Navigating R&D Tax Incentives: Guidance for Startups

Research and Development (R&D) is the cornerstone for innovation and creating new products. During a recent webinar, "Funding Innovation: Maximising R&D Tax Incentives and Government Grants," industry specialists Georgia King-Siem, KPMG Partner, and Joel DiBella, KPMG Director, delved into some of the nuances of the R&D Tax Incentive (RDTI). The session was moderated by Michael Chandler, Portfolio Manager at KPMG High Growth Ventures.

This blog post captures key takeaways from the session, offering valuable insights into what constitutes R&D under the RDTI, the criteria for qualifying activities, and strategic approaches to ensure successful R&D initiatives. Read below to learn what Founders need to know about the RDTI.

What are the benefits of the R&D Tax Incentive?

The RDTI is a program by the Federal Government to help companies innovate and grow by incentivising the cost of R&D. It encourages businesses to invest more in innovation by providing company’s with a tax offset for their R&D project spend. If your company has a turnover of less than $20 million, you can potentially claim a refundable tax offset.

This means you may be able to get back your corporate tax rate (usually 25% for startups) plus an extra 18.5% on top. For many startups, this adds up to a 43.5% refundable tax offset on eligible R&D expenses. For example, if a startup spends $1 million on R&D and is in a tax loss position, it could receive up to $435,000 as a cash refund.

What is the R&D Eligibility Criteria?

Joel highlighted three key criteria for ‘Core’ R&D activities: intention to create new knowledge, uncertain outcome, and follow a systematic progression of work. These elements are essential for startups investing in R&D to create novel products that stand out in the market.

Distinguishing between Core Activities and Supporting Activities

Georgia explained how accurately distinguishing between core activities and supporting activities is crucial to meet the necessary criteria for funding.

• Core activities: To qualify for the RDTI, your R&D activities must aim to generate new knowledge that isn't already publicly available. Your R&D process should follow a scientific method, starting with a hypothesis and concluding with results based on experiments. Additionally, the outcomes of your core R&D should be unknown and not predictable in advance, which is why the experimentation is necessary.
• Supporting activities: These are activities directly related to the core activities; typically things that help or enable core R&D activities. They can include research, project management, planning, scoping, and other parts of the project that are necessary for the core experiments to progress (e.g. UX/UI design). However, some activities must pass a stricter 'dominant purpose' test. This test applies to activities that produce (or are directly related to producing) goods or services, or are excluded from being core R&D activities, such as market research or developing software for internal business use. In these cases, the dominant purpose of the activity must be the dominant reason for conducting it. There is a list of excluded activities that companies should check before making a claim.
  

What Expenditure Can I Claim? 

Georgia outlined that claims are made post-expenditure and must be well-documented. In a nutshell, eligible expenditure includes costs incurred on R&D activities conducted in Australia. If you want to claim costs for international R&D activities, you need to apply for an Advance Finding for Overseas Activities. Typical eligible R&D expenses may include salaries and on-costs, travel costs, depreciation of plant and equipment, contractor costs, leasing costs, and overhead costs.

The Importance of Documentation

One of the recurring themes in the webinar was the significance of thorough documentation. Joel stressed that having detailed records from the project planning stage to the execution phase is vital for a successful R&D claim. This documentation not only supports the R&D application but also helps in navigating potential reviews by regulatory bodies.

Navigating the Review Process

Michael raised an important question about the review process and its implications for startups. Joel explained that reviews can occur at various stages, from pre-application to post-refund. It’s important to maintain clear and comprehensive records to avoid complications during these reviews.

Developing a Robust R&D Incentive Claim

The webinar provided a wealth of knowledge for startups embarking on their R&D strategy. By understanding the knowledge gap, differentiating between core and supporting activities, maintaining thorough documentation, and navigating the review process, startups can position themselves for success. Having a clear funding strategy and leveraging available resources can make all the difference.

Looking to learn more about the R&D Tax incentives and how they can benefit your business? Contact us today to maximise your R&D tax incentive opportunities.