Article
R&D Tax Incentive Regime – Planning for the year ahead
Tax Alert - February 2021
By Simon Taylor & Brendan Ng
As we get into the business end of tax return filing season, many taxpayers will find themselves preparing their Research and Development (“R&D”) Tax Incentive claims for the first time. While there may be some awareness of the process, there are a number of considerations that taxpayers should be taking into account.
We discuss below how taxpayers can organise themselves to ensure they are able to meet the required R&D tax credit regime deadlines for the 2019-20, 2020-21 and future income tax years, as well as a quick general update on the regime. Some of the key deadlines are summarised in the table below. The key is to ensure you are adequately prepared.
How do I ensure I am prepared?
Below are some key points to consider when preparing the 2019-20 and/or 2020-21 income tax year claims:
- Enrol in the R&D Tax Incentive regime via myIR. It is only once a taxpayer is enrolled in the R&D regime that the supplementary return (and the general approval form and significant performer application) can be accessed.
- Factor in the supplementary return in your income tax return timelines. As the amount of the R&D credit will impact a taxpayer’s tax position, the R&D credit should be considered in conjunction with the preparation of the income tax return. It is likely to require involvement of technical staff outside of the finance function. It is also worth noting that a taxpayer’s R&D supplementary return can currently only be filed online.
- For the 2020-21 income year, consider what R&D projects you are undertaking and prepare your general approval application by the 7th day of the 2nd month after the end of your income year. For some taxpayers this may even be required before your 2019-20 supplementary return has been prepared / submitted. The general approval process is discussed in more detail below. An extension has been made to the filing deadline for the 2020-21 income year due to COVID-19, as explained further below.
- Identify whether more than $2 million of eligible R&D expenditure is expected to be incurred in the income year (in which case an organisation may elect to be a significant performer). Note that Inland Revenue must be notified of this by the 7th day of the 2nd month after the end of your income year (i.e. 7 May for a 31 March balance date). The significant performer regime is discussed in more detail below, including a proposed deadline change.
- All draft approval applications in myIR are kept for 60 days. This should encourage taxpayers to start preparing their applications as early as possible as it provides most taxpayers with enough time to develop their answers before submitting their applications.
What dates should I be aware of?
The key dates to be aware of for selected example balance dates are below:
Balance date |
General Approval and Significant Performer applications due |
General Approval applications due (COVID-19 extension - where applicable) |
Income Tax Return due (with extension of time) |
R&D Supplementary Return due (with extension of time) |
---|---|---|---|---|
2019/20 income years |
||||
All 2019/20 income years |
N/A |
N/A |
31 March 2021 |
30 April 2021 |
2020/21 income year |
||||
31 December 2020 |
7 February 2021 |
7 May 2021 |
31 March 2022 |
30 April 2022 |
31 March 2021 |
7 May 2021 |
7 August 2021 |
31 March 2022 |
30 April 2022 |
30 June 2021 |
7 August 2021 |
7 November 2021 |
31 March 2022 |
30 April 2022 |
With a short timeframe between year-end and general approval / significant performer applications, in addition to financial reporting and audit commitments, the timing for completion of applications should be planned carefully and considered well in advance. Early applications are consistent with Inland Revenue’s expectations around contemporaneous supporting documentation.
What is general approval?
For the 2020-21 income year onwards, taxpayers will need to get their core and supporting R&D activities approved by the Commissioner (unless filing under the significant performer regime) in order to be eligible to claim the R&D tax credit (known as general approval). This general approval application is essentially the same as the activity parts of the R&D Supplementary Return, asking the same questions in relation to R&D project / activity eligibility, but excluding detailed questions in relation to expenditure. Once submitted, Inland Revenue will then analyse information, raise questions as necessary and, if accepted, taxpayers will have assurance that their R&D activities are eligible for a claim at the end of the year. This general approval will be binding so long as there are no material changes, law changes etc, and the approval can last up to 3 years. Variations can be made to approvals before the due date and new projects can be added as required. Taxpayers should note that this last point is critical – a variation or addition can only be made if it is notified by the general approval due date, not the supplementary return filing date. It is therefore critical that R&D projects are identified on a real time basis and the R&D processes don’t only start after balance date.
A COVID-19 determination allows a filing extension to the 7th day of the 5th month after the end of the 2020-21 income year. This applies where the planning or conduct of eligible research and development, or the ability to appropriately obtain necessary information, seek advice and formulate a general approval application on time has been materially delayed or disrupted by the COVID-19 outbreak and its effects. This is done on a self-assessment basis and it is recommended that affected taxpayers keep supporting records of why they meet these criteria.
What if I elect to be in the significant performer regime?
If an organisation expects to spend more than $2 million of eligible R&D expenditure, they may elect to claim under the significant performer regime, rather than the above project-by-project general approval regime. The following points should be considered:
- When making a significant performer notification, an organisation needs to apply for approval of their criteria and methodologies (“CAM”) for determining whether R&D activities and expenditure are eligible. Approval involves a very detailed presentation of the procedures used to identify and track R&D and sufficient time should be allocated to this process to ensure the information required by Inland Revenue is provided.
- Significant performer applicants are also required to obtain certification from an Inland Revenue approved certifier that they have complied with their approved CAM R&D identification systems, and have incurred more than $2m of eligible R&D expenditure.
- Applicants under the significant performer regime may still choose to seek general approval for selected projects - for example, for those where upfront certainty of their eligibility status is desired. This can be beneficial given that even after CAM approval, the Commissioner may still review the eligibility of specific R&D projects should she desire.
- It is also important to note that there is no fall-back ability to apply for general approval if a CAM application is denied after the deadline for applying for general approval has expired. Significant performer applicants should accordingly carefully consider their choice of the pre-approval mechanism. If the significant performer approval is chosen, applicants should submit their CAM applications as early as possible to allow for a general approval claim to still be made if their CAM is not ultimately successfully accepted by the Commissioner. To address the no-fall back ability, it is proposed in the Taxation (Annual Rates for 2020-21, Feasibility Expenditure, and Remedial Matters) Bill to bring the CAM application deadline forward from the 2021-22 income tax year onwards, to six months before the end of the applicant’s income year.
Taxation (Annual Rates for 2020-21, Feasibility Expenditure, and Remedial Matters) Bill
A number of R&D specific proposals are included in this Bill – please see our previous Tax Alert article. Oral submissions have been heard on the Bill, with the Finance and Expenditure Committee report back on submissions due on 4 March 2021. After the report is published there will be greater clarity about the proposed changes.
If you would like to discuss how the R&D tax credit regime could benefit your business, please do not hesitate to contact our specialist R&D team or your usual Deloitte advisor.
January 2021 Tax Alert contents
- COVID-19 backup support for business revealed
- Revised Inland Revenue guidance on tax avoidance – Happy New Year?
- R&D Tax Incentive Regime – Planning for the year ahead
- What’s new in the world of GST?
- Inland Revenue and OECD provide further guidance on COVID-19 related transfer pricing issues
- How do continued COVID-19 border restrictions impact tax
- More guidance on cryptoassets – hard forks and airdrops explained
- Snapshot of recent developments