1 June 2021
As we approach the end of the 2021 financial year, there have been a number of changes relevant to the research and development (R&D) Tax Incentive and other mechanisms the Australian Government uses to support business innovation. This bulletin presents some highlights.
Activation of the new R&D Tax Incentive Customer Portal
The new R&D Tax Incentive Customer Portal was activated on 17 May 2021. This means that instead of using a PDF smartform, R&D activities will be registered via an online portal. The portal also introduces some changes to the questions asked in the application form, intended to better articulate the eligibility of a claimant’s R&D activities – we briefly touched on these in our April 2021 bulletin. Importantly, the portal uses MyGovID to verify the identities of company officers and external advisers of the applicant.
Applications for the year ended 30 June 2021 can be submitted from 5 July 2021. Claims for the year ended 31 December 2020 must be submitted using the smartform, if submitted before 30 June 2021.
Temporary full expensing of assets, accelerated depreciation and instant asset write-off
Businesses with an aggregated turnover of less than $5 billion can immediately deduct the business portion of the cost of eligible new depreciating assets under the temporary full expensing measure. The eligible new assets must be first held, and first used or installed ready for use, between 7.30pm AEDT on 6 October 2020 until 30 June 2023 (as proposed to be extended from 30 June 2022 by the 2021-22 Federal Budget). Note that if your business has an aggregated turnover of $50 million or more, it is excluded from immediately deducting the cost of an eligible asset that is:
- a second-hand asset, or
- an asset you entered into a commitment to hold, construct or use before 7.30pm AEDT on 6 October 2020.
If the business and asset is eligible for the temporary full expensing measure and the asset was used for an R&D purpose, then you are entitled to an R&D notional deduction for the proportion of the asset that was used for R&D. Note that since the applicable R&D law (Division 355 of the Income Tax Assessment Act 1997 (ITAA 1997)) substitutes the requirement for the asset to be used ‘for a taxable purpose’ to one ‘for the purpose of conducting one or more of the R&D activities’, the date on which the asset is ‘installed ready for use’ may differ.
Where an asset was acquired before 6 October 2020, while temporary full expensing will not be available, the following may be available, subject to when the asset was acquired:
Accelerated depreciation may be available, applicable to the proportion for which the asset was used for R&D activities.
If the asset cost less than $150,000 and the business applies Division 40 of the ITAA 1997 for applying tax depreciation, the instant asset write-off may be available - once again, the notional R&D deduction will depend on the proportion for which the asset was used for R&D activities.
Proposed Patent Box regime
The Australian Government announced in the May 2021 Budget that it would implement a patent box regime to apply from 1 July 2022. While the detail is yet to be finalised, the announced program has the following features:
the program will tax revenue derived from patents at 17 per cent, as opposed to a corporate tax rate of 30 per cent for large entities and 25 per cent for smaller entities
the program will apply to patents granted after the Budget announcement (i.e. 11 May 2021)
the program will apply to patents granted in the medical and biotechnology fields
the Government has flagged it will consider including patents in the clean energy field in future
Digital games tax offset
Another announcement made in the May 2021 Budget was the introduction of a 30 per cent refundable tax offset for eligible businesses that spend a minimum of $500,000 on qualifying Australian games expenditure. This tax offset is intended to improve Australia’s attractiveness as a destination for digital talent. Consultation with industry is planned in mid-2021, to inform the criteria and definition of qualifying expenditure to support the development of digital games. Games with gambling elements or that cannot obtain a classification rating will not be eligible.
Recent Federal Court and Administrative Appeal Tribunal decisions
In the case of Coal of Queensland Pty Ltd v Innovation and Science Australia [2021] FCAFC 54, the Federal Court affirmed the decision of the Administrative Appeals Tribunal (AAT), which was that a series of activities undertaken by the taxpayer with the aim of making the mining, processing and handling of highly banded coal seams economically viable, were not eligible to be core R&D activities or supporting R&D activities.
The AAT’s decision affirmed by the Federal Court was that the evidence did not support the claimant’s contentions. The AAT noted that there were no R&D plans or documentation to demonstrate the activities were carried out by applying a systematic progression of work based on principles of established science, or that they proceeded from the purported hypothesis to experiment, observation and evaluation, leading to logical conclusions. Relevant to mining R&D, the AAT observed that the activities were not conducted for the purpose of generating new knowledge but were all generic exploration activities undertaken in initial exploration stages.
In another decision, the AAT found in favour of the applicant in PKWK and Innovation and Science Australia (Taxation) [2021] AATA 706 and held that activities concerning the development of pyrolysis technology to process municipal waste were core or supporting R&D activities. While this judgement has many further implications, some key observations include:
Witness statements and viva voce evidence are accepted by the AAT as legitimate records of R&D eligibility. However, the applicant also presented documentary records, e.g. spreadsheets, drawings and similar documentation.
The AAT acknowledged that ‘in a commercial environment, not every step (i.e. “intermediate steps” or the “iterative process”) will be recorded.’
The existence of similar products or systems elsewhere does not by itself preclude eligibility, provided the claimant’s targeted ‘new knowledge’ is appreciably different or there remain unresolved technical obstacles in the prior art.
The AAT noted that the ‘new knowledge’ criterion is ‘specifically expressed to include new knowledge in the form of improved materials, products, devices, processes or services.’ The AAT considered this ‘a comparatively low statutory threshold for an applicant to cross’.
It remains unclear whether the act of computer modelling can be considered an experiment but it appears the AAT was open to this.
Payments to associates
Finally, we remind claimants that incur R&D expenditure to ‘associates’, that such expenditure must be paid by 30 June 2021 in order for it to be taken into account in the R&D claim for the current income year.
Specifically, provided the relevant eligibility requirements are met, a claimant may only include expenditure incurred to an ‘associate’ in the R&D claim when the expenditure is ‘paid’ before the end of the income year.
For this purpose, an ‘associate’ includes shareholders and directors of the company, and can include other related legal entities (such as trusts).
Where an amount is not paid until a later income year, a claimant will either forgo the notional R&D deduction altogether and claim a normal tax deduction on an incurred basis, or defer the claim for the notional R&D deduction until the year in which payment is made. The term ‘paid’ takes its general meaning under income tax law and includes constructive payment.
Therefore, claimants who are seeking to include an amount incurred to an associate as part of their R&D claim for the current tax year must ensure these amounts are paid prior to 30 June 2021.
If you would like to discuss any of these matters further or how these changes will impact on your business, please reach out to your PwC R&D contact.
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