Catalyst Global

The digital games tax offset player’s manual

To this end, it has introduced the digital games tax offset (DGTO), which is a 30% refundable tax offset on Qualifying Australian Development Expenditure (QADE).  This refundable tax offset is provided in addition to a tax deduction, and is therefore generally more generous than the R&D Tax Incentive (i.e. a tax offset instead of a tax deduction).

This article outlines the key rules of the game for studios looking to access financial support from the Australian government via the DGTO.

Rule number 1: you must be an Australian resident company with an Australian business number (ABN), or a foreign resident company that has a permanent establishment in Australia with an ABN.

Rule number 2: you must obtain one or more certificates from the Minister for the Arts.  These can be a ‘Completion Certificate’ for the development of a new game, a ‘Porting Certificate’ for a game ported to a new platform, or an ‘Ongoing Development Certificate’ for the ongoing development of an existing game.

Rule number 3: you must have at least $500,000 of QADE.

Rule number 4: you can’t amend the tax return to include the DGTO, it needs to be included in the original tax return.

In terms of strategies for optimising the DGTO, consideration should also be given to the R&D Tax Incentive.  There could be instances where a business could qualify for the DGTO and also for the R&D Tax Incentive for the same underlying expenditure, but the tax law allows the business to claim the tax offset through only one of the programs (not both).  In these instances, there is no single strategy that will always result in the most favourable outcome for the business.  Therefore, an understanding of the pros and cons associated with each program is required.  Consider, for example, a pre-revenue business with a 25% company tax rate that spends $1M that could potentially qualify for the DGTO and also for the R&D Tax Incentive.  There are three key potential strategies:

• Strategy 1 – the business doesn’t access either the DGTO or the R&D Tax Incentive. By doing this, it will carry forward a $1M tax loss into future years which, assuming that the business ultimately becomes tax-paying, will reduce a future income tax bill by $250K.
• Strategy 2 – the business accesses the R&D Tax Incentive. It receives a cash payment of $435K, but doesn’t have any tax loss to carry forward to future years to reduce future income tax bills.
• Strategy 3 – the business accesses the DGTO. It receives a cash payment of $300K, and will carry forward a $1M tax loss into future years which, assuming that the business ultimately becomes tax-paying, will reduce a future income tax bill by $250K.

Whilst the benefit achieved by accessing the DGTO (i.e. $550K in total) is greater than the R&D Tax Incentive (i.e. $435K in total), a business that is in desperate need of cash or that isn’t projecting to be tax-paying for a long time would likely be better off opting for the R&D Tax Incentive instead of the DGTO.

If you would like to know more about this or any other government incentives in Australia, please get in touch to arrange a discussion.

By Dave Corbin, Managing Director of Catalyst Solutions Australia.

Recent R&D Tax Incentive court case: lessons for the government?

The recent decision in the case of Body by Michael Pty Ltd and Industry Innovation and Science Australia (2025) will surprise nobody; with the court ruling that the work conducted by the applicant business didn’t meet the tax definition of ‘R&D activities’. Body of Michael Pty Ltd joins a long list of businesses who in the past decade have tried, yet ultimately failed, to convince the courts that their project actually constitutes R&D.

What some may find interesting, however, are the criticisms that the judge in this case had for the way that the relevant statutory board (Industry Innovation and Science Australia, “IISA”) administers its component of the R&D Tax Incentive. Three of the key lessons for IISA were:

• The existing views of IISA reflect standards that are not in the statutory provisions and which may not be realistic to an industry-based program. For example, IISA states that to meet the ‘observation’ and ‘evaluation’ words in the tax legislation requires “analysis of numerical data using established statistical techniques”, without specifying what those techniques are or where that requirement comes from or why ‘observation’ and ‘evaluation’ do not have their plain meaning.
• IISA’s belief that the only relevant evidence that a business can produce in relation to its eligibility for the R&D Tax Incentive need be both ‘contemporaneous’ and ‘written’ is fundamentally incorrect. Evidence can be prepared at any time and could be written or oral.
• IISA’s opinion that ‘mental health’ constitutes a ‘social science’ and is therefore ineligible as a core R&D activity is fundamentally incorrect. Mental health is distinct from a social science.

