Manufacturing companies often underclaim RDTI, RSM says
Manufacturing firms frequently miss out on research and development tax incentives due to misconceptions surrounding the scheme, RSM has said.
Perceptions that R&D tax benefits only apply to certain industries has held back eligible manufacturing companies from claiming research and development tax incentive (RDTI) benefits, RSM has said.
“RSM often works with companies underclaiming or missing out on the RDTI due to the misconception that R&D is restricted to industries traditionally associated with research, such as the biotech sector,” the firm wrote in an insight.
“Not all Australian manufacturers will undertake activities that satisfy the legislative requirements of the RDTI. However, the relatively few manufacturers claiming the RDTI suggests some manufacturers may not be familiar with RDTI’s benefits or requirements.”
The RDTI was implemented to support innovation within industry and improve incentives for firms undertaking R&D activities.
RSM said that manufacturers, which were typically cash flow poor, could reap substantial benefits from the RDTI if they had conducted eligible R&D activities. The offset could be claimed on up to 48.5 per cent of the costs of undertaking such activities.
Less than 3 per cent of Australian manufacturing companies claimed the tax incentive in the 2021–22 financial year, the Department of Industry, Science and Resources (DISR)’s RDTI transparency report showed.
RSM highlighted that the RDTI eligibility criteria was broader than many companies realised.
To qualify as a core R&D activity, an action must seek to resolve a technical problem which couldn’t be solved using existing knowledge, involve a systematic process based on scientific methods and aim to create new knowledge, materials, products, devices, processes or services.
Such activities include the design and development of a new product, material, component, embedded software, production process or integration of components to improve performance.
Complying with statutory requirements, undertaking market research or conducting management studies or efficiency surveys did not qualify as eligible R&D activities.
It added that production-related activities could potentially qualify as R&D; for example, when the development of a new manufacturing process required iterative production trials to evaluate different equipment settings on the desired yield and quality of product.
However, once the R&D activity had served its purpose and generated new knowledge or materials, the RDTI would no longer apply, RSM said.
“Once the relevant core R&D activity’s specifications and the desired new knowledge are achieved, further production will no longer have a direct link to supporting a core R&D activity, and would likely need to be excluded from the RDTI claim.”
Manufacturing firms would have 10 months from the end of a financial year to support a retrospective RDTI application, RSM said. A successful RDTI claim would need to be underpinned by adequate documentation including emails, contracts, meeting notes, business plans, results and invoices.
Through their records, firms would have to demonstrate the purpose of undertaking the R&D, show when and where the R&D activities were undertaken and accurately record the commensurate expenditure.
“Ensuring a robust RDTI governance process is critical to both the preparation of a defensible RDTI claim and unlocking potential future investment".
