Robert Goodman Accountants Blog

Thinking about a gearing strategy for your SMSF? It's possible to borrow from a related party, but you must structure the loan terms correctly or else face significant tax penalties. Practically, this means there's a limit on the loan-to-value ratio (LVR) you can set up, plus other requirements for the interest rate and other key terms.

When planning a borrowing in your SMSF to buy an asset such as property or shares (known as a "limited recourse borrowing arrangement" or LRBA), you have a choice of borrowing from a commercial lender or a private party. This could even be a related party of the SMSF, such as the SMSF members or the members' family trust.

Bypassing the banks might seem like a convenient option, or a great way to draw on wealth you hold outside the SMSF to build your retirement savings. But you need to be aware that related-party LRBAs that don't reflect "arm's length" or commercial terms will create big tax headaches for the trustees.

What's the problem?

The "non-arm's length income" (NALI) rules essentially penalise uncommercial dealings by an SMSF that favour the fund. This tax penalty applies where the SMSF:

  • enters into an arrangement where it does not deal with the other party at "arm's length"; and
  • earns more income than it might have been expected to earn under an arm's length arrangement.

As a result, the income from the arrangement is taxed at a hefty penalty rate of 45%.

So how does this risk arise for LRBAs? In an audit situation, the ATO would first determine whether the SMSF's LRBA is on "arm's length" terms. For this purpose, the ATO would examine terms like the interest rate, the loan-to-value ratio (LVR) and the term of the loan. The ATO would compare these to the terms that would hypothetically exist under an arm's length (or commercial) arrangement.

If the terms aren't arm's length, the ATO would then consider whether the SMSF has earned more income than it would under an arm's length arrangement.

This is where the law becomes technical, but it's sufficient to say that at least some of the income from the arrangement will be taxed as NALI at 45% and in some cases, all of the income will be considered NALI. For an LRBA to buy property, the relevant income from the arrangement would be the rental income.

In short, if the terms of your related-party LRBA aren't what the ATO considers "arm's length", you're exposing your SMSF to a NALI risk and a potentially complex dispute with the ATO about exactly how much penalty tax you owe.

The safe harbour

Fortunately, the ATO has developed guidelines to provide some certainty. If your LRBA meets these, the ATO considers that the arrangement is on arm's length terms. There are different guidelines for property LRBAs and listed share LRBAs. For property (both residential and commercial), the terms must be as follows:

  • Interest rate: benchmarked to a certain RBA indicator rate, which is 5.94% for 2019–2020. The rate can be either variable or fixed for up to five years.
  • LVR: maximum of 70%.
  • Term: maximum of 15 years.
  • Repayments: principal and interest, payable monthly.
  • Security: registered mortgage over the property.

There must also be a proper written loan agreement in place, and naturally the arrangement must also comply with all laws that apply to LRBAs.

If your arrangement doesn't meet the ATO's guidelines, it doesn't necessarily mean it's not on arm's length terms. However, you won't have certainty that the ATO will accept it. Instead, you would need to demonstrate, using documented evidence, that it reflects an arm's length dealing.

Explore gearing options

If you're interested in using an LRBA to help grow your super, contact us for expert advice. We can help you consider your lending options and ensure your LRBA is structured for compliance certainty.

© Copyright 2019. All rights reserved. Source: Thomson Reuters.  IMPORTANT: This communication is factual only and does not constitute financial advice. Please consult a licensed financial planner for advice tailored to your financial circumstances. Brought to you by Robert Goodman Accountants. 



The small business CGT concessions can save businesses some serious tax – and help business owners significantly boost their superannuation – but it's essential that you keep the right records, particularly for when the time comes to sell. Find out what your business should be doing now to keep the ATO at bay in the future.

Most taxpayers understand they must keep proper records to help calculate their future capital gains tax (CGT) liabilities. However, business owners taking advantage of the generous small business CGT concessions are very likely to receive a "please explain" from the ATO after lodging their claim. So even if you're not planning to sell your business any time soon, make sure you've got your record-keeping under control now to put you in the best possible position in future.

What concessions are available?

