The New R&D Tax Incentive

1. The New R&D Tax Incentive Implications and impacts for your business • Nicola Purser & Ray Forrester • 8 September 2011 Nicola PurserRay Forrester Partner, R&D Tax Incentives Senior Manager, R&D Tax Incentives (07) 3237 5648(07) 3237 5950 nicola.purser@bdo.com.auray.forrester@bdo.com.au

2. R&D Incentives • Government Rationale • Technological innovation is a major driver of economic growth • Companies will not spend the optimal amount on R&D without government support as the returns do not justify that level of spending • The social benefits of R&D spending exceed those accruing to the firm that is investing in R&D • To influence R&D performers either to locate their activities within the country or at least to stop research jobs from leaving the country. The New R&D Tax Incentive Implications & impacts for your business

3. R&D Incentives • Designing a regime • What is the rate of the concession or offset on an after-tax basis? • Is all or a portion of the offset refundable? • What types of activities qualify? • Are there any territorial limits? • Is the system volume based or incremental, or a mixture of both? • What types of expenditures qualify? • What is the lodgement deadline and how much substantiation is required? • What is the likelihood of obtaining the offset once lodged and what is the audit process? The New R&D Tax Incentive Implications & impacts for your business

4. The New R&D Tax Incentive • Key aspects and changes • Applies for income years beginning on or after 1 July 2011 • Rules contained in a new Division 355 of the Income Tax Assessment Act 1997 • Repeals sections 73B to 73Z of the Income Tax Assessment Act 1936 • Administrative rules in a new Part III of the Industry Research and Development Act 1986. The New R&D Tax Incentive Implications & impacts for your business

5. The New R&D Tax Incentive • Key aspects and changes • Calculation of tax benefit (deduction to tax offset) • New definition of R&D activities • Compliance and administration changes • Other changes • PEs of foreign corporations now eligible • Adjustment to assessable income for feedstock expenditure • Adjustment to assessable income for grant funding (clawback) • Additional scope to claim R&D activities conducted overseas. The New R&D Tax Incentive Implications & impacts for your business

6. The New R&D Tax Incentive • Key aspects and changes - Tax benefit The New R&D Tax Incentive Implications & impacts for your business

7. The New R&D Tax Incentive • Comparison of tax benefit (40% non-refundable) The New R&D Tax Incentive Implications & impacts for your business

8. The New R&D Tax Incentive • Comparison of tax benefit (45% refundable) The New R&D Tax Incentive Implications & impacts for your business

9. The New R&D Tax Incentive • Definition – Core R&D activities The New R&D Tax Incentive Implications & impacts for your business

10. The New R&D Tax Incentive • Definition - Core R&D activities • ‘Exclusions list’ - certain activities continue to be excluded from being core • market research, testing or development, or sales promotion • prospecting, exploring or drilling for minerals or petroleum • commercial, legal and administrative aspects of patenting/licensing • management studies, efficiency surveys • complying with statutory requirements/standards • reproduction of commercial product/process • research in social sciences, arts or humanities • in-house software development for the dominant purpose of internal business administration. The New R&D Tax Incentive Implications & impacts for your business

11. The New R&D Tax Incentive • Definition – Supporting R&D activities The New R&D Tax Incentive Implications & impacts for your business

12. The New R&D Tax Incentive Case study – Deep Cycle Batteries Pty Ltd (DCB) • Case study • Deep Cycle Batteries Pty Ltd • Deep Cycle Batteries Pty Ltd (‘DCB’) is a manufacturer of automotive lead-acid batteries in Australia • Experimenting with recycled lead for use in battery manufacturing • Significant technical concern that use of recycled lead will impact on production throughput objectives • Production trial required to resolve technical uncertainty. The New R&D Tax Incentive Implications & impacts for your business

13. The New R&D Tax Incentive • Case study – DCB production trial Core Supporting Supporting Supporting $40k trial expenditure $240k trial expenditure The New R&D Tax Incentive Implications & impacts for your business

14. The New R&D Tax Incentive • Case study – DCB production trial • Key question: How does DCB satisfy dominant purpose test if production activities ultimately result in saleable products? • Factors that may support dominant purpose position include: • Additional monitoring, record keeping and output inspections • The extent of potential disruption to normal production activities • The risk that production outcomes will be compromised • Other points of differentiation between the trial production run and normal operational activities • Documentation likely to be key in maintaining all trial costs as eligible R&D • Technical objectives and scope of trial • Documentation of trial risks • Recording of trial results and conclusions. The New R&D Tax Incentive Implications & impacts for your business

15. The New R&D Tax Incentive • Compliance and administration • Advance findings • An R&D entity can request a finding about the nature of activities (ie core or supporting) before it is possible to register the activities (or before undertaking the activities) • Advance finding is binding on the Commissioner • May be appropriate for large projects where certainty around eligibility is important (eg where incentive has significant impact on financial modelling) • R&D plans and record keeping • No longer statutory requirement for an R&D project plan • However, similar documentation still required to support activities eligibility The New R&D Tax Incentive Implications & impacts for your business

16. The New R&D Tax Incentive • Compliance and administration • R&D application form • No change to lodgement deadline (10 months after tax year end) • More onerous ‘self-assessment’ registration regime • Separate out core and supporting R&D activities in the R&D application form and identify costs attributed to each • Project versus activity costing? • Pressure on AusIndustry to reduce compliance burden. • Quarterly payments • Potential for quarterly payments for SMEs from 2014. The New R&D Tax Incentive Implications & impacts for your business

17. Where to from here? • Planning • For those that have a 30 June year end – it applies now • We have Law. You don’t have to wait for Government’s interpretation • Good chance to finally do what the Government’s wanting you to do and look at R&D strategically • Opportunities for those with substituted accounting periods (e.g. 175% premium concession) • Contemporaneous documentation is key to maximising $ The New R&D Tax Incentive Implications & impacts for your business

18. Where to from here? • Further information • AusIndustry half-day briefing - 20 Sept in Brisbane • "R&D Tax Incentive Guidance Discussion Paper" - late October 2011 • Ask us • Meeting with key AusIndustry personnel • Meeting with Sophie Mirabella, Shadow Minster for Industry, Innovation and Science. The New R&D Tax Incentive Implications & impacts for your business

19. Questions... Implications & impacts for your business The New R&D tax Incentive Nicola PurserRay Forrester Partner, R&D Tax Incentives Senior Manager, R&D Tax Incentives (07) 3237 5648(07) 3237 5950 nicola.purser@bdo.com.auray.forrester@bdo.com.au