Maximise tax benefits: Research and development in agrifood

Are you eligible to claim a tax offset for your R&D activities in the agrifood industry?

Within the current agrifood landscape, there is a growing demand to increase production efficiency, minimise or mitigate environmental impact, reduce energy use and minimise sources of waste. This has sparked a renewed focus on research and development activities. 

The Australian government plays a crucial role in promoting research and development in the agrifood sector. Through initiatives like the Research and Development Tax Incentive (R&DTI), companies are encouraged to invest in R&D activities that they may not have pursued otherwise. This support is vital for advancing technology adoption in Australia's agriculture and agrifood industries, enabling companies to engage in high-value research activities and drive innovation within the sector.

The RDTI can provide substantial tax relief in the form of a tax offset, offering an R&D benefit ranging from 8.5% to 18.5% for each dollar spent on eligible R&D. Additionally, there is a potential cash refund of up to 48.5% in cases where a company has tax losses (and this depends on the company’s aggregated turnover).

Determining eligibility to support your RDTI claim in Australia

For the purpose of the RDTI, a company must be undertaking at least one eligible core R&D activity. Such activities 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 a “core” R&D activity may also be claimed for the same financial benefit.

Areas where eligible R&D activities are most likely to be found within the agrifood industry include:

• Development of new or improved agrichemicals to create more eco-friendly/sustainable products, lower input, enhanced crop yield, reduced costs, greater pest control, etc.;
• Development of new farming practices, such as methods of pesticide application, planting densities, etc.;
• Using new or improved agrichemicals or existing chemical technologies in a different location or context that involves uncertain outcomes; and
• Development of new or improved technologies to help extend the shelf-life and quality of harvested produce.
   

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; and
• Overhead costs to the extent they relate to conducting the R&D activities.
   

Supporting documentation for your research and development in agrifood

The RDTI program offers a great opportunity for agrifood industry businesses to reduce the costs of eligible research and development activities. However, it's important to consider key legislative provisions and industry guidance materials relevant to the agrifood industry in order to prepare a strong and defensible claim that meets the RDTI program criteria and reduces the risk of non-compliance.
 

Differentiate R&D and ‘Business as usual’ activities

Within the agrifood industry, it is common for a business to undertake specific streams of research and development alongside its ordinary business activities. However in order 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. 

This includes maintaining sufficient documentation to demonstrate the following:

• The technical uncertainty associated with the proposed R&D activities, and the related new knowledge the business is seeking to generate.
• The experimental procedure undertaken in the conduct of R&D activities.
• 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 RDTI 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 require agrifood businesses preparing an RDTI claim to consider several elements, including: 
 

• The raw material inputs used in their R&D activities, 
• Whether these inputs are processed or transformed during R&D activities into a tangible product.
• The direct energy inputs required to process or transform these inputs into a tangible product.
• The difference between the market value of the tangible product and the revenue that is attributable to feedstock expenditure.
   

Specialised R&D support and assistance with RDTI Australia

RSM's specialised R&D Tax and Government Incentives team has extensive experience in preparing robust and defensible RDTI claims for companies in the agrifood industry. We navigate relevant legislative provisions, publicly released guidance from the ATO and AusIndustry and draw on our experience with similar engagements to ensure that each claim captures all eligible expenditures while minimising any risk of non-compliance. We have also successfully assisted many agribusinesses to access state and federal government funding.

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