Companies undertaking smart projects in the 2011 financial year may be claiming their R&D tax cheques under a new R&D Tax Credit program, although we may not find out for sure for some weeks yet.

Instigated by the Labour government, legislation for the new R&D Tax Credit was before parliament when the August 21 election was called, and the R&D Tax Credit was put on hold pending the outcome of the election.

However with the Labour win, the new R&D Tax Credit is back on the cards with time and debate to determine what form it will finally take and whether it will apply retrospectively to the 2011 financial year, or whether it will wait until 1 July 2012.

Prior to being put on hold the new R&D Tax Credit showed some promise for small businesses with an increased 45% cash benefit compared with the current 37.5% amount. However there was controversey over plans to tighten the eligibility rules to exclude many commercially-related activities that are currently allowable such as field trials and full scale development for trials. As small businesses generally cannot afford purpose built R&D facilities and therefore undertake R&D activities usually with a customer in mind, any plans to make commercial activities ineligible would mean a drop in the R&D benefit for small companies.

R&D SmartTax will announce details of the new R&D Tax Credit as soon they are released and will also be first to release a new R&D Eligibility Wizard specifically for the R&D Tax Credit. This will save companies time and effort in deciphering the new rules, letting you know exactly how much you can get back for your smart ideas.

For any queries, please contact R&D SmartTax at [email protected] or visit our website www.smarttax.com.au

 http://anthillonline.com/anthills-smart-100-winners-revealed-2010/
Our online tools to help innovators more easily access the Australian Federal Government’s research and development tax breaks have been recognised by Anthill Magazine’s judging panel as the top Australian innovation for 2010.

R&D Eligibility Wizard and the R&D Application Wizard both take the guess work out of making claims for small entrepeneurs, helping more Australian companies secure vital cash funding for their ongoing research and development.

Caroline Hughes, Managing Director of R&D SmartTax is pleased by the honour of winning the Smart100 award, particularly with the view that even more smart Australian companies will now become aware of the R&D tax breaks and pick up their rightful entitlements.

“It’s tax time now, so make sure you get your claim in and don’t miss your cash this year.” Caroline says.

If there is any way that we can make your R&D tax claims easier, please let us know and we at R&D SmartTax will do whatever it takes to help.

Thank you to everyone for all your support and keep up the innovation!

From Caroline and the R&D SmartTax Team.

Did you know that around 30% of Australian businesses claim to be innovative, yet less than 0.5% actually make R&D tax claims?

If you have clients in the manufacturing, health, agriculture, software, food, mining or construction industries there is a very high probability they should be making R&D tax claims. 

R&D tax claims can lead to large cheques for small companies from the ATO when R&D tax claims are elected as a refundable tax offset. Many small companies rely upon this cash flow each year but many more are still unaware that projects they do every day could be eligible for this funding. 

With our goal in mind to get all the small businesses in Australia to pick up their rightful R&D tax entitlements, here are our Top 5 things we would like accountants to make sure they get right when dealing with R&D tax claims:

1. ASK ABOUT R&D

Please ask all clients, especially those that are in the manufacturing, software, mining, health, food and agriculture industries whether they will be making an R&D tax claim at tax time. These are the industries most likely to be eligible for R&D. So many have never heard of the R&D tax benefits and will be relying upon their tax advisors to let them know that these programs exist. To view examples of recent benefits received by small companies, click here.

2. ONLY COMPANIES CAN CLAIM

Know that R&D tax claims and grants can only be made for registered Australian companies. Please consider this when setting up the organisational structure for the company. If your client is in one of the industries listed in 1. perhaps consider whether a company structure may be better than a trust or partnership.  However if your client is operating as a trustee company, know that there may be circumstances where it can be eligible if it is doing R&D on behalf of itself and not the trust.  There is one R&D claim per company per financial year but if multiple companies are involved there can sometimes be joint claims where each company claims its share of costs incurred in its own R&D claim.

