KPMG presents Government Tax Incentives and Grants

R&D Tax Incentive & Government Grants

Raisa Monteiro and

JonathanT neJonathan TurnerJuly 2012

R&D Tax Incentive

R&D Tax incentive: overview

G t’ i i l t i d t i t t i h d• Government’s principal measure to encourage industry investment in research and development

• Long history in Australia: first introduced in 1986

• Several iterations of legislation: last one introduced in 2011 and applies to claims• Several iterations of legislation: last one introduced in 2011 and applies to claims after July 1, 2012

• Jointly administered by AusIndustry and ATO

• Based on self-assessment• Based on self-assessment

2© 2011 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and "cutting through complexity" are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

R&D Tax incentive: who can apply?

• A company incorporated under an Australian law:• A company incorporated under an Australian law: Traffica Pty Ltd

• A foreign company incorporated under a foreign law that is an Australian resident for tax purposes:

Google Australia Pty Ltd

• A foreign company incorporated under a foreign law that is a resident of a foreign country with a double tax agreement with Australia:

h l b i d A l ie.g. has a sales manager but not incorporated – Aptara – e-learning

• Trusts are not eligible

• Annual R&D expenditure must be over $20,000


Sixth Annual KPMG Private Companies Survey (May 2012)

OVERVIEW

• 500 respondents

• CEOs, Directors, CFOs from Private Companies

• 59% respondents consider their company a family business

A0%

Head office location

NSW24%

WA11%

Annual turnover 2012

NT%

VIC27%

< $20 M 43.0%

$21 M - $50 M 20.6%

$51 M - $100 M 12.3%5%

QLDTAS7%

$51 M $100 M 12.3%

$101 M - $200 M 11.3%

$201 M - $400 M 5.7%20%SA

6%

7%

$401 M+ 7.1%


Survey Question – R&D Tax Incentive

Q.47 Are you claiming the R&D tax incentive? Q.47a Why are you NOT claiming the R&D tax incentive?

Other

Yes24% Not aware of it

20%

6%

No76%

Not applicable to my business

74%76% 74%


Government and University of Queensland Innovation surveys


The benefits

45% refundable R&D Tax offset (cash refund) for eligible entities with a group turnover of < $20 million (no cap on R&D expenditure); and

40% non-refundable R&D Tax deduction for all other eligible entities.

Example: XYZ Co. incurs $1,000,000 R&D expenditure:

Company Size Benefit

R&D Group turnover <$20m, in losses $450,000 cashp $ , $ ,

R&D Group turnover <$20m, paying tax $150,000 reduction in tax payable

R&D Group turnover >$20m. $100,000 reduction in tax payableR&D Group turnover $20m. $100,000 reduction in tax payable


Aggregated turnover - grouping rules

• New grouping rules apply to access the refundable offset – calculating the $20 million threshold

• Aggregated turnover is the sum of annual turnovers of: - R&D entity

A “ t d titi ” j i t t it l f d- Any “connected entities”, e.g. major investors, venture capital, fund managers- Any “affiliates”

• Exempt entities (e.g. universities) can control up to 50% of the R&D entity. The previous R&D tax concession capped exempt entities to 25% control or ownership.

C t d tit• Connected entity- where either of two entities controls the other or both entities are controlled by a 3rd

entityAn entity controls another entity if the entity owns or has the right to acquire equity- An entity controls another entity, if the entity owns or has the right to acquire equity interests (i.e. options or convertible notes) in the other entity, carrying rights to exercise or control at least 40% of the voting power


When will I first be impacted?

The R&D Tax Incentive applies to expenditure incurred in income years starting on or after 1 July 2011.


Definition of R&D activities: CORE activities

Core R&D activities are ‘experimental’ activities

• Outcome cannot be known or determined in advance on the basis of current knowledge, information or experience;

C l b d t i d b l i t ti i f k th t• Can only be determined by applying a systematic progression of work that:

is based on principles of established science; and

proceeds from hypothesis to experiment observation and evaluation and leads proceeds from hypothesis to experiment, observation and evaluation, and leads to logical conclusions; and

• Conducted for the purpose of generating new knowledge (including knowledge about the creation of new or improved materials, products, devices, processes or services).

