A key driver of company growth is innovation which is fuelled from undertaking Research & Development (R&D). R&D may be in the form of a new or improved product or it could be the development of a more efficient process that provides a competitive edge. But what is less known is that there are ways in which the cost, and therefore the risk, of undertaking R&D can be reduced.
A recent survey identified that 80% of businesses believe that R&D is important for their future growth but one in five admit they don’t spend anything on R&D and 67% spend less than 5% of total expenditure. The most significant reasons listed for not undertaking R&D is cost, but interestingly, 72% of those surveyed said they had never sought Government funding to assist. This may be stoic but there are programs available to assist in reducing the cost of R&D.
When Government assistance is mentioned, many immediately think of competitive grant funding where their project competes for funds against other projects. While this is great for the successful applicant(s), it is difficult to base a two to three-year development program on the chance of being awarded a Government grant. Not only is the applicant faced with stiff competition during the grant application process, but grants tend to be available for short periods of time, may be based on a limited pool of funds or may be specific to certain industries and/or geographic locations.
The R&D Tax Incentive is another option to assist in funding R&D activities/costs. Given it is an incentive rather than a grant, applicants are not competing for a limited pool of funds. Where eligible R&D activities are undertaken and registered with the Department of Industry, Innovation and Science on an annual basis, eligible entities (namely companies) will be entitled to tax offsets based on R&D expenditure.
Presently, for eligible companies with less than $20m of aggregated turnover, a refundable tax offset of 43.5% is available. While a non-refundable tax offset of 38.5% is available for companies with turnover in excess of $20m.
The R&D Tax Incentive is open to companies from any industry that have developed a technological solution whether that be in the form of a new or improved product, process or service. Certain criteria must be met in order for an activity to be classified as R&D for the purpose of the R&D Tax Incentive. The main consideration is that the activity is overcoming technical uncertainties by developing new knowledge through an experimental process. An experimental process for the purposes of the R&D Tax Incentive does not have to be conducted in a ‘lab’ but does need to involve a systematic progression of work that includes developing an idea to test (which may be a new product), undertaking an experiment (for example, testing whether the new product worked as it should), and evaluating the outcomes of the experiment.
But what does this all mean and how can it assist a company in reducing the cost of R&D. A quick example may help:
Wizzybits Pty Ltd has a new idea for a product that will place them ahead of their competitors. The company spends $750,000 on R&D in 2018-19 on the new product and register for the R&D Tax Incentive within ten months following the end of financial year.
Wizzybits has aggregated turnover of less than $20m. Assuming Wizzybits is in a tax loss position, a cash refund of up to $326,250 may be available. Wizzybits Pty Ltd can then invest in further developing the product, to reduce debt or purchase plant & equipment.
To apply for the R&D Tax Incentive, eligible activities must be registered with the Department of Industry, Innovation and Science within ten months following the end of the company’s financial year. After registration, an R&D Tax Incentive Schedule must be completed within the company’s income tax return and lodged with the Australian Taxation Office.
Where the company has a 30 June financial year end date, registrations for the R&D Tax Incentive must be made by 30 April. William Buck has a specialist R&D team available to assist in navigating the required record keeping requirements and assist in the preparation of a compliant R&D Tax Incentive Application. Please contact your local William Buck Tax Services specialist for assistance with lodging a claim. You can find their details on our website here.