Research and Development R&D Tax Offset Claims

Businesses both small and large have been able to claim some tax benefits from their research and development activities for years. The government wants to foster innovation and is sometimes happy to pay for it.

However, in the past the range of tax benefits was limited. Previously a business could only claim some extra deductions against their taxable income. This was OK for some companies making money, but for many innovative start-up companies involved only in R&D activities, it was useless. They were burning cash and didn’t pay tax so there was no immediate use for any tax deductions.

That has now changed.

All except the largest business now have the option of cashing in their R&D spend. At tax time they can try to claim back a portion of the R&D as a tax refund. The catch is there are many more hoops to jump though to prove your R&D spend, but if you can navigate through that, it is a much better outcome for the smaller end of the market.

Before embarking on an R&D program you should know it is much harder to claim that might you think. Specialists in the field are paid a lot of money to advise businesses on their R&D plans and submissions. It really does need a lot of work and it seems like the thing being development must be close to revolutionary to qualify! If you are considering making an R&D tax offset claim, in our experience it’s probably best to try only if you have a very large R&D project.

There are, of course, many conditions and thresholds for different types of businesses. But suffice to say that the possible tax benefits now seem quite a bit better than before and it’s a step in the right direction.

If you require assistance with your tax situation please contact us.

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Company tax loss carry-back: Finally you can claim your company tax… back!

If you are running a profitable company and have paid tax for several years, it can pretty rough to go through a bad patch. You lose money, make tax losses and don’t get anything back from the taxman. Tax losses are only be used to save tax on future profits leaving your current cash flow situation a bit grim.

Well that’s all about to change.

From the 2013 financial year onwards, it is proposed that a company that makes a tax loss can try to cash back this loss. So if you make a tax loss of $100,000 after a history of making profits, you could potentially receive a refund of 30% of the loss, being $30,000. That would help immensely to rebuild your business and get back on track.

There are many conditions limiting how much you can claim back and I won’t go through all of them. But the general theory behind the rules is that:

  1. You can only claim back at most 3 years of tax
  2. You should not get double the benefit from your tax payments.
  3. You can’t claim back as many losses as you like.

Starting from 2013 there is a phase-in period where the tax loss claim time is shorter. But over the long term the ATO will only ever allow to claim back up to the last three years of losses. That is the plan. Assuming you are reading this a few years in, you will probably be aiming aim to claim back 3 years worth of tax payments.

Here’s the catch though. You can only claim back up the balance of your franking account. Tax experts would say “of course” and just move on. But to everyone else in the room this probably warrants some explanation.

Every time a company pays tax this is recorded on the company franking account. This is like a “tax bank account” which records tax payments and tax refunds. So if a company has a history of paying tax and accumulating the after-tax profits, their franking account would be pretty large.

Take a simple example. Imagine you are a small investor in Woolworths. The company makes money, say $100, then pays tax, leaving it with $70 cash. It then pays that $70 cash to you, and gives you a tax credit for the $30 of tax it has already paid. In this case, the franking account records the tax payment of +$30 and the  dividend credit of -$30 as well. The final balance would be NIL. When you do your tax return you get a benefit and pay less tax on the dividend because you have received this franking credit.

If your company has a NIL balance in your franking account it means someone, somewhere may have already received a benefit from the company’s tax payments. That is why the ATO will only let you claim back losses up to the balance left in your franking account. It doesn’t want to give out a double benefit.

Finally, the government doesn’t have endless piles of money to throw around, so the maximum tax losses you can claim per year are $1,000,000. That makes for a maximum refund of $300,000 per year regardless of how bad the business is going.

Now this is just a simple outline of the rules, but I hope you get a general understanding of how they work for you. If you require assistance with how this will work with your taxation situation please contact us.

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Renounceable Rights Issue Premiums – Capital Gains or Unfranked Dividends?

In taxation ruling 2012/1 the ATO clarifies what happens when:

  • you invest in a company
  • that company offer investors a discounted share purchase plan
  • you don’t participate
  • the company sells your rights to discounted shares
  • the company pays you the amount received on the rights sale

The ATO has confirmed now that these payments are dividends for tax purposes and unfranked.

So what, I hear you ask? After all,  sometimes people called it a capital gain, sometimes a dividend. Many times people just scratched their heads and said “I’ll just declare it as other income”. Either way it was taxable.

But there are two important implications here:

  1. Non residents pay tax – Capital gains on share sales by non-residents are normally not taxed as they are tax exempt. But unfranked dividends are subject to withholding tax which goes directly to the ATO. So it makes a big difference as these amounts can be taxed.
  2. There is no CGT discount – some taxpayers declared the money as a capital gain and if they held the underlying shares for a over a year, tried to claim the 50% discount to reduce their gain. Now that it is officially not a capital gain this is not an option.

The Tax Ruling is very favourable to the ATO and should be remembered by share investors and non-residents alike.

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Self Managed Super Funds are great – but what are the Loan, Related party and Tax issues?

