March 2021, signed an open letter to the ATO, proposing a collaborative workshop to help overcome a “lack of mutual understanding” over how the scheme works.  

What Will Be Audited?

The ANAO will be examining the Department of Industry, Science Energy and Resources, the ATO, and Innovation and Science Australia, and their running of the program.  

On the table for discussion is the effectiveness of:

  • assessment, compliance and assurance arrangements under the scheme
  • measurement and monitoring arrangements
  • planning for changes.

How To Have Your Say

If you’d like advice regarding the audit and making a contribution, please feel free to contact our NOAH Connect team for professional assistance. Or discover more about our services and the R&D Tax Incentive Scheme by reading our Case Studies

 

 

 

 

Case Study: Robotic Systems

“We work with companies to turn their practical real-world experiences into profitable new machines”

Adam Amos, Director, Robotic Systems. 

The Industry

The uptake of automation is set to deliver Australia $2.2 trillion over the next 15 year as more and more companies begin to understand and explore the potential of robotics and intelligent autonomous systems.  

The Company

Robotic Systems creates end-to-end solutions, which combine custom electronics, software and hardware to solve some of the most challenging problems in mining and agriculture. 

The Australian company’s collaborative approach and practical development pathway accelerates the journey from ideas to manufactured products through an advanced prototype development cycle.

robotics systems lab

Image courtesy of Robotic Systems

Robotic System’s clear value proposition and success in solving difficult problems is reflected in the company’s diverse and expanding client base, which includes start-ups to billion-dollar companies, as well as advanced research organisations as repeat customers.

Examples of successful projects include:

  • Weed geolocation and spraying systems for broadacre agriculture
  • Underground wireless monitoring systems for mining
  • Airborne methane analysis systems for the CSIRO

mining truck

Image courtesy of Robotic Systems

R&D Tax Support

The R&D Tax Incentive program has been a key support for Robotic Systems and its clients. Robotic Systems takes an active role in the identification of projects that might encompass some eligible R&D activities, and putting in place the right documentation to support claims.   This includes experiment design, setup and testing methodology, proposed or viable outcomes and actual results, as well related expenditure such as hours and prototype costs. 

For companies that access R&D services through a Registered Research Provider (RSP), it can be a great way to collaborate and gain access to expert R&D resources, without having to invest in specialist staff or infrastructure. And, you can claim an R&D tax offset for eligible expenditure on registered R&D activities even if your total claim is less than the usual expenditure threshold of $20,000 in an income year.

NOAH’s Involvement

NOAH has been working with Robotic Systems for several years now. The Robotic Systems team had made one R&D tax claim themselves, however, Adam Amos, Director of Robotic Systems, was less than convinced that the program was worth pursuing again, given the amount of time and effort it had taken the team for a relatively modest benefit.    

Fortunately, Adam decided to give it another shot, this time with NOAH Connect managing the process. NOAH came on board and refreshed the teams understanding about the scope of the eligibility criteria, took over the technical drafting and updated the cost methodology. Further, NOAH helped Robotic Systems navigate the increasingly complex compliance environment and ensure a sound R&D claims framework was established.  Most importantly, this allowed the team to focus on building and strengthening their core business.

NOAH is proud to be partnered with Robotic Systems and assist them with R&D Tax Incentive claims. To find out more about them, visit them at roboticsystems.com.au or check out their videos, ‘The Robotic Systems Experience’ and ‘How Does Robotic Systems Work?’.

Get in touch with Robotic Systems if you need a practical, affordable and creative solution to an automation problem.  

 

 

 

 

 

 

 

 

Don’t Wait, Apply for R&D Tax Incentive By 30th September 2020

From devastating bush fires to global pandemics, 2020 has already been a year that has severely impacted our regular everyday lives. It’s probably safe to say that R&D Tax Incentive claims probably haven’t been high on the agenda. The good news is that the Australian government has extended the deadline to apply for R&D Tax Incentive Claims for the period of 1st of July 2018 to 20 June 2019 (FY19) income year. The new deadline date is now the 30th September 2020 (previously 30th April). A fantastic result for anyone who may be experiencing a disruption or has simply been putting it off. 

