Spending money on research and development is necessary – and vital for a new and emerging company but, in many cases, financing research and development activities out of working capital can place a financial strain on your business. There is, however, a solution. Consider reducing any financial strain by claiming the Research and Development (R&D) Tax Incentive.
What is the R&D Tax Incentive?
This incentive is a generous government entitlement that helps companies conduct research and development and offset the cost. The program is broad-based, offering eligible businesses both big and small the opportunity to make claims for R&D.
Why claim the R&D tax incentive for your business?
A successful claim for R&D activities can offset a considerable amount of tax paid by your business. Business owners can use any returned money as they see fit, whether it be to conduct further research, or as a valuable injection of capital back into the business.
What concessions can businesses claim?
There are two core components to the incentive that outline the kind of tax concessions businesses can claim. They are:
- A 45 per cent tax offset for eligible entities with a turnover less than $20 million per annum, as long as they are not controlled by income tax exempt entities.
- A 40 per cent non-refundable tax offset for all other eligible entities (where unused offset amounts are carried forward to future income years)
Kevin O’Hara, General Manager of digital marketing and technology advisory Techwitty (www.techwitty.com.au) estimates that “A large proportion of small to medium of business owners don’t realise that they could, and should, be claiming the R&D Tax Incentive.”
What kinds of activities can businesses claim as research and development?
There are a broad range of activities that qualify for the R&D Tax Incentive and these activities fall into two categories:
- Core R&D activities –are research activities whose conclusions can’t be determined by current knowledge and need to be determined by a systematic process based on the principles of established science.
- Supporting R&D activities – are activities directly related to core R&D activities or activities undertaken for the main purpose of supporting core R&D activities.
How does a company know if its R&D activities make the cut?
O‘Hara says business owners should consider if the “research or development leads to technical innovation as opposed to commercial innovation”.
One example might be a business that has created a new image rendering technology on a website or app that enables it to automatically build houses from a website. This represents technical innovation gained through research and development and can be distinguished from a general run of the mill app or website that provides commercial innovation alone.
The key is the “creation of new knowledge” as a result of the research and development says O'Hara. If companies are developing new systems, processes, technology, products, and/or services, and in doing so are creating new knowledge, then it is likely that this research and development could qualify for the tax incentive.
Eligibility covers most of the expenditure related to the activities for R&D, including salaries, overheads, feedstock, contractor costs and R&D plant depreciation amount and materials.
What criteria must companies meet to be eligible?
Any R&D must be undertaken on the company’s own behalf. Also, applicants must meet the following criteria to be considered eligible to claim the incentive:
- Be incorporated in Australia;
- Be an Australian resident for tax purposes;
- Be a foreign corporation that carries out R&D through a permanent establishment in Australia;
- Be a corporation acting as trustee of a public trading trust.
Are there any other criteria that determine if a company is eligible?
In addition to determining whether the actual research and development activities are in fact eligible activities, the business must have also have incurred research and development related expenses of at least $15,000 in the 2016 financial year (from 1 July 2015 – 30 June 2016).
How should you apply for the R&D Tax Incentive?
O‘Hara says a lot of businesses engage Techwitty to complete their R&D tax incentive applications because the company can simplify the whole process from assessing eligibility, right through to receipt of a return. “Actually identifying the core and supporting R&D activities is not a simply process, and so many companies just prefer to have a specialist complete this work on their behalf” says O'Hara.
“We will establish a business’s eligibility, prepare and lodge the application on the business’ behalf and take the business owners through the various administrative and reporting requirements,” says O’Hara. An added bonus is that Techwitty also complete the applications at no upfront cost to the businesses, and only charge a small percentage of the rebate if the claim is successful. So there is no cost to the business if there is no rebate / tax offset.
“We work on a no rebate / tax offset, no fee basis, so it’s in every business’s interest to go through the process with Techwitty. There’s nothing to lose and everything to gain by assessing your eligibility,” says O‘Hara.
Do you run your own business? What research would you like to conduct?