After the end of the 30 June 2020 income year, many companies will be looking to lodge R&D Tax Incentive claims, particularly those able to obtain a refundable R&D offset. This article considers the impact on R&D Tax Incentive claims of COVID-19 economic stimulus measures.
R&D entities that have accessed economic stimulus measures should consider the potential for interactions with R&D claims for the 2020 tax year and, depending on the date of the company’s tax year end, the following year.
Four key economic stimulus measures to consider are:
- Increased access to the instant asset write-off until 31 December 2020
- Backing business investment with accelerated depreciation until 30 June 2021
- JobKeeper payments and other grants
- State and territory payroll tax relief measures.
More details on Australia’s various COVID-19 economic stimulus measures can be found here.
Instant Asset Write-off
Different treatments apply depending on whether an entity is a small business entity (aggregated turnover below $10m, not the R&D refundable threshold of $20m) or medium business entity (aggregated turnover of between $10m up to $500m as temporarily extended under the recent stimulus measures). Under some circumstances, an entity can access the enhanced immediate write-off for assets and claim the R&D portion of the write-off as R&D expenditure. In other circumstances, an entity must choose one or the other.
If a company (with aggregated turnover up to $500m) calculates the depreciation of its assets under Division 40, it may be eligible to access the additional 50% immediate depreciation for a new depreciating asset under the accelerated depreciation incentive. This potentially also allows R&D claimants to claim the increased depreciation in the first year for those eligible depreciating assets used in R&D activities. This applies to assets acquired on or after 12 March 2020.
R&D claimants that receive the JobKeeper payment for R&D employees may be required to adjust their R&D claims downwards by an amount related to their JobKeeper payments, which effectively compensate the company for the cost of the employee expenditure – the precise amount will depend on when those R&D employees were conducting R&D activities and what proportion of their work time was spent on those activities.
On 27 July 2020, the ATO released its preliminary views in draft TD 2020/D1, which states that JobKeeper payments made for R&D employees should be addressed under the ‘Expenditure not at risk’ provision of Division 355. Specifically, the Commissioner’s draft view is that:
- R&D claimants that receive a JobKeeper payment for an eligible employee who is wholly engaged in R&D activities during a JobKeeper fortnight cannot notionally deduct so much of the wage expenditure paid to that employee as is equal to the $1,500 JobKeeper payment.
- If an R&D claimant receives a JobKeeper payment for an eligible employee who is partially engaged in R&D activities during a JobKeeper fortnight, the notional deduction is reduced by that portion of the JobKeeper payment as is in proportion to the time the employee spends on R&D activities during that fortnight.
- Since such expenditure cannot be notionally deducted, it does not give rise to an R&D tax offset. Therefore, for the portion of JobKeeper payments that trigger the at-risk rule, no extra income tax is payable under the R&D Tax Incentive ‘clawback’ provisions.
Note that this Tax Determination is not yet final and may be subject to change.
State and Territory Payroll Tax Measures
For the most part, payroll tax relief measures applicable to certain employers in the current COVID-19 environment will have the effect of reducing a company’s outgoings – which would include reducing the cost of doing R&D – rather than constituting income related to its R&D activities. For this reason, unless the particular relief measure is structured as a grant, it should not affect R&D claims, except to the extent that it will reduce a company’s expenses generally.
Where an R&D claimant receives a government grant and it is structured as a recoupment of expenditure on R&D activities, or it requires expenditure to be incurred on R&D activities, it is likely to attract extra income tax under the R&D Tax Incentive ‘clawback’ provisions.
For information on how these measures will affect specific circumstances, please contact PwC via https://www.pwc.com.au/research-and-development-gov-incentives.html, or me via LinkedIn.