3. Understand How The R&D Fits Into the Company Income Tax Return

On a day to day basis there are absolutely no changes required to bookkeeping or accounting to make an R&D tax claim. It only appears right at the end in the Company Income Tax Return. This is because the R&D expenditure that is claimed is simply ordinary company expenditure that has been classified as R&D because it was directly related to R&D activities. To let the ATO know this though we complete an R&D Tax Schedule at tax time that is attached to and feeds into the calculation of the tax payable or refund amount.  Relevant labels are L, D, U, V, Y and M.

If the R&D Tax Concession is elected this has the effect of reduced tax payable. If this increases losses, then generally losses can be carried forward.

If the R&D Tax Offset is elected (best for small businesses in tax loss) then in most cases the tax loss amount is converted to a cheque from the ATO for the equivalent amount of the R&D expenditure.  Two situations this will not occur are when there are not enough losses or where the client has existing tax liabilities. The R&D tax offset cheque will be used to pay any existing tax liabilities before any remainder is sent to the client.

To work out the benefit amount, for the R&D Tax Concession election multiply the R&D expenditure by 7.5%. For the R&D Tax Offset election the maximum amount is generally 37.5%.  With the R&D Tax Offset there are a series of steps to go through to get to the exact benefit amount.  The ATO has set it out in their R&D Guidebook (Part C) and we have used this to create a handy little R&D benefit calculator tool (we use it all the time).  Unfortunately the steps are a little long to list here, but it is well worth knowing, and I am happy to pass this onto to anyone interested ([email protected]).

4. Don’t forget Label D

As R&D expenditure has already likely hit the Company Tax Return as deductible expenditure, we need to make sure there is no double deduction when we feed the R&D numbers again in the Company Tax Return via the R&D Tax Schedule. This is where Label D becomes an essential requirement. Companies must make sure they include their R&D expenditure amount at Label D which has the effect of adding back the R&D expenditure that was already deductible. Of course if the R&D expenditure was capitalised during the year for any reason, then make sure this amount is not included at Label D.

5. R&D Tax Offset Cheques are Not Assessable Income

They are not grants and therefore do not need to be included as assessable income. To record them as a general rule the journal entries are:

Upon creating the R&D tax offset refund:

 Cr Income tax expense

Dr Provision for tax

When the refund comes in it is coded to the provision for tax account:

Dr Bank

Cr Provision for tax

Finally, if you think your client might be making an R&D tax claim, particularly an R&D Tax Offset claim, then make sure to hold off lodging the Company Income Tax Return until your client has lodged and received their R&D registration number from AusIndustry. Companies have 10 months after year end to obtain their R&D registration number. The R&D registration number is then included in the R&D Tax Schedule. No number, no cheque.

If you want to help your clients using Australia’s best practice and award winning R&D tools, then purchase our 2011 R&D Tax Toolkit for Accountants.  Identify eligible projects quickly, prepare the R&D Application form in one step and minimise compliance risk with proven substantiation templates.  Plus get 12 months access to a qualified R&D tax specialist to contact at any time with queries. With maximum benefits and minimum fuss it will be easy to show your clients the value this tax time.  Click Here to Learn More.

Ok, so you are the sole person engaged in your business. You are just starting out on an idea you’ve always wanted to try. So there is no income, no profit, no money yet on the horizon. Surely you are too small to claim R&D tax benefits?

The answer here is a resounding NO, you are not too small to claim. In fact you are perfect. Exactly who the government hopes to target with these programs.

The whole idea behind the R&D tax breaks is that they are an incentive to encourage Australians to take more risks with regards to creating innovative new technologies. And there is nothing more risky than a start-up. A brand new business with nothing more than some great intellectual capital to get it going.

It is expected that you will have no income in these early days or early years. And it is perfectly understandable that you are not yet profitable. These things take time. That is the nature of the start-up company. But everyone had to start somewhere, even the likes of Professor Ian Frazer, Cochlear or BHP.

And this is where the R&D tax breaks slot into the picture. To offset the risks that you are taking, the government has agreed to pitch in a little, well, actually a lot, to help get you off the ground.  Instead of providing you with just a rather useless tax concession – after all who needs to reduce tax payable when you have no income – the government has decided that what small start-ups needs is cash. Cold hard cash and plenty of it. Infinitely more useful for paying the bills.

