A version of this article appears in The Australian
We’re exceptionally fortunate to be living in a country that prides itself on the potential of its people and takes active steps to support that talent in their business endeavours.
The research and development tax incentive, arguably Australia’s premium government business incentive, is one of those active steps.
However, there is a problem.
Unfortunately, too many businesses in Australia simply aren’t aware of the significant cash flow benefit they could be adding to their business by making use of the tax incentive.
According to Lior Stein, Director at Rimon Advisory, around 60 per cent of its clientele simply didn’t know the incentive existed; or they knew about it but were under the impression they were not eligible.
In short, the incentive offers a company making below $20 million in revenues a 45 per cent benefit on any of its research and development spend.
If the company is operating at a loss, the 45 per cent benefit would come in cash. As a simple example, if the organisation had $200,000 of research and development expenditure and was in a loss situation there would be a $90,000 cash injection through the tax incentive.
On the other hand, if the company is turning a profit they would be entitled to an additional 15 per cent tax benefit on the research and development spend. Using the same example, on normal deductions of $200,000 the tax benefit would be $60,000, being 30 per cent of the deduction. With the tax benefit it would be $90,000, being 45 per cent of $200,000, giving an additional $30,000 in tax benefits.
A very important point to note is that the incentive works on a financial year basis. Meaning that a company can claim on their research and development expenditure for their past financial year’s operations.
The deadline for submission is 10 months after the company’s year-end. For companies with a year-end of June 2015, that deadline is fast approaching at the end of April this year.
The benefits of using the incentive can be game changing.
Fame and Partners, one of Australia’s up and coming fashion tech start-ups, is one good example on how the incentive can be a major benefit to companies like them.
Nyree Corby, the company’s founder, used the incentive for a number of years to keep the start-up cash flow positive. This also allowed her to concentrate on building the business value without having to raise capital too early. The good news is that Fame and Partners is now poised to be one of Australia’s next great tech companies.
But it’s important to note the incentive is not only for technology companies.
Any organisation that meets the definition of R & D according to AusIndustry may be eligible.
To simplify it, business owners throughout Australia should be asking themselves the following question: “Are we doing something in our industry that is different from the competition and new in the market?”
But does this initiative require some sort of development?
Some examples could be a beverage with a longer lasting shelf life, a new way of cleaning swimming pools, or perhaps a tool to assess the structural soundness of buildings. The list is endless.
So, if you are innovating in your business category you may be eligible.
Here are some important points to note when considering a research and development tax incentive claim:
1. You should have valid reasoning for each and every figure being claimed. Don’t simply claim a standard percentage of all your deductions
2. Understand clearly which staff were really involved in the innovation, don’t convince yourself that more or less work was done
3. Don’t miss out on the smaller claimable items, they add up
4. When articulating the innovation be articulate — you are selling it to government
5. If this is a second year claim or onwards don’t simply copy and paste the previous year’s work. Find the new innovation that was done in that year
6. The programme is a self-assessment programme (it is part of the Tax Act), assess yourself honestly
7. Don’t miss the deadline, once missed that year’s claim has been lost
8. Don’t assume you aren’t eligible; there is a good chance you are
For small and medium enterprises, the theory is that the government is allowing you to use some of your tax losses today; rather than needing to wait until you are able to offset your tax losses against your tax profits in the future.
Australia tops the globe for loss making entities with the 45 per cent cash back benefit. But when it comes to profit making entities, Australia is also seriously up there as one of the front runners.