R&D Tax Incentives Key warning signs

Transcription

1 R&D Tax Incentives Key warning signs Andrew Hodge Andre Lakomy July 2015

2 Part 1: R&D Tax Incentives 1. Introduction to the R&D Tax Incentive 2. Types of eligible R&D entities 3. R&D activities 4. R&D expenditure and the ATO R&D Schedule 5. Administration of the R&D Incentive 6. Claim process and deadlines

3 1. Introduction to the R&D Tax Incentive: Offset rates available NB: The R&D offset rates are expected to decrease by 1.5% each for income years commencing 1 July Legislation was passed by the House of Representatives is currently before the Senate (to be debated when Parliament resumes). Expenditure now capped at $100million

4 1. Introduction to the R&D Tax Incentive: Share of registrations* by States and Territories (Income year 2013/14) (Source: Department of Industry and Science, TaRDIS as at 28 February 2015) (* including some which are grouped for tax purposes)

5 1. Introduction to the R&D Tax Incentive: Share of registrations by Industry Sector (Income year 2013/14) (Source: Department of Industry and Science, TaRDIS as at 28 February 2015) (* including some which are grouped for tax purposes)

6 2: Types of eligible R&D entities A body corporate incorporated under Australian law (Commonwealth, State or Territory law) A body corporate incorporated under a foreign law that is an Australian resident for income tax purposes Includes a body corporate acting in its capacity as trustee of a public trading trust. A body corporate incorporated under a foreign law that: Is a resident of a foreign company that has a double tax agreement in force with Australia and the agreement includes a definition of permanent establish Carries on business through a permanent establishment in Australia Can be a Partnership if each Partner is an eligible entity Deemed R&D entities (National Tax Equivalence Regime)

7 2: Types of eligible R&D entities Ineligible R&D entities Trusts Sole traders Individuals Unincorporated associations Body Corporate acting as a Trustee (unless for a public trading trust) Exempt entities Corporate Limited Partnerships cannot be R&D entities.

8 3: R&D Activities Research: Can be Pure or Applied Research Development: How to apply or further develop new knowledge into a new or improved product, process, device, material or service

9 3: R&D Activities (Core R&D Activities)

10 3: R&D Activities Excluded activities Market research, market testing or market development, or sales promotion (including consumer surveys) Prospecting, exploring or drilling for minerals or petroleum for the purposes of one or more of the following: discovering deposits determining more precisely the location of deposits determining the size or quality of deposits Management studies or efficiency surveys Research in social sciences, arts or humanities Commercial, legal and administrative aspects of patenting, licensing or other activities

11 3: R&D Activities Excluded activities Commercial, legal and administrative aspects of patenting, licensing or other activities Activities associated with complying with statutory requirements or standards, including one or more of the following: maintaining national standards calibrating secondary standards routine testing and analysis of materials, components, products, processes, soils, atmospheres and other things Any activity related to the reproduction of a commercial product or process: by a physical examination of an existing system from plans, blueprints, detailed specifications or publicly available information Developing, modifying or customising computer software for the dominant purpose of use by any of the following entities for their internal administration (including the internal administration of their business functions)

12 3: R&D Activities Examples and discussion

13 4: R&D Expenditure Types of expenditure Salary & Wages (including on costs) Associate expenditure Contract expenditure (where the expenditure is conducted on behalf of the R&D entity). Direct expenditure including consumables, travel and accommodation Certain eligible overheads including rent, electricity, administration and other day to day business costs which may support R&D activity or personnel Decline in value

14 4: R&D Expenditure Excluded Expenditure Building expenditure Expenditure included in the cost of a tangible depreciating asset as per Div 40. Interest Core technology Expenditure deemed not at risk Amounts not otherwise deductible for tax (entertainment, fines etc) Mark-ups between connected entities Deemed market value for transactions between associates

15 4: R&D Expenditure The ATO R&D Schedule Label D = Accounting expenditure Part A: Notional R&D deductions Foreign owned R&D shown separately

16 4: R&D Expenditure The ATO R&D Schedule Part B: Feedstock adjustment Additional assessable income Part C: Clawback of grant funding (10% tax) 5% permanent difference for 45% refundable offset Part D: Associate expenditure. Must be paid in the income year or carry forward and notionally deduct when paid.

17 4: R&D Expenditure The ATO R&D Schedule Part E: R&D Offset Calculation Exempt entity ownership (greater than 50% means only the non-refundable offset is available) Aggregated turnover less than $20million for 45% refundable / greater than $20million for 40% Aggregated turnover is a defined term. Consider connected and affiliated entities Cash out refundable offset when tax payable has been reduced to nil Non-refundable offset can be carried forward

18 4: R&D Expenditure Interaction with other tax offsets R&D Expenditure is notionally deducted and is only calculated for the purposes of determine the R&D offset amount. Interaction with other offsets (Refer to ITAA 1997 s63.10 Priority rules): Foreign Income Tax Offsets Non-refundable R&D Tax Offset (any excess can be carried forward subject to COT/SBT) Refundable R&D Tax Offset (any excess can be refunded when tax payable is nil) Franking Deficit Tax Offset. Where there are multiple carry forward R&D offsets, apply in the order in which they arose (FIFO). Recent ATOID 2015/6 clarifies that the head entity can access excess carry fwd offsets held by a joining entity at the time it joins. Need to satisfy COT/SBT after that time.

19 5: Administration of the R&D Incentive

20 6: R&D Claim Process and Deadlines R&D Application Form Describes each R&D Project and activity for each financial year How does your R&D meet the eligibility requirements? Must be lodged within 10 months of financial year R&D in the Tax Return Calculate expenditure related to each registered activity Amendment to tax return must be lodged within 4 years

21 Part 2: Key warning signs

22 Key Warning Signs Lack of clear strategic direction Consecutive losses lack of turnaround strategy Lack of budgeting/forecasting Lack of cash flow management Loss of major customers/contracts Loss of key management Loss of major suppliers Reduced sales Increased working capital Payment plans with suppliers/ato Non-lodgement /payment of BAS, non-payment of super Break-down of relationship with lender

23 Health Check Process

24 Informal Restructure Project M FAS involvement initiated by the accountant concerned about company's ongoing viability Overview Family owned/run business' (operating since 2000) Operating in the infrastructure sector Turnover: $7m FY14; $35m in FY15 Cash flow problems: Rapid growth Dispute about progress payments Poor financial management GT assistance Prepared 3 way financial model to assess funding requirements Assisting management negotiate payment plans with suppliers and ATO Sourced finance facility to stabilise the business Managing M&A process Key takeaway Get in early Professional assistance to develop realistic cash flows and understand funding requirements

25 Informal Restructure Project A FAS involvement initiated by the accountant concerned about company's ongoing viability Overview Family owned/run business' (operating since 1990) Wholesaler Turnover: $170m FY14; $90m in FY15 (changed business model) Cash flow problems: Implemented new warehousing system Injection of capex created cash flow problems Cumbersome internal reporting / forecasting taking up CFO time and energy Consecutive losses of c. $3 million GT assistance Reviewed 3 way financial model to assess funding requirements Provided value added improvements to model Assisted management negotiate payment plans with suppliers Identified short-term cash flow funding needs and appropriate financing facilities Key takeaway Get in early Professional assistance to develop realistic cash flows and understand funding requirements