There are however a number of significant changes to the eligibility criteria. It is important that companies conducting R&D gain an understanding of the new requirements and assess how the new legislation will impact their ability to claim R&D tax benefits.
Significant investment is often required to expand the capacity of existing operations or to access new resource opportunities, and also to improve productivity, minimise environmental impact and ensure worker safety through the use of ever advancing technology. The R&D Tax Incentive can assist those companies conducting eligible activities to achieve these outcomes and allow them to operate more competitively on both a national and international scale.
Increased benefit on R&D expenditure
The R&D Tax Incentive paves the way for companies across sectors to be rewarded in undertaking eligible R&D activities. Under the R&D Tax Incentive, the type of benefit received is dependent upon the company’s annual turnover:
- Eligible companies with a grouped annual turnover of $20 million or greater will be eligible to receive a 40 per cent non-refundable R&D tax offset, equating to a benefit of 10 cents for every dollar spent on R&D.
- Eligible companies with a grouped annual turnover of less than $20 million will be eligible to access a 45 per cent refundable R&D tax offset. For companies in a tax loss situation, this equates to a potential cash refund of $450,000 for each $1 million spent on R&D. This refundable offset is aimed towards start-up companies and SMEs and may be of particular benefit to exploration companies.
The types of eligible expenditure which can be claimed under the R&D Tax Incentive includes salaries of R&D staff, contractor costs, direct project costs (such as consumables, travel costs etc), plant leasing, depreciation of certain plant/depreciable assets to the extent they are used in R&D activities and other indirect costs.
Scope of eligible R&D activities
The R&D Tax Incentive requires companies to distinguish activities as either:
- ‘Core activities’ – experimental activities based on principles of established science to achieve a technical outcome that cannot be known in advance based on the field of current knowledge, information or experience, or
- ‘Supporting activities’ – activities that have a direct, close and relatively immediate relationship with the ‘core activities’ (but are not experimental ‘core’ activities themselves).
Activities that involve prospecting, exploring or drilling for minerals for the purpose of discovering deposits or determining the size or quality of deposits are again excluded from qualifying as ‘core’ activities, but may still qualify as ‘supporting’ activities if undertaken for the dominant purpose of supporting the core R&D activities. Supporting R&D activities which also produce goods or services may also qualify if they also meet this new dominant purpose test.
Therefore, the key to maximising the benefit under the new R&D Tax Incentive will be the ability of companies to demonstrate and substantiate the intent of their R&D activities. The following example illustrates the application of the new definitions of core and supporting R&D activities in the context of mining operations.
Example 1 – TJI Mining
TJI Mining (‘TJI’) is a resource company with interests in resource development and advanced exploration projects in a number of different rare-earth metals and minerals.
Conventional techniques required to process minerals are capital intensive, time consuming and do not allow for the efficient and commercially viable processing of small to moderate ore quantities. Accordingly, in early 2012 TJI initiated an R&D project in order to design and develop novel processes and techniques to enable the effective, efficient and economically beneficial extraction of its target minerals from the ore material.
Core R&D Activities
- Test work & Pilot Trials
During the 2012 financial year TJI undertook significant metallurgical test work in order to assess the efficacy of a developed High Pressure Acid Leaching (HPAL) process. TJI proposed to conduct process testwork on various ore blends in order to gain new knowledge with respect to the effectiveness of the new mineral extraction process. Thus, TJI is addressing a knowledge gap that can only be resolved by undertaking a series of experiments that are carried out based on principles of established science and thus arguably meet the core R&D activity definition
- Process test work – solvent extraction pilot trials
Continuing on from the previous core activity, TJI undertook further analysis and test work activity on the new mineral extraction process in order to determine the ability of the proposed solvent extraction technique to recover and produce high purity minerals. As the process test work is being undertaken through experimentation using principles of established science to address a knowledge gap which cannot have been known or determined in advance based on current knowledge or information, these activities also arguably meet the core R&D activity definition.
Additional supporting activities undertaken by TJI during the 2012 financial year included the monitoring of various baseline programs and the commencement of a venture analysis study with external engineering experts. Although the exploration activities surrounding the discovery of a unique mineral are excluded as being a core R&D activity and caught by the dominant purpose test, the mineral in question has very limited market use and the prevailing purpose of the exploration activities is to support the core R&D activities. Consequently, as the exploration activities have a direct, close and relatively immediate relationship with the core R&D activities, it is arguable they will be eligible as supporting R&D activities.
As the Government has provided limited guidance material to companies on the R&D Tax Incentive to date, some companies may still feel uneasy about the classification and eligibility of their activities undertaken during an income year. If a company is concerned about the eligibility of their activities, they may seek a pre-approved decision from Innovation Australia through the use of an Advanced Finding. A key feature of the Advance Finding process is that the ruling will be binding on the Commissioner of Taxation. As the Advance Finding covers activities conducted in the income year in which the application is made and the subsequent two income years, this can also be used as a mechanism to provide comfort to companies, and investors, as to cash flow which may result from R&D Tax Incentive claims.
Assess all of the R&D tax benefits for which you may be eligible using BDO Austalia’s R&D Tax Incentive
For more information on mining services companies in Australia visit Invest Brisbane.