Incentives for Research and Development
In the modern era with the changing tastes and demand of consumers, business entities are required to find out innovative ways that will help them in improving production process and quality of product. Organizations often engage in research and development activities for coming up with new techniques and innovative ways that will help them to comply with the changing requirements. Businesses are able to stay ahead of their competitors and differentiate them with others with the evolvement of development activities. Companies engaging in activities of research and development not only benefit themselves but also provide advantages to society (Robin 2017). It can be explained with the help of an example, if the automobile manufacturing companies make the development of automobiles that consumes electricity rather than petrol, and then it will help in reducing the fossils fuels consumption that is a non-renewable source and is getting dwindling faster. Nonetheless, development of such advanced technique will involve huge costs and will require entities to invest considerable amount of capital.
Promotion of such developmental activities undertaken by research and development department of respective entities can be done by providing them incentives in the form of taxation (Graetz 2016). Tax incentives are provided to companies in respect of the expenditures that are incurred by them for undertaking development and research activities. Tax incentives documentation gives detail about various tax incentives that will be received by organization and demonstrates by the conditions and statutes that should be fulfilled by entities such as small business for availing the same (ato.gov.au 2018).
Research and development refers to all such activities that are undertaken by company for the acquisition of new knowledge that will help them in innovating their products. Such activities require organization to make investments in advanced technologies and make use system, process and technology. The current capacity utilization of company is utilized in best forms with the help of research activities that help them in delivering best to customers and serving society at the same time.
The concession given to small business in reference to their research and development activities starting before 1st July, percentage stands at 125%. In some other circumstance, the percentage of tax incentives received by organization can exceed 175% (ato.gov.au 2018). For the purpose of motivating and encouraging companies to involve in the research and development activities, various tax incentives are provided as per statues. Companies are encouraged to undertake research and development activities if they are provided with the incentives relating to taxation. Tax incentives for research and development involve two components and this includes a refundable tax offsets and non-refundable tax offsets (Barkoczy 2016). The two components of tax incentives are listed below and are as follows:
- A non refundable tax offset of 38.5% to all eligible entities
- For some certain eligible entities, taxation authority provides a refundable tax offset of 43.5% and the turnover of company should not be more than 20 million (gov.au 2018).
Tax Incentives for Small Business
Statue has reduced the tax offset on research and development activities undertaken by company to 30% and the rate has been effective from 1st July 2004 and will remain till 1st July 2024 (ato.gov.au 2018).
There is a clear linkage between financial performance of company and research and development activities. Company is able to deliver better quality products at reasonable price if they are able to innovate their products by incorporating designs and advanced technology (Snape 2015). It will help them in increasing their competitive advantage over others and ultimately increasing their product sales. Increased sales will help in boosting their revenue and ultimately overall financial performance of company. It would help in creating wealth for shareholders and improving the position of company in the long run.
Providing incentives for undertaking research and development activities will help in lowering the cost of undertaking the research activities. This will reduce the overall operational cost of small business and cost reduction is of utmost important for small entities. Reduced operational cost will further persuade organization to engage in research and developmental activities (Saad 2014).
Providing tax incentives to small business will enable them to participate in the research and development activities and improve their capacity of products innovation. Involvement of organization particularly small business will assist them in upcoming with techniques that are efficient compared to their competitors. They will be able to design their products in such a way that will be attracted to customers and thereby increasing their demand and ultimately their sales and revue of organization (Cockfield 2016). For instance, business developing an automated inventory management system that makes use of artificial intelligence and robots will reduce the possibility of conducting errors and other thefts and frauds related to accounting system.
The benefits of tax incentives as provided under taxation law is attributable to those entities, which comply with the conditions and statutes, laid down in the taxation rules and regulations for small business. For availing tax incentives, organizations are required to accomplish all the prescribed conditions. There are increased acquaintances within the companies of complying with the ITAA 1936 provisions due to the associated costs and benefits to business. There is a likelihood that companies or business will be vulnerable of losing tax incentives if they are not complying with the conditions laid down in the taxation rules. In recent year, it has been ascertained that companies are inclined towards complying with the laid conditions for availing tax incentives.