• Some activities are excluded from being core, e.g. market research, sales promotions, software development for internal administration...*

*They may still be included as ‘supporting’ activities.

software development for internal administration...


Definition of R&D activities: SUPPORTING activities

Criteria for eligibility of supporting R&D activities requires that they be “directly related” to the core R&D activities.

Importantly, if an activity…

• is an excluded core R&D activity;* or

• produces goods or services; or

• is directly related to producing goods or services• is directly related to producing goods or services

…then the activity is only eligible as a supporting activity, if it is undertaken for the “d i t ” f ti th R&D ti iti“dominant purpose” of supporting the core R&D activities.

* e.g. market research, market testing, sales promotion


Software R&D claim: what’s excluded/included?

Excluded as a core R&D activity

• developing, modifying or customising computer software for the dominant use of internal administration (including the internal administration of the business functions).

Would not exclude:

• in house software of an applied nature (e g firmware)• in-house software of an applied nature (e.g. firmware)

• software activities undertaken to support a larger R&D project subject to the dominant purpose test

• software developed for commercialisation to only a single customer with no further intention to commercialise

Multiple sale test has been removed Multiple sale test has been removed


Routine developments versus R&D

R&D:

D l t f i tifi / t h i l d• Development of a scientific/or technical advance

Routine development (no advance):

• Debugging of systems

• Maintenance and support activities for existing systems

• Using a software solution in ways similar to previous experience

• Implementation of an “out-of-the-box” solution


Where have we historically found ICT claims?

• Internet software development where scale and complexity present p p y ptechnological challenges

• New object representations or data structures (e.g. single customer i )view)

• Integration of technology, or generations of technology, not previously integratedintegrated

• Integration of new technology with a legacy environment

D l t f i d d t t• Development of improved data centres


Common issues in ICT claims

Need to document the state of technology at the commencement of the project to demonstrate the novelty of your solution.

Think of technologies which were highly novel at inception but have become widespread quickly:

• Development of touchscreen technology for personal mobile devices• Development of touchscreen technology for personal mobile devices

• Application of voice recognition for intelligent personal assistant software (e.g. Siri)

• Video streaming for live events on mobile devicesg

• Cloud storage services such as DropBox

• Use of Voice over IP (VoIP) for instant messaging, voice and video (e.g. Skype)

On the flip side, integrating “off-the-shelf” solutions into legacy platforms could require significant innovation:q g• Many developments are driven by current legacy environments

• Software vendors typically promise the world


Common issues in ICT claims

Use of standard development methodologies• Agile methods may have little or no documentation – take pictures, print whiteboard

• Same methodology applied to routine software development and software R&D

Testing:Testing:

• Routine testing versus testing within the R&D experiment

The “failure to understand” factor for assessors:The failure to understand factor for assessors:

• Complex jargon

Cross border projects:p j

• Who really is doing the core R&D, and what is it?


Test your understanding: is this an R&D activity?

I’m changing the in-house general

I’m developing software within

All my test code is scrapped and never

in house general ledger devices that

manage a production line

scrapped and never makes it into a

production environment – only the

final version does

final version does

I’m adding a module to an in-house system for

b t

I need some routine changes to my backend system to allow me to

use by customers

only

system to allow me to do my R&D


R&D Expenditure

Typically, R&D expenditure comprises :

• Salaries & Wages

• Supporting overheads• Supporting overheads

• Contractor expenditure

• Materials

• Depreciation

Everything needs to be substantiated and well documented


R&D tax incentive – KPMG involvement

Identification of activities

• Eligible R&D projectsEligible R&D projects

• Breakdown into core/support activities

Calculations of expensesCalculations of expenses

• Identify/collate eligible expenses

Maximising your claim

• Strategic approach

• In-depth understanding of legislation

Taking the pain away

• Collating required paperwork, liaising with AusIndustry


Grant Funding

R&D tax incentive versus grants

R&D Tax Incentive Grants

Retrospective Prospective

Entitlement Competitive

Cash payments for SME loss making companies

Co-contribution usually required

Require innovation or high technical risk

Require innovation, commercial strategy, national benefit, need for f d d tfunds and proven management

Benefit against tax payable Grant income taxable


Survey Question - Government Grants

Q. 48 To what extent are you accessing grant funding opportunities?

No limited awarenessNot applicable to my No limited awareness22%

Not applicable to my business

27%

Not accessing30%

Aware/accessing21%


Considerations

It’s not free money: time and resources are required.