Contact Noah Connect if you’re looking to meet this deadline and submit your R&D application. We’ll help you organise crucial aspects of your application, including:

  1. Assessing Eligibility Criteria

Applying for the R&D Tax Incentive is a complex process that’s highly nuanced. We’ll use our vast experience to determine whether your business activities are defined as “experimental” under the program, and help you demonstrate how your proposed idea addresses an R&D knowledge gap.  

  1. Getting financials and records in order

Every R&D Tax Incentive Claim requires comprehensive supporting documents to substantiate the activities registered and costs being claimed. We’re here to help you review and assess your records to assure compliance with the program. 

Now more than ever it’s important to take advantage of tax incentives available to you and your business. If you’re looking to apply before September 30 for FY19 or compile a claim for FY20, don’t wait. Contact an experienced team of professionals, who’ll support you throughout all stages of the application. Get in touch today, it’s worth the effort. 

Small Business & Family Enterprise Ombudsman’s Review of the R&D Tax Incentive

The much anticipated Review into the R&D Tax Incentive (R&DTI) conducted by the Small Business & Family Enterprise Ombudsman, Kate Carnell, has now dropped and it’s fair to say that Ms Carnell hasn’t pulled any punches.

In short, the review found that the complaints of those small and family business taxpayers whose historic R&DTI claims had been subjected to review were well and truly justified. It was critical of the inordinate amount of time that was allowed to elapse between the R&D and the implementation of the compliance activity. It found that in most cases that the compliance activity itself was not only “untimely’’ but also “inconsistent and in many cases targeted’’. Moreover, the review identified that there had indeed been “an overall shift in the way the R&DTI legislation has been interpreted over the last three to four years’’ with “a narrowing of focus leading to a rejection of claims” which previously might have been regarded as “low risk’’.

The Ombudsman concluded that such an approach “undermined the policy intent of the R&DTI legislation” and seemed to be more about “recouping Government expenditure on the R&DTI”. It had not only created uncertainty but “has had a devastating impact on the companies” to such an extent that some now “face financial ruin”. Much more could be said about how compliance activities generally were found to be “reactive”, to “assume guilt” and to “lack the commercial understanding of how small businesses operate”.

In this last respect, we note that one of the recommendations made by the Ombudsman was that “[s]ubstantiation and record keeping requirements should reflect commercial practicality with Regulator personnel fully equipped to understand and collaborate with small business”.

All in all, we think the Review is a pretty damning assessment of the way in which the R&DTI compliance regime is currently being administered.

In the interests of balanced reporting, we should note that the Ombudsman did also examine the role played by R&D consultants. We have to admit that our patch did not escape criticism with the Ombudsman finding that there was evidence of some “mischief” in the R&DTI consulting sector. To be fair, though, this was identified as being largely confined to those unscrupulous operators (including some larger firms) who were aggressively marketing promises of cash tax refunds to businesses. NOAH agrees that such behaviour needs to be stamped out in order to prevent longstanding and well-respected R&DTI consultants from being tarred with the same brush. This is why we wholeheartedly endorse another of the Ombudsman’s recommendations that something akin to Austrade’s “Quality Incentive Program Consultant Register” be implemented in the R&DTI space. This would provide a level of surety to business that a particular R&DTI consultant is indeed properly accredited and has the expertise to offer professional and reliable advice.

The Ombudsman’s other recommendations seem equally well intentioned and sensible, namely that clearer guidance be drafted that is more attuned to small business and assurances given that any audit/ review activity take place as close as possible to the taxpayer’s first year of claim.

We can only hope that the Regulators take these recommendations on board when and if they revise their approach to R&DTI compliance. Reading between the lines, the Ombudsman seems to be quite optimistic that a change for the better might well be on the horizon. Let’s hope that such optimism is not misplaced because what is not in dispute is that the R&DTI can help stimulate Business Expenditure on R&D (BERD) which, in turn, has been linked to productivity growth.

R&D Tax Incentive Reforms Back on the Parliamentary Agenda

Just when we thought that the R&D tax reforms proposed by the Federal Coalition Government in its 2018 Budget were well and truly dead and buried they have been resurrected and reintroduced into Parliament – on the last sitting day of 2019 to boot!

