AgriFood Research and Development: Maximising Tax Benefits

Determining Eligibility

Are you eligible to claim a tax offset for your R&D activities in the agrifood industry? To be eligible for the R&DTI, a company must undertake at least one “core R&D activity”. These are described as “experimental activities whose outcome(s) cannot be known in advance, that can only be determined by applying a systematic progression of work based on principles of established science, and for the purpose of generating new knowledge”. Supporting R&D activities directly related to core R&D can also be claimed for the same financial benefit.

Eligible Activities in Agrifood Research and Development

Common areas of eligible R&D within the agrifood industry include:

1. Development of new or improved agrichemicals: Creating more sustainable products, reducing input costs, enhancing crop yield, and improving pest control.
2. Development of innovative farming practices: Exploring new methods of pesticide application, planting densities, and other agricultural techniques.
3. Applying existing technologies in new contexts: Using agrichemicals or chemical technologies in different locations or under varying conditions that involve uncertain outcomes.
4. Development of technologies to extend shelf life: Creating solutions to preserve the quality and freshness of harvested produce.

Eligible Expenditure for Agrifood R&D

Where a business is conducting eligible R&D activities, eligible expenditure that may be claimed includes:

• Salaries for staff time involved in conducting the R&D activities
• Consumables (e.g. the purchase of agrichemicals) required to conduct the R&D activities
• Depreciation of assets to the extent they are used in conducting R&D activities
• Third-party contractor costs
• Overhead costs to the extent they relate to conducting the R&D activities

Distinguishing R&D from Business as Usual

Within the agrifood industry, it is common for a business to undertake specific streams of research and development alongside its ordinary business activities. However, to be eligible, the R&D activities and associated costs included in your R&D claims should not be considered as regular business activities.

Distinguishing between R&D and ‘Business as Usual’ activities continues to be a significant focus of the ATO and AusIndustry, particularly within the agriculture industry, as articulated in Taxpayer Alert 2017/4. In light of this focus, it is imperative that businesses within the agrifood industry correctly scope R&D activities such that the registered activities, as well as the associated claimed expenditure, do not relate to regular agricultural activities (or whole of farm operations) and are for the core purpose of generating new knowledge through experimentation.

Key Documentation Requirements

To support your R&D claim, maintain comprehensive documentation demonstrating:

1. The technical uncertainty associated with the proposed R&D activities, and the related new knowledge the business is seeking to generate.
2. The experimental procedure undertaken in the conduct of R&D activities.
3. The nexus between claimed expenditure and the R&D activities.

Funding Considerations for Proposed R&D Activities

The nature of research and development within the agrifood sector lends itself to collaboration with and investment from both public and private sectors. As such, several funding opportunities are available to agrifood businesses seeking to conduct R&D activities. Agrifood businesses can still claim the R&DTI while receiving public or private sector funding, but additional considerations apply.

Expenditure Not at Risk

Section 355.405 of the Income Tax Assessment Act 1997 precludes companies from claiming otherwise eligible R&D expenditure under circumstances where, when the expenditure was incurred, the company could reasonably expect to receive any amount of reimbursement or recoupment of the expenditure being incurred, regardless of the results of the R&D activities. To assess whether R&D expenditure falls within this exclusion, agrifood businesses that receive funding from the public or private sector must conduct an appropriate evaluation of the funding agreement in place.

Clawback Provisions

Additionally, at Section 355.440, the Income Tax Assessment Act 1997 also prescribes a clawback adjustment where expenditure is incurred in relation to a government grant or reimbursement received by the company. This clawback does not decrease the grant or offset a business is eligible to receive, rather, it increases the income tax the business is liable to pay on the grant/reimbursement income. Consideration of whether a clawback adjustment is required, and calculation of that clawback adjustment where necessary, requires an in-depth analysis of the grant agreement or reimbursement contract in place.

Feedstock Provisions

Where an R&D entity ‘transforms’ or ‘processes’ a tangible product during an R&D activity, the R&D legislation provides that the costs incurred in relation to raw material inputs (for example, seeds used as inputs to an agrichemical treatment trial) and direct energy inputs must be disclosed as ‘feedstock input expenditure’; and where these tangible products are supplied to another entity or further used by the R&D entity for its own purposes, a feedstock adjustment, similar to the clawback adjustment discussed above, may be required.

The feedstock provisions mandate that agrifood companies take into account a number of factors while drafting an R&DTI claim, such as:

1. The raw materials they employ for research and development.
2. Whether these inputs are processed or changed into a physical output throughout research and development.
3. The amount of direct energy needed to process or convert these inputs into a finished good.
4. The discrepancy between the physical product’s market value and the revenue attributed to feedstock expenses

Maximising Your Claim

Take into account the following to maximise your R&D tax offset:

1. Seek expert counsel: Speak with R&D consultants or tax experts with experience in the agrifood sector.
2. Make a plan: Start keeping thorough and accurate records of your R&D operations as soon as possible.
3. Explore additional funding opportunities: Investigate government grants, partnerships, and collaborations to supplement your R&D efforts.
4. Leverage R&D for business growth: Utilise the insights and innovations from your R&D activities to gain a competitive advantage and expand your market reach.

Industry Challenges and Opportunities

The Australian AgriFood industry currently facing many challenges, including labour shortages, biosecurity threats like varroa mite and lumpy skin disease, unstable commodity prices, and unpredictable weather. These challenges form many opportunities for innovation via R&D.

AgriFood businesses are gradually required to innovate to meet sustainability targets, including reducing emissions in line with Australia’s goal of achieving net-zero greenhouse gas emissions by 2050. This transition requires significant investment in R&D for sustainable agricultural practices.

Financial Support for Small and Medium Enterprises (SMEs)

The R&DTI offers particular benefits for SMEs in the agrifood sector:

• SMEs with an aggregated turnover of less than $20 million can receive a refundable R&D tax offset of 43.5% to 48.5% on eligible R&D expenditures, which includes an 18.5% premium above the corporate tax rate.
• This can result in cash refunds from the Australian Taxation Office (ATO), providing crucial financial support for innovation efforts.
• Research indicates that smaller firms are generally more responsive to R&D tax incentives compared to larger companies, meaning SMEs can leverage these incentives more effectively to boost their R&D investments and overall innovation performance.

Conclusion

The R&DTI presents a valuable opportunity for agrifood businesses to invest in innovation and drive growth. By understanding the eligibility criteria, documenting your R&D activities effectively, and seeking professional guidance, you can maximise your tax benefits and contribute to the advancement of the agrifood industry.

The R&DTI not only supports technological advancements but also provides significant financial relief, making it a valuable tool for any agrifood company committed to innovation. It encourages businesses to engage in R&D activities they might otherwise avoid due to the risks associated with uncertain outcomes, which is particularly important in the agrifood sector where companies face ongoing challenges such as climate change, labour shortages, and biosecurity threats.

By leveraging the R&D Tax Incentive, agrifood businesses can enhance their competitiveness, drive growth within the industry, and contribute to the development of sustainable practices that align with environmental goals. This long-term growth potential is critical as the agrifood industry adapts to changing consumer preferences and regulatory environments.