To access the concessions, you must either be a business entity with annual turnover under $2 million or have total net assets of no more than $6 million. (The turnover and net assets of some of your related entities will also count for these purposes.) The asset you're selling must also have been used in a business carried on by you, or a relevant related entity, for a minimum time period.

If you meet these requirements, you can potentially access one or more of the following concessions:

  • Where the asset is owned for at least 15 years and sold in connection with your retirement: you can potentially disregard the entire capital gain. You can also contribute proceeds of up to $1,515,000 into superannuation under your lifetime "CGT cap".
  • Alternatively, you can disregard up to $500,000 of the capital gain provided you make a superannuation contribution equal to that amount if you're aged under 55.
  • In many cases, you'll also have the choice to apply a 50% reduction to your capital gain (in addition to the regular discount for assets held for at least 12 months), and/or defer the gain until later.

These generous concessions can open up many planning opportunities for small business owners. All the more reason to keep your CGT records in good shape!

ATO record-keeping requirements

It's essential to record all relevant information about your business assets so that you can later substantiate your claim for the CGT concessions. This includes all the information you need to calculate the capital gain, such as purchase information (date of purchase, the price you paid, any stamp duty and legal fees you paid) as well as ongoing costs (repairs, insurance, installation costs and improvement costs). You'll need to keep documents like contracts, invoices and receipts to support your claim.

Usually, you need to keep all records for at least five years after the CGT event (generally, when you sell).

For example, if you purchased an asset in 2002 and sold it in 2019, you'd need to keep all the purchase records until 2024 – that's 22 years!

Alternatively, keeping a CGT "asset register" can make record-keeping simpler. This is a register where you keep relevant information for all your CGT assets, and a major advantage is that once an entry is certified by a tax agent, you only need to keep the original records for five years from the certification date. So, using the previous example, if you'd entered the purchase information into an asset register and your tax agent certified this in 2006, you would've only needed to keep the original purchase documents until 2011.

Your tax adviser can help you with the correct format for an asset register. Note, for example, that maintaining a simple electronic spreadsheet is unlikely to meet the ATO's requirements because it may lack the security measures needed to prevent entries from being easily altered.

Talk to the experts

Want to simplify your record-keeping? Or perhaps your records aren't completely up-to-date and need some reconstructing? Don't jeopardise your future tax planning – talk to us today for expert assistance in ensuring your business will be ready to take advantage of the CGT concessions.


Call us at Robert Goodman Accountants on 07 3289 1700 or email us at  © Copyright 2019. All rights reserved. Source: Thomson Reuters. Brought to you by Robert Goodman Accountants.

Being a smart taxpayer means knowing what resources are available to you and understanding how the ATO deals with individuals as tax problems arise. Here are three simple things all individuals can do to help keep their tax affairs as stress-free as possible this tax time.

Sometimes, the way we approach tax matters can end up making a big difference to our bottom line and stress levels. Here are three tips to help individual taxpayers achieve a better outcome when lodging and dealing with the ATO.

Tip one: Get help with debts early

If you're experiencing financial difficulties, there are a number of ways the ATO can assist. If you can't pay your tax bill, the ATO encourages you to contact them early to discuss your options. This might include:

  • Payment plans: In 2017–2018 the ATO negotiated 226,000 payment plans to allow taxpayers to pay in instalments. For tax bills under $100,000 you can set up a payment plan online through myGov, or through your tax agent. For bigger debts, contact the ATO to discuss a plan.
  • Debt relief: The ATO has power to release an individual from their tax bill (in part or in full) where paying the bill would leave them unable to afford food, clothing, accommodation, medical treatment, education or other necessities. In 2017–2018, the ATO granted 2,174 full or partial releases.

A good tip for anyone having trouble paying their tax bill is to stay on top of their lodgment obligations. Even if you can't pay, you should still lodge your tax returns on time (and any business activity statements).

Not only will you show the ATO that you're aware of your obligations and making an effort to comply, you'll avoid penalties for non-lodgment.

