Question

In your work as an accountant you advise a client, Avon Pty. Ltd. (Avon), on various matters. Avon entered into a $500,000 one year contract in June 2016 with Central Queensland University (a registered Research Service Provider) to undertake research and development for Avon. The contract was to run from July 2016 to June 2017. Avon wants your advice about tax offsets and how this expense could be treated by the ATO in the 2016-17 tax year.

Answer 1

ATO provides a tax offset for some of a company's cost of doing eligible research and development (R&D) activities by reducing a company's income tax liability. Tax offsets of 43.5% or 38.5% are available for costs incurred on eligible activities depending on a company’s annual aggregated turnover. The 43.5% benefit is a refundable offset.

?Who can apply:
At a minimum, applicants must:
• be an incorporated company
• be conducting eligible core R&D activities. These are defined in the legislation as being experiments that are guided by hypotheses and conducted for the purpose of generating new knowledge
• have incurred eligible R&D expenditure or notional deductions of at least $20,000 (unless using a Research Service Provider or a Cooperative Research Centre).

Conclusion
??As mentioned above, R&D expense incurred by the company are eligible for deduction and no tax offset will be given to Research service expense as crux of the law is to promote the inhouse research & development facilty. Hence the expenditure of $500,000 would be treated as expense and proportionate tax benefit on it can be availed but there will be no tax offsets for 2016-17 tax year.