Research & Development Tax Incentives for Aussie Businesses: What you need to know
If you’ve heard other founders talk about Research & Development (R & D) grants and have wondered what they’re all about, this article is for you. Sleek sat down with Ray Radice, Director at Grants Pro and their in-house R&D tax agent, Robert Dyring (Bob), to get the 101 on R&D Incentives.
Grants Pro works with businesses of all sizes, making the complex world of government grants easy to navigate. They provide comprehensive and expert assistance, preparing and submitting grant applications and compliance reports to ensure their clients successfully access the research and development tax incentive. They also advocate and support clients during the audit process. Their no-win, no-fee approach means businesses working with them have nothing to lose and everything to gain.
Ray (CA, LLB Hons, BCom) has previously worked for Ernst and Young before spending over a decade with the federal government administering various grant programs. He consulted on Austrade’s EMDG Legislation, Rules, and Guidelines and developed the assessment framework that all applications are assessed against.
Bob has been a specialist R&D tax agent since 1986 and is a member of the National Tax and Accountants Association (NTAA) and the Export Consultants Association. So if anyone has decades of valuable insights to share with the Sleek community, it’s these two.
Outline
- What are the top government grants small businesses and startups should know about?
- What’s the difference between an R&D Grant, Incentive or Tax Offset?
- What is the R&D Tax Incentive?
- How does the R&D tax incentive work?
- How does the Government define R&D?
- What benefits are eligible entities entitled to?
- What kind of businesses are eligible/suitable for R&D grants?
- What expenditure can businesses claim?
- How can businesses best leverage the R&D tax incentives?
- What are your tips for a successful R&D Offset application?
- What are some things founders should be aware of (good and bad) when applying for/receiving an R&D tax?
- Can you share some success stories of founders you’ve worked with?
- Where can founders discover which grants they may be eligible for?
- Final thoughts
Q: What are the top government grants small businesses and startups should know about?
That’s a big question to unpack! Below is a list of grants (including incentives that come under other titles) that I think all small/medium businesses should consider. I think small business and startups should be mindful that there are other great state-based programs as well, but I’ve tried to keep this list Australian-wide for a broader appeal.
I’ll also add a caveat that a challenge owners may face, is that not all programs are ongoing, and the information may become dated in time. The R&D and EMDG programs are likely to stay for many years. I have included the government websites links for further information.
- R&D Tax Incentive: A significant program for small and medium-sized businesses focused on research and development. This incentive can provide substantial support for innovative projects. For more details, visit the official government website: R&D Tax Incentive.
- EMDG: The Export Market Development Grants program supports businesses in expanding their export markets. This grant can be crucial for startups and small businesses looking to grow internationally. Further information can be found here: EMDG.
- Industry Growth Program: This program is designed to assist industries in achieving sustainable growth, focusing on small to medium enterprises. You can learn more at: Industry Growth Program.
- Small Business Technology Investment Boost: This initiative offers incentives for small businesses to invest in technology. It’s an excellent opportunity for businesses looking to modernise or improve their technological capabilities. More information is available at: Small Business Technology Investment Boost.
- Wage Subsidies: These subsidies are designed to encourage the hiring of employees in small businesses, potentially easing the financial burden of expanding a workforce. For more details, visit: Wage Subsidies.
Q: What’s the difference between an R&D Grant, Incentive or Tax Offset?
Ray: Nothing! An R&D grant goes by many names, including the R&D tax credit, R&D Tax offset, R&D tax credit or R&D tax rebate. But they all refer to the ATO R&D tax incentive.
Q: What is the R&D Tax Incentive?
The Research & Development Tax Incentive is Australia’s flagship program to support business investment in innovation and promote economic growth. The tax incentive program directly aligns with the focus of the Australian Government on increasing total investment in research and development by offering businesses generous benefits to offset some of the costs for eligible R&D.
The R&D tax incentive aims to boost competitiveness and improve productivity across the Australian economy by:
- encouraging industry to conduct R&D that may not otherwise have been conducted
- improving the incentive for smaller firms to undertake R&D
- providing business with more predictable, less complex support.