Tip two: Stay off the ATO's radar

No one wants to be audited, so it pays to know the "red flags" the ATO looks for when analysing its increasingly vast data sources. Understanding these risk areas can also help you self-identify any mistakes you might have accidentally made, or areas where it's worth getting professional tax advice. For individuals, the ATO looks closely for:

  • work-related expense claims that are unusually high or out of the ordinary, especially in relation to clothing, cars, travel and self-education;
  • rental expenses, especially those inconsistent with rental income or other information the ATO holds about the property;
  • undeclared capital gains from property sales, the Australian share market and cryptocurrency;
  • undeclared income (eg cash payments or income from foreign sources); and
  • taxpayers who don't lodge returns on time.

Tip three: Manage disputes efficiently

There are many options for resolving tax disputes, ranging from lodging an objection, seeking external review, alternative dispute resolution and litigation. However, the ATO wants to resolve tax disputes quickly and fairly. It says in the last five years, there has been a 60% reduction in Administrative Appeals Tribunal applications made by taxpayers against its decisions.

To achieve an efficient resolution, individual taxpayers should consider taking advantage of the ATO's "in-house" facilitation service. This gives individuals (and small businesses) free access to an impartial ATO mediator who will take the taxpayer and ATO case officers through the issues in dispute and attempt to reach a resolution. It's a voluntary process and can be undertaken at any time from the early audit stage up to and including the litigation stage. If the mediation fails, your usual review and appeal rights aren't affected at all. It may not solve the problem in every case, but if the facilitation is successful it could save you time, stress and money.

Need help with a tax problem?

We're here to support you in all of your dealings with the ATO. Whether it's an unpaid tax debt, a disputed assessment or a complicated deduction you're just not sure about claiming, our experts will guide you every step of the way and help you achieve the best possible outcome.

Call us at Robert Goodman Accountants on 07 3289 1700 or email us at  © Copyright 2019. All rights reserved. Source: Thomson Reuters. Brought to you by Robert Goodman Accountants.  

Taking an extended job posting overseas? If you currently have an SMSF, you'll need a strategy for managing your super to ensure your fund doesn't breach any residency rules. Know your options and plan before you go.

When SMSF trustees travel overseas for an extended period, there's a risk their fund's "central management and control" (CMC) will be considered to move outside Australia. This causes the SMSF to become non-resident, resulting in very hefty penalty taxes. It's essential to plan for this before departing overseas.

The first step is to consider whether your absence will be significant enough to create a CMC risk. A temporaryabsence not exceeding two years isn't a problem, but whether the ATO considers your absence temporary or permanent will depend on your particular case. Your adviser can take you through the ATO's guidelines. If you think you'll have a CMC problem, the next step is to consider possible solutions.

Option 1: Appoint an attorney

Usually, every SMSF member must be a trustee (or director of its corporate trustee). However, an SMSF member travelling overseas can avoid CMC problems by appointing a trusted Australian-based person to act as trustee (or director) for them, provided that person holds the member's enduring power of attorney (EPOA).

Sounds simple? Just a word of caution: the SMSF member must resign as a trustee (or director) and be prepared to genuinely hand over control to their attorney.

If the member continues to effectively act like a trustee while overseas – for example, by sending significant instructions to their attorney or being involved in strategic decision-making – there's a risk the CMC of the fund may really be outside Australia.

You'll also need to comply with the separate "active member" test, which broadly requires that while the SMSF is receiving any contributions, at least 50% of the fund's total asset value attributable to actively contributing members is attributable to resident contributing members. To illustrate this, in a Mum-and-Dad SMSF where both spouses are overseas, a single contribution from either spouse could cause the fund to fail this test and expose the fund to penalties. In other words, you may need to stop SMSF contributions entirely while overseas. Consider making any contributions into a separate public offer fund.

Option 2: Wind up

Not prepared to give control of your super to an acquaintance? You might consider rolling your super over to a public offer fund and winding up the SMSF. This option completely removes any CMC stress (as control lies with the professional Australian trustee), and you can make contributions into the large fund without worrying about the "active member" test.

However, you'll need to sell or transfer out the SMSF's assets first – real estate, shares and other investments – and this may trigger capital gains tax (CGT) liabilities. These asset disposals will be partly or even fully exempt from CGT if the fund is paying retirement phase pensions, so talk to your adviser about your SMSF's expected CGT bill if you choose this wind-up option.