It will be interesting to see whether IISA takes these judicial lessons on board and modifies its R&D Tax Incentive guidance material and/or views in relation to the assessment of future R&D applications.

If you would like to know more about this or any other government incentives in Australia, please get in touch to arrange a discussion.

R&D Tax Incentive – the ATO can now assess the eligibility of R&D activities

The Administrative Appeals Tribunal recently released its decision regarding the case of GQHC v Commissioner of Taxation (2024). Whilst the case deals with a few R&D Tax Incentive issues (e.g. what constitutes feedstock, etc.), it is significant because it is the first time in the almost four decades that an R&D tax program has existed in Australia that the eligibility of projects and activities has been decided by the Australian Taxation Office (ATO).

To give some context here, the Australian R&D tax programs have always been and continue to be dually administered; AusIndustry (on behalf of Industry Innovation and Science Australia) has always had jurisdiction about whether projects and activities meet the tax definition of R&D, and the ATO has always had jurisdiction about whether the claimed expenditure on those R&D activities was eligible.

In this case, the company had submitted its annual R&D application and had been registered (conceptually similar to approved) by AusIndustry. In situations such as this, the ATO would typically only concern itself with whether the claimed expenditure on those R&D activities appeared eligible. However, the ATO instead disputed whether those projects and activities did, in fact, meet the tax definition of R&D. This is significant because it is the first time that the ATO has sought to rule on the eligibility of projects and activities.

In court, the company challenged whether the ATO was legally capable of making decisions about the R&D eligibility of projects and activities. However, in an outcome that has surprised many, the court ultimately decided that the ATO was, in fact, allowed to make such decisions. This outcome seems logically inconsistent with the original intention of having a dually administered R&D tax program, where it was believed that the ATO wouldn’t possess the requisite understanding of such highly technical and scientific matters, and that therefore these elements of the R&D tax program should be the jurisdiction of AusIndustry.

This court case raises two key questions:

• Will this broaden the scope of the ATO’s R&D audits in the future, such that they will now include an assessment of projects and activities?
• Given that AusIndustry had previously registered the projects and activities as constituting R&D, and given that the ATO ultimately overruled AusIndustry’s position here, will it be more difficult for businesses to qualify for the R&D Tax Incentive moving forward? Or to put it another way, will the ATO continue to set the bar higher than what AusIndustry historically has?

If you would like to know more about this or any other government incentives in Australia, please get in touch to arrange a discussion.

By Dave Corbin, Managing Director of Catalyst Solutions Australia.

Export Market Development Grant – what’s new for FY2026 and FY2027?

With exactly 5 weeks to go until applications open for the next round of the Export Market Development Grant (“EMDG”) program, now is the time to start assessing your business’ potential eligibility for grant funding. Austrade has recently changed the eligibility criteria of the EMDG program, meaning that businesses that had previously been entitled to funding may no longer qualify.

What are the key points?

• Applications open at 10am AEDT on 12 November 2024;
• The assessment and offering of grants will occur in the order that Austrade receives applications. The program will close once the available funding is allocated to eligible applicants. This change means that not all applicants will necessarily receive funding;
• Applications can be for a maximum of two financial years; FY2026 and FY2027;
• The government has earmarked up to $104,500,000 in grant funding per financial year (i.e. $209,000,000 equally split across the two financial years);
• The business must have been operating under the same ABN for at least 2 years;
• The business must have the capacity to spend at least $20,000 per financial year;
• There must be a high-quality plan to market that is specific to each business;
• The business must be tax compliant and fit to receive a grant; and
• Consistent with previous EMDG rounds, businesses need to apply for a particular ‘tier’ (see below).

Tier 1 – ready to export:

• The business has not exported before;
• Have an FY2024 annual turnover of more than $100,000 but less than $20,000,000;
• A business can qualify as Tier 1 for a maximum of two years; and
• Grants of between $20,000 and $30,000 per financial year.

Tier 2 – exporting within existing markets:

• Already exporting;
• Seeking to expand its marketing and promotional activities within its existing export markets;
• Have an FY2024 annual turnover of more than $500,000 but less than $20,000,000;
• A business can qualify as Tier 2 for a maximum of four years; and
• Grants of between $20,000 and $50,000 per financial year.

