While you may have heard about the research and development (R&D) tax incentive – the Australian Government’s tax incentive to encourage innovation – you may be unsure how to apply for the incentive, or have concerns about whether your activities are eligible to claim or not.
The incentive isn’t just for big business – startups and SMEs can take advantage of the incentive and, in doing so, can gain a significant cash injection for their company.
For the 2015/16 financial year*, eligible companies can claim up to 45c for every dollar they spend on R&D on an annual basis on an annual basis (if you or the companies you are grouped with earn under $20 million per annum).
Determining whether you can make a claim
Many Australian companies are undertaking R&D and don’t realise that they can have a portion of the related expenses refunded.
To determine whether the activities you’re undertaking are eligible to claim, you must ask yourself ‘are we undertaking activities that are significantly new or different in this field of technology’.
This is a key factor and must be considered with rigor prior to claiming. This is especially important now as the ATO is reviewing companies in software, agriculture and construction who may be claiming expenses which are not significantly different.
If your innovation activities are significantly new or different in your industry, you could get up to 45% of the related expenses refunded if you also:
- Are under a company structure, and registered in Australia
- Have an annual turnover of less than $20 million
- According to the ATO, conducting “an experiment or experiments to solve a technical unknown… for the purpose of generating new knowledge.”
- Spend at least $20,000 on research and development within a year
Companies with an annual turnover of more than $20 million and annual R&D expenditure of $20,000 or more are eligible for up to a 40% non-refundable tax offset.
Case study: Growing from a tax incentive
For James Hodge, co-founder and CEO of HLS Software, the R&D incentive allowed his company to evolve from HLS Vehicle Customisation – an organisation focused on building digital instrumentation, in-car displays and vehicle data capture tools – to what is now HLS Software, a company that specialises in data visualisation experiences.
“Approximately 80% of our refund was immediately re-invested into capital assets directly related to work we wanted to pursue through HLS Software”, says Hodge.
The R&D work Hodge’s company was doing involved the exploration and development of machine learning systems to improve road safety and vehicle management – technology new to the industry.
This research led to conclusions, knowledge and expertise that afforded Hodge and co-founder Kevin Atkinson an opportunity for growth. An opportunity that could only get off the ground with the backing of additional finances, such as a timely government tax incentive.
However, Hodge says, they very nearly didn’t capitalise on their R&D investment. “We were first made aware of the R&D incentive through a meeting in 2015,” Hodge says, going on to state that they did not believe the incentive was suited to their small company at the time.
It wasn’t until the company revisited the incentive when lodging their tax return that they realised the opportunity was within reach.
“If we hadn’t received the R&D incentive we would not have been able to fund the capital assets required to support our company evolution,” Hodge says.
This, he concludes would have made it difficult for the company to capitalise on the opportunities afforded by their original R&D work.
* From 1 July 2016, the maximum R&D tax incentive refund will be 43.5%.
Nifty R&D powered by PwC, is an online tool that allows small businesses and startups to apply for their R&D Tax Incentive online; quickly and easily.