Option 3: Convert to a small APRA fund

Another option is converting the SMSF into a "small APRA fund" (SAF). Like SMSFs, SAFs have a maximum of four members but instead of being managed by the members they are run by a professional licensed trustee. This takes care of any CMC worries, and on conversion the fund won't incur any CGT liabilities because the assets remain in the fund – only the trustee structure changes.

The downside is that an SAF may be expensive because you'll be paying a professional trustee to run your fund. You'll also need to comply with the "active member test" so, as in Option 1, you may need to stop all contributions into the SAF.

Let's talk

If you're moving overseas for a while, contact us to start your SMSF planning now. We can help you explore your options and implement a strategy to protect your superannuation against residency problems.

 © Copyright 2019. All rights reserved. Source: Thomson Reuters.  IMPORTANT: This communication is factual only and does not constitute financial advice. Please consult a licensed financial planner for advice tailored to your financial circumstances. Brought to you by Robert Goodman Accountants. 

Got a passive corporate entity that holds an investment property or perhaps plant and equipment? The ATO has confirmed it takes a broad approach to when a company carries on a "business", which means some company taxpayers may be entitled to business tax concessions they hadn't previously considered. Find out if your company is affected.

It's often obvious when a company is carrying on a business. But many clients have companies set up in their family or business groups for a wide variety of reasons, and whether those entities carry on a "business" may be less clear. Common examples include companies that simply hold assets used by another entity in the group, that receive trust distributions, or that appear to be "inactive" because they no longer trade.

Why does it matter? Whether an entity is considered to carry on a business can affect its tax position in various ways. For example, if it carries on a business it may be able to access the instant asset write-off for small and medium businesses, deductions for start-up expenses, or in some cases the choice to account for GST on a cash basis, among various other measures.

To provide guidance, the ATO has recently published a ruling on when a company is considered to carry on a business – and it confirms that even passive, small-scale or irregular activities will often amount to a "business".

These principles apply not only to the tax concessions mentioned above, but also the specific issue of whether a company qualified for the lower corporate tax rate in the 2015–2016 and 2016–2017 years (which included a requirement that the company carry on a "business"). Therefore, if your family or business group includes company structures that might be affected, consider speaking to your adviser about your tax position in light of the ATO's views.

Profit intention is key

The ATO confirms the general principle that there's no single test to apply when determining whether a business is carried on. Rather, it's a weighing-up of many factors and this will depend on the particular facts.

However, one of those factors – the intention to make a profit – is very influential for companies. Where a company aims to make a profit, and has a prospect of profit, it is presumed that it intends to carry on a business. The ATO says once this profit intention is established, other factors (eg the size and scale of activities, and how regular and repetitive they are) may carry less weight than they would for individuals or trusts.

As a result, companies carry a stronger presumption of a business than individuals or trustees who undertake the same activities. The ATO gives the following examples of companies that are carrying on a business:

  • An inactive company with retained earnings that generate bank interest of $12,000 p.a.
  • A company that has ceased trading and now leases its plant or equipment to third party operators under a commercial lease agreement.
  • A new company that is investigating whether a proposed business would be viable, but is also deriving interest of $9,000 p.a. from the share capital held in its bank account.
  • A company that derives passive rental income from real estate at a profit. (It's important to be aware, however, that an asset you use mainly to derive rent is specifically excluded from the small business capital gains tax concessions.)
  • In some cases, corporate beneficiaries – even companies set up to repeatedly receive income distributions from a family trust. How those income amounts are then dealt with will impact whether the ATO believes a "business" is carried on.

On the other hand, companies that the ATO would not consider to be carrying on a business include those set up solely to hold and maintain personal use assets (eg a boat or holiday house of the shareholders), or those with no prospect of making a profit.

Reviewing your tax position

Contact us today to discuss how the ATO ruling may affect your company structures.

Call us at Robert Goodman Accountants on 07 3289 1700 or email us at  © Copyright 2019. All rights reserved. Source: Thomson Reuters. Brought to you by Robert Goodman Accountants. 

You've worked hard for your super, so make sure you access your benefits in the most tax-effective way possible. Members aged under 60 years will pay tax on their withdrawals, but if you're over 60 you generally will not pay any tax. But there are always exceptions! Find out what taxes apply before you jump in.

If you're aged 60 or over, you usually won't pay any tax on super benefits you withdraw. However, if you're under 60 your benefits will be taxed.