You might recall that back in 2018 the Coalition proclaimed that the reforms were aimed at:

  1. improving the integrity of the system
  2. continuing the support of the start-up end of the R&D spectrum; and
  3. refocusing support for larger companies with greater rewards for companies undertaking higher-intensity R&D.

To the Coalition’s great frustration, a fractious Senate put these proposed reforms to the sword back in the day but it seems the government has kept them well and truly up its sleeve and in “original condition” for they have been reintroduced almost unchanged.

Clearly the government fancies its chances of getting them passed into law this time around but will nevertheless still have to prosecute its arguments when the Treasury Laws Amendment (Research and Development Tax Incentive) Bill 2019 gets debated upon Parliament’s resumption in February next year. Should the legislation pass it will apply to income years commencing on or after 1 July 2019.

To refresh everyone’s memory, here follows a comparison of how the proposed law differs to the current law:

R&D entities with aggregated turnover in excess of $20M

Current Law

Non-refundable R&D tax offset at a rate of 38.5%, equivalent to 8.5% effective tax saving.

Proposed Law

Non-Refundable R&D Tax Offset rate to be tiered depending upon the R&D entity’s “R&D intensity”. This “R&D intensity” is defined as the proportion of the R&D entity’s total business expenditure (as per Item 6 of the company income tax return) spent on eligible R&D expenditure in the income year (i.e. the R&D claim).

The tiers and the applicable Non-Refundable R&D Tax Offset rate are as follows:

Tier R&D intensity range   Intensity premium
1 R&D claim that is up to and equal to 4% of total company expenses 4.5%
2 R&D claim is between 4% – 9% of the total company expenses 8.5%
3 R&D claim is greater than 9% of the total company expenses 12.5%

 In what can be seen as somewhat of a concession, the Government has proposed that the $100M R&D expenditure cap be increased to $150M.

R&D entities with aggregated turnover less than $20M

Current Law

Refundable R&D Tax Offset rate at 43.5%.

Proposed Law

The Refundable R&D Tax Offset rate will be fixed at 13.5% over and above the corporate tax rate. The amount of any R&D tax refund will capped at $4M per annual (except for clinical trials).

Other changes:

There are some other changes that have been proposed in the Bill around claw back rules and balancing adjustments and the manner in which the program is being administered. We will tackle these at greater length in the upcoming blogs.

What Can We Say

As a long-standing adviser in R&D tax and a passionate advocate for a broad based and generous Government R&D incentive scheme for the nation, we are obviously disappointed to see the reforms reintroduced. In the context of a regulatory environment that is demonstrably and increasingly harsh, we fear these changes will only further discourage local R&D investment by introducing complexity (at the non-refundable end, where the benefit is marginal at best to begin with) and a measure of discrimination (at the refundable end with the carving out of clinical trials only from the $4M cap).

It is hard for us to see these changes as otherwise especially given the Government forecasts that they will deliver savings in excess of $4B to the budget bottom line.

R&D Activities – Text, Context and Purpose

Australian coal mining company Moreton Resources has won a Full Federal Court appeal over the R&D tax offset claims it made on a failed Underground Coal Gasification Plot Plant.

Whilst the Decision is still subject to appeal, the case is being hailed as a landmark in the R&D Tax space as the judgement handed down by the Court provided greater clarity in respect of the following:

The Court’s approach to interpretation of the RDTI legislation

The Court confirmed that R&D provisions are designed to encourage industry R&D and in this context, it supported an expansive interpretation of the legislation including what constitutes ‘’new knowledge’, ‘purpose’’, ‘outcome’’, ‘’core’’ and ‘’supporting’’ activities etc.

The definition of ‘Core R&D activities’

Instead of equating core R&D with the dictionary definition of ‘’experimental activity’’, the Court concluded that one should simply pay heed to the legislative definition of ‘’R&D’’ in s355-25 paragraph (a) and (b).

