R D Tax Offset

The recent Budget scrapped one of the only grants programs for R&D, Commercial Ready, so the cash-strapped startup might be looking for other ways to get money from the government. It's possible to get some back in a tax break but it's not as good as the dollar-for-dollar schemes like Commercial Ready.

It's a bit of a black art so if you ask 3 people how it works you'll get 3 different answers. My take on it will be different again so don't take my word for it, ask a responsible adult (accountant or consultant) before taking action.

As far as I can tell it goes something like this; If a company is engaging in Research and Development (i.e. R&D must have an element of risk and it must be directed at making something new and commercially useful) and spending between $20k and $1m on R&D in a financial year and if the company's turnover is less than $5m per year then it is eligible for a tax deduction of 125% of the amount it spent on the R&D. So, for example, if a company spends $20k on R&D then it can deduct $25k from its taxable income. That works if the company is earning enough to pay tax. For companies making a loss the "tax concession"' turns into a "tax offset" which mean the government gives the company 30% (the company tax rate) of 125% of what it spent on R&D. That works out to be about 37cents for every dollar spent on R&D. There are some other rules; If a company has been claiming the tax concession for 3 years in a row then for the 4th and subsequent years the concession can go up to 175%; R&D on software is eligible only if the software's output is new and if the company has the intention of selling the software; the company must have an R&D Plan signed off by the directors by 1st July of the financial year the concession or offset is to be applied for; the concession or offset can be applied for up to 10 months after the end of the financial year; the company must register with the IR&D Board and apply for the concession or offset before it does its tax return.

So the sequence of events for claiming an R&D concession or offset for the 2008/2009 financial year would be something like the following:
1/ Draft an R&D Plan by 1st July 2008. This doesn't have to be very detailed but it should outline the goals and possible ways they will be achieved. It must be signed off by the directors or there must be evidence of an R&D Plan being in place at the beginning of the financial year. The R&D Plan does not need to be submitted to the ATO, AusIndustry or the IR&D Board at this stage.
2/ During 2008/2009 record your spending on eligible R&D.
3/ Some time between 1st July 2009 and 30 April 2010 the company should register with the IR&D Board, apply for the tax concession or offset then do their tax return. The application for the tax concession or offset should be made before or at the time of lodging the tax return, but not after.

But the most important thing is; don't take my word for it, check with a responsible adult or have a look at the ATO web site and become as confused as I was.

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