The Australian Government provides eligible companies who engage in Research & Development (R&D) with a tax offset of up to 18.5% for expenditure on relevant R&D activities. Depending on turnover and tax status this offset can be claimed by a company as a tax credit or as a cash refund.
However, many business owners are unsure if their business qualifies for the incentive. In this article, our R&D experts quash 10 common R&D Tax Incentive Myths that stand in the way of many Australian companies applying for the incentive.
Myth #1: I don’t work in a lab and therefore I don’t do Research and Development (R&D)
Incorrect! The R&D Tax Incentive program is broad based, making it applicable across a range of industries and activities, not just those that are undertaken in a laboratory. If your company develops new or improved products, processes, materials, devices or services then you may be eligible.
The key criteria to determining whether you’re undertaking R&D is whether your project is generating new knowledge and there exists uncertainty, as to the outcome, that can only be resolved by undertaking trials and development.
The work you're doing may not feel like you are undertaking an R&D experiment, but if you don’t know how to get from A to B, and there exists no publicly available knowledge, information or experience to guide you, there's a good chance you're undertaking R&D R&D! If the solution requires formulating a hypothesis and undertaking experimental steps to achieve the outcome, it likely qualifies as R&D under the incentive program.
Myth #2: I’m not eligible for the R&D Tax Incentive because I haven't completed my project yet
No way! The R&D Tax Incentive program is a year-on-year application process that requires you to detail and describe the nature of activities undertaken and expenditure incurred in any given financial year.
There's no need to wait until the project is finished to start applying. Companies have 10 months from the end of each financial year to apply for the tax incentive.
Myth #3: I’m only eligible for the R&D Tax Incentive if my project is successful
Not true! You can still apply for the R&D Tax Incentive even if you don’t achieve your objective. Failure is in fact a sign of the level of technical uncertainty and the challenge that exists to achieve your desired outcome.
The goal of the R&D Tax Incentive program is to encourage and incentivise companies to take the risk, to solve technical challenges and generate new knowledge, whatever the outcome. This outcome can be in the form of a new or improved, product, process, material, device or service.
Myth #4: If I apply for the R&D Tax Incentive, my company's accounts will be audited
Not likely! Claiming R&D is the same as claiming any ordinary tax deduction. Some companies worry about the disruption and expense of an ATO audit .
If you receive an R&D Tax Incentive ‘request for information’ from the ATO, they're generally only investigating your what the company has included in the R&D claim, whether you have the documentation to support those expenses and that they relate to your R&D activities.
Myth #5: I’m already receiving another government grant so I'm not eligible to receive the R&D Tax Incentive
That's not quite right! It's true there are measures to stop you from double-dipping and claiming the same expenditure for the same activities under two or more government grant programs . However, if you're receiving funding for another aspect of the business, or in relation to entirely different activities, there's nothing stopping you from claiming the R&D Tax Incentive.
Where a company receives a grant that does cover activity and expenditure for R&D, a grant clawback will apply to remove any double-dipping.
Myth #6: I’m not eligible for the R&D Tax Incentive because my competitor already has a similar product in the market
Incorrect! In a competitive market environment it is more likely than not that companies are working on similar product or process initiatives. The know-how and intellectual property is often closely guarded and commercial in confidence.
Where you can’t access or determine the necessary knowledge, information or experience at the time you start your R&D project and you have to undertake activities to generate that new knowledge, you could still be eligible as technical uncertainty still exists as to how to achieve your objective.
Myth #7: The financial year is already over. I’m too late to lodge my R&D Tax Incentive application
Nope! You have 10 months after your company’s financial year-end to lodge your technical R&D Tax Incentive application. E.g. If your financial year-end is 30 June 2024, you have until 30 April 2025 to lodge the R&D Application. You also have the normal four-year amendment time frame to lodge your R&D tax schedule with the company tax return . But don't wait this long. The sooner you get your tax return lodged with the R&D tax schedule, the sooner you get your R&D Tax Incentive!
Myth #8: If I don’t pay taxes, I can’t get the incentive
False! The larger 43.5% refundable benefit is targeted toward start-ups and SMEs with an aggregated turnover of less than $20 million. If you don’t pay company income tax yet, you get the bonus of receiving your R&D Tax Incentive as cash back to keep investing in your R&D projects! If the company is tax paying, the benefit is received as a tax credit.
Larger companies with turnover greater than $20 million and in a tax loss position, are entitled to a non-refundable tax benefit that can be carried forward to be applied against any future income tax liability. Remember though, you must still lodge the R&D application within 10 months of the financial year end to safeguard the entitlement.
Myth #9: I don’t have stringent timesheeting or scientific reporting systems to track my R&D project and therefore I can’t claim the R&D Tax Incentive
Not completely true. While AusIndustry emphasises the importance of maintaining contemporaneous records to substantiate R&D there is not a prescriptive list of requirements. In some instances meeting minutes, supplier contracts, contractor agreements, calendar entries, spreadsheets, emails, internal reports and presentations, photographs and whiteboard notes can be used to help support the activities and expenditure undertaken during the financial year. The threshold is that there must be a reasonable basis to documenting the R&D undertaken. Furthermore, businesses must also retain their records for at least 5 years.
If you plan on claiming R&D over multiple years, it’s worth establishing or implementing an internal documentation strategy and process, to make sure you're keeping track of your R&D progress. Often this will lead to a more robust and increased claim.
Myth #10: Some of my R&D activities are undertaken offshore and are ineligible to include in my R&D Tax Incentive application
Not always true! If there’s good reason as to why you had to undertake part of your R&D activities offshore, such as access to facilities, populations, expertise or certain environments, then these activities may still be eligible. You'll need to submit an Overseas Finding to AusIndustry to be eligible. The request must be submitted on or before the last day of the financial year during which the overseas activities were undertaken. If successful the finding is binding for the current and forthcoming 2 financial years.
Where a company undertakes R&D both in Australia and overseas and does not obtain an overseas finding, the Australian-based activities are still eligible for the R&D Tax Incentive.
Get Started with the R&D Tax Incentive
Phew! You’ve graduated R&D 101. If you’re still not sure whether you are eligible for the R&D Tax Incentive, or you’d like to discuss your business eligibility, please get in touch with our R&D advisors who are always happy to have a no-obligation chat.