Practically, this means ‘’core R&D activities’’ can be qualitied by checking if it satisfies the following:

1. The outcome of undertaking the activities is unknown (i.e. knowledge/technology gap), and cannot be determined in advanced using current knowledge, information or experience; and

2. This gap can only be bridged by undertaking hypothesis guided experimentation based on scientific principles.

The scope of the registered activities

The Decision reaffirmed the Court’s approach to viewing a set of ‘’core R&D activities’’ as a whole and not as individual ‘’components’. The legislation (s355-25) defines ‘’core’’ in the plural form – “core R&D activities”, implying that it permits a set of related experimental activities to be considered in combination and evaluated against the statutory criteria.

This is consistent with our practical approach to the characterisation and registration of activities, as what we often tell clients that a mosaicked approach should not be taken in assessing eligibility.

Records and documentation

The Court sighted many documents generated during the course of the ‘project’. This highlights the importance for companies to generate and maintain contemporaneous documentation evidencing R&D activities registered.

How can Noah help

The different approaches taken by the AAT and the Court in the interpretation of the RDTI legislation demonstrate the complexity behind the qualification, characterisation, and substantiation of ‘R&D activities’.

The most frequent question we get asked by a client is “We’re doing or developing X,Y, and Z, is it R&D?”. I wish there was a more straightforward answer that I could give, but as is the case with all other federal statutes, the RDTI legislative definitions are open to interpretation. Under self-assessment, it all turns on how compelling or, in legal terms, ‘’reasonably arguable’’ is your position.

A trusted and experienced adviser like Noah can guide you through the steps required to determine if a ‘project’ you’ve undertaken involved ‘’R&D activities’’. More importantly, our in-depth knowledge and understanding of the legislation and case law governing the space mean that you’ll be fully informed about all the measures you should factor into your deliberations when assessing if certain activities satisfy the legislation.

In conclusion, I’d also say that it was refreshing to see the Court in the Moreton case reaffirming the importance of taking account not just of the text of the legislation but also its context and purpose. In simple terms that means acknowledging that the RDTI is what is referred to as a piece of ‘’relieving’’ tax legislation. It is not designed to impose a penalty but rather to encourage and promote a certain class of activity – i.e. ‘’research and development’’ activity.  Under these circumstances, one should not seek to ‘’read the legislation down’’ in order to apply a narrow interpretation.

If you’d like to know more about the importance of the Moreton decision and how it might impact your RDTI entitlements, please feel free to get in touch today.

Software Activities in the R&D Tax Incentive

The Regulators have issued additional software guidance, namely ‘Software activities in the R&D Tax Incentive’ and ‘Guide to common errors’ (both of which were released on 21 February 2019).

The Guidance is notable in that it references commentary from the Frascati Manual and thereby introduces additional concepts and criteria into the conversation about the type of software development that should qualify for R&D tax treatment.

In this respect, the Guidance cites some examples of software-related activities that Frascati considers to be routine and therefore not ‘’R&D’’ in nature including:

  • the development of business application software and information systems using known methods and existing software tools
  • adding user functionality to existing application programs (including basic data entry functionalities)
  • the use of standard methods of encryption, security verification, and data integrity testing.

The lawyer in me cannot help but be somewhat irked by the reliance on non-legislative material and the fact that it is given almost as much weight as the plain ordinary meaning of the words in the statute itself. To be fair, though, the Regulators’ viewpoint (perhaps quite rightly) is that such activities would surely be within the capabilities of just about any competent software engineer, who would not, therefore, need to conduct any ‘’experimental’’ activity to acquire any new knowledge in order to complete such tasks.

In the overall scheme of things as well, the Guidance is welcome not least because it provides still further context that can inform conversations about what kind of software dev benchmarks most strongly benchmarks for claim under R&D tax.

Update from the State Reference Group On R&D Compliance

AusIndustry and the ATO recently convened and jointly hosted a State Reference Group (SRG) meeting. SRG forums provide a select group of R&D tax advisers with an opportunity to discuss program administration and operational matters. NOAH is a foundation member of the SRG and a regular participant.

At this most recent SRG, much of the discussion was focussed on the Regulator’s new ‘’streamlined’’ compliance process. This involves the review of every registration that is lodged with further compliance activity being conducted where this initial review identifies some risk of non-compliance. Where a registration is flagged for examination, a Notification of Examination and a Statement of Issues is provided to the claimant, who then has 30 days to provide the records that were generated during the course of conducting the R&D. Extensions of time to respond may be requested.