To understand how much tax you'll pay, it helps to remember that your super benefits are split into two components:

  • The "tax free" component of your benefits is not taxed when you make a withdrawal, even if you're under 60. This component is the part of your super balance made up of things like non-concessional (after-tax) contributions.
  • The "taxable" component is This component reflects things like compulsory superannuation guarantee contributions, salary-sacrifice contributions and personal contributions for which you claimed a tax deduction, as well as investment earnings.

You can't "cherry pick" which component you would like to fund your withdrawal. This means, for example, that if your accumulation account is 80% taxable and 20% tax-free at a particular point in time, any lump sum you withdraw at that time would also reflect this 80/20 split for tax purposes. Similarly, any pension you start at that time would have this 80/20 split locked in from the commencement day of the pension.

Therefore, the bigger your "taxable" component as a percentage of your account balance, the more tax you'll pay when you withdraw benefits. The applicable tax rates are as follows:

  • Pensions: the taxable part of your pension payments is taxed at your marginal rate, less a 15% tax offset.
  • Lump sums: the taxable part of a lump sum withdrawal is tax-free up to your "low rate cap" of $205,000 (for 2018–2019; set to increase to $210,000 for 2019–2020). This is a lifetime cap that you gradually utilise each time you withdraw a lump sum. Once you have fully utilised your cap, the remaining taxable part of any lump sum is then taxed at 17% (or your marginal rate, whichever is lower).

Several exceptions apply to these rules. First, if you're receiving certain "disability superannuation benefits" or accessing super before you've reached preservation age (eg on "compassionate" grounds), different tax treatment applies. Second, some people such as members of public sector or government superannuation funds are subject to special rules that mean they will pay some tax even if they're aged over 60.

Planning ahead

It's worth talking to your adviser to plan the best strategy for your super withdrawals. For example, if you're under 60, a lump sum may be more tax effective than a pension because of the "low rate cap" discussed above.

However, to access a lump sum before age 65 you must meet a relevant condition of release such as "retirement", whereas you only need to reach your preservation age in order to access a transition to retirement income stream (TRIS).

Your adviser can also help you explore the possible tax benefit of starting a full account-based pension (ABP). Unlike a TRIS, an ABP requires that you've met a relevant condition of release such as retirement, but the advantage is that it attracts a partial or possibly a full exemption from income tax on investment earnings inside the fund. So, as you can see, the decision to access your benefits is best made with professional advice that takes into account a range of factors including:

  • your age;
  • employment status and income;
  • lifestyle/cashflow needs;
  • tax efficiency of running a pension;
  • eligibility for the Aged Pension; and
  • special planning required if you hold more than $1.6 million in super (the current limit on the amount you can hold in full pensions like ABPs).

Need to access your super?

Talk to us today for expert advice tailored to your individual circumstances. We'll help you navigate through the tax rules to get the most out of your retirement savings.

 © Copyright 2019. All rights reserved. Source: Thomson Reuters.  IMPORTANT: This communication is factual only and does not constitute financial advice. Please consult a licensed financial planner for advice tailored to your financial circumstances. Brought to you by Robert Goodman Accountants. 

Have you run a small business that has ceased or paused operations? Or perhaps you've been hired as an ABN contractor? The ATO is cleaning up the Australian Business Register and is on the lookout for people who may not be entitled to hold an ABN. Find out what the ATO's concerns are and understand your responsibilities as an ABN holder.

This year, the ATO has been focused on improving the integrity of the Australian Business Register (ABR). You may have even heard that the ATO has been "bulk cancelling" a large number of ABNs. So, what's the problem and how might this affect you?

When does the ATO cancel an ABN?

Only entities that "carry on an enterprise" are entitled to hold an ABN. An enterprise includes running a business, as well as other activities like leasing property or being the trustee of an SMSF. It does not include working as an employee. The ATO is focused on identifying the following types of ABN holders who are not entitled to hold their ABN:

  • businesses that are no longer active
  • businesses that hold multiple ABNs
  • workers who are incorrectly classified as contractors rather than employees (discussed below).

