Australian R&D Tax Incentive Considerations – December Financial Year-End

While the majority of Australian businesses close their books on 30 June, companies with a December financial year-end aren’t as common.  As the end of December approaches, companies planning to claim the Research & Development Tax Incentive (R&DTI) should carefully consider key factors. Throughout the year, and particularly as it concludes, it is important for companies to continuously review their tax positions, ensure that R&D activities are comprehensively documented, and maintain evidence of the nexus between incurred expenditures and eligible R&D activities are on hand.

Snapshot of key considerations for December year end companies:

• Associate Payments
• Overseas Activities
• Expenditure Not at Risk
• Contemporaneous Record Keeping

Claiming Payments to Associates Expenditure

When claiming the R&DTI, it’s crucial for companies to understand the specific rules regarding payments made to associates. Under Australian tax law, an associate can include related parties such as subsidiaries, parent companies, trusts, shareholders, directors, and even family members involved in the business.

For R&D expenditure incurred to an associate (an entity or individual with a ‘majority voting interest’ or ‘sufficient influence’ over your company), expenses must be both incurred and paid (by way of cash transaction) before 31 December 2024. Merely accruing the expense or having an outstanding liability on your books is insufficient, and The Australian Taxation Office (ATO) requires evidence of actual payment to validate the R&D expenditure claim.

If you have incurred expenditure to associates during the financial year but have not made the payments (and extinguished liability) by 31 December 2024, you can still carry forward and claim the amount in subsequent years following payment. Unpaid amounts can be carried forward but won’t attract the R&D Tax Offset in the December 2024 Company Tax Return.

Now is the time to assess your associate relationships and ensure the payment of any outstanding amounts incurred to associates (on eligible R&D activities) are made before 31 December 2024, if you wish to include them in this year’s R&DTI claim.

Applications for Advance and Overseas Findings are closing soon

Applications for Advance and Overseas Findings for R&D activities commencing between 1 January 2024 to 31 December 2024 are closing on 31 December 2024.

An Advance Finding is a binding decision from The Department of Industry, Science and Resources (DISR) that determines whether your R&D activities are eligible for the R&DTI. While not mandatory, a successful Advance and Overseas Finding application will give you certainty about the eligibility of your activities for up to 3 years.

Typically, expenses incurred for overseas activities are not eligible for a deduction under the R&DTI. However, if you plan to claim costs associated with overseas R&D activities in the December 2024 year, you must take the following steps:

• Submit an Advance Overseas Finding application by 31 December, 2024, providing a detailed justification and supporting evidence as to why the activities had to be carried out abroad, which could include:
  • Access to facilities or expertise not available in Australia
  • Access to a population not available in Australia
  • Activities that would breach the Biosecurity Act 2015
  • Access to a geological characteristic not available in Australia;
• Receive a finding approving the eligibility of the overseas activities for registration;
• Maintain records that evidence the R&D activities were carried out, and that the expenditure is attributable to those activities; and
• Register those certified activities in the annual R&DTI Application (due 10 months after company year end).

Expenditure Not at Risk

Understanding the “expenditure not at risk” provisions and the ATO’s Tax Ruling TR 2021/5 is essential for claimants, under the R&DTI program. Only expenditure that is ‘at risk’ is eligible for the R&D Tax Offset. This means the company must bear the financial risk associated with the R&D activities without any guaranteed recoupment or protection from loss.

Expenditure not at risk refers to costs where the company is not fully exposed to the financial risk of the R&D activities due to certain agreements or arrangements, such as:

• Guaranteed returns: Arrangements where the company is assured of receiving a payment or benefit regardless of the success of the R&D activities.
• Indemnities and insurance: Situations where a third party agrees to compensate the company for any losses incurred in conducting the R&D.
• Non-commercial terms with associates: Transactions with related parties that are not conducted on an arm’s length basis, potentially mitigating the company’s financial risk e.g. non-commercial loan arrangements.

To confirm that your R&D expenditure is at risk and eligible for the R&DTI, consider the following steps:

• Review contracts and agreements: Examine all R&D-related contracts to identify clauses that may limit your financial risk, such as indemnities, warranties, or guaranteed payments.
• Conduct arm’s length transactions: Ensure all dealings, especially with associates, are on commercial terms comparable to those with independent third parties.
• Understand the impact of other funding and grants: Review any government grants, incentives, or third-party funding arrangements to determine if they affect the at-risk nature of your expenditure.
• Consult your accountant or R&D advisor: Engage early with your accountant or an R&D specialist to review your funding arrangements and ensure compliance with the integrity provisions outlined in the ATO’s guidance and relevant legislation.

Contemporaneous Record Keeping for R&D Activities and Expenditure

Thorough preparation and good governance are essential for submitting an R&DTI claim that is able to evidence the self-assessment process that a company went through in preparing its claim.

The substantiation of R&D activities is a major focus of regulator compliance reviews and audits, and it’s imperative that companies ensure they have contemporaneous documentation including technical, financial, and contractual documentation to substantiate the R&D activities conducted, and the associated expenditure records, which evidence:

• You are the eligible claimant of the R&D activities and the activities have been conducted for you i.e., you are entitled to claim (rather than another entity)
• The activities follow a systematic progression of experimental work
• The outcome of the experiments could not have been known or determined in advance
• Experiments are conducted for the purpose of generating new knowledge
• Expenditure is clearly linked to an eligible R&D activity and apportionment methodologies are adequately supported.

If you would like to discuss any of the above considerations, please get in touch with our specialist R&D Incentives & Grants Team who can help you further understand the key R&DTI eligibility considerations as we approach year end.