Tier 3 – exporting to new key markets:

• Already exporting;
• Seeking to diversify its marketing and promotional activities into new key markets (i.e. any of 27 prescribed countries);
• Have an FY2024 annual turnover of more than $1,000,000 but less than $20,000,000;
• A business can qualify as Tier 3 for a maximum of four years; and
• Grants of between $20,000 and $80,000 per financial year.

Given the ‘first come, first served’ nature of this new EMDG program it is highly recommended that any business that is desirous of receiving grant funding ensures that it has everything ready to submit by 10am AEDT on 12 November 2024.

If you would like to know more about this or any other government incentives in Australia, please get in touch to arrange a discussion.

Export Market Development Grant changes – new FY2025 applications have been cancelled

Austrade has recently announced that the Export Market Development Grant (EMDG) program will not be accepting new applications for the 2025 financial year (i.e. for the period 1 July 2024 to 30 June 2025).

Whilst the EMDG program has been around for decades, it undertook a significant revamp which took effect from 1 July 2021. Businesses have been able to access the new program for the 2022, 2023 and 2024 financial years, but have been informed that, due to budgetary limitations, no new grant applications will be accepted in relation to the 2025 financial year. It is noted that any businesses with grant agreements already in place that cover the 2025 financial year will still receive funding.

Austrade expects that the next round of applications will be for the 2026 financial year (i.e. for the period 1 July 2025 to 30 June 2026), and that it will accept these applications in late 2024 or early 2025.

If you would like to know more about this or any other government incentives in Australia, please get in touch to arrange a discussion.

NSW grant program opening up – MVP Ventures

The NSW Government’s MVP Ventures grant program is designed to support startups and SMEs in the product lifecycle between early-stage research and mature investment opportunities.

The Department of Enterprise, Investment and Trade will provide up to $3 million per annum until 30 June 2027. The minimum grant amount is $25,000 and the maximum grant amount is $50,000, and these funds will need to be matched by the business.

To be eligible, you must:

• have an Australian Business Number (ABN);
• be non-tax exempt;
• be Headquartered in NSW;
• have an account with an Australian financial institution;
• be one of the following entity types:
  • a company incorporated in Australia; or
  • an incorporated trustee on behalf of a trust in Australia;
• hold intellectual property (IP) or rights to commercialise.

You must also:

• not be an entity or a subsidiary of a group of companies that has an Aggregated Turnover that is more than A$1 million for each of the three financial years prior to the lodgement of your application;
• not be an entity or a subsidiary of a group of companies that has more than a total of 20 FTE.

To be eligible, your project must:

• be related to the commercialisation of your product or process
• involve progressing your product or process along the Technology Readiness Level (TRL) scale between 3 and 9
• be aligned to one of the following NSW Government Industry
  Development Framework priority industries:
  • Agriculture and agrifood
  • Resources
  • Defence and aerospace
  • Clean energy and waste
  • Medical and life sciences
  • Digital systems and software
  • International education
  • Visitor economy
  • Advanced manufacturing
  • Biotechnologies
  • Digital technologies
• demonstrate a minimum 50 per cent cash contribution
• have a validating entity that will qualify and evaluate the quality, functionality and intended behaviours of the product or process
• be completed within 12 months of funding
• undertake funded activities in NSW
• demonstrate why sufficient funding for the entire project cannot be accessed from alternative sources and that the project would not proceed in NSW without government support
  include only eligible expenditure.

Applications for Round 1 can be submitted between 4 December 2023 and 30 April 2024.

If you would like to know more about this or any other government incentives in Australia, please get in touch to arrange a discussion.

Government Incentives Update – September 2023

Below is a summary of the key things that are happening in the Australian government incentives space at the moment.

Research and Development Tax Incentive (Federal)

• Businesses with a 31 December year end must submit their FY2022 R&D applications to AusIndustry by 31 October 2023.
• Businesses with a 30 June year end can submit their FY2023 R&D applications to AusIndustry any time up until 30 April 2024.

Export Market Development Grants (Federal)

• Round 1 and Round 2 grantees can submit their FY2023 Milestone Reports to Austrade any time up until 31 October 2023.