Q: How does the R&D tax incentive work?
It works by giving eligible entities a refundable tax offset or non-refundable tax offset. If you are undertaking research and development activity, you must first register with AusIndusry and provide a document detailing your R&D activities.
They provide a registration notification number that your accountant will use on the R&D tax schedule incorporated into your Company tax return. It’s submitted to the ATO, and the tax offset or refund is provided. You have up to 10 months after the financial year end to put in your claim.
Q: How does the Government define R&D?
Good question and one that business owners should be fully aware of. The government defines Core R&D experimental activities as:
- whose outcome cannot be known or determined in advance on the basis of current knowledge, information or experience
- which can only be determined by applying a systematic progression of work that
- is based on principles of established science
- proceeds from hypothesis to experiment, observation and evaluation, and leads to logical conclusions
- that are conducted for the purpose of generating new knowledge (including about creating new knowledge or improved materials, products, devices, processes or services).
In our experience, the ATO is looking for experiments where the outcome is unknown. They like failure. The only way to innovate is to fail, iterate and try again, which is one of the things the Australian Government is trying to encourage. This is known as technical risk.
Q: What benefits are eligible entities entitled to?
Refund tax offset
For companies with aggregated turnover of less than $20 million.
A premium of 18.5 percentage points + company tax rate. For companies with a group turnover under $20 million
Non - refundable tax offset
For companies with a group turnover of $20 million and above.
Rates are dependent on the incremental intensity of the R&D expenditure:
For up to 2% R&D intensity. 8.5% for R&D expenditure + company tax rate.
For above 2% R&D intensity: 16.5% for R&D expenditure + company tax rate.
Q: What kind of businesses are eligible/suitable for R&D grants?
The most important thing to know is that only registered companies are eligible for the R&D tax offset. So, if you’ve set your business up as a sole trader, partnership or Trust, you won’t be able to apply. If you’re using specialists like Sleek, they could advise you on the best structure for your kind of business. Usually, a company structure gives you the most options.
About 40% of the recipients of the tax incentives are technology and software companies, but any entity can be eligible if they are conducting systematic, investigative and experimental activities that contain innovation or high levels of technical risk and are conducted for the purpose of acquiring new knowledge or creating new or improved materials, products, processes or services.
We’ve helped companies across all industries access the R&D tax incentive, from Manufacturers to Health and Pharma, Agriculture, Resources, Energy, and Goods & Services.
Q: What expenditure can businesses claim?
Expenditure incurred on R&D activities is detailed and specific but can include:
- Expenditure you incur under contract to other parties
- Salary expenditure
- Leased plant and buildings
- Accountant and consultant fees
- Decline in value of assets
- Administrative costs and overheads
- Other eligible expenditure
You can find a full list on the ATO website.
Q: How can businesses best leverage the R&D tax incentives?
Because R&D tax accounting is a specialist field, many standard tax accountants will say you aren’t eligible, which isn’t always true. So, doing your own research and education on what’s out there is critical. Speaking to a company like Grants Pro early on in your journey (or the tax year) is a smart idea.
Although you don’t apply until the end of the tax year, keeping highly detailed notes on your R&D activities is vital, and it’s hard to do that in retrospect. The papers, videos, photos and notes you keep are the backbone of your application. This is the single best way businesses can leverage the R&D tax incentive. The ATO expects to walk into any applicant and find an open set of books.
Q: What are your tips for a successful R&D Offset application?
- Have your financials in order. Good accounting records (either produced internally or externally) are paramount in identifying eligible costs and responding to audit enquiries.
- Keep impeccable notes. Dedicate one hour monthly to hold a board meeting to discuss what you’ve been doing and note the details down.
- Cross all the t’s and dot all the i’s. Pay bills on time and have proper agreements in place with suppliers and contractors.
- Engage a good lawyer to assist with interpreting the complex (and often changing) legislation, program rules and prior AAT cases.