If your ABN is cancelled by the ATO and you think they've made a mistake, you can object to the decision within 60 days. Alternatively, if you agree with the cancellation because your business has ceased, you can re-apply for an ABN at a later time if you need it. You will receive the same 11-digit ABN, provided your business has the same structure.

It's illegal to quote an ABN that has been cancelled, so make sure you're on top of any cancellation issues.

Concerns about "sham" contracting

The ATO is also concerned that some businesses are incorrectly classifying their workers as "independent contractors" when in fact they are likely to be "employees". In such cases, the employer may ask the worker to obtain an ABN and call the arrangement "contracting". Unfortunately, this illegal practice is sometimes done to avoid paying entitlements like award wages and superannuation contributions.

You're entitled to hold an ABN if you're legitimately an independent contractor – but not if you're really an employee. The ATO says it is sensitive to this issue and understands many workers in "sham" arrangements have been placed in that difficult position by their employer.

If you're currently being hired as an ABN contractor and have concerns this may not be legitimate, contact the Fair Work Ombudsman for help. If you're a business hiring workers as independent contractors, make sure you've got it right because penalties can apply for unlawful arrangements. The ATO publishes some useful online information to help businesses work out whether their workers are employees or contractors.

Responsibilities of ABN holders

If you hold an ABN, you must update the register within 28 days of becoming aware of a relevant change. This includes things like your contact details (including your business address) and your main business activity and business category.

If you need to cancel your ABN, you can do this online. You should cancel your ABN if your business has been sold or is no longer operating. However, before cancelling your ABN you should make sure you've complied with all of your lodgment and reporting obligations.

You may also need to cancel your ABN if you're changing your business structure (eg from a sole trader to a company) and then apply for a new ABN. Of course, you should get professional advice before changing your business structure to make sure you understand the associated tax consequences.

Need help?

Don't stress over business administration – get help from the professionals. Whether you're thinking of starting a new business or need help sorting out a registration issue, we can handle all of your ABN registration needs, as well as related registrations like GST, PAYG and business names.

Call us at Robert Goodman Accountants on 07 3289 1700 or email us at  © Copyright 2019. All rights reserved. Source: Thomson Reuters. Brought to you by Robert Goodman Accountants.   

Setting up a new SMSF does involve some cost, and one of the decisions you'll need to make is whether it's worth paying to establish a new company to act as trustee. The alternative option of appointing the members as individual trustees is initially cheaper, but this may have downsides in the long run.

A key benefit of having a corporate SMSF trustee is that recording ownership of assets like shares and property is easier. The ATO strictly requires that SMSF assets must be held in the name of the trustee(s). If an SMSF has individual trustees, every member will need to be a trustee and the title to all assets will need to be recorded in all of the members' names. This means that each time a member joins or leaves the fund (eg following a death, divorce or admission of an extra member such as an adult child), the title to all SMSF assets must be updated.

On the other hand, if the SMSF has a corporate trustee, the directors of that company will change, but the company itself will simply continue to hold title to the fund assets.

A change in members and therefore individual trustees also creates more internal paperwork for the fund. To remove or appoint an individual trustee, SMSFs generally need to have formal "change of trustee" documents prepared. This is usually more expensive and complicated than the process of appointing or removing a company director.

Another great advantage of a corporate SMSF trustee is that it makes it easier to comply with the legal requirement to keep the assets of the SMSF separate from any assets the members own personally.

Having a corporate trustee makes it easier for everyone – the members, their advisers, the fund's auditor and even the ATO – to identify which assets belong to the fund. And the risk of any confusion is reduced even further when you use a new company that has been set up to act solely as trustee of the SMSF (rather than re-using another company you already own, eg the corporate trustee of your family trust).

Corporate trustees are also beneficial for single-member SMSFs. The sole member can be the sole director of the trustee company and exercise full control over the fund. However, if the fund is set up with individual trustees, by law the member must find a second individual to act as a co-trustee. This issue becomes very relevant for many two-member SMSFs when one spouse dies and leaves the surviving spouse as sole member of the fund; for many couples, having a corporate trustee that continues in place is a huge benefit and avoids the need for the grieving spouse to find and appoint another individual trustee.

So, what are the costs?