These records of substantiation are expected to evidence the ‘’experimental’’ nature of the work (i.e. show that some kind of ‘’hypothesis’’ or idea has been raised and tested and the outcomes assessed). On the accounting side, supporting documents (e.g. timesheets/ invoices etc) should show the connection between the R&D expenditure being claimed and the R&D activity that has been registered.

It is clear that the Regulators have little appetite to exercise discretion and give companies the benefit of the doubt in terms of assessing whether documentation mustered in support of a claim satisfies the burden of proof that taxpayers must meet under self-assessment.

Quarterly Payments Back on the Table

Cash flow. Cash flow, cash flow, cash flow. Two little words that can either make or break a business. Start-ups and SMEs will know that cash flow is the elixir of life, which is why the Labor government was applauded in 2011 when it announced its intention to pay entitlements to companies eligible to claim the R&D Tax Incentive cash rebate in quarterly installments. Our clients told us first hand that they viewed this act as progressive – a policy that seemed to show an understanding that cash flow and innovation are inextricably linked – and we wholeheartedly agreed.

Unfortunately, in December 2013 the new Coalition government announced that it would not be proceeding with the program of quarterly credits. Intensive planning and consultation with industry groups and huge support from all parties affected meant that the move came as a complete surprise. In fact, it was shown by a leading body in the biotech industry that the timing of the incentive payments was a significant factor in the value of the Incentive in encouraging additional R&D activities.

As a result, it comes as little surprise that the announcement by the Greens last week that it will ‘move amendments in the Senate to…put in place quarterly payments’ has been received with rapturous applause. The same amendment sees the Greens also aim to block the government’s plan to exclude companies with revenue over $20billion from claiming the Incentive.

With the aim of the Incentive to increase Australian levels of innovation and presence on the global stage, we were left scratching our heads as to why some of those companies at the forefront of innovative developments in this country would be denied such benefits.

Hopefully, we will see a positive result in the near future, with the government recognising the immense benefit quarterly payments can deliver in helping shape an economy of innovation.

Entrepreneurs’ Infrastructure Programme – Part 1 (R&D Tax)

The Entrepreneurs’ Infrastructure Programme was announced under the 2014-15 Commonwealth Budget, replacing previous programs such as Commercialisation Australia and the Innovation Investment Fund.

With $484.2 million over 4 years to be spent, the Government’s aim for the programme is to:

1.  provide strategic support to business

2. bring research and business together to develop and commercialise novel intellectual property; and

3. equip small and medium businesses with the management and business skills needed to lead change and expansion.

So what does that all mean? Well, it seems the government is taking on more of a guidance councillor approach. Whilst funding is still provided (on a co-contribution and competitive grant basis, as in past schemes), the money granted is to be spent on activities recommended by appointed ‘Advisors’ and ‘Facilitators’. There is a significant focus on internal business practices, improving business capabilities, business relationship management and access to the Government’s ‘network of advisors’.

The Programme consists of three elements

1. Business Management

2. Research Connections

3. Accelerating Commercialisation

1. Business Management (commenced 1 July 2014)

The services offered under the Business Management element of the Programme include:

  1. Business Evaluation – on-site analysis of all aspects of a business, carried out by independent, appointed Advisors. A Business Evaluation Report is prepared and presented, along with suggested improvements to the business.
  2. Supply Chain Facilitation – access to services that assist individual businesses to improve their interactions with suppliers and customers, to increase participation in new and existing markets. Improvements are suggested in a Supplier Improvement Plan.
  3. Business Growth Services – supports eligible businesses with ‘high growth potential’ for up to two years, so that they may develop and implement agreed business improvements to facilitate growth, as outlined in a Growth Services Plan. Businesses are assessed against specific merit criteria to determine the existence of sufficient growth potential, including financial capacity to fund growth.
  4. Business Growth Grant – reimbursement of up to half the cost (no more than $20,000) of appointing an external consultant to implement business improvements outlined in the above services. The total cost of engaging a consultant must be funded by the business before claiming the Grant.

To claim the grant, the business must provide two different consulting quotes and demonstrate:

i.) that the chosen consultant is providing new knowledge to the business

ii.) that the work involved in not simply a part of the normal business operations, and

iii) how the activities are undertaken will help to develop the capabilities previously identified as lacking.