Q: What are some things founders should be aware of (good and bad) when applying for/receiving an R&D tax?
Ensure you’re conducting the R&D on your own behalf and you own all the IP
This means your company ‘effectively owns’ the know-how, intellectual property or other similar results arising from your company’s expenditure on the R&D activities, has appropriate control over the way the R&D activities are conducted and bears the financial burden of carrying out the R&D activities.
Submit the application under the right company
If you own several entities that work together, ensure the R&D application is made through the correct entity. The R&D tax incentive applies to your consolidated group or MEC group as if it is a single entity conducting all R&D activities within the group. Only the head company of the group should register for and claim the tax incentive for these R&D activities.
Be aware and prepared for audits
As the tax incentive program is self-assessed, AusIndustry and the ATO regulate it through audits. This is why impeccable record keeping and paperwork are required, then, you won’t have any nasty surprises. The ATO are the worst people to owe money to and have wound up many businesses for unpaid debts.
The work needs to be done in Australia.
Approval of overseas R&D activities, while possible, is rare. The general rule is that all R&D activities must be undertaken in Australia.
Take a systematic approach to record keeping
We know we sound like a broken record, but this is really critical to success and is the game-changer when it comes to the offset being granted.
You’ve got to be on top of the requirements
If you aren’t using a professional service like Grants Pro, it’s vital to read, read and read some more. You need to be across all the details of the eligibility criteria of the tax incentive program and the obligations of your business. There is no shortcut to this, as errors can be costly. Making a mistake can have penalties, or you could miss out on a substantially higher grant than you otherwise were entitled to.
Q: Can you share some success stories of founders you’ve worked with?
Example 1: R&D offset continues to help plumber design and launch highly successful products
A tradesman identified problems with current products on the market that made processes inefficient. They sketched a simple design, identifying the specifications to address the issues. With no design experience, they engaged the services of a research provider to undertake certain eligible R&D activities.
This included
- Developing prototypes
- Testing
- Iterations until the product was ready for market.
When it launched, the product was highly successful, and B2B sales boomed. The business has since created several new products and has become a major boutique player in the plumbing supplies space for trades. Many of the products have been patented within Australia and overseas.
The R&D program was instrumental in the success of this business. Not only in the early days but still today in creating new products.
- It provided valuable cash flow for products yet to be commercialised over many years.
- It allowed additional funds to be spent on R&D than otherwise would have been available.
- It lowered the risk for the business to develop new products.
- Importantly, the business maintained 100% control of the products and business. Equity was not diluted.
Example 2: R&D offset keeps the lights on for start-up that turned into global business
A software company started developing a product in the market research and analytics space. By including AI in the solution, the business was able to develop a product that first sold domestically but went on to become a global product, selling in the US, Europe and Asia.
With global patents, revenue in the past 5 years has increased by 400%+, turning the business from being in a loss position to a highly profitable Australian success story.
The R&D program was instrumental in this.
- It provided a valuable rebate to keep the lights on in the early loss-making years.
- It allowed more money to be spent on R&D than would have otherwise been available.
The business started with a small office of 4 people. It has since upgraded its facilities several times and now supports a large team solely focused on creating new software solutions for its clients.
Q: Where can founders discover which grants they may be eligible for?
Grants Pro offers a no-win, no-fee service, and we encourage founders to contact us for an initial chat where we can discover what grant programs are appropriate for your business. The R&D Tax Incentive is one of many programs that may be suitable. During a collaborative approach, the group is open to queries. Alternatively, AusIndustry and the ATO assist corporations and consultants who engage in its R&D tax incentive programme.
Final Thoughts From Sleek
Securing grants for your business in Australia is a multi-step process that requires careful planning, research, and strategic execution. It’s important to note that grant application processes can be competitive and time-consuming. It’s essential to carefully research and select grants that align with your business goals, thoroughly prepare your application, and meet all the requirements and deadlines.
Consider consulting with Grants Pro or business advisors such as Sleek, who can provide guidance throughout the process.