And that’s what the R&D Tax Offset does. It takes your tax loss and converts it into a cheque for the equivalent amount of your R&D expenditure x 125%.  This means that the greater your tax loss, the greater your R&D cheque, provided you have spent the same on R&D during the year.

As a small start up you probably have paid scant regard to matters such as your company tax return. After all, there’s not a lot to show in it income-wise.  But provided you have spent at least $20,000 on R&D during the financial year, then you are perfectly eligible to claim your R&D tax cheque at tax time.

So at tax time this year, make sure you talk to your accountant about making an R&D tax claim. Don’t listen to them if they tell you that you are too small, and follow our easy Four Step system to making your claim.  For a minimum $7,500 cheque it could be just the thing you need to keep afloat as a start up and take your business to the next level.

We look forward to seeing your business make it when it does.

R&D Eligibility Wizard

R&D Eligibility Wizard

The great thing about R&D eligibility is that if you are eligible, you are guaranteed to get the R&D tax benefits. It’s law. A cheque from the ATO for tens or even hundreds of thousands of dollars could be coming your way, just for ticking all the right boxes at tax time.

But the government has not exactly made finding out eligibility the easiest task.  For the R&D Tax Offset and R&D Tax Concession Programs, eligibility rules are written into two main pieces of legislation, the Income Tax Assessment Act (1936) and the Industry Research and Development Act (1986).  The ITAA 1936 legislation alone stretches from Section 73B to Section 73Z over 112 pages. On top of this there are Tax Rulings, Guidelines, Fact Sheets, Interpretive Decisions and Case Law to all aid in the interpretation of the rules.

It is no wonder that to date the only way companies have been able to wade through this has been with the aid of R&D tax specialist consultants. And the consultants know they have a captive market. Fee schemes range from 10% to 30% of benefit amounts or hourly rate billing at up to $1000/hr.  But it not just the fees, by letting the consultants do all the work, companies often find they have absolutely no idea about what is claimed and how. And the claim preparation period can stretch for months and months taking up valuable staff time to run back and forth providing information for the consultants. Some companies may be justified in thinking that the benefit may not be worth the effort and cost.

But fortunately there is now a viable alternative for companies to find out eligibility without the use of consultants. It is through a new online software tool called the R&D Eligibility Wizard. Designed to be easily accessed at any time by small businesses who can least afford consultant fees or lost business time, it contains all the essential eligibility criteria for companies to quickly know their eligibility before they claim.

The R&D Eligibility Wizard covers both company and project eligibility, plus has a handy benefit calculator section to help companies work out what their R&D Tax Cheque is likely to be. Eligibility issues companies need to consider include:

• which company is the correct claimant where there are multiple parties involved such as clients and suppliers
• what types of software are eligible
• how new the technology being developed needs to be, and
• what types of records need to be kept to substantiate eligibility

But the R&D Eligibility Wizard does more than just tell you which projects you can claim at tax time, it actually educates you about the R&D tax programs so that they become part of your decision making in your business when deciding on strategic directions to take. For example, would your decision to undertake a new project or not change if you knew for sure that the government would pay up to 37.5% back at tax time?  And although you may not be incorporated yet, if you knew that these programs and all grants are only given to incorporated companies as opposed to sole traders, trusts or partnerships, then you may decide to talk to your accountant about changing your business structure so you can get these benefits.  And you may also negotiate a supplier contract differently to ensure you can claim the R&D tax benefits.

If your company does undertake work to create new or improved products, devices, services, materials or processes, then there is a good chance it could be eligible for R&D tax benefits.  The R&D Tax Offset program is extremely lucrative for small businesses that rely upon the extra cashflow every year.

We hope that all small businesses and their accountants find the R&D Eligibility Wizard tool of great value, and look forward to seeing your smart ideas benefit Australia too.

Adding up your R&D Expenditure is the step in the R&D Tax Claim process that has the most direct impact on your final R&D Tax Cheque amount. The more that is claimed, the more a company will get back, but it is critical to get it right, otherwise you risk trouble with the ATO down the track.

Here are Five Tips to help ensure your R&D expenditure is correctly claimed at tax time:

1. R&D Expenditure can only be claimed for R&D activities that have been registered with AusIndustry. If the activity was not registered, then you can’t claim the associated expenditure. This is why it is important not to be too specific with your registered R&D activities. Refer to our website for a suggested list of R&D activities to register.