Cooperative Research Centres Projects (Federal)

• Round 15 opened on 3 August and will be closing on 14 September. The Cooperative Research Centres Projects (CRC-P) grants provide funding for short-term research collaborations (matched funding of between $100,000 and $3,000,000).
  It will focus on supporting projects with a focus in any of the following:
  • renewables and low emissions technologies
  • medical science
  • transport
  • value-add in the agriculture, forestry and fisheries sectors
  • value-add in resources
  • defence capability
  • enabling capabilities
  • food
  • soil and water
  • cybersecurity
  • energy
  • resources
  • advanced manufacturing
  • environmental change
  • health
  • circular economy.

  If you would like to know more about these or any other government incentives in Australia, please get in touch to arrange a discussion.

  Government Incentives Update – June 2023

  Below is a summary of the key things that are happening in the Australian government incentives space at the moment.

  Research and Development Tax Incentive (Federal)

  • Applications for advance or overseas findings for FY2023 need to be submitted to AusIndustry no later than 30 June 2023.
  • Standard FY2023 R&D applications can be submitted to AusIndustry any time between 1 July 2023 and 30 April 2024.
  • Expenditure incurred during FY2023 to the company’s ‘associate’ (a type of related party) must also have been paid no later than 30 June 2023 to be able to be included within the FY2023 R&D claim.

  Export Market Development Grants (Federal)

  • Round 1 and Round 2 grantees will be able to submit their FY2023 Milestone Reports from early July.

  Accelerating Commercialisation Grant Program (Federal)

  • The Accelerating Commercialisation grant program (matched funding of up to $1 million) was recently shut down. A new commercialisation grant program has been announced to replace Accelerating Commercialisation, but specifics about this new program are scant at the moment. What is known is that it should launch in late 2023 and will focus on projects in the following areas:
    • renewables and low emissions technologies
    • medical science
    • transport
    • value-add in the agriculture, forestry and fisheries sectors
    • value-add in resources
    • defence capability
    • enabling capabilities.

  MVP (Minimum Viable Product) Venture grant program (State – NSW)

  This grant program was recently and abruptly closed down. Unfortunately, not only can businesses no longer apply for the grants, but even those businesses who had already submitted applications have been informed that they won’t receive any grant funding.

  If you would like to know more about these or any other government incentives in Australia, please get in touch to arrange a discussion.

  Why I’m glad that your company’s R&D Tax Incentive claim was rejected

  0.17% of Australians are registered tax agents, meaning that their job is to assist others to pay as little tax as is legally allowable, to get the biggest tax refunds (including R&D refunds) legally allowable, and to advocate on behalf of their clients. This advocacy has involved myriad articles in recent years about how terrible AusIndustry and the ATO have been in their rejection of various companies’ R&D claims, and how unreasonable their demands are in relation to keeping documents and records.

  I am a registered tax agent and each year I assist many businesses to access the R&D Tax Incentive. But I am going to take the alternative view to many of my colleagues here and explain why I fundamentally agree with what AusIndustry and the ATO are doing. This is because, like almost 100% of Australians, I am a taxpayer.

  As a taxpayer I only get some of the remuneration that I’m entitled to in my bank account each pay, I have to pay 10% more than I should for many of the goods and services that I purchase, and I pay more at the petrol station when I fill up my car than I otherwise would. The reason that I accept all of these hits to my back pocket is because I know that these taxes are what we all have to contribute as members of a society so that things like hospitals, schools and firefighters can exist.

  As a taxpayer I also like that some portion of the taxes that I pay goes towards incentivising private sector research and development (R&D) to occur in Australia. However, I don’t want any portion of my taxes to fund businesses that aren’t actually doing R&D (I’d rather just keep that money for myself). And herein lies the dilemma; how do we know which businesses to fund and which businesses not to fund?

  The R&D Tax Incentive is, as the name suggests, part of the tax system. Because of this, it operates in the same way that many other taxes do; via self-assessment. This means that it is the responsibility of the company to determine whether it meets the requirements and, if it does, to submit an R&D claim. R&D claims (like everyone’s personal tax returns) are assumed to be true and correct when they are lodged. I’ve never encountered a business that didn’t want free money before. So what is to stop just anyone from saying that they are spending money on R&D, and that they are therefore entitled to a big cash payment from the Australian people when in fact they really aren’t eligible?