Note: The business must have received advice offered under at least one of the areas outlined above in points 1-3 above, and be implementing the recommendations, to be eligible to claim the Grant.

Eligibility

To be eligible to access the services offered under the Business Management stream, businesses must:

–   Be a registered business/corporation

–   Be registered for GST

–   Not be tax-exempt

–   Have operated in Australia and filed business activity statements for at least 3 years

–   Be financially solvent

–   Have an annual turnover or operating expenditure thresholds between $1.5 million – $100 million

–   Be operating in the following industries: Advanced Manufacturing; Food and Agribusiness; Medical Technologies & Pharmaceuticals; Mining Equipment, Technology & Services; Oil, Gas & Energy Resources; or Enabling Technologies of these sectors, or demonstrate the business has the ability to operate in one of these industries in the future

Entrepreneurs’ Infrastructure Programme – Part 3 (R&D Tax)

3. Accelerating Commercialisation (commenced 1 November 2014)

The third and final element of the Entrepreneurs Infrastructure Programme (EIP), Accelerating Commercialisation (AC), aims to help SMEs and commercialisation offices to commercialise novel products, processes and/or services.

There are two main stages to the AC application process which tie to the two main components of the stream:

Stage 1 – Expression of Interest

Companies that pass this initial review are added to the ‘Accelerating Commercialisation Portfolio’. This database of businesses will be accessible to investors, industry experts, supply chains, ‘strategic corporations’ and Commercialisation Advisors who can provide feedback and guidance.

Stage 2 – Competitive Application for co-funding and further support/exposure

If an application is successful, companies can receive co-funding for eligible projects and expenditure. Up to $1 million over two years for companies and $250,000 for research organisations is available.

Businesses applying for grant funding are assessed against the following criteria:

i)      Need for funding

ii)    Market opportunity

iii)   Value proposition

iv)   Execution plan

v)     Management capability

vi)   National benefits

The ‘Need for Funding’ criteria arguably holds the most weight – businesses must demonstrate that they have exhausted all efforts to fully fund their project yet still have the ability to co-fund their project.

Access to the Expert Network is also provided to those that pass Stage 2. This network can potentially provide business connections, funding opportunities and promotional events.

Eligible projects must be shown to aim to achieve at least one of the following:

–      Complete development of a novel product, process or service

–      Prove commercial viability of a novel product, process or service

–      Make the first sales of a novel product, process or service in Australia or overseas

–      Drive the businesses towards commercialisation of its novel product, process or service

In other words you cannot seek funding if:

–      You cannot demonstrate the commercial viability of your product, process or service

–      You have already made sales and are looking to scale or conduct marketing activities

–      You are looking to develop further versions of your product

–      You are not looking to ultimately commercialise your product, process or service i.e. your project is for internal business use only

–      Your project is still in a fundamental R&D stage with a low likelihood of the finished product being commercialised


Note:

  i)    The business must demonstrate that they are able to equally match the funding being sought through sources besides other government funding schemes

ii)   A project can take place over a two year period but no longer

iii)  Businesses applying for inclusion in the Portfolio but not for grant funding will only be assessed on points ii.-vi. above

iv)  Although the AC stream is open to businesses in all industries, priority will be given for those operating in Advanced Manufacturing; Food and Agribusiness; Medical Technologies and Pharmaceuticals; Mining Equipment, Technology    and Services; Oil, Gas and Energy Resources; or Enabling Technologies of these sectors.

Eligibility

To be eligible to access the services offered under the Accelerating Commercialisation stream, businesses must:

–      Be a registered business/corporation

    Note: applicants can be individuals, partnerships or trustees BUT must agree that at the time of submitting an application that they will form a non-tax exempt corporation before signing a funding agreement if granted

–      Be registered for GST

–      Not be tax-exempt

–      Have not exceeded an annual group turnover of $20 million for each of the three years preceding the application

–      Have a novel product, process or service they wish to commercialise and trade to customers external to the state or territory of the Applicant’s place of business

–      Have ownership, access to, or the beneficial use of, any IP that is the subject of, or is necessary to carry out the eligible project