Grant programs are each uniquely different.

There may be intellectual property implications for theThere may be intellectual property implications for the project.

F t t t t k f thFrom start to success may take a few months.

Grants support specific projects and activities, you must have a clearly defined project.

Think broadly when considering which grant suits your projectproject.


QLD state government grant update

• All innovation and technology grant programs are currently on hold

• State government continues facilitating industry/small business networking (e.g. Q-WIN for SMEs)g ( g Q )

• Australian Institute of Commercialisation programs are still active

• ichoose – a tool that delivers individual business plans for digital growth in a business


Priority Funding Areas

Grants are generally aligned with Australia’s national priorities. Key priority areas include:

• Environment

• National broadband network / Hi-tech economyNational broadband network / Hi tech economy

• Energy efficiency

Clean technology & renewables• Clean technology & renewables

• Sustainability KPMG publication –Government grants and incentives

• Innovation

• Regional development

incentives

• Discretionary fundingKPMG publication –Australia’s Climate Change Plan: Summary


of Assistance Packages

Commercialisation Australia

Project must aim to produce or establish the commercial viability of, or commercialise a new, clearly defined, product, process, or service.

• up to $50k• 80:20Skills & Knowledge• Turnover < $10 m

• up to $200kExperienced

Assessment Criteria

1. Impact of funding• 1:1• Turnover < $10 m

Experienced Executives

$50k 250k

1. Impact of funding

2. Commercial plan & potential

3 M k i• $50k - 250k• 1:1• Turnover < $10 m

Proof-of-Concept3. Market opportunity

4. Management capability

• $250k - $1M• 1:1 (repayable)• Turnover < $20 m

Early Stage Commercialisation

5. National benefits


Commercialisation Australia participants in ICT

Company Project Grant amountamount

Mesaplexx Pty Ltd, Brisbane

Ultra compact, high performance filters for the mobile telecommunications industry

$924,902

ConnectiX Technologies Mobile productivity and workforce management $916 400ConnectiX Technologies Pty Ltd, Sydney

Mobile productivity and workforce management solutions for businesses

$916,400

PlayFi Pty Ltd, Melbourne

An innovative platform to stream and sell live performances over the Internet

$120,000Melbourne performances over the Internet

Semantic Sciences Pty Ltd, Adelaide

Sintelix, a software program which allows users to extract information economically, from millions of documents per hour

$50,000

documents per hour

Professional Development (PD) Online Pty Ltd, Perth

Commercialisation of an online learning platform for smartphones and tablet PCs

$197,194

y ,

Ingogo Pty Ltd, Sydney Ingogo.mobi peer to peer, corporate taxi booking and payment system

$250,000


Discretionary Funding

• Potential funding outside official programs.

Oft bi d ith th t (l i f d l / t t l l)• Often combined with other grants (leveraging federal /state level)

• Target funds in the government’s operating budget for use at g g p g gDepartment or Ministerial discretion.

• Require direct approach by the applicants who have a good• Require direct approach by the applicants who have a good business case for a project that meets the government’s overall objectives, strategy and grants policy.


Grant opportunities – KPMG involvement

Identification

• Matching current / future funding opportunities to activitiesMatching current / future funding opportunities to activities

• Multiple jurisdictions

CoordinationCoordination

• Preparation, drafting, editing, review, support documentation

• Tax, audit, management assistance for the review process

Discretionary

• Direct government approach – national reach or significant economic benefit projects

Project Management

• Manage business projects to deliver defined, measurable outcomes

• Scaled-up assistance across project life-cycle


p p j y

Contacts

Thank you

Raisa MonteiroManager – R&D Incentives

Jonathan TurnerDirector – R&D Incentives

[email protected]: 07 3233 9482

[email protected]: 07 3225 6888

KPMG’s Tax practice is not licensed to provide financial product advice under the Corporations Act and taxation is only one of the matters that must be considered when making a decision on a financial product. You should consider taking advice from an Australian Financial Services Licence holder before making any decision on a financial product.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide


g y p y g paccurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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KPMG presents Government Tax Incentives and Grants