Accounting for the Research and Development Tax Incentive

Lately, we are increasingly being asked for guidance on the correct accounting for Research and Development (R&D) Tax Incentives received. As an investment tax credit is accounted for either as a government grant or as income tax or as both but alarmingly it falls outside the scope of both relevant accounting standards AASB 112 Income taxes and AASB 120 Accounting for Government Grants and Disclosure of Government Assistance.

Without clear guidance from these standards and historically given different interpretations of the standards by accounting professionals, management must determine the most appropriate accounting policy to apply and in so doing they can have a material impact on the earnings before interest and tax (EBIT) of the company and the effective tax rate. With no applicable accounting standard, this is a matter of judgement that is covered under AASB 108 Accounting Policies, Changes in Accounting Policies and Errors to determine the most appropriate accounting treatment. Management should therefore consult with all major stakeholders and their auditor in setting this policy.

The Government currently provides a tax offset for some of a company's cost of doing eligible R&D activities by reducing a company's income tax liability. Refundable tax offset of 43.5% apply for companies with an aggregated worldwide turnover of less than $20 million per annum, or a Non-refundable tax offset of 38.5% for all other eligible companies.

The Government is currently preparing draft legislation to implement reforms to the R&D Tax Incentive announced in the 2018 Federal Budget although the fundamentals of the incentive are not expected to change.

Refundable tax offset of 43.5%

In our experience, the common accounting policy for refundable tax offset of 43.5% is to account for them as a government grant adopting the accounting principles of AASB 120.

Under this policy, a credit should be recognised in EBIT over the periods necessary to match the benefit of the credit with the costs for which it is intended to compensate. Where the R&D was expensed during the year it is expected that the refund will be recognised in full in EBIT for the year.

However, where the R&D has been in whole or in part capitalised, the entity should either account for the tax benefit as deferred income that is recognised in EBIT on a systematic basis matching the useful life of the asset, or through adjustment to the carrying value of the asset, which is therefore effectively recognised in EBIT through a reduced amortisation charge over the life of the asset.