  Enter AusIndustry and the ATO. R&D claims may be (although generally are not) audited, and if an audit occurs the onus is on the company to demonstrate to the auditor why it meets the R&D eligibility criteria. This generally involves two things; demonstrating that the company did actually do R&D (experimentation, innovation, etc.), and demonstrating how much money was spent on that R&D. The first issue is administered by AusIndustry, and per section 355-705 of the Income Tax Assessment Act 1997 can occur within 4 years from the last day of the financial year that the R&D claim relates to (e.g. an R&D claim made for the financial year ending 30 June 2021 can be audited by AusIndustry at any time up until 30 June 2025). The second issue is administered by the ATO, and per section 170 of the Income Tax Assessment Act 1936 can occur (for SMEs) within 2 years from the date that the company’s relevant income tax return was lodged with the ATO (e.g. an R&D claim made for the year ending 30 June 2021 that was lodged with the ATO on 28 February 2022 can be audited at any time up until 28 February 2024). It is worth noting that the ATO can go back indefinitely if it suspects that fraud or evasion has occurred.

  Failure by the company to provide sufficient evidence of its R&D Tax Incentive eligibility will result in some or all of any tax refund that the company had received having to be repaid to the ATO (potentially along with interest and other penalties).

  I am baffled as to why there is such outrage by the private sector when an R&D claim gets rejected. Essentially, the company must not have adequately evidenced at least one of these two criteria. By blaming AusIndustry and/or the ATO the company is essentially saying ‘the Australian people should just simply trust me and give me lots of their money despite the fact that I can’t demonstrate to anyone other than myself that I qualify for this money’. I don’t know any person, business or organisation that hands out money on someone else’s say so alone, so to think that R&D claims are any different is ludicrous.

  Of those that have had their R&D claims rejected, some have elected to take the matter to court. The overwhelming majority of these court decisions have upheld the view that the R&D claims are invalid, and almost always on the grounds that there was insufficient evidence presented by the company (see the cases of Docklands Science Park, Royal Wins, NaughtsnCrosses, Ultimate Vision Inventions, etc.). So AusIndustry and the ATO are just administering the R&D Tax Incentive in exactly the way that the Australian legal system wants them to – i.e. no R&D evidence means no R&D refund.

  From my interactions I see four key excuses that are rolled out by companies for failing to keep sufficient evidence, as follows:

  • When we were doing the R&D we didn’t even know about the tax incentive so we couldn’t have known what records to keep.
  • We were too busy actually doing the R&D (or other things) so we didn’t have the time to do the record-keeping.
  • The R&D Tax Incentive guidance material is ambiguous as to what records we need to keep so we didn’t really keep anything very much.
  • We just assumed that our existing records and processes would be sufficient to demonstrate eligibility.

  Let me address each of these in turn. For the first excuse, as the name implies, the R&D Tax Incentive is supposed to be an incentive, in that it is supposed to incentivise companies to do R&D that they may not have otherwise done. It does not exist to ‘reward’ companies for having done R&D. Therefore, if you did some R&D without knowing that the Tax Incentive even existed, then the Australian people essentially got lucky here, in that you’ve done the thing that they wanted you to do and they don’t even have to pay for it by giving you an R&D claim.

  For the second excuse, keeping records is a mandatory requirement of the R&D Tax Incentive. You’re absolutely welcome to do some R&D and then not claim the R&D Tax Incentive, but if you are making an R&D claim then you need to divert some of your resources to keeping records.

  For the third excuse, I will grant you that there is definitely some uncertainty as to exactly what type of records need to be created, how many are required, how detailed they need to be, and when they need to be in place. But this uncertainty does not give you licence to keep almost no records. If the R&D refund is such a significant source of cash for your business then, if in doubt, create too many documents that are too detailed too often, rather than too few documents that are too vague too infrequently.

  For the fourth excuse, given the highly specific and unique eligibility requirements associated with the R&D Tax Incentive, it is borderline reckless to just assume that you would ‘accidentally’ keep exactly the correct records. For example, one of the requirements of the R&D Tax Incentive is that you are able to evidence your ‘experiment’. But very few industries mandatorily require details of experimentation to be kept (with the exception of the heavily regulated biotechnology sector). Therefore, unless you are documenting the experiment specifically for the purpose of making an R&D claim, it is unlikely that you will have kept the necessary evidence.

