Feedstock adjustments also apply where an affiliate or a connected entity utilises the feedstock product.
Companies claiming the R&D Tax Incentive, may engage in R&D activities that produce marketable or useable goods. In the circumstance of these tangible products being used or supplied to another entity, a feedstock adjustment may be required.
Feedstock adjustments apply to expenditure on:
- Feedstock inputs – resources, goods and raw materials that were used in R&D activities, generating tangible products.
- Energy input that was used directly in the above processing.
These provisions may apply to both Core and Supporting R&D activities, undergone in the processing of feedstock inputs. These activities are not confined to mass production, and will be triggered by any production of tangible products that were used or supplied to another entity.
How does it work?
The feedstock adjustment increases the company’s assessable income, rather than by reducing the claimable offset or deductions. The feedstock adjustment aims to avoid ‘double dipping’ of companies generating marketable products from their eligible R&D activities.
A company is only required to lodge a feedstock adjustment if both of the following take place:
The company is claiming R&D Tax Incentive on expenditure related to the acquiring or producing of feedstock inputs (including expenditure on energy inputs directly related to the processing of feedstock inputs, and the decline in value of depreciating assets); and
The company sold, supplied to another entity or used the feedstock output.
Example
Tea and Feedstock (T&F) Pty Ltd were developing a new tea extraction process. The experimentation process required the extraction of different tea products, utilising the new machine technologies. From the experiments the, company generated marketable tea products; worth $9,000. From the total notional deductions that the company could claim ($10,000) the company spent $3,000 on feedstock expenditure.
A third of the products, ($3,000) were reused by the company in further testing, to generate shelf-life prototypes.
Another third of the products ($3,000) were taken by the company and were used internally for consumption.
The final third of the products were sold for $3,000 as an early release of the product.
The third that was used for further testing will not be included in the feedstock adjustment. Therefore the feedstock revenue will be $6,000. Including both the third used for internal consumption and the third used in commercial supply.
T&F’s feedstock adjustment calculation will be as follows:
The lesser of feedstock expenditure or feedstock revenue, X 1/3
Feedstock expenditure = $3,000
Feedstock revenue = $6,000
1/3 x $3,000 = $1,000
Therefore, in addition to the $6,000 of revenue received from the sale and the internal consumption of the good, T&D are required to include a feedstock adjustment of $1,000 in their assessable income. This will increase the amount of income tax that T&F are liable to pay by $300 (%30 x $1000).
This document is intended to provide useful information for companies considering accessing the R&D Tax Incentive. However it is not exhaustive and it is not legal or financial advice. Saving Point disclaims all liability for any loss or damages arising from the reliance on any information contained in this document. If you wish to seek legal and financial advice regarding the eligibility of your R&D activities, please contact the Saving Point Grants team.
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