I have just got off a call with a potential R&D Tax Incentive applicant and realised that for many people, the R&D in the R&D Tax Incentive can still be confusing from an activity and expense point of view and what can and can’t be claimed.
This post sets out an exclusions list that relate to the R&D Tax Incentive.
1. Non Core R&D Activities
To be eligible for the Tax Incentive, you have to be undertaking a Core Activity. In one of the first Guidelines that AusIndustry released on the R&D Tax Incentive, there was a page on what are non core R&D Activities.
The list is as follows:
1. Market research, market testing or market development, or sales promotion (including consumer surveys).
2. Prospecting, exploring or drilling for minerals or petroleum for the purposes of one or more of the following:
a. discovering deposits;
b. determining more precisely the location of deposits; or
c. determining the size or quality of deposits.
3. Management studies or efficiency surveys.
4. Research in social sciences, arts or humanities.
5. Commercial, legal and administrative aspects of patenting, licensing or other activities.
6. Activities associated with complying with statutory requirements or standards, including one or more of the following:
a. maintaining national standards;
b. calibrating secondary standards;
c. routine testing and analysis of materials, components, products, processes, soils, atmospheres and other things.
7. Any activity related to the reproduction of a commercial product or process:
a. by a physical examination of an existing system; or
b. from plans, blueprints, detailed specifications or publicly available information.
8. 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):
a. the entity (the developer) for which the software is developed, modified or customised;
b. an entity connected with the developer;
c. an affiliate of the developer, or an entity of which the developer is an affiliate.
2. Ineligible Expenses
The ATO has a list of ineligible expenses. These expenses are unlikely to have a link to R&D activities and would relate to general company operating or marketing expenditure that the company would undertake regardless of the R&D activities:
- advertising (for instance, of a company’s product)
- audit fees
- bad debts
- company establishment and other fees incurred under the companies code in relation to the administration of the company
- costs incurred in preparing taxation returns
- decline in value of a depreciating asset
- directors’ fees
- distribution and selling expenses
- employee benefits such as canteen and recreational facilities
- entertainment expenses
- grounds and garden maintenance costs
- insurance premiums on matters unrelated to R&D such as loss of profits and product liability
- legal expenses not associated with any approved research project, for example, legal expenses for a patent search before undertaking a research project or in taking out a patent after a successful project
- patents and trademarks in marketing a new product or technology, or as a result of R&D activity
- rent paid for premises that are not used in R&D activities
- salaries, associated costs and on-costs of support staff not linked with R&D activities and of staff employed in areas such as distribution, sales, marketing and debt collection
- tender costs.
3. Ineligible Expenditure
There is also ineligible expenditure which cannot be notionally be deducted under the R&D Tax Incentive:
- interest expenditure (within the meaning of interest in the withholding tax rules)
- expenditure that is not at risk
- core technology expenditure
- expenditure included in the cost of a depreciating asset (decline in value notional deductions may apply however)
- expenditure incurred to acquire or construct a building (or part of a building or an extension, alteration or improvement to a building).