  Hopefully the point is clear by now. There is no valid excuse for making an R&D claim without sufficient evidence.

  Many companies that I speak to complain about the difficult and time-consuming task of gathering all of the information that they need in order to pull together their annual R&D claim. My suggestion to them is always the same; rather than spending 12 hours at the end of the financial year scrambling for documents and evidence, spend one hour every month preparing dedicated R&D Tax Incentive documents. The end of year claim process should then be an exceedingly easy task, and the claim itself will be significantly more defendable should it be audited. It’s not more work, but it does require being more disciplined. Going about things this way has the added advantage that you should be well-placed to access an R&D loan should you need it (the R&D lenders won’t lend to you unless you have good R&D records in place).

  There are two situations where R&D claims get rejected; when the company wasn’t actually spending money on R&D, and when the company was spending money on R&D but simply didn’t keep the right evidence. I sympathise with the latter infinitely more than the former, but as a taxpayer I’m glad that both situations have their R&D claims rejected. The former was fundamentally ineligible for the Tax Incentive, and the latter couldn’t convince anyone other than themselves that they were eligible. We, the Australian people, are offering up our hard-earned money to support Australian R&D, and it’s completely unreasonable for you to simply say ‘I deserve your money – just trust me’.

  Given the relatively low rates of R&D audits, I’m confident that there are some companies that have submitted (and will continue to submit) invalid R&D claims that weren’t (and won’t be) audited, and as a taxpayer I’m not thrilled that they are effectively stealing some of my money. To those companies that adopt the ‘choose not to keep adequate evidence and just cross our fingers’ approach and then do actually get audited, I’m glad that your R&D Tax Incentive claims were rejected. You don’t have anyone to blame but yourselves. Stop complaining and start complying!

  If you would like to discuss how your business could better prepare to claim the R&D Tax Incentive, please get in touch with us to arrange a tailored discussion.

  CIP ‘Critical Infrastructure Programme’ – Amended Guidelines

  What is the Critical Infrastructure Programme?

  The Critical Infrastructure Programme (“CIP”) provides cost-sharing grant funding for infrastructure deemed critical to unlock future investment projects and is administered by the Department of Trade, Industry and Competition (“DTIC”).

  Amendments to Critical Infrastructure Programme guidelines 

  Recent amendments to the CIP guidelines (effective May 2021) widened the scope of support to include infrastructure addressing the economic impact of the COVID-19 pandemic (e. g infrastructure that supports the hard-hit tourism sector), clean/green energy infrastructure, film and cinema infrastructure and strategic infrastructure feasibility studies (including pilot plants). Under the amended guidelines applicants must be at least a level 6 BEE contributor at application and at claim stage compared to a level 4 BEE contributor under the previous guidelines.

  Critical Infrastructure Programme Support

  The CIP grant is capped at R50 million and offers between 10% and 30% for investments in critical infrastructure, 60% towards strategic infrastructure feasibility studies (80% for project’s inside SEZ’s) and 30% towards film and cinema infrastructure. Applications made by distressed municipalities could enjoy support as high as 100%.

  Infrastructure is deemed critical if an investment project would not take place or operate optimally without the infrastructure and refers to structural foundations or permanent network facilities via which business and society in general receive or supply basic services such as transport, electricity, water, sanitation, telecommunications, etc. Examples include roads, bulk water infrastructure, energy generation infrastructure alleviating dependency on the national grid, shared wash or processing plants linked to mining beneficiation operations as well as shared silo’s / irrigation / cold storage / reservoirs linked to agro-processing.

  Things to consider prior to submitting an application

  A completed application form with supporting documents must be submitted and a CIP site visit be conducted before construction on the project can commence. All the required permits from relevant authorities, tax clearance and BEE certificate in addition to the normal compliance documentation is needed to complete an application.

  Contact Catalyst Solutions if you are planning an infrastructure related project and are interested in accessing the CIP or other grants.

  bernhard@catalystsolutions.co.za
  082 336 9042
  christo@catalystsolutions.co.za
  084 513 8177