CRCs and the R&D tax incentive

Article by Ms Anne-Marie Perret, Advisor to high growth companies, Board Member & Investor

The ISR System Review on the Performance of the Australian Innovation, Science and Research System released in February 2016 found that:

  • overall Australia is above average when it comes to knowledge creation; however
  • when it comes to knowledge transfer “The identification and selection of knowledge for application and the passage of information between those who generated the knowledge and those who will apply the knowledge” the findings slip to “needs to be improved”; and
  • when it comes to knowledge application “The development, trailing, testing, refinement and iteration of ideas to address a specific aim” the finding is that Australia’s knowledge application does not currently match its strength in knowledge creation.

What does this mean for CRCs and the knowledge they generate.  How do CRCs improve the knowledge transfer and application?  Options include:

  • More collaboration with business to further the research and commercialise the outcomes
  • License the IP to another entity to commercialise
  • Spin out research and IP into an entity that can then apply that can execute that knowledge transfer and application in a commercial setting.

In addition to the ISR review, a review of the R&D Tax Incentive was commissioned by the Government and conducted by a panel that included Mr Bill Ferris, Dr Alan Finkel and Mr John Fraser.  The findings from this review were released in April 2016.  The panel in its recommendations noted, “that there is a modest amount of collaboration with publically-funded research organisations, but it is not an explicit focus”. Finding 2 of the review proposed increasing collaboration by introducing a collaboration premium ways of increasing collaboration premium to provide additional support for the collaborative element of R&D expenditure undertaken with publicly funded research organisations.

This article is the first of three that will focus on what these reviews and their findings mean for CRCs.  This first article will focus on the R&D tax incentive and what CRCs can do to better leverage the program to help fund research and provide better commercialisation outcomes through engaging and collaborating with industry.

CRCs, as tax exempt entities, cannot claim the R&D tax incentive, however where the CRC has a partner organisation that is a tax-paying entity or the CRC conducts research on a contract basis for a tax-paying entity, the amounts paid to the CRC may be eligible for an R&D tax incentive claim by the tax-paying entity [1].

The purpose of the R&D Tax Incentive is to encourage companies to conduct experimental R&D activities that might not otherwise be undertaken.  In addition, the Government seeks to encourage industry investment in research and development with research organisations by providing benefits to entities that engage the services of registered Research Service Providers (RSPs).  RSPs, including universities and CRCs, are entities registered by AusIndustry (on behalf of Innovation Australia) as being capable of providing scientific or technical expertise and resources to perform research and development (R&D) on behalf of other companies.

The ability to access the R&D tax incentive in relation to payments made to a CRC can help defray the costs of such an investment by the tax-paying entity and serve to encourage the entity to utilise the research services of the CRC.  Therefore, it is in the interests of the CRC to ensure that they are providing their partner organisation or the party contracting them to undertake research with the information that the entity requires to make a claim.

An entity claiming the R&D tax incentive must undertake a registration process annually, within 10 months of the end of their financial year, with AusIndustry to register the activities in relation to which the entity intends to make a claim for that financial year.  AusIndustry guidance makes it clear that entities must describe in writing their eligible core R&D in accordance with the definition of a core R&D activities listed in the Income Tax Assessment Act 1997.  The focus of eligibility for the tax incentive is the core experimental activities undertaken within a project, rather than the project itself.  To establish activity eligibility the entity requires information such as:

  • The hypothesis of the experimental activities undertaken;
  • The new technical knowledge to be generated by the activities undertaken;
  • The unknown outcomes that could only be overcome by undertaking the experimentation
  • The steps in the experimentation and;
  • The findings, observations and analysis of the outcomes of the experimentation.

In addition to establish expenditure eligibility the claiming entity requires:

  • Invoices that detail what the payments are for and the link to the experimental activities.
  • The percentage of the payments that were expended on experimental activities as opposed to the administration of the contract or IP costs.

As activities undertaken with a partner entity or under contract with an entity may not fall neatly within the financial year and different entities may have different financial years, the CRC must be mindful that reporting may be required at the end of the entity’s financial year regardless of the stage of the experiment or the results achieved to date.

CRCs should be aware of the potential benefits available from the R&D tax incentive to any tax paying partners they may have or to tax-paying entities that may contract with the CRC to conduct research.  If Recommendation 2 of the Ferris, Finkel and Fraser review is adopted the potential benefit to tax-paying entities of engaging with a CRC will increase.  CRCs can maximise the existing and potential future benefit of the program by (a) ensuring their partner organisations are equally aware of the possibility of access to the R&D tax incentive and (b) that the CRC is providing the correct information in a timely manner to the entity making the claim.  Focusing on these steps will ensure that the CRC is best leveraging the R&D Tax Incentive as a source of funds to benefit its research program and a way of encouraging collaboration between the CRC and industry.

 

[1] Note where the tax-paying entity is a partner to the CRC the arrangements put in place around the partnership may impact the ability of the tax-paying entity claiming the R&D tax incentive as such specific advice should be obtained on the arrangements and their impact on R&D Tax Incentive eligibility.