10 tips for businesses making an R&D Tax Incentive Claim
Australian companies that engage in Research & Development (R&D) can be eligible for a tax offset if these activities are deemed relevant by the Australian Tax Office. This funding can often come at a critical stage during the innovation process and assist with the hiring of technical staff, purchase of equipment, or investment in technology that can push the needle forward. The challenge is that business owners who undertake expenditure on R&D activities are often unsure whether they can qualify for the program formally known as the R&D Tax Incentive. This article aims to provide 10 tips for Australian business owners looking to gain a better understanding of the R&D Tax Incentive and most importantly, help them in deciding to apply.
Tip #1: You do not need to be wearing a lab coat to be innovative
A Bunsen burner, mysterious compounds, and an understanding of quantum physics are all requirements of innovation, right? Wrong! As it relates to the Australian government R&D Tax Incentive program, innovation has a broad definition to ensure it is applicable across a wide range of industry sectors. The acid test as it applies here is whether the R&D activity your business is undertaking, aids in developing new industry-relevant knowledge while having elements of technological uncertainty. So, our tip is that if you are testing, developing, in the prototype stage, or creating new processes, services, or products – guess what, you are innovating!
It is all about the journey here and if your product roadmap feels more like a game of snakes and ladders as opposed to a straightforward process, you are on the path to innovating.
Tip #2: Do not let the fact that there is a similar product in the market stop you from applying for the R&D Tax Incentive
A common talking point relating to the R&D Tax Incentive is project eligibility. That is if there is an existing product already in-market, will your project be able to apply for the R&D Tax Incentive? If the knowledge is not publicly accessible or the competitor’s IP is ring-fenced and the knowledge not commonly known, companies can still claim the R&D Tax Incentive. This is so they may develop the knowledge and know-how themselves at a time when the information is not widely spread in the market.
Tip #3: Do not wait until you have finished your project to apply for the R&D Tax Incentive
Not done with your project? No stress, as the program works on a year-on-year application process. The R&D Tax Incentive is designed to allow the applicant to track the progress of their innovation projects throughout the financial year. It then allows them to measure how much was spent across 12 months. The tip here is not to wait until completion to apply.
Tip #4: Success has many fathers and failure is an orphan – except in the case of R&D Tax Incentive eligibility
When it comes to innovation, failure is good. That is why you can still apply for the R&D Tax Incentive even if you fail – it is a sign that there is a challenge and you are shifting the goalposts in some manner. It shows that there is a level of technical uncertainty in what you are aiming to achieve. That is why the R&D Tax Incentive program is designed to inspire Australian businesses to solve the challenges of their industry, create new knowledge for the country’s business community, and inspire companies to undertake the level of risk required to innovate. That is why the tip is to not let failure get in the way of applying for the R&D Tax Incentive as the goal is to encourage a level of failure to push the economy forward.
Tip #5: Applying for the R&D Tax Incentive does not mean that your business will be audited
Here is the tip, applying for the R&D Tax Incentive does not mean that your company will need to stress about being audited by the Australian Taxation Office. So do not let this stop you from applying for the program. It does not need to investigate your entire accounts to determine your eligibility, only the R&D-related expenses as they relate to the activities undertaken to support the R&D.
Tip #6: I missed the end of the financial year so it is too late to lodge my R&D Tax Incentive claim
Missed the 30th of June and a bit down? No worries at all! That’s because businesses have 10-month after your company’s financial year-end to lodge a technical R&D Tax Incentive application. There is also a four-year amendment to lodge the R&D tax schedule with the company tax return. Now, obviously, the problem with delaying the application is that you miss out on the R&D Tax Incentive so do not be too tardy. However, it does allow for a level of retrospective analysis or delayed market entry that can suit some companies.
Tip #7: You’re not double-dipping if you receive the R&D Tax Incentive along with other government grants
There are measures in place to restrict companies from getting two bites of the cherry so to speak, and claiming two government grants that are basically for the same costs. That does not mean that if you are receiving funding for another element of your business’s activities nothing is stopping you from claiming the R&D Tax Incentive. Grant clawbacks will occur and be applied to cover some items that you may include in your R&D tax claim. This will reduce your R&D expenditure by the amount that this funding stream was used to pay for expenses incurred while undertaking R&D.
Tip #8: The R&D Tax Incentive is designed to support Australian start-ups and small to medium businesses
Even if you are not paying taxes yet, the R&D Tax Incentive is targeted to Australian start-ups, and small to medium companies via the larger 43.5% refundable benefit. If you are yet to start paying taxes, you can use the R&D Tax Incentive as funding to invest back into R&D projects. If your turnover is greater than $20 million, in tax losses you can access the 38.5% non-refundable benefit. This can be carried forward as tax losses and used against future income tax payable amounts.
Tip #9: R&D activities do not need to be undertaken solely in Australia to be eligible
Although the R&D Tax Incentive is designed to support the innovation of Australian companies to strengthen our capabilities and knowledge base, the ATO recognises that some activities need to be undertaken overseas. This could be due to access to foreign expertise, facilities, larger populations, or even environmental or geographic differences. You will need to submit an Overseas Finding (due 30th June within the financial year the activities are taking place) that provides a rationale behind why said activities occurred overseas. It also needs to show that more money was spent on these activities in Australia than overseas. There is also the option of only claiming the portion of expenditure that occurred within Australia.
Tip #10: Make life and applying for the R&D Tax Incentive easier by getting your documentation processes in order
Emails, internal reports, presentations, images, agendas, whiteboard pictures, and meeting minutes can all be used to support your application for the R&D Tax Incentive. However, we do advise that you make your life and everyone else’s a lot easier by establishing a rigorous system of documenting your R&D activities – particularly if they are undertaken over many years.
After reading these tips, we hope that you feel ready to explore your eligibility for the R&D Tax Incentive. This is where Synnch can help…
Synnch is designed to assist businesses in maximising their chances to lodge a successful claim via its platform that automates the information collection process of all R&D-related activities. If you want to talk about your business, industry or eligibility, get in touch with the team at Synnch here, who will provide their insights and expertise around how your company can apply for the program.