The R&D Tax incentive is a broad-based program that allows innovative companies to receive tax offsets – in the form of a cheque or direct transfer – for companies under $2m turnover in a loss of 43.5% of total R&D expenditure; or 45% for companies between $2m and $20m turnover.
Companies of this size in a profit receive a Tax Credit of 13.5% and 15% respectively. For larger companies over $20m turnover in a loss, a non-refundable tax offset of 40% or 10% if they are in a profit.
Understanding the R&D Tax Incentive
Much ink has been spilt in the Australian press recently regarding a tightening of the R&D Tax Incentive program and increased audit activity. The truth of the matter is:
- The R&D tax legislation has not changed
- The ATO and AusIndustry are now more aware of which industries are more likely to rort the R&D incentive
- Companies doing the right thing have nothing to worry about
- The offending companies – who should be nervous – have most likely been deterred or at least ‘had their wings clipped’ and will put in more reaonable claims
- This initiative by the Regulators frees up access to R&D funds for more genuinely innovative companies.
The business and finance news in Australia has also been full of talk of an economic slump; of the threats to the Australian economy from a credit crunch in China; Trump’s ‘anti-diplomacy’ attitude to global affairs and – locally – the end of the mining “boom”. It is more of concern to the R&D program that with the current emphasis of using tax cuts to achieve a budget surplus, the government may place more limiting constraints on applicants than the current ‘Spring Clean’.
At a macro-economic level, if this occurred, the potential impact on small to mid-size companies would be discernible as – much like in nature – an adverse impact on the Australian innovation ecosystem will inevitably impact many more companies than originally intended. It would be most likely that if this happened, the impact would be felt across industries, with some investment in innovation potentially moving offshore and the ecosystem that supports small developing companies set to contract if R&D funds were extracted from the sector. However, this is more conjecture than risk.
What does this mean for you?
Now is the time – as mining and some related markets soften – to ensure that your business runs as effectively as possible. It is very easy to blame ‘the economy’ and it is something that business owners frequently lament, but let us bear in mind that since the beginning of commerce, businesses have experienced cycles of leaner times followed by better times. In the history of the world, Winter has always been followed by Spring.
Innovative financial management may also be required and extraneous expenses that your business could afford during the Boom times will need to be reviewed. Some of our clients have freed up significant amounts of cashflow by financing assets that were previously owned outright and then leasing them back. Others have survived – even prospered – by pivoting themselves into new industries.
I always say “money flows like water to good ideas”, if you have a great solution to a common problem, then consider implementing it! There are plenty of ideas for businesses that can be applied to replace or top-up current income. Innovative strategies may be required and new markets may need to be sought. Some companies looking to ‘weather the storm’ are using this as an opportunity to release new, cost-saving or productivity improving products and services to the market. Investment in R&D and the innovation that arises from successful projects may also bring substantial rewards. In this new legislative environment, well-researched, planned and executed R&D will ensure your project is compliant with the legislation and that it has a far greater chance of success.
In summary, Eden Philpott, renowned English author, poet and dramatist and a much wiser man than I put it best:
“The universe is full of magical things patiently waiting for our wits to grow sharper.”