2. Expenses must have been incurred by the company in the year of income. If your accountant oks it for your Profit and Loss statement, then this is a good indication that it has been incurred.

3. Only claim wages and salary amounts that have been actually paid. Many small business owners do not always pay themselves which is great for company cashflow, but it means that you will often miss claiming these payments.

4. Don’t forget the depreciation from assets used in R&D.  Make a list of all assets that supported the R&D project including items in the office and then apportion the depreciation for the R&D v non-R&D use. 

5. Substantiate everything. The ATO treats R&D tax claims just like any other company claim for tax deductions and will happily review or audit a company to make sure everything has been correctly claimed. However as this may not occur for a year or more, then create a file to store all supporting records including timesheets, invoices, purchase orders, asset registers and trial records.

R&D SmartTax has a template to help you add up your R&D Expenditure for the 2010 financial year. This is available on the website www.smarttax.com.au. If you have any questions do not hesitate to contact us at any time: [email protected].

R&D Plans are a legal requirement for R&D Tax Claims made for either the R&D Tax Concession or R&D Tax Offset programs in Australia. They are not required to be lodged before claiming but they are required to be on hand in the event of a review or audit. From a company’s point of view they make an excellent reference point to document eligibility of the R&D project(s) against the eligibility criteria. Legal criteria are set out in the R&D Plan Guidelines made available on the AusIndustry website (www.ausindustry.gov.au).

Five tips to making sure your R&D Plans are prepared correctly are:

1. The R&D Plan must be authorised prior to the commencement of major activities in your R&D project

2. R&D Plans are best prepared by the main technical person responsible for the R&D project. This is because much of the plan discusses the technical details of the project.

3. Back up assertions made in your R&D Plan with other documents including literature, patent or internet searches.

4. Be detailed and thorough with information. The R&D Plan is your main document to support eligibility of your R&D project and will be reviewed by AusIndustry in the event of a review or audit. Give AusIndustry plenty of reasons to support the eligibility of your project.

5. If you have several smaller projects which have one common technical objective, then use one R&D Plan to cover all the projects, describing the details of the smaller activities under the Technical Objectives, Innovation and High Levels of Technical Risk sections.

R&D SmartTax has a template for the R&D Plan available on its website www.smarttax.com.au. Please also contact us at any time if you need assistance with preparing or updating your R&D Plan.

The current R&D Tax Concession and R&D Tax Offset programs are being replaced by a new R&D incentive program driven through the tax system called the R&D Tax Credit.

Slated to commence on 1 July 2010, the start date and its final form are now in doubt due to the legislation not making it through the last sitting of parliament before the call of the Federal Election on 21 August 2010. As a result it is now unclear as to whether the new R&D Tax Credit will commence on 1 July 2010 or 1 July 2011. This will become clearer once the Federal Election is over.

Features considered beneficial to small businesses include:

• an increase from 37.5% to a 45% tax credit
• definition of small businesses expanded to include any company with a group turnover less than $20 million
• no upper limit on R&D expenditure to be claimed
• decoupling of benefit from the company tax rate meaning that if company taxes decrease, the R&D benefit won’t
• increase of ownership threshold from tax exempt entities from 25% to 50%
• availability of tax credit to entities whose intellectual property resides overseas

However there are a number of proposed features that are less desirable for many small businesses including:

• change of eligibility definitions away from the well known and understood definition used by thousands of businesses over the past 25 years
• creation of a new requirement to allocate all activities between core and supporting
• supporting activities to receive no support where there is any commercial purpose to the activity
• many activities currently supported are no longer eligible

As an incentive to encourage small businesses to undertake innovative and risky activities, it is vital that the new R&D Tax Credit continues to support the critical development and trialling activities that are essential to prove commercial viability of new designs. Small businesses cannot afford to set up separate R&D departments and this means the only way innovative activity occurs is within a commercial environment and almost certainly with a customer in mind.

Thus when debate resumes about the new R&D Tax Credit, there will be plenty of pressure on the prevailing government to make changes to the way the legislation is currently drafted and to restore support for small business.