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New Guidance Relating to Feedstock Adjustments

AusIndustry and the ATO have recently released joint guidance in relation to the calculation and disclosure of feedstock adjustments. The guidance clarifies that companies are able to “opt-out” of claiming feedstock inputs if the benefit arising from claiming feedstock inputs as R&D expenditure is not commensurate with the compliance requirements for the corresponding feedstock adjustment.

When claiming the R&D Tax Incentive, a company is required to make a feedstock adjustment if it supplies or uses products produced during its R&D activities. The adjustment reduces the net R&D tax benefit through a calculation that increases assessable income.

The feedstock adjustment applies to expenditure incurred on:

• Goods or materials (feedstock inputs) that are transformed or processed during registered R&D activities in producing one or more physical products (feedstock outputs);
• Energy input directly into that transformation or processing;
• Amounts claimed for the decline in value of assets used in acquiring or producing feedstock inputs;

Companies should make an assessment of the tax benefit arising from a claim for feedstock expenditure to determine whether it is optimal to include the costs of such activities within their claim. Regard should be given to the following factors when assessing this:

• The amount of feedstock revenue relative to the corresponding feedstock expenditure;
• Whether the company is claiming under the Refundable or Non-Refundable R&D Tax Offset;
• If a company is claiming under the Refundable R&D Tax Offset, whether surplus tax losses are available during an income year;

If a company decides that claiming the R&D Tax Incentive for feedstock expenditure is not beneficial for a set of activities, they may opt out by adopting the following solution published within the AusIndustry and ATO joint guidance:

“R&D entities can choose not to register R&D activities or parts of the activities that involve the acquisition or production of goods or materials that are to be transformed or processed in R&D activities.

To do this an R&D entity would include an express statement in their R&D Tax Incentive registration application that the relevant activity does not include the specific actions that would give rise to a requirement to perform a feedstock adjustment calculation. An R&D entity may either choose to make this statement against each of the relevant activities or once in relation to each project.

By doing this an R&D entity does not create an entitlement to claim the R&D tax offset in respect of the expenditure on those acquisition or production activities and, consequently, does not need to calculate and report a subsequent feedstock adjustment with respect to that expenditure. The R&D entity may then consider claiming the expenditure it has excluded from the R&D Tax Incentive provisions under other tax law provisions.”

For further information, please see the full AusIndustry and ATO joint guidance titled “Can an R&D entity choose not to claim feedstock input and avoid feedstock adjustments?”