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  • Writer's pictureHaines Consulting Group

Are You Eligible for Australia’s Best R&D Tax Incentive?

R&D Tax Incentive - Haines Consulting Group

This may seem cliché, but Australia is an amazing place to be an SME or start-up. The place is buzzing with innovation, ambition, hopes and dreams.

Australia is home to some unbelievable financial incentives and government grants supporting Australian business. A fascinating paradox about government incentives is that, on the one side of the coin it is such an enticing source of funding, but on the other side most eligible companies either aren’t aware it exists or don’t know how to access it.

Ask yourself these two basic questions:

  1. Is your company doing something different to the competition?

  2. Is your company producing something that differentiates you from the competition that involves experimentation and uncertainty?

If you have answered yes to any of those, then you may be eligible for the R&D Tax Incentive.


R&D Tax Incentive

The R&D Tax Incentive (sometimes known as the R&D Tax Credit) is an Australian Government Incentive to spearhead and support innovation and research & development within our country.


Benefit: up to 43.5% cash back on eligible spend (in some instances the benefit is a tax saving)


The Australian Government understands that creating innovation is a costly endeavour and therefore has implemented an excellent mechanism to financially incentivise innovative companies. Here is a quick video on how the R&D Tax Credit works




A Cash Back benefit

Benefit: up to 43.5% cash back on eligible spend (in some instances the benefit is a tax saving)


Most innovative companies incur losses for the first few years of their existence, and sometimes even longer. The reason being is that it takes time to get your innovative product to the revenue generation stage.


Under the regular tax system, a company’s losses are “rolled-over” until, hopefully, one day they are making profits. At that stage the company can “offset” their losses against their profits and pay no or less tax.


However the Aussie Government has recognised that a huge barrier to R&D is cashflow. Innovative companies need extra spurts of cash in order to keep on going.


What making a R&D Incentive Application does is allow innovative companies to access their tax losses, in cash, today, rather than wait until they hopefully turn a profit one day.

Explained simply, if a company with losses has spent $100,000 on eligible R&D activities it could get back $43,500 in cash through the R&D tax incentive by drawing down on their tax losses.



A Tax Saving benefit


The Australian Government wants to continue supporting innovation even after the R&D company has turned a profit.


To this end the government has essentially offered an additional tax rate on any eligible R&D expenses.Explained simply, if a company spends $100,000 on eligible R&D that company will save $43,500 in tax as opposed to saving $27,500 in tax (assuming a 27.5% tax rate)



Eligibility


In order to claim the Research and Development Tax Incentive an entity needs to be:

  • An incorporated Australian Entity

  • Non-tax exempt corporation


For the activity to be eligible it needs to meet three criteria for the R&D Tax Incentive

  1. New Knowledge

  2. Experimentation

  3. Uncertainty

These three principles all flow into each other.


Here are some case studies to explain them:

1. New knowledge begins by locating a gap in the market.

A software company (Airport Transport Pty Ltd) noticed that there wasn’t one web location to see all land travel options. They did an analysis of Webjet and saw that there wasn’t a similar land vehicle aggregation website. Further research into the market was and there seemed to be no one trying to roll out their idea in the manner they had in mind.

A gas heater manufacturer (Heat Us Pty Ltd) wanted to bring better performing gas heaters to the market. They wanted their heaters to emit lower gas emissions and to be more aesthetically pleasing. Further research into the market was and there seemed to be no one trying to roll out their idea in the manner they had in mind.

2. Experimentation

Airport Transport Pty Ltd hired some contractor developers to prove the MVP or prototype. Many lessons were learned along the way. Once they felt they could make their product happen they started hiring internal developers.

Heat Us Pty Ltd started tinkering and developing. There were many iterations of the product and learnings along the way. The development process is an ongoing process.

3. Uncertainty

Both Airport Transport Pty Ltd and Heat Us Pty Ltd weren’t certain at the onset that these new developments were going to succeed. They did, however, think that each would be a success, but the final products were arrived at through much experimentation.

Now we come full circle, the final products are what fill that initial gap in the market and could become commercial.



How is eligibility assessed when applying for the R&D Tax Incentive?


The key to assessing an R&D Tax Incentive claim is to first identify any activities that meet the definition of a core activity (Core R&D activities are defined in section 355.25 of the ITAA 1997)


You must conduct, or plan to conduct, at least one eligible core R&D activity to register for the R&D Tax Incentive.



Core R&D activities are experimental activities


1. whose outcome cannot be known or determined in advance on the basis of current knowledge, information or experience, but can only be determined by applying a systematic progression of work that:

  • is based on principles of established science; and

  • proceeds from hypothesis to experiment, observation and evaluation, and leads to logical conclusions; and

2. that are conducted for the purpose of generating new knowledge (including new knowledge in the form of new or improved materials, products, devices, processes or services).


For queries on your eligibility and how to apply, contact Australia's leading experts at Rimon Advisory at rimon.com.au



R&D Tax Incentive - Rimon Advisory





 

Haines Consulting Group is a management consultancy firm specialising in business strategy, growth, government grants and new venture developments. If you need any assistance with a grant submission please contact us now for a confidential conversation.

 

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