In the dynamic landscape of consulting, where fluctuating demand can lead to periods of excess capacity, Australian small and medium-sized enterprises (SMEs) have a unique opportunity. Rather than taking long lunches and playing Sudoku, staff can spend time on Research & Development (R&D) projects, unlocking the potential to access R&D Tax Incentives . In this article I share the trends I’ve observed and explain how Australian SMEs can strategically redeploy staff into R&D projects to improve their business and lower costs.
The Benefits of Redirecting Consultants to R&D Projects
R&D is expensive, and usually a business that focuses on R&D does so at the expense of revenue generating activities. Having consulting services that effectively pay for the businesses R&D activities is a great way to fund an innovation program. In working with businesses that have adopted this practice, I have picked up on three main benefits.
1. Innovation Unlocks New Opportunities
Channelling underutilised hours into R&D is an investment in the creation and exploration of new ideas. Think of it as a startup incubator within a company, where products are developed that could eventually be commercialised and spun off into stand-alone entities .
This proactive and curious approach not only positions a business at the forefront of trends and changes in its field, but also diversifies the revenue streams. Imagine equipping your business with a portfolio of intellectual properties or groundbreaking solutions, ready to be pitched to both existing and potential clients.
2. Tax Incentives for R&D Can Offset the Operating Costs
In Australia, SMEs with an annual turnover of less than $20 million can access tax incentives when they engage in eligible R&D activities . Here’s a typical scenario.
A company has a team of five consultants with an average salary of $100,000, predominantly working at 75% capacity on client projects. There’s also an overhead of $20,000 per employee for rent, insurances, software, etc.
Redirecting this team’s excess capacity to R&D could lead to an 18.5% tax offset, equating to savings of $27,750. What’s more, loss-making companies could recoup up to 43.5%. The unused capacity is still a cost to the business, but tax incentives are used to lessen the cost.
Team Members | 5 |
Utilisation | 75% |
Average Salary | $100,000 |
Average Overhead | $20,000 |
Cost of Unused Capacity | $150,000 |
Benefit if Redeployed to R&D Project at 18.5% | $27,750 |
3. Innovation Drives Culture and Engages Employees
Investing in R&D is more than a financial play, it's a cultural one. Business leaders tell me that their employees become more engaged when they’re allowed to explore new ideas, develop their skills and follow their curiosity. A team involved with innovative projects nurtures a culture of creativity and continuous learning. This not only helps retain top talent but also attracts forward-thinking individuals who are eager to work in an environment where their skills are used to drive meaningful progress.
Consulting Fields Where Redeploying Staff to R&D Projects Can Be Applied
There aren't really any restrictions on the fields or industry verticals where this strategy could apply. Accountants can focus on building new tech, as can marketers and designers. Xero and Canva were once just ideas. The fields where I’ve observed this practice used effectively include:
- Technology and Software Development
- Engineering and Industrial Design
- Life Sciences and Healthcare
- Asset Management
- Agricultural Consulting
- Environment and Sustainability
- Architecture
- Data Science and Advanced Analytics
- Energy
- Management Consulting (Technical Divisions)
- Telecommunications
- Cybersecurity.
Activities that Might Qualify for the R&D Tax Incentive
If you’re looking at the tax offsets to lower costs, consider these activities:
- Conducting comprehensive IP and competitor research to establish a baseline state of knowledge
- Developing and prototyping innovative products
- Data analytics for predictive insights
- Applying machine learning and artificial intelligence to a problem in your field
- Carrying out experiments to test theories and models
- Crafting advanced software solutions.
A Few Tips to Maxismise the R&D Tax Incentive
To make the most of generous tax incentives, consider these pointers before implementing this strategy:
- Structure your R&D within a company. Trusts and other entities are not typically eligible for these incentives
- Understand that both core R&D activities and their direct supporting R&D activities are covered
- Recordkeeping is essential . If R&D activities take place in a forest and no one documents it, I can confirm that it did not take place
- If your R&D initiative gains traction, remember that Early Stage Innovation Company (ESIC) incentives can sweeten the deal for investors
- Keep in mind that tax incentives favour scientific and technological endeavours, and not all types of research qualifies
- The incentives are designed to bolster activities within Australia. Remote team members working abroad won’t be covered.
Book a Consultation with our R&D Consultants
Our grant consultants specialise in R&D tax incentives and provide independent advice and full support with your R&D Tax Incentive applications. Our approach is based on a track record of successful submissions and deep knowledge of the R&D landscape. Submit the form below and one of our R&D grant consultants will be in touch to help you grow your business.
