If you don’t wear a white lab coat and fiddle around with test tubes, there’s a good chance that you have been caught up in the myth that your business isn’t involved in research and development.
However, with the end of the financial year looming, you will need to gain a better understanding of R&D, or potentially miss out on significant savings. The R&D myth can cost you cold, hard cash.
Many small businesses complete research and development work in their business, without recognising that they are doing this.
This represents a huge missed opportunity because if you are undertaking R&D work then you could be eligible for additional tax concessions or even a cash refund from the Government.
R&D is often thought of as highly technical work in a clinical environment. The reality, however, is that where a business seeks out innovation, is testing and trialling processes and where there is an inherent risk that the test might fail, then you are likely carrying out R&D work.
It is all about developing new products or product variations that can be commercialised and add value to your business.
Your testing might be carried out in your factory, office or warehouse. You don’t need a research laboratory and a science degree to qualify.
There is a Government incentive program for research and development work carried out by business. This is administered through Ausindustry, but your claim is made through your tax return.
To make a claim you need to be registered prior to lodging your tax return. Once your claim is submitted to Ausindustry, they will provide you with a claim number and this is included in your tax return.
Your application to Ausindustry must be made by no later than 10 months after the end of the financial year.
So, assuming you have a June 30 balance date, you need to submit your application by April 30.
This only gives you around three weeks to act on this.
The two main concessions are:
125% R&D Tax Concession: This is a general concession allowing eligible companies to deduct 125% of eligible R&D expenditure incurred on eligible Australian-owned R&D activities in their annual tax returns.
The basic eligibility requirements must be satisfied to access this tax concession.
R&D Tax Offset: This tax offset allows small companies who are in tax loss to cash out their tax concession entitlements.
The tax offset is paid at the rate of 30 cents for each dollar of deduction that would have otherwise been claimable.
For early stage companies or where you are in a tax loss position, this can be a valuable boost to your cashflow. You can cash out the tax losses that have been incurred in your R&D work.
To be eligible for the R&D tax concession, you must meet all of the eligibility requirements. It is important that you have assessed your eligibility for a specific claim.
The basic requirements to be satisfied to access the R&D tax concessions are:
- The entity must be a company incorporated in Australia, not acting in the capacity as a trustee.
- The activities must qualify as R&D activities. R&D activities are activities which are either ‘systematic, investigative and experimental activities involving innovation or high levels of technical risk’ (SIE activities), or activities which are directly related to the carrying on of the SIE activities.
- A R&D plan and adequate R&D records are maintained.
- A minimum of $20,000 R&D expenditure was incurred unless the R&D is contracted to an approved Registered Research Agency.
There are some additional requirements for claiming the tax offset and premium.
If you think you might be eligible for the concessions speak with your accountant. You are likely to need some advice on this and assistance in preparing your claim.
Like most other tax areas, you self-assess your position but you need to be able to substantiate it if it is queried or subject to an audit.
Where you are undertaking R&D activities you should take advantage of these additional assistance programs. They will help to defray some of your costs and also provide a cashflow boost. So don’t delay.
Greg Hayes is a director of Hayes Knight and specialises in taxation and business planning advice.