Australia Offers Refundable R&D Tax Incentive
, Partner, International Tax ServicesJeff Driesen
, Director, International Tax ServicesAdrian Hung
, ManagerAlex Zinzopoulos
, Principal, William Buck
US biotechnology organizations that conduct R&D activities in Australia may be eligible for the Research and Development Tax Incentive (RDTI), which could provide significant benefits to an organization including increased cash to reinvest into the business and more.
The RDTI, which is jointly administered by AusIndustry and the Australian Taxation Office, plays a key role in driving biotechnology innovation in Australia. This program provides organizations in the biotechnology sector access to researchers, health professionals, and world-class research facilities.
Details of the RDTI
The RDTI is a tax credit received upon filing of an Australian company tax return to offset expenses and allow organizations to reinvest more capital in themselves.
The Australian R&D tax incentive includes a:
- 43.5% refundable tax credit for companies with an aggregated turnover of less than AUD $20 million
- 38.5% nonrefundable tax credit for companies with an aggregated turnover of at least AUD $20 million
The refundable tax offset isn’t dependent on the company having an income tax liability for the year. If the company doesn’t have tax liability, the tax offset is refundable in cash.
The incentive can then be put back into funding further clinical trials and research in Australia, resulting in a cycle which can significantly increase the scope of the trials in a way not otherwise possible in many other jurisdictions.
What Are Components of R&D Activities?
There are two types of R&D activities that could be eligible for the RDTI: core and supporting.
The RDTI requires the taxpayer to conduct at least one core activity during the income year, which has three key elements:
- New technical knowledge. The activity is carried out for the purpose of generating new knowledge in the form of new or improved materials, products, devices, processes, or services.
- Technical uncertainty. The outcome of the activity can’t be known based on current knowledge, information, or expertise.
- Experimentation. The activity is experimental in nature, based on the principles of established science and requires the necessary steps of hypothesis, observations, and evaluations leading to logical conclusions.
Examples of core R&D activities for life sciences businesses include:
- Pre-clinical trials such as laboratory studies, in vitro testing, and in vivo testing
- Phase 1 clinical trials such as testing treatment efficacy of the lead candidates or disease response
- Phase 2 clinical trials including testing the safety of lead candidates
- Phase 3 clinical trials comparing lead candidates to placebos and other alternatives
- Designing or reformulating new or existing drugs or chemical compounds
- Generating prototypes in robotics or medical devices
Supporting R&D activities are also eligible for the incentive and are necessary for the core R&D activities to be conducted. These include:
- Preliminary research
- Project management
- Data collection
- Chemistry, manufacturing, and controls (CMC) processes
What Are Eligibility Requirements for RDTI?
A company must satisfy various conditions to be eligible for the RDTI. There are also separate criteria for companies subcontracting R&D activities to another entity.
Key Criteria for RDTI
Other necessary conditions that must be satisfied include:
- The applicant must generally be an Australian tax resident company
- The R&D activities must be conducted in Australia
- The company must incur at least AUD $20,000 of eligible R&D expenditures during the income year—including both core and supporting R&D activities
Criteria for Subcontracted R&D Activities
If the R&D activities are subcontracted to another entity, the applicant of the RDTI must satisfy the following conditions:
- The applicant has ownership or rights to exploit any intellectual property generated from the R&D activities
- The applicant bears the financial risk of conducting the R&D activities
- The applicant controls how the R&D activities are performed
Multinational corporations may need certain written agreements in place prior to conducting R&D activities. The nature of the agreements depends upon the corporate structure and who owns the intellectual property.
Overseas R&D activities generally aren’t eligible for RDTI. However, overseas R&D activities may be eligible if the company can demonstrate the following components.
- The overseas R&D activity is necessary and can’t be carried out in Australia for reasons other than cheaper cost
- The overseas R&D expenditure is less than the R&D expenditure conducted in Australia
An advanced ruling must be obtained to determine the eligibility of overseas R&D activities.
What Are Examples of Eligible R&D Expenditure?
- Employee salary and wages
- Labor on-costs such as pension and payroll tax
- Contractor expenses
- Depreciation of plant and equipment
- Expenditure to research service providers and co-operative research centers
- Expenditure to contract research organizations (CROs)
- Overhead expenses including rent, electricity, and internet
- Traveling expenses from attending technical conferences or on-site testing
There are a few considerations for organizations seeking to apply for the RDTI to help make the process more efficient.
Document the Process
Organizations need to keep a record of:
- Planning paperwork, including potential companies or facilities used and documentation of the regulatory approval process
- Project plan, including business goals, technical hypothesis, experiment design, and how the experiment results will be analyzed
- Expenditures, including for overseas activities and work undertaken in Australia
Submit the R&D Application
The R&D application must be submitted within 10 months following the company’s year-end.
Once the application is processed, a registration number is provided for input into the income tax return.
Make the Most of the R&D Claim
Before year-end, simple steps to make the most of the R&D claim include:
- Pay outstanding employee benefits incurred
- Prepay expenses
- Pay any amounts owing to associates
- Choose appropriate depreciation rates
US Tax Considerations
Consider US tax implications to determine if the RDTI would benefit your organization, including:
- Activities undertaken in Australia and the IP ownership implications
- Transfer pricing
- Withholding tax on future dividends and the ability to claim a foreign tax credit for US income tax purposes
- Potential US GILTI (global intangible low-taxed income) tax from the refundable portion of the RDTI
We’re Here to Help
To learn more about R&D tax credits and if your organization is eligible for their benefits, contact your Moss Adams professional.
You can also visit our International Tax Services or R&D tax credit spotlight for additional resources.