Funding Special: R&D Tax Credit

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The R&D Tax Credit has been a mainstay of small business funding for years, and has proved to be both popular and effective. We got expert Steve Carroll to explain it to us.

Steve, of RSM Bird Cameron, is one of Perth’s experts on the subject and a familiar face at Perth startup events. Over to you Steve…
steve

In recent years the support for startups in WA has improved dramatically. There are more ways for innovators to seek advice, assistance, network and help each other than there has ever been. But before the growth in the WA startup scene, and all the way through it, there has been one constant source of funding assistance for innovation, the Federal Government has always had an R&D Tax program.
The R&D Tax Incentive is an eligibility, retrospective, support program provided to encourage Australian companies to carry out research and development. The R&D Tax Incentive provides a generous 45% refundable tax offset to companies with aggregated turnover of less than $20 million. This means that a company with tax losses can receive money back from the ATO up to 45% of the amount they spent on R&D.

Even though R&D tax has been available for many years and provides a substantial cash impact for startups, it is given scant inclusion in the various forums. It has helped many companies but there are many myths and fables, some of them result in a company claiming what they shouldn’t and others that result in companies missing out on their entitlements.

  • The R&D Tax Incentive is not free money, it is an entitlement program that is available if a company meets the criteria and understands their compliance requirements.
  • It is only available to companies, if you have spent money in another entity, such as a trust, those costs are not eligible and setting up a company after the fact and transferring costs into it is not correct.
  • A company does not need to be tax payable to claim the benefit, start-up companies with no income are supported by the ability to “cash out” their R&D tax expenditure rather than carry forward the tax losses.
  • In-kind costs in a company to the owner are not eligible R&D tax costs, R&D costs must be incurred as per tax legislation requirements and if the costs are for the business owner they must also be paid to the owner in order to be eligible.
  • If there is no documentation to support the conduct of the R&D project how can a project be defended and justified under a review, R&D tax claims must be supported with appropriate documentation that covers both the financial and technical aspects of a project.
  • R&D tax projects are not just the cutting edge patentable inventions. The R&D tax legislation is generous to support projects that might not meet the patent requirements but still involve developing new knowledge that did not exist before the project commenced and could only be generated by undertaking development, testing and analysis.
  • A company that receives a Government Grant may also be entitled to claim the R&D tax incentive, there are provisions that relate to this situation and claiming one does not preclude a company from claiming the other. In addition, different Government programs have different definitions of R&D, a project should not be ignored for R&D tax opportunities if it is not considered R&D under different definitions.
  • The R&D tax incentive registration must be lodged 10 months after the end of a financial year. An amendment to a tax return is possible to include an R&D tax claim.
  • R&D tax is a specialist section of tax legislation and advice must be provided by appropriately qualified tax agents, in addition it is recommended that an experienced R&D tax advisor is sought for assistance as they will have an understanding of the technical aspects of what qualifies as R&D.

Given the above, following are some of the simple suggestions and comments for innovators:

  • Get appropriate advice but don’t pay too much. Most of the experienced R&D tax advisors will discuss your eligibility issues in an initial meeting that won’t cost anything.
  • Get advice early, after the fact is often too late.
  • R&D tax benefits for start-up companies are invaluable and worthy of time and effort to prepare them, treat an R&D tax claim with the same respect and diligence you would of any investor.
  • When considering how to fund an innovation project don’t forget to factor in the R&D tax benefit.
  • The benefit of an R&D tax claim to an early stage innovator is substantial, why don’t all innovation programs, incubators, investors, accelerators, etc include a portion of time on the important of R&D tax and making sure that people are appropriately informed?
  • An interesting parallel exists between companies that make strong, well managed, planned and justified R&D tax claims, and companies that apply good innovation management practices.
  • R&D tax management should be included into a company’s business processes and procedures, an innovator should extract the maximum value of an R&D tax claim. An innovator should ask questions such as, how does lean startup theory impact on my R&D tax claim? Is this business model pivot an eligible R&D tax activity or a commercial test? What is the difference between market test and a technical test?
  • Consider the potential benefits of including the financial leverage an R&D tax claim into an investment pitch.
  • Many pitches discussing innovation fail to identify the technical aspects of the innovation, instead covering the pure market novelty, a good R&D tax claim helps companies differentiate and identify the technical innovations and novelty in a project.

Three key points to remember:

  1. For R&D costs incurred in the previous financial year ending 30 June 2014, the lodgement deadline is 30 April 2015!
  2. The R&D tax incentive provides up to 45% cash back on the R&D expenditure incurred.
  3. Plan and manage your R&D project with advice from experienced advisors and if you do not apply correct tax and accounting practices you may miss out on an R&D tax benefit.

If you’re interested in finding out more then contact a specialist. As Steve says, they usually provide the initial discovery meeting for free.

This article is part of our Funding Special series of articles.

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