Setting up a company entails the following costs:

  • Initial establishment costs, including ASIC's registration fee. Talk to our office about company set-up services to assist you with this process.
  • Ongoing annual fees payable to ASIC. This is usually $263 for most companies, but if you establish the company as a "special purpose" superannuation trustee company, you pay a reduced annual ASIC fee of $53.

Thinking about an SMSF structure?

If you're planning to set up a new SMSF, or are thinking of switching your existing SMSF to a corporate trustee structure, talk to us for expert advice and guidance. We can help you evaluate your trustee structuring options, handle the necessary documentation and company registration, and provide full support on all aspects of establishing and running your SMSF.

© Copyright 2019. All rights reserved. Source: Thomson Reuters.  IMPORTANT: This communication is factual only and does not constitute financial advice. Please consult a licensed financial planner for advice tailored to your financial circumstances. Brought to you by Robert Goodman Accountants. 

Is your company planning to develop software as part of an experimental R&D project? You may qualify for the R&D tax incentive, even if you're not a software developer but operate in a technology-focused industry such as manufacturing. However, the activities you claim for must genuinely meet the relevant tests – and the ATO says some companies are incorrectly assuming their project qualifies. Make sure you understand the criteria before making an R&D claim.

In our modern economy, software development is a key driver of growth and innovation across many Australian industries. However, the ATO is concerned that some companies are assuming that their software development projects are eligible for the government's R&D tax incentive without properly considering their eligibility. The incentive broadly offers:

  • for companies with turnover below $20 million: a refundable tax offset of 43.5% of eligible R&D expenditure; or
  • for other companies: a non-refundable offset of 38.5%.

These offsets apply to expenditure between $20,000 and $100 million. Expenditure outside this range has different incentives.

The Department of Industry, Innovation and Science (DIIS) has recently released guidelines to help clarify the rules as they apply to software development.

The DIIS and ATO both stress that the incentive applies to specific activities, not projects as a whole. It's therefore essential to identify and document particular activities.

To qualify for the scheme, a company must have "core" R&D activities. It can then claim the offset for expenditure on those core activities (as well as for "supporting" activities that are directly related to the core activities: more below). Core activities are essentially experimental activities conducted using scientific principles to generate new knowledge. Crucially:

  • you cannot know the outcome of the experimental activities on the basis of current knowledge, information or experience;
  • the new knowledge generated must result from a systematic progression of work that involves testing of one or more hypotheses; and
  • the knowledge generated must be "new" in the sense that it's not already available and reasonably accessible in the public arena on a world-wide basis.

This is a high bar, and the guidelines note that "innovative" activities won't necessarily meet this test. The DIIS provides the following examples of activities that generally may be, or won't be, eligible:

May be eligible as core R&D activities Generally not eligible
  • developing new operating systems orlanguages
  • designing new search engines based on originaltechnologies
  • resolving conflicts within hardware or software based on the process of re-engineering asystem or a network
  • creating new or more efficient algorithms based on new techniques or approaches
  • creating new and original encryption orsecuritytechniques
  • developing business application software andinformation systems using known methods andexisting software tools
  • adding user functionality to existing programs
  • creating websites or software using existing tools
  • customising a product for a particular use, unless during this process knowledge is added that significantly improves the base program
  • routine debugging of existing systems and programs

If your software development activities don't qualify as "core" activities, you may still be able to claim these as "supporting" activities that directly relate to other core activities. For example, a manufacturer who undertakes some manufacturing R&D that genuinely qualifies as "core" R&D might be able to claim some software development that directly relates to that core R&D. The DIIS provides examples of: setting up test beds, coding algorithms that will be used in an experiment and collating a data sample that will be used to conduct a relevant experiment.

One final tip: developing software that will be used predominantly for an entity's "internal administration" is expressly excluded from being a core activity. You may still be able to claim this as a supporting activity, but only if it's undertaken for the dominant purpose of supporting the core R&D.

We're here to help

If you're thinking about a software development project, talk to us today about whether it may qualify for the R&D incentive. We can also help you register a claim and guide you through the necessary documentation requirements.

Call us at Robert Goodman Accountants on 07 3289 1700 or email us at  © Copyright 2019. All rights reserved. Source: Thomson Reuters. Brought to you by Robert Goodman Accountants.