The R&D Tax Incentive assists thousands of Australian startups focused on innovation, providing tax credits to reduce spend on R&D expenditure.
If done correctly, the R&D Tax Incentive is a huge opportunity for Australian startups, and can offset a sizable share of your company’s R&D spend, freeing up capital for growth.
However, get it wrong, and the mistakes can be costly – and businesses with incorrect or incomplete documentation may be forced to repay any incentives received, along with interest and penalties, well after the money has been spent.
So, what is the R&D Tax Incentive and how can it help your business? We break down the what and the how, as well as the key things to be aware of if you want to make a claim.
What is the R&D Tax Incentive?
The R&D Tax Incentive is the Federal Government’s primary program to help companies innovate and grow. By offsetting the cost of R&D, the program aims to encourage businesses to invest more in innovation.
Under the R&D Tax Incentive program, companies with an aggregated turnover under $20M may claim the refundable R&D tax offset, which is your corporate tax rate (usually 25% for startups) plus an 18.5% premium. For the majority of startups, the R&D Tax Incentive can provide a 43.5% refundable tax offset on eligible R&D expenditure. For example, a start-up company that is in a tax loss position and spends $1 million on R&D could receive up to a $435,000 cash refund.
Your R&D Glossary
Definitions are everything when it comes to the R&D Tax Incentive and are the difference between qualifying for the R&D Tax Incentive or not. When making your R&D claims, you must clearly demonstrate that your core and supporting activities meet the criteria – this is the legislative framework AusIndustry applies to determine whether what you’re doing fits the bill.
Eligible R&D activity is split up into two kinds of activities:
- Core Activities (your experimental R&D activities), and
- Supporting Activities (activities which support and are directly related to your core R&D).
What is a “Core” R&D activity?
Core R&D is defined by three characteristics, namely:
- Intention to generate new knowledge: this means knowledge that is not currently in the public domain or otherwise accessible to you on a reasonably worldwide basis.
- Scientific: Your R&D strategy follows a clear scientific method, starting with a hypothesis and ending with conclusions based on experiments to test your hypothesis (or hypotheses).
- Unknown: Outcomes that couldn’t be known or determined in advance – hence the need to experiment.
What is a Supporting R&D activity?
Supporting R&D activities are activities that support and enable a core activity. They include activities that directly enable the implementation of core R&D, which could include:
- Research
- Project management of R&D
- Planning
- Scoping, or
- UX/UI where it directly impacts core experiments.
However, for some activities, a stricter 'dominant purpose' test applies to activities which:
- produce, or are directly related to producing, goods or services;
- are specifically excluded from qualifying as core R&D activities (e.g. market research, complying
with statutory requirements or standards, developing software for internal business administration,
etc.).
In such cases activities can be conducted for more than one purpose, the dominant purpose is the prevailing or most influential purpose.
What is eligible expenditure?
Expenditure incurred on eligible R&D activities conducted in Australia can generally be included as part of your R&D claim. If you want to claim costs on international R&D activities, you will need to apply for an Advance Finding for Overseas Activities.
Typically, eligible R&D expenditure (to undertake your R&D activities) may include:
- Salaries and on-costs
- Travel costs
- Depreciation of plant and equipment
- Contractor costs
- Leasing costs
- Overhead costs
changes to the R&D tax incentive
The R&D Tax Incentive is an evolving program that has undergone significant changes over the past decade; legislative changes, Federal Court decisions, changes in guidance, different approaches to compliance activities, and more.
With so many other things to juggle, it can be difficult for you (or your team) to keep track of what's expected – and the cost of getting it wrong can be damaging and costly for your startup. If you are considering participating in the R&D Tax Incentive program, it’s essential that you are across the latest guidance and regulator expectations. Getting professional advice can be invaluable to ensure you are correctly approaching and preparing your R&D claims.
What happens if you get it wrong?
The programs regulators, the ATO (Australian Tax Office) and AusIndustry, regularly look at claims (including past claims) to see if everything is up to scratch.
If the ATO or AusIndustry reviews your claim and finds you have made ineligible claims, you could be forced to pay back your refund with the addition of interest, and possible penalties - well after the money has been spent. You may find yourself having to go back and consolidate data, answer questions from your investors, or improve governance and processes. Failure to do these could result in a downgrade of your valuation, or open your business up to the risk of failing an audit.
How to ensure you have a robust R&D incentive claim
Good governance, accurate documentation and smart management is crucial - but good governance can be an administrative headache, and it’s often hard to know where to start and how to manage it.
Working with a trusted advisor is key to capitalise now, and in the future. KPMG High Growth Ventures works closely with specialists within KPMG's Accelerating Business Growth team to help founders navigate the complexities of the R&D Tax Incentive with ease. Our specialists meet regularly with the ATO and AusIndustry to understand best practice and governance requirements to help assist in keeping your documentation in line with the latest standards.
Want to learn more? Get in touch with us today.