Link between Financial Performance and Research
Several rulings are incorporated in the Income Tax Assessment Act 1936 that is required to be complied by entities for availing benefits of tax incentives. Organizations are required to claim for receiving tax incentives and the rules specify the nature of research and development expenditures against which the tax benefits can be claimed. Provisions and conditions of taxation ruling that are required by company to fulfil or availing tax incentive is depicted in taxation ruling that is TR 92/2. This particular taxation ruling explains the type of expenditure that are deductible for undertaking scientific research under the sub section 73(A)1 of the Income Tax Assessment Act 1936 (Wang 2017). Under this particular section, the accurate amount of expenditure that should be deducted by company from their net income for arriving at the taxable income is depicted. A general ruling about the deduction of expenditures is provided in the sub section 1 of the section 73A while deductions are not allowed under other section (Miller and Oats 2016). Deductions are considered allowable only for the payments that are made to research institutes that are approved and if the expenditures incurred are of capital nature that the taxpayer incurs when conducting research activities for its own business. Moreover, it is also provided in the section that organization will be able to increase their generation of revenue with the increase in expenditure incurred and if this is not the case, the incurred expenditure will not be allowed for the purpose of deductions. Therefore, it can be said in this regard, that expenditure that are allowed for deductions should only be business related. Listed below are the categories of expenditures that are considered as allowable for deductions under the given taxation rulings and they are as follows:
- Any considerable amount of contribution that has been made by reporting entities o any approved research institutes for carrying out research related activities and are intended to enhance their business activities or are related to improvement in their production process and in general it can be contract research payment (Blank and Osofsky 2016).
- Contribution to any approved research institutes that have the purpose of undertaking research activities and that is related to business activities of taxpayers.
Under the sub section, any amount that is paid to research activities for undertaking research related to tax payers business that are not approved are not considered or allowed for the deduction purpose. Nonetheless, no provisions are laid down in the given taxation rulings concerning the place of carrying out research activities. Researches activities either can take place the business premises or in the premises of the approved research institutes that are carrying the taxpayers’ business activities. Here, it should noted that in both the scenario, organizations are incurring expenditures whether undertaking research themselves or paying to any approved research institutes to conduct research on their behalf. Organizations also receive tax incentives in lieu of the expenditures incurred by them provided the fact that they fulfill all the motioned provisions and conditions. Companies will be attributable to receive tax incentives for the expenditures that are incurred for the specific purpose (Yang and Metallo 2018). Incentives will not be recovered by entities for the expenditures that are incurred for the listed below purpose.
- Expenditure that are incurred by organization for acquiring buildings and land
- Expenditure incurred for purchasing plant and machinery for undertaking research activities that are don within the premises of the organization.
- Expenditures that are incurred for any type of alterations, extension and replacement or addition to building and lands (Tsindeliani 2016).
Lowering Costs of Research and Development
Therefore, in order for organization to be eligible for receiving tax incentives, companies should refrain from incurring such expenditures. Excluding all the above purposes other capital expenditure made by the company will help in getting allowance for deduction for arriving at taxable income. Expenditures incurred by organization are segregated into categories as per TR 92/2 and this will assist in enhancing the understandability (Graetz 2016). It will assist organizations in gauging the ruling implications and they are listed below:
- Any type of capital expenditures that is attributable to company on part of research and development activities undertaken by them.
- Contribution of amount to any approved research institutes to carry out research activities for the business of taxpayers.
- Expenditures that are incurred by company in purchasing lands and buildings that are related to carrying out research activities (Berman et al.2016).
- Expenditure incurred on acquisition of plants and machineries that is associated with conducting research and developmental activities.
The provisions of taxation is laid down only for two categories mentioned above that is incurring capital expenditures in relation to research and development activities and expenditure incurred in hiring approved research institutes for conducting research on their behalf relating to their business. It should be kept in mind that expenditure incurred in current scenario has the capacity of generating revenue in future date so that companies seriously undertake research projects. Companies are provided with the above-mentioned deductions for encouraging them so that they imbibe a habit of making themselves engaged in research and development activities (Falkenberg 2015). This will help them in coming up with innovative products and improve the quality of existing products and maintaining good standard of their operations.
Conclusion:
The above-discussed points provide with an elaborate explanation of TR 92/2 and several conditions and provisions of subsection of 73(A)1 of the Income Tax Assessment Act 1936. It has been ascertained that there are some positive implications of sub sections of taxation provisions for the expenses incurred in relation to research and development activities. Functioning and financial performance of companies will improve and this will motivate them to incur expenditures in relation to research and development activities. Furthermore, expenditures should be incurred in sense of value creation in the long run. The only encouraging factor for incurring expenditures relating to research should not be only to motivate them for availing tax. This will lead to violation of the very purpose underlying the taxation rules. Businesses are motivated to improve their operating performance with the benefits of tax incentives. Nevertheless, companies for receiving appropriate tax benefits should comply with all the provisions and conditions laid down in the taxation rulings.
References list:
Ato.gov.au. (2018). Legal Database. [online] Available at: https://www.ato.gov.au/law/view/document?DocID=TXR/TR922/NAT/ATO/00001&PiT=99991231235958 [Accessed 25 Jan. 2018].
Ato.gov.au. (2018). Research and development tax incentive. [online] Available at: https://www.ato.gov.au/Business/Research-and-development-tax-incentive/ [Accessed 25 Jan. 2018].
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