R&D Tax Incentives – could you qualify?
What is the R&D tax incentive program?
The research and development tax incentive program was started back in 1996, by the Federal government. It was set up as a way to encourage Australian companies to do research and development locally in the Australian economy. The philosophy is that if Australian companies develop and gain new knowledge locally, that will benefit the Australian economy overall.
You can claim R&D tax incentives for all your efforts to bridge knowledge or technical gaps in your business – anything AusIndustry approves as R&D.
In our experience, many small businesses are engaged in activities which qualify, but they don’t know they’re eligible. They’re missing out on a lot of support. (Check out the examples below to give you some ideas!)
What’s the benefit to you?
If you qualify, you’re entitled to up to 43.5% of what you’ve invested in experimenting to fill that gap in your business.
It’s important to note that this is an entitlement, not a grant. You don’t have to compete with others to access it.
How you receive it depends on whether your company is trading at a profit, at a loss or at breakeven. It will be a cash refund, a tax credit or a combination of both.
But the real benefit of the program is more than just financial. Once you know it exists, you look at your business differently. So often clients told us they thought they had no funds for innovation, but now they know they can reclaim a large chunk of any outlay. That means they look at opportunities very differently.
What qualifies as R&D?
Many businesses don’t realise their activities qualify as R&D, so they don’t apply and they miss out. Let’s look at some examples.
Manufacturing
Manufacturers are always looking at process improvements and ways to achieve better efficiency on the production floor. That kind of continuous improvement is R&D.
Specific projects can also be eligible:
· One of our clients is a sheet metal manufacturer. Imagine someone comes to them with a particular project – for a circular staircase which has to fit in a specific space. The project might be challenging in terms of how to make one part curve as per the design, or testing different materials to ensure structural safety. Testing options is classified as R&D.
· Or perhaps you supply light cases and fittings, and one of your clients wants fittings of specific dimensions and materials for a building they’re looking after. You may need to play around to see if you can create that particular style.
Food Manufacturing
Food manufacturers are always exploring new recipes, whether you’re expanding your range, developing gluten free versions or just testing alternative ingredients. All too often, things don't work out, but the cost of ingredients adds up fast. The good news is that all that experimentation with recipes is classified as R&D, so you qualify for the incentive.
Craft brewers are another example. They’re always looking at how to infuse flavours into beer. One challenge for them is scaling up from a 15 litre test production run to 150 litres or 1000 litres. Sometimes simply doubling the quantity of ingredients doesn’t work.
Building
We’re working with a builder in the Illawarra region who specialises in eco-friendly homes. They’ve designed and developed panels which lock together in an innovative way, such that they can get a house up in just 10 days. That whole process is R&D.
Primary Industries
You might not think there’s much R&D in growing trees, but think again! As you know there’s high demand for timber across Australia. A timber grower might experiment with different fertilisers and treatments to try and speed up seedling growth and produce more timber, more rapidly, from the same land
Software
Software is a huge area for R&D. Around 30% of all our applications relate to software.
They’re also some of the most difficult applications to write.
The challenge is not software development, it’s identifying the knowledge gap or process gap which you’re trying to resolve with your software. You can’t claim for poor programming, only for trying to program something new.
Fortunately, the Tech Abstract team dealing with software applications are engineers or from other science backgrounds. They can drill down into the algorithm level to identify what’s eligible.
Other Service Industries
Robotics and automation is another growing area for R&D. Companies in this space are constantly developing and testing systems to meet specific client scenarios. It’s hard to pass those costs on to the client, but if you know you can reclaim the R&D tax incentive, you can take on a higher risk project.
Rolling out a product in a new scenario
We work with a tiler who’s found an overseas product which helps waterproof bathrooms. He can’t just bring it into the country and start using it – he has to test how it stands up in the Australian climate and environment. (As we all know, Australia has some of the toughest climate extremes of the planet.)
This example is interesting because it’s not a new product. It’s an existing product in a new environment, but it’s still R&D.
What are the rules?
You must be a registered Australian Proprietary Limited Company to claim.
You must claim within the relevant financial year – there’s no opportunity for retrospective claims.
Right now, we're working on applications for financial year 2022. We have until the end of April 2023 to submit those claims.
You must identify claimable costs
You can claim costs in three different areas:
· Direct costs Track the time your staff are spending on R&D projects. If someone’s spending half his time in research and experimentation, you can claim an offset on half that person’s salary.
· Indirect costs You can attribute a portion of your overheads to R&D cost.
· Feedstock This covers all the raw materials you’re using in your R&D. This is often a challenge for small businesses, as their accounting needs to track these costs separately. It’s something we work on with clients. Sometimes, it’s too hard to get the data retrospectively, so we just set up .
You can claim whether your R&D is successful or not
The program isn’t about whether you can commercialise successfully, it’s about whether you’re doing R&D. The aim is to encourage an innovation and experimentation mindset, to drive growth on a macro level.
Of course, it’s frustrating from your point of view if your project fails. On the other hand, it’s comforting to know that you can claim back a large chunk of what you invested in trying to make it work.
So you think you can claim. What next?
If you think you can claim R&D tax incentive, I’d strongly suggest you get in touch with us at Tech Abstract. We work on a success fee basis – if your application isn’t successful, there’s no fee to pay. And with our years of experience and deep understanding of the legislation, our applications are successful.
If you don’t qualify, it benefits both you and us to find that out as soon as possible and move on! What that means is we keep your time investment (and ours!) to an absolute minimum. If it’s not going to work for you, you know that quickly and walk away with no fees to pay.
If you do qualify, we can work with you all the way from that preliminary assessment to technical discovery and application writing.
All applications are now submitted via an online portal which launched in 2021. We’re seeing more requests for detailed and specific information, including the hypothesis, the experimentation steps and the learnings. We have the experience to help you by
· Setting up processes which mean you can monitor, track and report on your activity in an appropriate way for AusIndustry. This can include regular monthly or quarterly meetings with us to ensure all the information is being captured correctly.
· Assisting you with presenting your activities in a way which conforms with the legislation
· Working with your external accountants to prepare your R&D tax incentive schedule.