Govt releases ‘plain English’ R&D tax guide


Denham Sadler
Senior Reporter

New “plain English” guidance for the research and development tax incentive has been released, providing new definitions for “hypothesis” and “new knowledge” and further information on the record keeping required under the scheme.

The new Guide to Interpretation, an update on the document first published in 2016, comes just weeks after the federal government’s “enhanced” reforms to the research and development tax incentive (RDTI) were passed by Parliament, bringing an end to two and half years of uncertainty surrounding the popular scheme.

The new guidance does not mark any new policy shifts or changes in interpretation of the RDTI legislation, but does refresh the language used to make it simpler, introduces new diagrams to assist companies in assessing their eligibility for the scheme, and includes new definitions of key terms surrounding the scheme.

Karen Andrews
Karen Andrews: New guidance should simplify the R&D tax incentives

The document is also updated to take into account recent Federal Court and Administrative Appeals Tribunal decisions regarding the RDTI, including the significant Moreton Resources Ltd v Innovation and Science Australia.

The guidance is a “significant improvement” on the previous version, according to UTS Innovation Council chair Professor Roy Green.

The refreshed guidance is the result of consultation with businesses and tax agencies, industry minister Karen Andrews said.

“By giving greater clarity to the scope of eligible activities under the RDTI legislation, we’re supporting more Australian companies to self-assess their R&D activities against the criteria and offset some of the associated costs,” Ms Andrews said.

“Alongside reforms announced in the recent budget, providing clearer guidance material helps give companies the confidence and certainty to invest in the kinds of R&D that boosts our economy and creates highly skilled jobs right across Australia.”

The guidance is for businesses to use to assess their activities against the RDTI legislation and to “cater to different learning styles and accessibility requirements”.

To be eligible for the scheme, a company needs to have a hypothesis for the R&D it plans to undertake. Previous guidance defined a hypothesis as being ‘expressed as a causal relationship between variables”.

The new guidance outlines that a hypothesis does not need to be expressed in this way, instead defining it as an “idea or proposed explanation for how you would achieve a particular result and why that result may or may not be achievable”.

Eligible R&D activity must also come with the aim of producing new knowledge, defined in the guidance as being in the form of a new or improved material, device, product, process or service, or in the form of new practical or theoretical understanding of a subject.

The new 44-page document also clearly outlines that software development is excluded from the RDTI scheme when it is done for the dominant purpose of internal business administration.

“You may assess your software development activities as core R&D activities that are not subject to this exclusion. If so, we expect to see records that support your assessment around internal administration and your dominant purpose,” it said.

The document also makes it clearer what sort of records companies are required to keep in case their claim under the RDTI is audited. These will have to prove a record of developing a hypothesis, designing the experiment, observing and recording the results, evaluating these results and reflecting on the conclusion.

“We expect you to keep records so that you can provide them to us if we review your application for the RDTI. Your systems and processes that identify, evaluate and record your eligible R&D activities and expenditure will be evidence to support your claim,” the guidance said.

This evidence can include Gantt charts, tests, project plans, prototypes, regulatory approvals, contracts or research agreements, email correspondence, ASX announcements and board minutes.

The new document is an improvement on previous versions and will make things easier for companies looking to access the tax offset, Professor Green said, but the government still needs to look at increasing direct funding mechanisms along with the indirect RDTI.

“The new guidance is clearly a significant improvement on previous versions and, with the abandonment of the $1.8 billion funding cut to this scheme, will hopefully stem the recent precipitous decline in both government and business expenditure on R&D,” Professor Green told InnovationAus.

“However, the challenge in Australia, particularly in post-COVID recovery, is to shift the funding emphasis from an indirect self-assessment scheme to direct mission-led investment in research and innovation, as in most other advanced economies,” he said.

“If next year’s May budget is to fulfil the government’s structural reform ambition, this policy realignment should be high on the priority list.”

In last month’s federal budget the federal government revealed it would be backing down from its highly controversial plan to cut $1.8 billion from the RDTI.

Under the “enhanced” reforms, companies with annual turnover under $20 million will receive a refundable tax offset for eligible R&D activities at 18.5 percent points above the claimant’s company tax rate. Plans to introduce a $4 million cap for these companies have been scrapped.

Larger firms will use a simplified two-tiered intensity measure to calculate the size of their offset, measured as their level of R&D conduct divided by a company’s total expenses. The expenditure threshold has also been lifted from $100 million to $150 million.

The reforms were passed by Parliament unamended last month and will come into effect from July next year.

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