Setting up a self-managed super fund can be a great experience for those of us who love to manage our own money. Maybe in the current climate its not too pretty to see your money drop, or the market go sideways, but at least your destiny is in your own hands. You can:

  • Choose a share portfolio and investment mix to fit your exact aims and to complement your personal investments.
  • Borrow to invest (via an installment warrant) which is best suited to property purchases to grow your retirement savings over the long time.
  • Do not necessarily need to have a lot of money in super to make it cost effective especially if you negotiate good accounting and audit fees upfront and can minimize and sensibly justify the management expenses involved.

The world is your oyster! But what many people do forget though is that the money in self managed super funds (SMSFs) is not theirs and has many rules like:

  • it usually cannot be leant as a loan to related parties of the fund
  • most people cannot withdraw money from super yet
  • some investments are not generally allowed in a fund
  • as members and trustees there are specific duties required of you and
  • you could potentially lose almost half of the money in your super fund if you commit a serious breach and make the fund non-complying

The ATO releases many warnings about SMSFs and the amount of funds it has audited, found mistakes in, disqualified trustees for and the number of auditors it has castigated. We don’t want to scare you off self-managed super, but just remember you need to:

  • dedicate enough time
  • put in the investment effort
  • plan your future goals and
  • get professional advice

We have a strong background with SMSF administration, compliance and tax planning. Contact us today to discuss your situation.

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Centro Case and Director Duties – Issues to Consider

The case involved the almost failed retail property owner Centro Properties Group (CNP). Back in the times of the global financial crisis, it was found that the accounts prepared for Centro did not correctly categorise current liabilities, instead marking them as non-current.

Rather than pore over the ins and outs of the case, company directors should note that, in general terms, the recent judgment in the case against Centro directors and key management showed:

  • directors must more fully understand the financial situation of their company
  • it is not good enough to simply trust the work of advisers

Next time your company’s accounts are being prepared – for bank finance, audit or shareholders – keep the case in the back of your mind and adopt a sense of professional skepticism to what has been prepared. Please contact us to discuss your company’s situation.

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ATO Data Matching more Sophisticated

Under the self-assessment system, a taxpayer has the obligation to disclose all their taxable income to the ATO. If they fail to disclose and are audited then fines may result.

But times they are changing and so is the ATO.  They are changing the system by using technology to check what you say is true at the time of assessment, not after. They currently gather the following information which they crosscheck with your tax return declarations:

  • interest income from the banks
  • trust distributions from the managed funds
  • wages from employers
  • dividends from the share registries

But wait there’s more. They are moving into:

  • share trading history from the share brokers
  • sales records from  eBay
  • property sales from the state revenue offices
  • rental income from property agents
  • income declarations from loan applications
  • car sale records from departments
  • GST and tax audit results to target linked businesses

Yes, they can get access to all of this. And more to come. Every month they announce ever more sources of information gathering and how they are moving closer to a pre-assessment system. Let us assess your risk and discuss how this could affect you.

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Preference shares, Franking credits and CBA Perls V case

The investors and finance professionals out there would be very familiar with CBA Perls V (ASX: CBAPA).  They are preference shares similar to other colourful hybrids issued by other companies, such as SITES, PRYMES, TREES, FORESTS, RENTS and TELYS.

It seems to be the best of both worlds – combining what investors saw as a high “interest rate” with the franking credits investors love. At the time though, I remember carefully reading the CBAPA prospectus and noticing an odd paragraph. It read something like “franking credits can be claimed by investors, but the CBA and the ATO will settle this in court”. 

Well, this court case has just concluded and CBA lost. The court determined that the payment from CBA to investors was not frankable  and therefore no franking credits could be claimed. They analysed the complex cross border financial arrangement and the relevant tax treaties and said “no”.

Where does this leave investors? No worse off as the CBA guaranteed the credits but it does leave the tax adviser with a question mark on the benefits of “hybrid” securities like these.

If you are involved with these instruments its best to get some tax advice before proceeding.

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Complexity precedes uncertainty

You may have experienced first-hand the complexity of the income tax system and the uncertainty it can place in your decision making. This is not unusual among tax systems across the globe. The main source of government income arises from corporate tax receipts and there are reams of legislation enacted to protect that revenue stream.

We can help you work within the tax world and provide certainty with your decision making.  Our staff are experienced in analysing and interpreting tax legislation and more importantly identifying where issues interact and the possibilities that can result from your business transactions.

Lucentor knows that the number one priority for large business is getting on with business. However, during the financial year corporate taxpayers should consider these issues.

Taxpayers with tax losses should be aware of the rules governing loss utilisation. The losses tests must be passed to continue to carry forward and claim tax losses. Certain ventures or structural changes can jeopardise this.

Purchasing a new subsidiary can affect you as a taxpayer, be you a tax consolidated group or not. These events can also trigger the question: should the group structure be changed? Is there a more tax beneficial outcome?

Some rules can limit the debt you can tax effectively use in your business and how you treat financial arrangements. These need to be analysed and taken caer of.

Let us deal with the complexity to provide you with certainty. We can explain how these issues affect you and more importantly help you plan your next move knowing the tax result in advance. Lucentor is your taxation manager.

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